The Fuse

Suez Canal’s Hefty Tariff Increase Pushes Tanker Owners to Use Alternate Routes

by Lisa Ward I @Lisa_Ward1990 | October 24, 2016

Guest post by Lisa Ward | @Lisa_Ward1990

Lisa Ward, an oil trader based in the North of England, is the Co-Founder of the #OOTT (Organization of Oil-Trading Tweeters) hashtag on Twitter.

The Egyptian government, which is trying to secure $12 billion in loans from the International Monetary Fund (IMF) to save its economy, needs to deal with a new financial challenge, and is looking at trade through the Suez Canal in order to raise more funds by increasing tariffs. The $8.4 billion expansion of the Suez Canal, which was supposed to aid in the recovery of Egypt’s economy, so far has not been generating enough revenue. The government’s move to increase taxes on ships that use the Canal is likely to backfire, as oil-at-sea volumes will find other routes to reach their destinations.

The Egyptian government, in order to raise revenues, has increased taxes on ships that use the Suez Canal, but the move will likely backfire, as oil-at-sea volumes will find other routes to reach their destinations.

The aim behind the expansion was to also maximize its competitiveness versus other routs and increase the Suez Canal revenues exponentially, from $5.3 billion up to $13.2 billion in 2023, making a considerable contribution towards Egypt’s national income. This in turn would then help aid Egypt’s struggling economy and additionally help create job opportunities.

The reduction in global trade due to the continually low oil prices, rising shipping rates, and Egypt’s strict reforms are only some of the factors involved that are causing reasons for concern. Yet, despite all these challenges for shippers, the Egyptian government is raising the tariffs on the usage of the passageway.  The Suez Canal is an artificial waterway in Egypt that provides the shortest maritime route between Europe and Asia, which in turn can reduce a vessels journey by approximately 4300 miles (7000 kilometres) and acts as one of the main sources of foreign currency for the Egyptian economy. As a result of the high volumes of traffic, the Suez Canal began an expansion project that began construction in August 2014, to introduce an additional parallel canal of 22 miles (35 km) length. This project was completed in August of 2015, costing a total of $8.4 Billion.

During 2014, the total amount of total oil that passed through the canal was 1.306 billion barrels of oil equivalent, and of those volumes, 638.3 million barrels were crude oil. However, one year on since the expansion, there’s been an 8.3 percent drop, equating to 30.13 million barrels of crude oil. The Canal is an important route for OPEC countries. In order for countries to meet their export needs, especially producers sending barrels to Asia or Europe, utilizing the Suez Canal can vastly reduce the voyage length of a tanker even shortening some journeys by almost half.

Against the current backdrop, the Suez Canal will no doubt be a major talking point at the next maritime conference (SMME) to be held in Dubai from October 31 to November 2. The Seatrade Maritime Middle East event attracts over 7,000 attendees from across 69 different countries, with the involvement of business owners, operators, managers and various others involved in acquiring of equipment and services within the maritime, offshore, oil and gas and port industries.

The managing director of the Suez Canal, Admiral Mohab Mohamed Mameesh, who will be on a panel, will discuss some of the concerning issues. These will include topics such as the challenging economic climate, development in means of global trade, canal transits, infrastructure, investments, and generation of revenue and many more.

Expansion isn’t generating revenues

Since the expansion’s opening, it has generated negative revenues due to the decrease in international trade.

Since the expansion’s opening, it has generated negative revenues due to the decrease in international trade. As a result, this has led to a price increase in attempt to revive positive revenue. Fees paid by ship owners using the Canal bring in on average $5 billion a year into the Egyptian economy, which makes it one of the best revenue streams for the government.

Over the past three months, the Suez Canal prices have increased on average by a hefty 26 percent to $386/mt per vessel in order to make up for lost revenue. This has prompted many countries and companies to find and use alternative maritime routes, such as the Panama Canal and even sailing around South Africa, in an attempt to avoid such exuberant fees. By using the route chartered around South Africa, companies and shippers can save $235,000 per voyage on average, making it even more enticing in the current climate of low oil prices.

