Red Sea crisis: Agri commodities, Marine foods to see maximum impact; no impact on metals, pharmaceuticals -CRISIL

Red sea Crisis is posing challenges for many sectors and any aggravation of the crisis is looked as potential threat for the equity markets too as can stroke inflation.

The Red Sea route through the Suez Canal is used by the Indian Companies to trade with Europe, north America, north Africa and part of the middle-east .

Also these regions accounted for 50% of India’s exports worth 18 lakh crore and 30% of imports worth 17 lakh crore last fiscal suggests CRISIL data. India’s overall merchandise trade (exports and imports combined) last fiscal was 94 lakh crore, with ~68% (in value terms) and ~95% (in volume terms) shipped through sea.

Due to increased attacks on ships sailing in the Red Sea region since November 2023, many shippers are considering the alternative routes as those past the Cape of Good Hope, which are longer route. This has not only stretched delivery time by 15-20 days, but also increased the transit cost substantially because of incremental freight rates and insurance premium.

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Differential impact across sectors-

As street and analysts try to gauge the impact of Red Sea crisis, the rating agency CRISIL expects it to have differential impact across sectors.

The impact will vary on depending on the industry and sector-specific and trade nuances.

The companies operating in sectors such as agricultural commodities and marine foods, as per CRISIL could see a significant impact due to the perishable nature of their goods and/or lean margin profiles, which limit their ability to absorb the risks from rising freight cost.

The agri commodifies as Basmati rice see 30-35% of production being shipped to these regions and rising freight cost has curbed exports with produce now being sold in domestic market leading to lower realisations. Marine foods exports also are likely to see impact due to perishable nature of these products and lower margins.

The sectors like textiles, chemicals and capital goods, however may not be immediately impacted as per CRISIL, which they owe to better ability to pass on higher costs, or because of a weaker trade cycle. But a prolonged crisis over the next few quarters can make these sectors also vulnerable as working capital cycles would get stretched with orders put on hold feels CRISIL.

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A few sectors, such as shipping, could benefit from rising freight rates.

Lastly, players in pharmaceuticals, metals, and fertilisers to not be much impacted. The companies in the pharmaceuticals and metal enjoy healthy profitability and will be able to absorb the higher freight cost as per analysts.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions

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