Following the global stay-at-home orders due to the coronavirus pandemic, unstable oil markets, and low cargo demand, ominous shadows hung over the future of Egypt’s Suez Canal, with ships reducing their overall fleet capacity and companies seeking lower transit and port fees.
Indeed, Egypt’s key waterway revenues fell to $5.72 billion USD in the 2019/20 financial year down from $5.75 billion USD in the year prior and reported a 9.6 percent decline in revenues in May compared to the same month a year earlier.
Egypt’s key waterway revenues fell to $5.72 billion USD in the 2019/20 financial year down from $5.75 billion USD in the year prior.
The decline took place due to dwindling oil prices in April and slumping world trade following the outbreak of coronavirus, Osama Rabei, Chairman of the Suez Canal Authority, said in a Reuters report.
Also in April, Brent crude hit a 21-year low and US oil futures plummeted into negative territory for the first time in history. The glut in oil overwhelmed the world’s limited storage facilities, triggering a wave of selling by oil traders in April.
In addition, Bloomberg reported in May that ports had been congested with tankers as the coronavirus pandemic paralyzed transport movement, causing the world’s largest ever glut.
In the past weeks, oil prices have been bouncing back as countries started to reopen their businesses. But analysts expect fluctuating oil prices amid halting of some reopenings in Germany and the US and amid concerns that a possible second wave of coronavirus will bring down prices to the “Black April” levels.
Taking the Longer Route
After the oil price slump, some ships had decided not to take the Suez Canal route, traveling the much longer route around the Cape of Good Hope, on the southern tip of Africa. They used the Cape route to reduce high costs of port and transit charges despite the length of time spent on the trip.
“The number of containerships that have opted to use the Cape route and bypass the Suez Canal has risen to a historic peace-time high.”
“The number of containerships that have opted to use the Cape route and bypass the Suez Canal has risen to a historic peace-time high, including at least 20 sailings on the Asia-Europe, Europe-Asia and North America east coast-Asia trades,” the shipping intelligence service Alphaliner stated in a recent research paper; adding that low bunker prices and lack of cargo demand in European markets had caused the moves.
Map illustrating how the Suez Canal and the Panama Canal shorten transit routes.
The 2M alliance consisting of the Maersk Container Line and the MSC Line – the two largest shipping lines in the world – announced on May 4 the change of their shipping lines to the Cape of Good Hope as an alternative route for the Suez Canal between Asia and Europe. This came after the announcement of the French CMA-CGM line in early April, which also sought to change routes to the Cape to avoid Suez Canal tolls.
The three lines represent more than 26.5 percent of the canal’s total trade volume, and the majority of the Maersk and MCS line services have been merged into the 2M alliance. Analysts expect the Suez Canal to lose over $10 million USD in revenues from such moves by shipping companies.
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Lower Suez Canal Fees
In an attempt to lure back companies, the Suez Canal announced discounts on transit fees to attract container ships as well as LNG and petroleum tankers. The discounts, which range between 17 and 75 percent, started to take effect in April and were renewed on June 25 to last until the end of this year.
The Suez Canal Authority head said on June 2 that the waterway attracted 104 container ships after putting the discounts into effect.
However, Alphaliner said in a late May report: “As of May 26, a total of 15 ships that departed from Europe and North America are still using the Cape route, even though they would have been eligible for Suez toll discounts.”
Nevertheless, analysts expect the Suez Canal revenues to bounce back in June as oil prices are now standing at about $40 USD with some reopenings taking place across the world, even though the return of rising coronavirus cases and the fluctuating prices of oil are raising new concerns in the shipping industry.
Alphaliner said in a June report that 11 of the world’s top container carriers have reduced their overall fleet capacity in the first half of 2020: “The shipping lines reacted to lower cargo demand due to the COVID-19 pandemic, mostly by redelivering chartered tonnage to their owners.”
Economists and maritime transport experts have voiced concerns about the effects of such oil uncertainty and world trade volatility on the future revenues of the world’s most crucial waterway.
“The unstable oil market and world trade will continue to take its toll on the Suez Canal revenues until the coronavirus crisis ends.”
“The unstable oil market and world trade will continue to take its toll on the Suez Canal revenues until the coronavirus crisis ends,” Bassant Fahmi, an economist and a member of parliament, told Inside Arabia.
“Even with the discounts and with some ships being expected to return to the canal after the increase in oil prices again, revenues will continue to dwindle amid a volatile world trade movement and coronavirus fears,” Fahmi said. Fee discounts will significantly reduce the revenues of the Suez Canal which is a key national source of income. The coronavirus crisis and the decline in oil prices will possibly last for a year, which will likely give a strong blow to the national economy, Fahmi added.
The MP also said that the Suez Canal has lost about 15 percent of its total revenue, which she describes as a “disaster,” saying that the government would have to further reduce transit fees not only to attract ships but also to serve the major developmental projects that are now being carried out in the Suez Canal corridor.
The Suez Canal is the third largest source of foreign exchange for Egypt, after remittances from Egyptians abroad and tourism, respectively. Its revenues amounted to $5.75 billion USD in the past fiscal year.
“The shipping companies will be in terrible financial position after the coronavirus pandemic ends and the Suez Canal Authority will have to keep fees intact for some time until those companies stand up on their feet again,” Ahmed el-Shami, an economist and a maritime transport expert told Inside Arabia. In his view, the Suez Canal is really in hot water because even after the coronavirus crisis ends it will have to keep these discounts in place for some time.
