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8,900 km saved Source: World Shipping Council
Source: Arab Academy for Science, Technology and Maritime Transport
Source: Arab Academy for Science, Technology and Maritime Transport
A year ago today the idea of a two-direction Suez Canal linking the Mediterranean and Red Seas was not on anybody’s to-do list, let alone the idea that it would be completed in 12 months.
But the idea emerged with President Abdel-Fattah Al-Sisi’s announcement in August 2014 that a second waterway would be built alongside the first and that it would be inaugurated in a year. People tried to understand what he meant, finding it difficult to see how the task could be executed.
The mission was to dig a new 72 km long and 24 metre deep canal, representing approximately the middle section of the existing 193 km 145-year-old Suez Canal. 35 km were freshly dug as part of the new project, in addition to the expansion and deepening of two sections, the Great Bitter Lakes by-passes and the Ballah by-pass, at a total length of 37 km.
Despite claims that the one-year timeframe was unrealistic, the new canal has been completed on time. By contrast, the original Suez Canal was 10 years in the making, at huge human and financial cost.
This time around, modern machinery and round-the-clock working did the trick. The dredging work on the new canal was carried out by a consortium of four contractors led by a United Arab Emirates (UAE) company, the National Marine Dredging Company (NMDC). The consortium also included the Dutch and Belgium firms Boskalis, Van Oord and Jan De Nul in a contract worth $1.5 billion. The whole project was managed by the Egyptian army.
The new waterway shortens the transit time through the canal from 18 to 11 hours. According to the Suez Canal Authority (SCA), it reduces the waiting time for vessels to three hours at most instead of the previous eight to 11 hours, cutting costs and making the Suez Canal even more attractive for shipping companies.
The new canal will make an enormous difference to shipping times, says Mohammad Shihab, managing director for Egypt, Lebanon, Libya and Syria of Maersk Line.
“That seven-hour difference represents money. It is also better from a safety perspective because it cuts the time spent waiting in the Great Bitter Lakes,” he said adding “if there are many large vessels anchored at the same time, this could increase the level of operational risks.”
Maersk Line is one of the biggest customers of the Suez Canal and part of the Maersk Group which operates in the shipping, logistics and the oil and gas industries. Last year, Maersk Line paid $729 million out of the $5 billion annual income of the canal, Shihab said. Other units of Maersk also contributed to canal revenues.
“The Suez Canal is the biggest supplier in the world that we pay money to,” Shihab said. Transit costs amount to around $500,000 per ship in one direction.
The new canal allows for the doubling of the number of vessels crossing the canal from 49 to 97 per day, forecast to increase the canal’s revenues from the current $5 billion annually to $13 billion by 2023, according to Mohab Mamish, SCA chairman.
The Suez Canal is one of Egypt’s top four hard-currency earners together with tourism, remittances and foreign direct investment. Despite the turmoil that has taken place in the country since the 25 January Revolution, canal traffic has not been affected, keeping the country’s income steady.
However, not everyone has been convinced by the new project. “Enlarging the entrance to a mall does not mean you will get more shoppers,” comments one sceptical economist who preferred to remain anonymous. He explained that increased usage of the canal would depend on increased global trade. Around eight per cent of global sea-borne trade currently passes through the canal.
But global trade has not been faring too well in recent years, and according to the World Trade Organisation (WTO) the volume of world merchandise trade will pick up only slightly over the next two years, rising from 2.8 per cent in 2014 to 3.3 per cent in 2015 and 4 per cent in 2016.
The WTO said in April that trade expansion would remain well below the annual average of 5.1 per cent posted since 1990, adding that the risks included the “unbalanced nature of the global economic recovery.”
In a report it said that any shortfall in the performance of the US economy, which has only recently began to pick up, would leave few alternative sources of rising demand. Though economic conditions in the European Union are improving, it said, EU-wide unemployment remains high at 9.8 per cent in February and contentious bailout negotiations between Greece and the rest of the euro area threaten to revive financial instability.
The outlook for China is also less certain, the WTO said, as activity in the country has eased. The 7.4 per cent increase in Chinese GDP in 2014 was the smallest such rise in 24 years, it said, adding that “China’s growth is still likely to exceed that of other major economies this year and next, but it may do so by a smaller margin than in the past. This suggests steady rather than accelerating import demand in China.”
However, economist Ahmed Ghoneim says that even if global trade is currently slow, this does not mean it will continue this way. He thinks the $13 billion target revenue for the new Suez Canal will be easily achievable as it follows the normal pattern of development over time.
According to Shihab, 100 per cent of Maersk Line ships going from east to west and vice versa currently go through the Suez Canal, being all those going from Asia to Europe, from Asia to West Africa, and from Asia to East Coast North America. The same thing applies to other shipping lines as well, he says.
Nonetheless, he foresees that there could be even more business for the new Suez Canal, since while Maersk Line “is like a bus line” which makes specific stops at specific hours, other businesses, such as ships carrying oil, “are more like taxis” operating between different locations and depending on when and where each shipment is needed.
For them, there are case-by-case negotiations according to which they decide whether to use the canal. “A more efficient canal could tilt their calculations in favour of using the canal,” Shihab says.
