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Traffic figures began to climb up

Traffic figures began to climb up
Signs of a recovery at Suez Canal finally emerged over the summer as traffic figures began to climb back up.

Signs of a recovery at Suez Canal finally emerged over the summer as traffic figures began to climb back up.

Although the Suez Canal, one of Egypt"s largest foreign currency earners, suffered a significant drop in revenues late last year following the slowdown in global trade, signs of a recovery finally emerged over the summer as traffic figures began to climb back up. July receipts were the year"s highest, and, according to statements in local press, were prompted in part by the Suez Canal Authority (SCA) lowering transit fees on ships in a bid to attract more international traffic. While a return to pre-crisis traffic highs is unlikely in the short-term, lower tolls should ensure that the Canal will maintain its foothold as the preferred trade route for international shippers and continue to provide Egypt with much-needed foreign income.

In 2008, 7.5% of the world"s trade passed through the Suez Canal, including 4.7% of the global production of crude oil. Connecting the Red Sea and the Mediterranean, the 195-kilometer waterway is traditionally favored as the shortest trade route between Asia and Europe and between Asia and the east coast of the United States. The alternative route, sailing around Africa"s Cape of Good Hope, is a significantly longer journey ? a typical voyage between Saudi Arabia and the Black Sea for example, is up to seven times as long. Despite this, some have opted to take the route to avoid transit fees, which average around $200,000. As a result, Egypt reaps the benefits when bunker fuel prices are high and shipping companies need to minimize fuel consumption.

Revenue from the Suez Canal accounted for 3.2% of Egypt"s GDP in FY2007/08 fiscal year, making it the country"s third largest source of foreign currency behind tourism and remittances from expatriates. In recent years, revenue has increased dramatically, from $2 billion in 2002 and $4.6 billion in 2007 to $5.4 billion in 2008, due in part to higher transit charges ? the SCA raised the toll by an average 2.8% across all vessel types in 2007, and another 7.1% in 2008. Additionally, traffic stepped up from 13,986 vessels in 2001 to 21,415 in 2008. Over the same period, net tonnage nearly doubled from 456.1 million tons to 910.1 million tons. This growth was due in part to a spike in container trade from China, which increased its worldwide exports by 25.7% in 2007, and to capacity problems at the Panama Canal.

The global shipping industry took a beating at the onset of the financial crisis as trade volumes faltered. The Baltic Dry Index, which measures shipping costs for commodities such as iron ore and crude oil, plummeted 90% in October 2008 to 982 points from a May high of 11,793. By year-end, it stood at 663 points, down 95% from the previous year. In response, shippers slashed their rates ? by May, a container that had cost $2,000 to transport from Asia to Europe cost as little as $500.

In its 2009 interim report, Danish shipping giant Maersk announced a $540 million net loss, when in the same period last year it registered a $2.5 billion profit. Dry bulk trade, especially coal and iron ore, and container trade took the greatest hits. Coal and iron are used in the production of steel, which dropped in price at the start of the crisis, while containers typically transport Asian manufactured goods, demand for which fell considerably.

A battered shipping industry naturally spelled bad news for Egypt"s waterway, which saw a marked decrease in traffic starting in November. That month, 1,770 vessels passed through, compared to 1,900 in October. By February, the Canal"s throughput had sunk to 1,272, a five-year low. In January, the SCA announced a freeze on its transit rates, which had been subject to yearly hikes, while hinting at possible discount deals for shipping companies.

Factors other than the trade slowdown contributed to dwindling traffic at the Canal. Ships had begun choosing alternate routes due to rising piracy and the falling cost of bunker fuel. In 2008, Somali pirates hijacked 40 ships in the Gulf of Aden, which connects the Red Sea to the Indian Ocean. In 1H2009, 31 ships were taken. While the threat of attack is proportionally very low (up to 30,000 pass through the Gulf annually), it has nevertheless led shipping insurance companies to slap a hefty risk premium onto this route.

Faced with an extra $10,000?20,000 fee for using Egypt"s shortcut, several big shipping companies opted to take the long way around Africa, especially with bunker fuel reaching a low of $236 per metric ton in December. French carrier CMA CGM was among those to reroute its large containerships around the Cape of Good Hope, indicating that extra fuel for a 9,400 teu (twenty-foot equivalent unit, a standard measure of cargo capacity) ship cost just $250,000 whereas going through the Canal would have garnered a $600,000 transit fee.

Shippers" appeals to the SCA to cut its transit rates appear to have had an effect. In early January, in response to the slowing growth, SCA chairman Ahmed Ali Fadel confirmed an indefinite freeze on transit fees. According to statements from the SCA, ship owners would even be able to negotiate for considerable discounts, perhaps slicing bills by a quarter or more.

In July, local press reported that discounts of 25-30% were being offered to select liners. Per an agreement between the Egyptian and Qatari governments, Qatari LNG carriers, some of the world"s largest ships, receive up to 50% discounts. On April 30, having signed a 25-year contract to bring gas to European ports via the Canal, Qatar"s Nakilat sent the new generation LNG carrier "Mozah" on its inaugural journey through the waterway. SCA chairman Ahmed Fadel was cited as saying these discounts are all designed to increase traffic.

The SCA"s measures appear to have narrowed the cost savings gap for rerouting around Africa and have induced some customers to return. Revenue and traffic statistics for the Canal have been on the uptick since May. July saw 1,521 vessels transiting the waterway, representing an 8.6% increase from 1,401 in June. Revenue increased by 9.9% month-on-month, from $348.2 million in June to $382.9 million in July. August registered slight revenue and traffic drops ? $371.8 million and 1,453 ships, respectively ? which were the year"s second highest figures.

Traffic also received a boost from rising bunker fuel prices, which reached $400 per metric ton June 5, encouraging ship lines to divert back to the Canal route. However, measured against figures from the pre-crisis shipping boom, July"s numbers represent only a small improvement. July"s revenue, the year"s highest, still represents a 22% decrease over the same month last year, during which $490 million was generated. Net tonnage dropped 18% (from 79.3 million to 64.8 million) and traffic 18% from 1,854 vessels. August, the highest earning month of 2008, performed even worse, registering a 26% yearly decrease.

Nonetheless, given the state of the shipping industry, this summer"s modest numbers are about the best that Egypt can hope for right now. A return to pre-crisis traffic and revenue highs will not be possible until international trade volumes recover, a factor that remains out of the hands of the SCA. However, the Canal"s authorities are taking the correct measures to ensure that the passage continues to receive the bulk of east-west maritime traffic. By lowering its transit rates, Egypt has protected a valuable source of capital inflow in a time of global financial uncertainty.


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