Arabian Sea likely to become 'high risk area' again, says PortsMin

Wrote to MEA, DefMin; traders may have to shell out higher freight, insurance costs

Amid rising Houthi attacks on merchant vessels in the Red Sea and Somali piracy in the Arabian Sea, the Ministry of Ports, Shipping and Waterways expressed concerns about the possibility of the Western Indian Ocean being re-established as a “high-risk area”, Business Standard has learnt.

A high-risk area is determined by the global shipping industry through its associations and declared for information for all maritime stakeholders in the global supply chain so that adequate security protocols can be put in place on those trade routes.

A high-risk area typically entails cost escalations for traders in the form of higher freight and insurance costs as the risk of traversing these trade routes is accounted for.

The shipping ministry wrote to the Ministry of External Affairs and Ministry of Defence in December 2023, highlighting this possibility, along with the impact the Red Sea crisis could have on the economy.

“The increase in operational costs could have a cascading effect on our economy, influencing trade, commerce, and the pricing of commodities. We may also consider the possibility of the re-establishment of the high-risk area in the Western Indian Ocean and Arabian Sea if such a situation persists,” the ministry wrote in its communication on the subject of the Red Sea crisis, seen by this paper.

However, an official in the know played down the high-risk area issue and said that the present concern within the Centre is largely on costs incurred on rerouting and war-risk premiums on insurance.

The Ministry of Ports, Shipping and Waterways, Ministry of Defence, and Ministry of External Affairs did not respond to this paper’s queries by the time of publishing.

The Red Sea crisis began on November 19, 2023, with the Iran-backed Houthis in Yemen launching their first attack on the Galaxy Leader, a merchant ship. Over 25 attacks have been reported to date, which encompass anti-ship missiles, piracy, ballistic missiles, and unmanned aerial vehicle strikes.

Estimates by London Stock Exchange Group Shipping Research suggest that a single tanker voyage between Asia and Northwestern Europe is now costing shippers a $1 million higher on account of rerouting via the Cape of Good Hope, as the Red Sea becomes increasingly unsafe for merchant vessels. This is not inclusive of the additional premiums being paid due to the elevated risk.

“Due to the Houthi attacks, insurance premiums are already quite high on account of a war risk premium, but the effects of becoming a high-risk area, if it happens, may become visible once the Red Sea crisis is over. Insurance costs had come down after the high-risk area was removed in 2023,” the head of a logistics industry body said.

The commerce ministry is currently spearheading the Centre’s efforts to minimise the impact on trade and has asked the Department of Financial Services to ensure a smooth credit flow for traders grappling with surging costs.

At the end of 2023, a rise in piracy in international waters after a period of calm caused concerns for the Centre, which issued an advisory to all stakeholders in early December. The return of Somali pirates in the Arabian Sea has also become a concern for traders.

The Indian Navy has been called on multiple occasions for rescue missions in the recent past.

“The perpetrators are still operating in the area and may attempt an opportune target. Vessels are advised to exercise extreme caution, remain vigilant and maintain strict anti-piracy watch and measures,” maritime security data centre Information Fusion Centre — Indian Ocean Region said in a comment earlier this month.

Meanwhile, the finance ministry also flagged risk factors stemming from the Red Sea crisis for global trade on Monday.

“Various challenges, such as sticky inflation, sluggish growth, and mounting fiscal pressures, continue to persist in the global economy. Potential risks are expected to emanate from ongoing geopolitical tensions and the recent surge in shipping costs due to rerouting to avoid security risks in international waters, which contains the potential for triggering inflation, especially in terms of energy costs,” the finance ministry said.

The Indian Ocean high-risk area over the years has been flagged by the shipping industry, comprising associations such as the International Chamber of Shipping, International Association of Dry cargo Shipwoners (InterCargo), Baltic and International Maritime Council, International Marine Contractors Association, International Association of Independent Tanker Owners (Intertanko), and Oil Companies International Marine Forum.

In August 2022, the industrial group of shipping associations proposed to the International Maritime Organization, seeking the removal of the high-risk area in the Arabian Sea, on the back of “a significantly improved piracy situation in the region, largely due to concerted counter-piracy efforts by many regional and international stakeholders”.

Subsequently, the Indian Ocean high-risk area was removed in 2023.