But the economist who spoke on condition of anonymity adds that the tendency to build larger vessels might affect the number of vessels crossing the canal. Shihab believes there is nothing to stop more and larger vessels using it, since “if forecasts for trade improve, there could be more and bigger ships using the canal.”
Shihab stresses that although today there are fewer than 97 vessels waiting to cross – 97 being the capacity of the new Canal – the project is being built for the next 100 years and not just for today, meaning that the increased capacity is very necessary and especially in the light of present congestion.
Magda Shahin, director of the Prince Al-Walid Centre for American Studies and Research at the School of Global Affairs and Public Policy (GAPP) at the American University in Cairo, agrees that global trade will eventually pick up, especially with agreements such as the Trans-Pacific Partnership (TPP) between several Pacific Rim countries which are currently being negotiated.
She believes that once finalised the TPP will have a very positive impact on the Canal, noting that China will be kept out of the TPP, increasing China’s trade with the new African regional trade area in the making. Furthermore, with the BRICS (Brazil, Russia, India, China and South Africa) countries not forming part of the agreement, they will need to compensate by trading more with each other and Africa and Latin America.
While the new canal will allow for two-direction navigation, it will still not accommodate fully-laden supertankers transporting oil. These usually offload some of their cargo into the SUMED pipeline in Ain Sokhna before passing through the canal and then reloading at the point of exit on the Mediterranean.
For this group of shippers, and especially in the light of the low oil prices which have prevailed this year, taking the longer route around the Cape of Good Hope could be attractive if canal tariffs increase.
But Shihab is confident that SCA officials will not be caught off guard or increase prices at a time when oil is cheap, possibly encouraging container ships to take the longer route. The last time canal tariffs were increased was in January 2014.
He explained that his company makes its calculations taking into account the effects of any change in tariffs. “This does not mean that any increases will cause immediate action on our part, but ultimately we are in a very cost-competitive industry, and so if there is a more cost-efficient formula the company will pursue it,” he says.
Ghoneim says that building the new canal was the right move, but he nevertheless described it as “a drop in the ocean” and urged people not to exaggerate expected returns. “The real benefits from the canal will not accrue on its own. It has to be part of the overall development of the Suez Canal region,” he said.
Shihab agrees, explaining that there is potential for more services to be offered around the canal, such as husbandry, the transportation of food, on-boarding and off-boarding of crew and bunkering (fuelling) solutions.
He said it was “like having a gas station on one highway, or another one to which you have to take a detour.” Having the station on the road you were currently on was definitely better, he said, adding that “we get these services elsewhere around the world, and if they are provided competitively by the Suez Canal, I foresee a market for it.”
It is not just about ship services, either, but is also about establishing an industrial area in the region. Shihab referred to the possibility of assembling semi-finished goods in the area to be distributed region-wide. “I am very enthusiastic about the potential of the Suez Canal Development Project,” he said.
The canal being inaugurated today has been created at a cost of some $8 billion, funded by the Egyptian people through investment certificates at an interest rate of 12 per cent. The funds were raised in a record six days in September 2014.
Ghoneim is concerned that the financing has placed a heavy burden on the government budget deficit, since it is responsible for paying the interest rate on the certificates as well as refunding them when they mature. This is not a project that should be financed locally, he says. “Going forward, the project needs to be funded differently by international investors and donors.”
Even before the new waterway was built, the Suez Canal was considered to be one of the world’s main maritime routes. Travelling through the Suez Canal cuts shipping times considerably, since a four-week transit to Europe via the Suez Canal could be a six-week transit around the Cape of Good Hope.
Shihab says that most container ships going from east to west and vice versa pass through the canal, carrying everything from food to clothes and raw materials. Goods that do not go in container ships include oils and foodstuffs such as grains. “These also more often than not go through the canal,” he comments.
He says that though the Suez Canal and the Panama Canal are often compared, the two canals are not in competition because they lie in different geographical areas. Where they can compete, he says, is on trade travelling from Asia to the East Coast of North America, though this is only three per cent of Maersk Line’s total business.
The Panama Canal recently saw major upgrades, enabling it to accommodate container ships of 13,000 twenty-foot equivalent units (TEU), used to measure the capacity of container ships. However, that remains below the Suez Canal’s capacity, which can take vessels of 18,000 TEU.
However, another route that could compete with the Suez Canal in future is the North Sea route, and changing weather patterns are increasingly making the icy waters of this navigable at least in the summer months. Normally, only an icebreaker can proceed through these waters north of Russia.
The North Sea route is considerably shorter than others. According to the Ocean 71 magazine, a journey from Europe to Asia comes to around 14,000 km using this route, compared to the around 19,000 km through the Suez Canal.
The New Suez Canal includes the following construction work:
• Construction of a new 35-km-long parallel waterway to a depth of 24 metres and a width of 317 metres at water level, so that the new channel can accommodate vessels up to a 66-ft draught.
• Expansion of the existing western bypasses by 37 km in total length to a depth of 24 metres (66-ft draught). The western bypasses include the 27-km bypasses at the Great Bitter Lakes and the 10-km Ballah bypass.
•258 million cubic metres of dry excavation work.
• Revetments extending along 100 km of the canal.
• Dredging work to move about 250 million cubic metres of soil.
(Source: Suez Canal Authority)