Canal Toll Raise Announced To Backdrop Of Violence

BMI believes that revenues from the Suez Canal, one of Egypt's primary sources of foreign reserves, are becoming ever more crucial to the newly democratic Arab state; continued political unrest has led to a marked fall in both investor confidence and visitor numbers, and a rate increase planned for May 1 will help the struggling economy maintain its public finances. However, recent violence in the three main cities along the canal has forced the Suez Canal Authority (SCA) to give assurances that it is safe to use the waterway.

On January 31 the SCA announced that it would be raising fees on ships passing through the canal from May 1 2013. Liquid bulkers carrying cargos such as crude oil, petroleum products, chemicals and liquefied natural gas, and dry bulkers with coal, iron ore and other minerals will see their fees raised by 5%, while container ships and ro-ro vessels will have to pay 2% more than they do currently. Other ships will see a 3% rise in fees.

Fees for all vessels traversing the waterway rose by 3% in March 2012, the first rise in three years according to the SCA. The setting of the fees is a delicate balancing act for the SCA; while the desire to maximise revenues for the Egyptian coffers is strong, this has to be weighed against ensuring that global trade continues to flow through it. Hence fees were frozen through the worst of the global economic crisis, when containerised shipping actually decreased for the first time since its advent, and are now being raised following studies by the SCA into prospects for global trade growth.

The global economic outlook is brighter than it was in 2012, and we have recently revised up our growth outlook for the year for the two largest economies in the world, the US and China. Although many European economies will continue to struggle, we believe that shipping through the canal will climb, and this presents Egypt with the opportunity to increase its tolls. Revenues from the canal actually decreased in 2012, falling 1.8% from US$5.22bn to US$5.13bn, despite cargo tonnes climbing by 7.0%, and the SCA will be keen to remedy this disparity.

Money To Be Made
Suez Canal Tolls, US$mn (LHC) & Cargo Tonnes, '000 (RHC)

Given the current turmoil in Egypt, BMI is unsurprised that the SCA is taking this opportunity to raise its tolls. The Suez Canal is, along with tourism and remittances from Egyptians working abroad, a key source of foreign revenues for the Egyptian state. With the country still in the throes of a rocky political transition from the authoritarian 30-year tenure of Hosni Mubarak to its first democracy under Mohamed Morsi, these three are becoming even more important as foreign investors are put off by ongoing violence and an uncertain regulatory future.

However, in what will prove to be another blow to a still-struggling economy, the two-year anniversary of Egypt's anti-Mubarak revolution in late January was marked by widespread rioting, the deaths of dozens of protestors, and President Mohamed Morsi imposing a month-long state of emergency in three cities along the Suez Canal. This latest outburst in violence was ostensibly sparked by a court's decision to sentence several people to death for the killing of dozens of football fans in the city of Port Said in 2012. In reality, however, it is simply another indication of the deepening societal divisions and growing security vacuum that has characterised Egypt since the start of H212.

What impact this latest outbreak of violence will have on recovering visitor numbers to Egypt remains to be seen. What it has done is highlight the importance of the canal to the country, with the SCA making an immediate statement assuring customers that the waterway was unaffected and pledging to ensure that traffic continued to flow smoothly. SCA chairman, Admiral Mohab Mameesh, boarded ships in the canal to assure others that it was '100% safe', and the Egyptian Army was deployed to ensure vessels' safety, taking control of the Suez Canal building.

Just as we maintained that Suez Canal traffic would not halt during the initial Arab Spring protests that swept Mubarak from power, so we believe that it will not be affected by this latest violence. The importance of the canal, not only to Egyptian coffers, but to world trade itself, is too great. Although the growing security vacuum heightens the possibility of terrorist attacks on vessels, we do not believe it faces any existential threat, with the alternative of sailing around the Cape, or utilising land routes from Asia to Europe, not really viable options.

However, while the canal traffic can be deemed assured, Egyptian ports could suffer. The Egyptian ports sector makes the most of the canal's presence, with key transhipment hubs like East Port Said generating considerable container traffic bound for other markets. Port operations in the three canal cities affected by the violence - Port Said, Suez and Ismailia - was said to have continued throughout the violence, yet it will surely have raised concerns in shipping companies. Inchcape Shipping Services suspended all crew changes and transfers at Egyptian ports, and shipments delivery as roads were deemed unsafe.

BMI notes that this risk of violence is not only a threat to existing facilities but could also derail plans to develop the Suez Canal further; Qatar has recently announced plans to invest US$8bn in a gas, power and iron and steel works near East Port Said.

This article is tagged to:
Sector: Freight Transport, Shipping
Geography: Egypt, Egypt, Egypt, Egypt

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