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India Ratings and Research (Ind-Ra) in its latest report has said that sustained disruptions in the Red Sea route is likely to raise the freight and forwarding (F&F) cost by 25-30 per cent for corporates largely dealing in international trade. Moreover, it said the working capital cycle is likely to aggravate by 15-20 days, and the impact could be higher for sectors such as agriculture and textiles. Working capital cycle refers to the period between payments made to suppliers and revenue received from sales. 

According to the report, pressures on cash flow, although moderate for large entities, will further increase borrowings, especially for sectors such as iron and steel, auto and auto ancillaries, chemicals and textiles, which have seen a year-on-year rise in net leverage in the first half of the current fiscal (H1FY24). The initial reaction can be seen in freight rates rising by 150 per cent in the past 45 days. The route constituted 40 per cent of the total oil imports and 24 per cent of the total exports during April to October 2023. Major shipping lines have rerouted vessels around the Cape of Good Hope, which has increased time and costs, impacting both exports and imports. 

The report further said this detour adds 12-15 days to voyages on a business as-usual basis; however, there could be a further delay owing to any sudden operational challenges. This detour is directly translating to a higher operational cost, along with freight and insurance and intermittent disruptions on account of ship size and cost dynamics. Although these disruptions have historically been short lived, a swift resolution seems improbable given the geopolitical standing.