Cheap Oil May Spell Trouble for Canals

by Henrik Vorloeper

One of the most interesting news stories this month was published on the website, “BBC Future”, and discusses the trading industry and its return to pre-industrial shipping routes and avoiding manmade waterways like the Suez and Panama Canals by detouring around continents.

This new phenomenon was explored and analyzed by the Danish SeaIntel Maritime Analysis and has produced some interesting statistical data. Between October 2015 and February 2016, 78 cargo vessels enroute to the Indian Ocean from the Atlantic have avoided the passage through the Suez Canal in favor of the longer route around the southern African cape. The rising trend indicates that more and more shipping companies are opting for the longer route in order to avoid “bottlenecks” and high transit fees. For example, despite the benefits of passage through Suez, which reduces the distance of a sea journey from Rotterdam to Singapore by 3,500 nautical miles (roughly the distance between Moscow and Shanghai), shipping companies are increasingly taking the long way around. The simple economic reason for this: the low oil price and the high transit fees imposed by the Egyptian authorities make shipping through the passage between the Mediterranean and the Red Sea unattractive for traders. According to OilPrice.com, vessels passing through the Suez pay an average of USD 465,000 on transit fees, while the South African route, with higher fuel costs, still saves an average of USD 235,000. Fuel for ships fell from USD 400 to USD 150 per metric ton in May 2015 (Singapore prices), as a result of low crude prices encouraging the alternate route for traders.

This trend is bad news for Egypt, since the Suez is the major source of foreign currency for the state and it risks losing billions of dollars in income if this trend continues. According to the numbers provided by SeaIntel, the Suez would have to half its transit fees in order to attract ships to return. The current political turmoil and weak government makes Egypt even more dependent on income from this source. In response and in order to maintain its favorable geographic location, Cairo just raised USD 8 bln to widen the canal. The new measurements would allow ships to reduce the transit time in the Suez from 18 hours to 11 hours, an achievement that sounds bizarre, taking into consideration that shipping companies seemingly accept additional transit time with an average of one week, to go around Africa instead of Suez.

The question is whether low fuel prices will compensate for longer journeys or not. It is not that any ship and any cargo has the same formula for the most economic shipping route, so that some vessels might continue to rely on Suez and reduced transit times remains an asset of hope for Egypt. However, also here the market situation does not speak for Egypt’s fortune for several reasons. First, low fuel prices allow ships to increase the average speed, hence reducing the time difference between the two routes. Second, shippers still have the potential to optimize the cargo, the size of the chartered vessel and the ports in which the cargo can be dropped. Third, cargo vessels, especially oil tankers want to stay longer at sea, as according to BBC, the current oil glut makes it for oil producers more attractive to store in any available storage capacity, including ship tanks, where it waits for higher prices to be sold. Higher oil prices, is what Cairo hopes for as well, therefore our assessment is that Suez will eventually have to adjust its fees according to the current economics, but not as dramatic as it appears to be on the first impression and ships will return to Suez.

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