Suez Canal crisis

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Suez Canal crisis: Could this impact India's earnings story? While a prolonged blockage of this vital trade route could impact company earnings, analysts said that it’s too early to gauge the full extent of the potential repercussions. ANISHAA KUMAR DECEMBER 21, 2023 / 02:22 PM IST      

The repercussions could also depend on dependency on the route, industry-specific vulnerabilities, and adaptive strategies. A prolonged blockage of the Suez Canal, one of the world’s most vital trade routes, could erode India Inc’s earnings as global freight costs may rise significantly and stoke inflation, analysts said. In a December 19 report, CNBC reported that cargo worth around $35 billion had been diverted, with around 57 cargo ships changing their route as major shipping corporations announced their decision to pause movements through the Suez Canal route after the recent attacks on ships passing through the area by Yemen-based Houthi rebels, backed by Iran. Potential impact on India One of the biggest impacts of the blockage of trade or use of alternative routes is usually an increase in freight rates as routes get longer and volumes reduce. While this is beneficial to shipping companies, increasing costs of transportation and delays in shipments could have larger implications. Also read: Shipping giants halt Suez Canal routes: Should you buy shipping stocks now? You May Like Move In to 1,2BHK Futuristic Homes by AsmitA Grand Maison AsmitA India Learn More by Taboola

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logistics costs are bound to rise, which Indian exporters and importers may find difficult to pass on to end users. “The weak macroeconomic outlook further limits the ability to pass on the cost increases to end users. If the Red Sea conflict lingers on for a long time or the conflict escalates, it could stoke inflationary pressures and keep the cost of financing high in the near to medium term,” he says. To be sure, several analysts said that it would be too early to conclude whether it could potentially hit India’s earnings story. Markets have not seen any adverse impact yet because of this news. Only some shipping stocks saw immediate gains over the last two days. While there has been some volatility in Indian stocks, analysts say one cannot directly connect this to the ongoing crisis. Most experts would like to see price signals to decide which way to go. Thus, for the market, it seems to be signalling that the issue may not escalate for a longer period as stocks are still holding up. The sell-off we are seeing in smallcaps is not necessarily an indication of risks emanating from the Suez Canal blockage. It is thus better to wait and watch, experts said. Some experts, however, pointed out that investors are booking profits where they can. Several midcap and smallcap stocks where investors are sitting on significant

profits are taking them off the table to protect them from a potential crack in the market that could stem from a larger risk-off trade if the crisis intensifies. If extended, the crisis could lead to challenges across the board, especially in segments that depend on cross-border trade, like the import of raw materials or even the export of finished products. “If the problem persists, the overall logistics cost will go up, especially if the logistics cost is a key part of the business. Then their profitability will get hit,” said Sneha Poddar, an analyst at Motilal Oswal Financial Services. Also read: Suez Canal closure worries industry but government confident of minimal impact “Delays and rerouting can disrupt supply chains, and industries heavily dependent on imported raw materials and inputs may face increased costs. Just-in-time inventory systems, perishable goods, or those highly reliant on timely imports and time-sensitive production requirements of inputs could be most at risk, as could sectors heavily integrated into global value chains, potentially affecting employment and economic stability,” said Winnie Shekhar, Partner, Indus Law. Poddar added that, in the short term, it could mean that costs could be absorbed by shipping companies themselves, but in the long term, it could lead to price rises

for consumers as well as challenges for the customers in fulfilling orders and a contraction in earnings. Some of the sectors that could be impacted include textiles, oil and gas, chemicals, some capital goods companies, metals, and pharma. “In the long term, it is a big negative for India because it has to depend a lot on imports. But currently, we don’t expect it to be a big issue for the Indian market on a medium- or short-term,” Vinod Nair of Geojit Financial Services says. The chemical sector, Gogia of ICRA said, remains significantly exposed to global markets and is already under pressure from Chinese dumping. The rise in freight costs, he says, may increase cost pressures as shipments take longer to reach end users. On the port side, container traffic, which had witnessed robust growth in the last seven months of FY2024, may witness headwinds due to longer travel times, leading to issues like container availability. Déjà vu 2021? The last time India was faced with a trade crisis arising out of the Suez Canal was in 2021, after a large container ship blocked the route for nearly a week. This incident, which came amidst an already-lingering global COVID crisis, saw countries around the world facing

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delays of over $10 billion per day. “This blockage had a huge economic impact on global players and significantly slowed down trade between Europe, Asia, and the Middle East (including India). The last 2021 blockage led to a hike in freight rates by 5-15 percent, largely increasing input and import costs, apart from causing massive delays and disruptions in the supply chains,” Shekhar explains. While India did notice a decline in GDP rates from 2021– 2022, analysts say that there were larger global reasons behind the decline, such as the COVID pandemic in 2021 and the Russia-Ukraine war in early 2022. This quarter, India has reported a GDP of 7.6 percent, beating the RBI’s forecast of 6.5 percent. Nair is of the view that one cannot compare the possible impact of the current situation to any of the previous global crises, whether the Russia-Ukraine war or even the 2021 Suez Canal blockage. “From 2022 to 2023, due to the Russia-Ukraine war, there was a direct impact on commodities like wheat, but it is different this time and cannot be a like-to-like comparison,” he says. Additionally, Gogia explains that while there was a freight cost increase at that time, as the issue was resolved within a week’s time, it did not have a structural impact on the economy.

“Most of the trade experiences in the past have been ephemeral in nature, like the sharp rise in freight rates, post-COVID, and the blockage of Suez in 2021, which impacted the economy for a short period of time; thereafter, as things normalised, the economic impact also waned,” he says.

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