By using the route chartered around South Africa, companies and shippers can save $235,000 per voyage on average, making it even more enticing in the current climate of low oil prices.

The price is controlled by the Suez Canal Authority (SCA) and is heavily influenced by several factors, one being Egypt’s current economic situation. The country’s economy is reeling, with pronounced food shortages causing unrest. The Egyptian authorities and the International Monetary Fund (IMF) are in the final stages of negotiations over the $12 billion lending program in an attempt to reduce the budget deficit and aid the economy’s recovery, currently seen to be heading in the right direction due to the implementation of strict reforms.

One of the reforms was the introduction of a VAT increase to 13 percent, which was implemented with effect from September 8, 2016. The government plans to further increase the VAT to 14 percent starting in July of next year. As a result of the VAT law, one can noticeably see the effects this has had on the shipping costs via the Suez Canal increasing prices up from $339/mt to $380.50/mt.                                   

Furthermore, the price increases can also be seen reflected in the Baltic Dry Index (BDI), which is a way of measuring and providing an assessment of the price of transporting various materials by sea that derived from the Baltic Freight Index. Fig 2 below.

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During the past month, Egypt has seen varying amount of maritime traffic passing through the Suez Canal. One of its big users is the 7th largest shipper of containers, Hanjin, which has recently filed for bankruptcy, resulting in some of its vessels being seized by authorities and creditors, while others were barred entry to into ports, including the Suez Canal, due to lack of authority to approve the expenses.

Higher tax deters shippers

The higher costs of using the Canal have in many ways also encouraged countries and companies to use other routes as a way of avoiding the extra shipping rates and costing involved.

The higher costs of using the Canal have in many ways also encouraged countries and companies to use other routes as a way of avoiding the extra shipping rates and costing involved. But shifting routes affects the speed of the journey. A tanker travelling from Iran to France takes approximately 19 days via the Suez Canal, whereas an alternate route going around Africa takes 34 days. The Suez route saves an enormous amount of time, meaning more trips can be made during a shorter timeframe. Recently, however, we have observed more and more tankers using this alternate chartered route.

Below, Fig. 3 shows data of various vessels that are carrying hydrocarbons, which have been provided by our #OOTT Tanker Tracking data using MarineTraffic as source for tracking the various movements of seaborne oil and petroleum product imports and exports around the world. This image clearly shows a considerable amount of tankers en route via the South Atlantic Ocean.

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The current prolonged era of low oil prices has pressed shippers to watch their costs and avoid expensive shortcuts such as the Suez Canal. On average, crude oil prices were 5 percent lower in September this year compared with same period last year. This backdrop encouraged countries to transport larger amounts of hydrocarbons but in fewer journeys.

If prices rise, we could expect to see higher volumes of traffic via the Suez Canal as it becomes more affordable within profit margins in order to keep up to world oil demands.

Besides price, production and consumption play a vital role in affecting the demand for tankers and the number of journeys. OPEC members increased production to record levels of 33.64 million b/d in September, with no intention of slowing in the run-up to the group’s meeting in Vienna at the end of November. Global demand is also up by over 1 million barrels per day with forecasts for 2017 showing the average to be roughly 1.2 million b/d. In 2015, global oil demand averaged 93 million b/d up by 1.7 percent year on year, with the largest increases taking place in Asia Pacific, North America, Western Europe, the Middle East and Africa.

But price ultimately plays a key role, and higher prices would benefit Egypt. Fig 4 shows a visible correlation between the price of oil and use of the Suez Canal due to demand. If prices rise, we could expect to see higher volumes of traffic via the Suez Canal as it becomes more affordable within profit margins in order to keep up with world oil demand. So, ultimately, for the Egyptian government, it will find some relief if oil prices rise.

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