Can the Suez Canal Crisis impact India's income?

 Can the Suez Canal Crisis impact India's income?

Market players think it is too soon to predict what the longer-term effects of the crisis' continuation would be, despite the possibility that they will be significant.

Route reliance, industry-specific vulnerabilities, and adaptive tactics might also affect the outcome.

If the bottleneck at the Suez Canal continues, economists warn that India's earnings narrative and stock prices might suffer, but it is still too early to give up.

In a story published on December 19, CNBC said that major shipping companies have blocked the Suez Canal due to recent assaults on ships that were going through the canal, resulting in the diversion of around 57 cargo ships and the loss of over $35 billion in cargo. has declared its intention to halt traffic on the road. the region occupied by the Houthi rebels in Yemen, who are supported by Iran.

Potential effects on India

When routes become longer and volumes decline, the biggest effect of trade interruption or the adoption of other routes is often an increase in freight charges. While this is advantageous for shipping firms, there may be serious repercussions from higher transportation costs and cargo delays.

Indian exporters and importers may find it challenging to pass on rising total logistics costs to final consumers, according to Varun Gogia, Assistant Vice President and Sector Head, Corporate Ratings, ICRA Limited.

The bleak macroeconomic prognosis makes it much harder to pass cost hikes on to customers. In the short to medium term, rising inflationary pressures and hefty finance costs might result from the Red Sea conflict escalating or prolonging, the expert warns.

However, a number of experts that Moneycontrol contacted with said that it was too soon to draw any firm conclusions about whether this will slow down India's profits narrative.

This news hasn't yet had a negative effect on the market. In the last two days, only few shipping stocks saw an instant increase in value. Analysts claim that although there has been some volatility in the Nifty and Sensex, it cannot be directly attributed to the current situation.

When choosing a strategy, the majority of specialists will wish to consider price indications. Given that the stock is still in the doldrums, the market interprets this as evidence that the problem may not worsen in the long run.

The smallcap selloff we are seeing is not representative of the danger associated with the closure of the Suez Canal. Thus, rather of giving up, experts advise waiting and observing.

Nothing has fundamentally changed. Apart from the Red Sea issue, which affects 12% of global trade, emotionally, it is quite significant, and there is always a chance of an escalation. However, Israel, Hamas, or Ukraine, Russia, independent market expert Ajay Bagga told Moneycontrol in a separate conversation, "or these are well covered."Therefore, mood and geopolitics are not that large of a market driver.

Experts have noted that investors are, however, making money wherever they can. Several mid-cap and small-cap stocks, in which investors have made substantial gains, are being removed off the market to shield them from possible market fissures resulting from high-risk trading in the event that the crisis worsens.

Should the crisis persist, a plethora of obstacles may arise, particularly in industries that rely on international commerce, such the importing of unprocessed goods or even the exportation of final goods.

"The overall cost of logistics will rise if the issue lasts for a long period, particularly if they account for a significant portion of the business's expenses. Then, Sneha Poddar of Motilal Oswal Financial Services said, "their profitability will be affected."

See also: Industry concerned over Suez Canal closure, but government believes effect will be limited

Supply chains may be disrupted by delays and rerouting, and businesses that mostly depend on imported inputs and raw materials may see a rise in expenses. Perishable goods, just-in-time inventory systems, or industries that rely heavily on imports and inputs for time-sensitive production "may be most at risk," according to Vinny Shekhar, partner at Indus Law, because these industries may be deeply ingrained in global value chains, which may "seriously affect employment and economic stability."

The length of the crisis also affects the outcome. According to Poddar, this could allow shipping businesses to cover expenses in the short run, but in the long run, it might result in higher pricing for customers and make it more difficult to complete orders. There could be more contractions. Getting paid.

Textiles, oil and gas, chemicals, metals, pharmaceuticals, and some capital goods corporations are among the industries impacted.

India would ultimately suffer greatly from this as it will have to depend more on imports. However, as of right now, Geojit Fine Vinod Nair of Ensia L Services says, "We do not anticipate this to be a major issue for the Indian market on a medium or short-term basis."

According to Gogia of ICRA, the chemical industry is already under pressure from Chinese dumping and is exposed to international markets.

He claims that if goods take longer to reach end customers, rising freight prices may exacerbate cost concerns. Longer travel durations may provide challenges for the port side's container traffic, which had grown significantly in the last seven months of FY24. These problems might include container availability.

Remember 2021?

When a big cargo ship obstructed the Suez Canal's passage for about a week in 2021, India last experienced a trade crisis.

The event resulted in daily delays for nations worldwide exceeding $10 billion, and it happened within the continuing global COVID problem. Global players suffered greatly economically as a result of the interruption, and commerce between Europe, Asia, and the Middle East—including India—slowed down dramatically. In addition to producing significant delays and disruptions in supply chains, the earlier 2021 interruption resulted in a 5–15% rise in freight rates as well as a large surge in input and import expenses, says Shekhar.

..While India's GDP rates did decrease between 2021 and 2022, researchers attribute this decline to more significant global reasons, such as the COVID-19 pandemic in 2021 and the Russia-Ukraine conflict in early 2022. India's GDP for this quarter came in at 7.6%, higher than the RBI's prediction of 6.5 percent.

Nair thinks that no other global catastrophe, not even the 2021 blockade of the Suez Canal, can really equal to the potential consequences of the present scenario.

"The Russia-Ukraine war from 2022 to 2023 had a direct impact on commodities like wheat, but this time it is different and there cannot be similar comparisons," he claims.

Goggia further notes that while freight charges went up at the time, the issue was fixed in a week and had no long-term effects on the economy.

The majority of trade experiences in the past, he claims, have been transient. Examples include the spike in freight costs during the Covid pandemic and the 2021 Suez blockade, which had a brief negative effect on the economy before things returned to normal.