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Panama Canal
Isaac Leung

Suez and Panama Canals Face Off for Container Ships

by Isaac Leung | Dun & Bradstreet Editor

April 11, 2016 | No Comments »

Egypt celebrated the expansion, via a new bypass, of the Suez Canal with elaborate pomp that included sailing the 150-year-old Egyptian royal yacht down the wider canal in August 2015. But while the engineering work on the Suez Canal was completed ahead of schedule, the impact of the Middle East’s expanded waterway pales in comparison with the much-delayed — but more important — widening of the Panama Canal, which is set to be completed in June 2016.

The Panama Canal’s expansion will unlock passage through the isthmus for close to half of the world’s containership fleet, based on a Dun & Bradstreet analysis of data from the World Shipping Register. Currently, about a third of the “pre-Panamax” global fleet can transit the Panama Canal’s locks.

Once the 32.3-meter width restriction is lifted, over 150 million tons of “post-Panamax” containership capacity will be able to transit, including ships carrying up to 14,000 twenty-foot containers. The expansion will likely transform world trade in energy and food bulks as the US East Coast ships to Asia in larger vessels and, hence, more cheaply.

By contrast, the Suez project’s accomplishments are rather minor. Two-way passage is now possible, instead of the one-way convoy system. Waiting times should be reduced, and southbound convoy time should decline from 18 to 11 hours. The size of vessels that can transit remains largely unchanged. Full supertankers still cannot transit except by unloading into the Sumed Red Sea-Mediterranean pipeline.

The six previous expansions of the Suez channel by Egyptian President Al-Sisi’s predecessors were comparable in scope but nowhere near so lauded, suggesting the government needed a demonstrated national success in the wake of the country’s political instability of the past five years.

Revenues under Pressure

However, receipts have dwindled, a worrying concern for Egyptian policy makers. Although the Suez Canal is only responsible for 1.5%-2% of Egypt’s economy, it is responsible for a much higher proportion of external foreign-exchange receipts at a time when Egypt is struggling to obtain access to sufficient hard currency to finance basic import needs.

Canal receipts fell 4.2% in US dollar terms in 2015, despite a 3.7% rise in net freight moved via the canal. Containers moved via the canal fell 2.3%, and the number of container ships transiting fell by 3%. Traffic was already depressed during the euro crisis: The number of ship transits fell by more than 3% in both 2012 and 2013 and overall receipts in 2015 were still short of their 2008 record. Offsetting increases in oil tanker transits as cheap oil spurred more tanker movements was sagging dry bulk (and weak container) traffic. Bulk cargoes declined more than 20% year-over-year in Q4 2015.

Traffic in general is about half of capacity in the Suez Canal. The canal’s performance is disappointing in light of the more than $8 billion bill for the canal’s recent expansion, or more than 18 months of toll revenues. Official projections that canal revenues will reach $13 billion by 2023 (up from $5 billion in 2015) seem unrealistic and would imply astounding growth of 10% per annum.

Drivers of Declining Traffic

Suez Canal traffic is a relatively effective barometer for global trade, especially Asia-Europe and Asia-US East Coast. The weak showing is in part due to shortening or reshoring of supply chains and the end of the boom in China trade, weak recoveries in Europe, and the end of the commodities supercycle, shocking commodity-based economies. World merchandise exports fell 5.9% in 2014 and 4.4% in 2015, in dollar terms, as output in Brazil, Russia, and China slowed and commodity prices sagged.

However, cheaper oil prices are also a factor. Research by Denmark-based consultancy SeaIntel, picked up by the BBC, showed that 112 container ships on the “backhaul” voyage from the US East Coast to Asia had traveled via the Cape of Good Hope instead of the Suez Canal since late 2015. Despite the longer distance, the lack of canal fees more than made up for the longer journey, as fuel costs have diminished so much in the past year. Indeed, in March the Suez Canal Authority offered backhaul vessels discounts of 30% until June on this leg. Another pattern less reported has been coal cargoes from South Africa to Turkey, routing via Gibraltar instead of Suez.

Yet another factor has been the difficulties for the global container trade. Investment in over 100 million tons of new container-ship capacity since 2010, more than one-third of the global fleet, at a time when long-haul routes, especially Asia-Europe trades, are stagnant or declining, has caused terrible downward volatility in freight rates. The rate for moving a container from Shanghai to Europe crashed to a record low of almost $200 in March, compared to over $1,100 in 2014. In this context, global leader Maersk has already cut three of its services running through the Suez Canal since November.

More Pressure to Come

The Panama Canal’s expansion in June 2016 will threaten Suez’s business further. The Suez Canal will lose its monopoly on the largest, most-efficient container ships. The Shanghai-New York journey via Panama, rather than Suez, will save almost a week. Meanwhile, low marine fuel prices will enable carriers to threaten the Canal Authority with south-of-Africa routes and drive down prices. Accordingly, the Suez Canal expansion will likely be viewed as a brave effort to keep up with the deteriorating situation in Egypt.

Isaac Leung is a senior economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow/United Kingdom, he covers China, India, and other parts of the Asia/Pacific region as a contributor to D&B Macro Market/Country Insight Products. His areas of interest include maritime economics. He has degrees from Cambridge University and the London School of Economics.

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Photo by Dr. Edwin P. Ewing Jr.

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