The sharp rise in freight rate would impact medium and small entities, Ind-Ra’s Soumyajit Niyogi said. File
| Photo Credit: C.V. Subrahmanyam
A recent four-fold spike in container freight costs, could hit Indian exporters’ profit margins and enhance their working capital requirements through 2024-25 if there is no respite soon, with smaller players likely to face a worse impact, India Ratings and Research (Ind-Ra) warned on Monday.
While freight rates had corrected significantly after the surge witnessed in 2022 after the COVID pandemic due to supply chain bottlenecks, the correction in freight and forwarding cost of Indian corporates was lower than that for international freight and forwarding cost, and is likely to inch up in this financial year, Ind-Ra noted.
“After a brief lull period, the global trade is expected to gain traction, and for that undisrupted sea trade and conducive freight rate are essential.
The sharp rise in freight rate is more detrimental for the medium and small entities with thin margin,” says Soumyajit Niyogi, Director, Ind-Ra, adding that the working capital cycle, which had peaked during the pandemic before reverting to the mean, is also showing signs of lengthening this year.
While part of the uptick in global freight rates could be a surge in Chinese exports seeking to beat the duty protections kicking in the U.S. from October 1, the firm said freight rates are still likely to rise further. It attributed this to the higher usage of fuel and rising insurance risk premia due to the disruptions in the Red Sea as well as a 24% drop in merchandise trade flowing through the Panama Canal this year.
“Increased travel time and expansion of trade routes are causing congestion at the main ports, thus increasing the turnaround time for ships and adding further to the cost,” the rating agency observed.
Its research note is based on an analysis of 102 listed corporates with 25% or more of revenues and/or raw materials sourced from foreign trade for the period 2018-19 to 2023-24.
“If sustained, the surge in container freight rates could affect the business operations, EBITDA margins and working capital of exporters during FY25,” Ind-Ra concluded.
