Red Sea tension raises insurance, freight charges for ships

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Though the Iran-Israel conflict did not trigger a spike in global crude prices or trigger a deep correction in the stock markets as apprehended, the confrontation is perhaps going to inflict a drawn out impact on Indian businesses, thanks to freight charges and insurance premia that might spike for shipping vessels due to the heightened tension between Iran and Israel.

The Economic Times has reported that vessels moving on global routes could become more expensive with ships bound for the developed economies of the US and western Europe suffering the maximum impact.

The tension in the region has also resulted in the lengthening the time for a round trip between India and Europe by about 38%. Earlier, a ship would take 63 days on average to move from India to Europe and back. Now, the time has expanded to 87 days.

As a result, exporters are bound to bear extra charges, which is bound to rise further if the confrontation is prolonged. Industry experts have told the newspaper that freight rates have already moved up by almost $100 per container for vessels that are navigating the Red Sea due to disruptions and capacity constraints.

The confrontation between the two nations have overnight hiked the war risk insurance premium. What was only about 0.05% before the conflict, has now moved up between 0.75% and 1% of the insured value of the vessel.

Sunil Vaswani, executive director at Container Shipping Lines Association, told the newspaper, “These high premiums are a consequence of increased risk due to Houthi activity in the region.” Vaswani admitted that there is a distinct possibility of expenses rising even higher if the conflict drags one.

Global shipping major AP Moller-Maersk has announced peak season surcharge for a few routes on April 22. “There is space constraint on the ships, which is leading to higher fares. Shipping a standard size container (20 feet long) to Europe now costs $2,500, five times up from $500 before October 2023. Fares to the United States’ east coast have also risen significantly to $4,500 per container, up from $1,500 in the pre-crisis period,” chairman at Engineering Export Promotion Council of India, Arun Kumar Garodia, told the newspaper.

Garodia too said that costs will go up if the Red Sea crisis worsens.

It might be mentioned that the Israel-Hamas conflict has already pushed India into a difficult position as New Delhi is close to Israel and Iran. India imports about 85% of its crude requirements and it is critically dependent on this route for crude imports. Already Red Sea has posed difficult for Indian imports due to attack by Houthis of Yemen who are supported by Iran. The Israel and Iran confrontation threatens another crucial sea route – the Strait of Hormuz.

The US Energy Information Administration regards the Strait of Hormuz as the world’s most important oil transit choke point.