Suez Canal suffers double blow from pandemic, collapse of oil prices

Russia attempts to side-line the Suez Canal in favour of the Antarctic route.
Friday 22/05/2020
Container ship sails through the Suez Canal. (REUTERS)
Container ship sails through the Suez Canal. (REUTERS)

CAIRO--The Suez Canal has been hit by a double blow. After absorbing the shock of stagnating global trade due to the COVID-19 pandemic, it was hit by the steepest drop in oil prices in 18 years. Consequently, the canal is no longer as competitive as a corridor for global trade.

Three global shipping lines have already announced plans to reduce their operating costs by rerouting some of their cargo ships to take the route around the Cape of Good Hope. The concerned ships belong to the 2M alliance, which includes the Maersk Line of Containers, the MSC Line and the CMMA-CGM Line.

During the first quarter of this year, Saudi Arabia engaged in a fierce oil war with Russia after the collapse of the OPEC+ coalition grouping OPEC producers and allies from outside the organisation, led by Russia. This economic battle confused the oil market and pushed prices down to $19.33 a barrel of Brent crude by the beginning of April.

Developments near the Bab el-Mandeb Strait have added to the canal’s burdens. The ongoing conflict in Yemen and a spike in pirate activity in the strait have added to Cairo’s contribution to the costs of securing access to the Red Sea through the strait, in order to protect its interests and secure its shipping lane.

As Cairo seeks to preserve its important shipping artery, blows to its canal have continued to come, this time from Cairo’s ally, Moscow. Indeed the Russians have plans to pull the rug from under the Suez Canal by enticing shipping lines to move their cargo through the northern shipping lane of the frozen Antarctic Ocean.

Moscow is wooing shipping lines by offering to pay for any possible damage to their ships if they take the northern lane. In fact, there are already plans to transport liquefied natural gas through the north.

Moscow’s enthusiasm is dampened by commercial carriers’ reluctance to pay double the cost of insurance required for the northern lane, which they have to add to the cost of hiring the services of icebreakers. Moscow, however, is not giving up and continues to tout the Arctic route, promising to make it a year-long open lane by 2030. And that is not good news for the Suez Canal.

Ahmed al-Shami, a marine transport expert, played down the impact of Russia’s impact on the Suez Canal. He pointed out that last year, only about 6.5 million tons of cargo went through the Arctic Ocean, while 1.2 billion go through the Suez Canal every year.

A container ship sails through the new section of the Suez Canal in the Egyptian port city of Ismailia. (AFP)
A container ship sails through the new section of the Suez Canal in the Egyptian port city of Ismailia. (AFP

He also described the decision made by some global shipping lines to reroute ships around the Cape of Good Hope as a temporary measure and a way to pressure the Suez Canal to grant extra incentives. The canal can withstand this pressure, he said, while the shipping companies may end up revising their strategy because cheap fuel is only one small part of operating costs.

The 192km Suez Canal cuts travel time between Asia and Europe by an average of 15 days. In addition, the Suez Canal Authority grants incentives and discounts to container ships coming from the ports of north-western Europe on their way to south-east Asia and the Far East, reducing transit fees by some 17%.

Revenues from the Suez Canal represent around 23% of the revenues of the services sector exports and about 3.7% of the revenues of the general state budget, in addition to 7% of the current account flows to Egypt.

Adel el-Lemai, head of Port Said Chamber of Shipping, pointed out that Suez Canal revenues are going to be negatively impacted by the global economic recession, as many cargo shipments around the globe have been cancelled.

The Suez Canal accounts for about 12% of the total volume of global trade traffic. Forty-one thousand container ships plow the ocean waters around the globe, linking markets in Europe with Africa, Europe and Asia. To move between continents, these vessels have no faster and easier transit corridor than the Suez Canal.

Othman Shawky, former director of the port of Nuweiba, pointed out that despite the decline in global oil prices, the Suez Canal remains the safest and fastest passage for container ships.

He pointed out that the Cape of Good Hope route is fraught with navigational dangers emanating from severe storms and bad sea conditions, as well as ongoing conflicts in some African countries that drive up insurance costs for ships.