Suez Canal expansion carries risks alongside opportunity Upgrade project not seen as a game-changer for shipping, with fears funding pressure will lead to increase in transit tolls when completed Toiling under a hot summer sun, about 10,000 workers and two army battalions have dug eight million cubic metres of earth in the Egyptian desert since 10 August, when excavation work began on a new Suez Canal lane to run alongside part of the historic 163-kilometre (101-mile) waterway. The $4bn project, scheduled for completion in between one and three years, would allow two-way traffic in the canal, cutting the maximum waiting time of ships by about eight hours and allowing it to double the number of vessels it can handle daily to 97. But shipping industry players are unimpressed by the plan because they understand the new canal will not allow even bigger ships to cross and, thus, is unlikely to create new trades. “I don’t see it as a game changer,” Bimco chief shipping analyst Peter Sand told TradeWinds. One ship operator added: “With charter rates at about $7,000 to $8,000 per day, the market is such rubbish right now that a quicker Suez transit wouldn’t make a difference.” According to Egypt’s state-run news agency, citing canal officials, the new 72-kilometre-long (45-mile) waterway would slash waiting times for ships to just three hours. It is understood that a 35-kilometre stretch of the system would involve the dry digging of a new, parallel lane, with the remaining 37 kilometres being an expansion and deepening of the current one. According to the website of the Egyptian government’s information agency, the Suez Canal Corridor Development Project includes “the double-tracking of the Canal’s navigational waterway at a length of 34 kilometres long in the area from Al-Ballah Bypass to the 52-kilometre area at the Western Qantara”. Canal officials did not respond to TradeWinds’ phone calls or return an e-mail to provide clarifications. At the moment, only fully laden, very large crude carriers (VLCCs) are unable to cross the canal on a commercial basis. In order to make the journey, they funnel excess crude through the SuMed pipeline linking Suez on the Red Sea to Alexandria on the Mediterranean Sea. “If the expansion allowed a VLCC to transit full, then at least some of the costs could be saved from needing to use the SuMed pipeline but this does not seem to be the case,” another industry source said. The Egyptian government did not face any pressure from the shipping industry to overhaul the canal, particularly in the current, dismal market environment. “There has been no official contact on this issue between the ICS [International Chamber of Shipping] and canal authorities,” ICS director of external relations Simon Bennett told TradeWinds. The plan likely aims to boost Suez’s competitiveness vis-a-vis the Panama Canal — the expansion of which will pitch the two waterways into direct competition for containerships of up to 13,000 teu on the route between Asia and the US East Coast (USEC). “Suez’s monopoly is coming down now from everything beyond 5,000 teu to everything beyond 13,000 teu,” said Sand. “For the shipping industry, it’s pretty useful to have alternative routes to go to the USEC. Hopefully, that will bring around a competitive pricing environment.” Competition on this route has heated up lately, with Suez overtaking its Central American rival for the first time in terms of container capacity from Asia to the USEC, as reported by TradeWinds. Panama’s expansion, scheduled after several delays to become operational in 2016, might explain Egyptian president Abdel Fattah al-Sisi’s push to complete the Suez upgrade in as little as 12 months — a much shorter period than the three years initially announced by Suez Canal Authority chairman Mohab Mamish. But market players take any completion deadline with several pinches of salt. “The initial time frame of one year looks very unrealistic,” said Eva Tzima, an analyst at Athens-based Intermodal Research & Valuations. “Just consider how they’re struggling to complete the Panama Canal expansion, which is a project that makes a lot more sense.” Egypt has begun digging before having secured the financing yet. Al-Sisi says the Egyptian government will do away with any foreign funding, instead relying on domestic financing. Funds will be raised through local-currency investment certificates sold to Egyptians only, bearing a bumper annual interest rate of 12%, says Central Bank of Egypt governor Hisham Ramez. The certificates are to be sold soon by three local lenders, the National Bank of Egypt, Banque Misr and Banque du Caire. The government is also considering issuing five-year, 3%-bearing certificates denominated in dollars or euros for Egyptians living abroad. The government plans to raise as much as $8.4bn from the transaction to also fund a host of other associated projects, including large “logistical projects” understood to include container terminals, bunkering stations and adjacent car roads and tunnels. As TradeWinds’ website reported, Egyptian finance minister Hany Kadry Dimian expects these projects to almost triple the canal’s revenue in a span of four years to an annual $13bn, covering the investment’s capital costs. But industry players fear this assumption might be too optimistic, leaving the project with a funding hole that might have to be plugged with higher tolls. “The industry is extremely concerned about tolls, and a further hike is definitely going to deny the big volumes of ships in transit that are currently projected post-expansion by the Egyptian government,” Intermodal’s Tzima said. ICS’s Bennett added: “There would be concern among shipowners if the proposal was simply used as a justification or pretext to increase tolls in what remains a very difficult market,” adding Suez has already hiked tolls three times in as many years. “Last year, the increases amounted to 4%, which is actually quite a dramatic change given the current state of the market,” he said. With political turmoil hitting Egypt’s tourism hard in recent years, the canal is left as the country’s sole major foreign currency earner and pressure on canal authorities to boost receipts have been on the rise. Higher tolls would be of particular concern to boxship operators running scheduled services, who would be the best placed to benefit from shorter transit times. “The upgrade would remove a bottleneck, therefore they could increase their schedules or slow speed — it would give them more flexibility,” said one shipping source. “If you’re a bulk cargo operator, it’s usually somebody else who’s paying for the time if you’re delayed due to congestion at the canal.” More ships on the waterway would also increase accident risk, says insurer Allianz. “Higher frequency of the traffic and the added complexity that a new shipping lane would bring could also present a number of risks in the future,” said Captain Rahul Khanna, global head of marine risk consulting at Allianz Global Corporate & Specialty (AGCS). A total 16,596 ships crossed Suez in 2013 and another 8,160 between January and the end of June this year. According to Allianz data, the odds of a shipping incident occurring in Suez are at around 1:1,100 ships compared with Panama’s higher ratio of 1:4,000. Suez sees relatively fewer collisions than Panama but it does suffer more machinery damage, wrecks and strandings. “Authorities must place proper emphasis on quality training for pilots and tugs in order to reduce human error when the new canal opens,” Khanna told TradeWinds. Players expect Panama and Suez to remain shipping’s main arteries, seeing off any possible competition from the Arctic route or possible new projects, such as the Nicaragua Canal. “For any meaningful future, I only see two canals competing for shipping traffic and that’s Panama and Suez,” said Sand. “I think the Arctic shipping route is wishful thinking from some players in the market. The likelihood of the Nicaragua channel being built is less than 50% but you never know with shipping and big money.”
Posted on: Mon, 29 Dec 2014 12:49:23 +0000
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