MUMBAI: If the ongoing war on Iran and its counter attacks on its neighbours and the resultant uncertainties persist or escalate, there could be adverse impact on sectors such as fertilisers, diamond polishing, travel operators, airlines and basmati rice exporters, given their direct exposure to the region.
If the closure of the Strait of Hormuz continues for longer, the impact on energy prices will be too high for downstream industries that dependent on LNG and crude oil, Crisil Ratings has warned in two separate reports Thursday.
Countries affected by the war are Israel, Iran, the UAE, Oman, Yemen, Qatar, Kuwait, Bahrain, Saudi Arabia, Iraq, Lebanon, Syria and Jordan. Of these, the UAE, Oman, Qatar, Kuwait, Bahrain, and Saudi Arabia are under Iranian attacks, the others are under Israeli fire.
While we depend as much as 20.1% of imports from the affected six Middle Eastern countries in the first three quarters of this fiscal at Rs 1,016,951 crore, (for full FY25 this was 21.5% or Rs 1,308,611 crore), our exports to the region was 15% in FY25 at Rs 5,54,705 crore but rose in percentage terms to 15.1% in the nine months of this fiscal at Rs 4,35,381 crore, Crisisl said quoting the commerce ministry data.
While our imports are primarily crude, petroleum products and LNG, our exports consists primarily of basmati rice, fertilisers, and rough/polished diamonds, as well as some capital goods and spices. Furthermore, various services sectors, including airlines and travel operators, also have significant direct and indirect exposure to the region.
While crude prices shot up over 14% since the war began and is inching towards $84/barrel mark today, the closure of the Strait of Hormuz by Iran, saw the liquefied natural gas (LNG) prices shootng up over 2.5 times from $10/MMBtu to $24–25/MMBtu as the supply chain is disrupted after Qatar, the largest LNG supplier from the region, has declared force majeure on deliveries following a halt in production at its Ras Laffan facility that was damaged by Iranian missile strikes.
Apart from the above cited sectors, additionally, sectors such as ceramics and fertilisers, with high dependence on imported LNG, could see near-term production impact, while crude-linked sectors such as downstream oil refiners, tyres, paints, specialty chemicals, flexible packaging and synthetic textiles could also be affected, Manish Gupta, senior director and deputy chief ratings officer at Crisil Ratings and Aditya Jhaver, a director with the agency said in a separate report Thursday.
The Middle East account for 30% of global crude and 20% of global LNG production. A majority of this is transported through the Strait of Hormuz. India imports 85% of its crude and half of its LNG requirement. Of this, 40-50% of crude and 50-60% of LNG are shipped through the Strait of Hormuz. Most shipping vessels have stopped sailing on this route since March 1 after Iran closed the passage for all except Chinese vessels.
The price of Brent crude has already surged to around $84/barrel from an average $66-67 during January-February. For Asian spot LNG, price has flared up from $10/MMBtu to $24–25/MMBtu. A further surge would widen the country’s current account deficit and stoke inflation. It will also impact corporate profits, given the critical role of energy across sectors, they said.
Additionally, the country also imports about two-thirds of its LPG mostly from the Middle East. LPG is primarily used towards household consumption with only 10% used as fuel in industries, limiting the impact on India Inc.
The war has also increased air/sea freight costs and insurance premium for export/import-based sectors, which could impact the profitability of those with significant trade exposure globally.
The following is a detailed impact assessment of the sectors expected to see a greater disruption:
Basmati Rice: Exports to the Middle East and other West Asian countries constituted 70-72% of our basmati export volume of nearly 6 million tonne last fiscal. Basmati rice is a staple diet for these countries, and most of the demand is met through imports. The recent developments may lead to delays in shipments and impact basmati trade volume in the near term.
“A prolonged conflict could lead to delays in payments from counterparties in these regions, elongating working capital cycles. However, healthy balance sheets of exporters offer a cushion to credit profiles,” Gupta and Jhaver said.
Fertilisers: India imports 30% of fertiliser requirements and the Middle East supplies 40% of it. The country also depends on this region for 30% of its imports of key raw materials and intermediates, such as rock phosphate, phosphoric acid and muriate of potash.
As a result of the closure of the Strait, Sehul Bhatt, a director, Crisil Intelligence said Asian spot LNG prices have flared up from $10/MMBtu to $24–25/MMBtu. Qatar supplies 10–11 mtpa of LNG to India, tantamount to 45% of its imports, while the same sent the gas prices in Europe by over 55%. The massive price spike has also to do with Iran closing the critical shipping passage the Strait of Hormuz which carries over a fifth of global energy supplies.
Parallelly, the largest LNG terminal operator in the country Petronet LNG, has also invoked force majeure for its affected tankers after insurers pulled out of key Middle East routes leading to choking of supplies in the Strait. It has also served force majeure notices to downstream off-takers, mostly oil marketing companies and public sector utilities, leading to curtailed supplies.
