Demand uncertainties and regional turmoil threaten Indian stakes at Iran gateway

Aerial view of Chabahar port, Iran. Credit: Chabahar Port

Sagging trade demand and rising geopolitical tensions in the Middle East region have put a heavy burden on Indian efforts to gain a head start, or even a respectable start, on its strategic investment at Chabahar Port in Iran.

Located in the Sistan-Baluchistan Province on the south-eastern coast of Iran, Chabahar is approximately 550 nautical miles from Kandla Port Trust (KPT) and about 790 nautical miles from Jawaharlal Nehru Port Trust (JNPT), two of India’s major west coast ports. In exchange for a US$500 million investment commitment, India has secured exclusive rights to operate two refurbished cargo berths at Chabahar. The Chabahar harbour encompasses two gateways – Shahid Beheshti and Shahid Kalantari, but India’s bet covers the former.

India’s interest in Chabahar is two-pronged – opening an unhindered passage, bypassing Pakistan, for its burgeoning oil and energy sourcing from Iran and secondly, pushing bilateral trade with land-locked Afghanistan as part of a May 2016 pact between India, Iran, and Afghanistan.

After lengthy delays due in large part to business restrictions from US sanctions against Iran, India kicked off operations at Chabahar in December 2018. However, one year into the opening, the shipping route has had a lukewarm response from liner ship operators, with the exception of some sporadic bulk vessel movements. To illustrate the magnitude of the growth struggle, out of Chabahar’s total market size of 50,000 TEU annually, first-year operations under the Indian contract saw some 4,850 TEU, according to available industry data.

Aside from container equipment inadequacies, competitive disadvantages vis-à-vis the established Afghanistan-Karachi (Pakistan) route are denting the Chabahar growth. Although shipping costs for Afghanistan-bound Indian freight have gone down a bit since the Chabahar opening, transits via Karachi are still seen as more economical. To explain why, anecdotal industry estimates put the cost of moving an Indian container directly to Afghanistan via Chabahar at $2,000 against about $1,600 for Karachi and $1,900 for Bandar Abbas transits.

The Indian venture is also in a fix because of intra-port competition from the nearby Shahid Kalantri Port. This is partly attributable to productivity issues in the absence of an efficient private partner for Indian-led operations, for which two previous bidding attempts failed to draw interest from investors and had to be abandoned.

In addition, ship operators are wary of potential additional empty container repositioning costs due to hugely insufficient export liftings from Chabahar.

To reinvigorate carrier interest in a subdued market, the Indian ports of JNPT and Kandla recently began doling out discounts up to 40 percent on normal vessel-related charges for Chabahar in/outbound calls, but even this inducement has yet to pay off. Sensing the challenges, the government is now considering enhancing the scale of such port tariff incentives, even as private terminal operators at JNPT have been averse to concessional pricing in light of their revenue sharing obligations as build-operate-transfer (BOT) operators.

This was a contentious issue during previous stakeholder consultations on tariff rebates and the consensus to extend a 40% discount was reached after port authorities agreed to compensate private terminals through revenue share adjustments. Similar pushbacks from these concessionaires cannot be ruled out if a deeper tariff cut were to be considered for implementation. 

India is also looking at other ways to boost industry participation, including setting up of roadshows at some port locations, notably Mumbai, to highlight the importance of the new shipping corridor.

At Chabahar, India holds a 640-metre container berth with a draft of 16 metres and a 600-metre multi-purpose facility with a draft of 14 metres. Phase I redevelopment included the addition of rail-mounted gantry cranes, rubber-tire gantry cranes, reach stackers, empty handlers, fork lifts, and trailers. Phase II investment will be evaluated at a later stage, according to current plans.

While Indian transport leaders are pulling out all the stops to get Chabahar off the ground, at least on a measurable scale, the task seems to be daunting and moreover, any escalation of the US-Iran conflict could torpedo all efforts on that front.