“If supply tightness persists, price-sensitive industrial consumers may seek alternative fuels, such as liquefied petroleum gas, furnace oil, or naphtha. The extent of this feedstock diversification will be a function of the cost-benefit math. Elevated LNG prices can also translate to costlier gas supplies to fertiliser plants. This, in turn, can increase the government’s subsidy burden,” Bhatt warned.
The ongoing uncertainties can lead to supply-chain disruption with possible impact on imports. Since the region also plays a key role in the global supply chain, there is a likelihood of an increase in the international prices for urea and di-ammonium phosphate. Additionally, LNG is a feedstock for manufacturing urea. Its reduced availability, or increased prices, will impact production or raise input costs. All of these, in turn, can result in a higher subsidy requirement than budgeted by the government.
Diamond Polishers: The Middle East is a major trading hub with Israel and the UAE together accounting for 18% of total diamond exports in the first nine months of this fiscal. Additionally, 68% of all Indian rough diamond imports are from the UAE and Israel due to the auctions held in the region.
What can be a mitigant here is that polishers have alternative trading hubs, such as Belgium and Hong Kong, with ultimate buyers based in the US and Europe. This will help them manage further adverse impact on a sector that has been under pressure from higher US tariffs.
Airlines: Around 10% of total flights operated by domestic airlines transit to, or through, the Middle East. Airport and airspace closures in most key cities, especially Dubai, the second-busiest airport in the world, has crippled air travel.
While limited flights have resumed operations from March 3, mainly to evacuate tourists and foreign nationals, a return to normalcy is seen taking time. In addition, due to airspace restrictions, flights by domestic carriers to and from Europe and the US will incur higher fuel costs as diversions and detours add to flying time.
Fuel accounts for 35-40% of operating cost for airlines. An increase in ATF prices will impact operating margins given the limited ability of airlines to pass on, especially on domestic routes. Further, any sharp depreciation in the rupee will also have a bearing on the profitability of airlines as a significant portion of their lease liabilities is in foreign currency.
Travel Operators: India’s outbound travel mix comprise 25% to the UAE, 10% to Saudi Arabia, and 10% across Qatar, Kuwait and Oman. Cancellations and postponements may rise, but most cancellation charges being insured, incremental cash outflow remains limited.
The impact will be more from timing of revenue recognition, with refunds and re-bookings leading to shift in revenue into future periods. Moreover, higher airfares and uncertainty may slow new bookings, leading to margin pressure, although some demand may be diverted to alternate destinations like Southeast Asia.
Ceramics Manufacturers: The impact is likely to be on two fronts. First, with the supplies of LNG and LPG hit, majority of ceramic plants will be forced to operate at lower, or even nil, utilisation levels. Second, exports contribute 40% of their overall revenue, of which the Middle East contributes over 15%.
City Gas Distributors: LNG imports account for 40% of total demand and the war has already hit LNG supplies. The impact, however, would be primarily on the industrial segment, which is heavily reliant on imported gas and may experience a drop in sales. But, margins may not be hit hard as prices for most alternatives for customers are also linked to crude, which are also expected to see an uptick.
Oil Refiners: A prolonged rise in oil prices would pressure gross refining margins as higher input costs may not be fully or immediately passed through an increase in retail fuel prices.
Paints & Specialty Chemicals: There could be some pressure on profit margin as 30% of the production cost is linked to crude prices, where competitive intensity and suppressed demand could limit ability to pass on elevated input prices to customers, thereby impacting profitability.
Tyres: About half of the operating cost for the sector is linked to crude prices. While tyre producers may be able to pass on part of the increase in cost via higher product prices, there can be a lag in pass-through, especially for original equipment manufacturer sales (contributing to 35% of revenue), compared with the replacement market.
Flexible Packaging & Synthetic Textiles: While 70-80% of production cost for these sectors is linked to crude prices, the impact of an increase can be moderate due to the improved demand-supply scenario and manufacturers’ ability to pass on costs to customers, albeit with a slight lag.
The impact of a further rise in crude prices will vary across sectors depending on their direct/indirectly exposure, impact on profitability will depend on the ability to pass on the cost increases.
While rising crude price benefit upstream oil companies because they translate to more revenue and their cost are fixed, for shipping lines despite a rise in insurance costs, are good as a spike in charter rates due to the closure of the Strait of Hormuz and the resultant reduced supply of active vessels and an expected increase in the tonne-mile demand.
Besides the Strait of Hormuz, the Red Sea route via the Suez Canal is another critical shipping lane in the Middle East, extensively used for global merchandise and crude trade connecting Asia with Europe, North America and North Africa. Although trade through the Suez Canal has declined significantly over the past 15-18 months following the Houthi rebel attacks, it remains substantial. Any major disruption to this shipping route, as a potential domino effect of the conflict, could further impact crude prices and shipping time and cost and will warrant close monitoring.
Notwithstanding the potential risks, the near-term impact on most domestic companies is expected to be limited, given their robust balance sheets, which provide a cushion against vulnerabilities, Gupta and Jhaver said, adding however, prolonged uncertainties could exacerbate the problems.