TRANSPORTATION / GLOBAL LOGISTICS
Egypt in a major economic advance…
source: CONTROL RISK
Headwinds for financial return
Amid tight security, container ships have already been trialling the first stage of the Suez Canal Expansion project. Egypt is hailing the project as a major economic advance and the expansion seeks to cut valuable time off transits, allowing the canal to be a truly global maritime highway. With increased competition to build ever larger container ships to service just-in-time supply chains, the project aims to shorten journeys not just between Europe and the Middle East, but between Asia and the United States.
How it works
Although described by some reports as the “second” or “new” Suez Canal, the project is more of a widening and expansion of the existing canal’s central section.
This new section allows for more passing places and ultimately reduces the waiting time. Together with future expansion plans and widening of the channels, this reduces the risk, and impact, of major disruption.
Most cases where vessels have run aground have been resolved promptly by the Suez Canal Authority; however major disruption to the single channel also remains a possibility. This was seen most clearly in November 2004, with the most significant disruption to Suez Canal operations in recent years. Although vessels have occasionally caused minor delays when running aground in the channel, on this occasion, a crude oil tanker became stuck and wedged in the northern section of the canal for three days, blocking the route.
The incident also highlighted how essential the Suez Canal is to supply chains when it emerged that one of the vessels caught behind the tanker was carrying a major shipment of Sony PlayStations, for the approaching European Christmas market. The subsequent delays to transits through the canal reportedly forced Sony to charter cargo planes to ease the stock shortages. One of the obvious benefits to any expansion or widening would be the reduced risk of a similar incident having a major impact on canal operations and, as a result, international supply chains. But although the new channel is expected to reduce the transit time up to half to a notional 11 hours, the northern and southern sections will remain a single channel.
While, statistically, delays related to vessels running aground have been more likely, increased domestic instability has led to heightened international concerns about the security of vessels in the canal. Most recently, militancy has been particularly pronounced in the northern Sinai Peninsula, which the canal effectively separates from the major cities in the Nile Delta.
Despite increased militancy within Egypt, the number of confirmed direct attacks on vessels transiting the Canal has been low. This can be largely attributed to the comprehensive security measures put in place by the Egyptian authorities throughout periods of instability. These include extensive patrols and a heavy military presence along the canal zone, but also a restriction on crossings and local small boat activity in the area – emphasising the importance of the canal to the national economy.
The only confirmed attack on a vessel underway in the Suez Canal remains the 2013 aggression against the container vessel COSCO Asia. The attack itself, which involved two rocket-propelled grenades being fired at the ship, was relatively unsophisticated and appeared opportunistic. Since the incident there have only been claims of unspecified “plots” being foiled, the most recent reported in early July 2015. While the 2013 incident has not been repeated and security measures may limit the chance of a ‘spectacular’, unsophisticated or small-scale attacks remain a possibility.
The economic impact
The importance of Suez in the global economy depends largely on the pattern of global trade as well as its competitiveness. As the new channels were being expanded in Egypt, the Panama Canal has also been going through a longer, more problematic expansion programme. Panama, unlike Suez, is more constrained by geography, relying on a complex series of locks to move vessels between the Atlantic and Pacific Oceans, while rumours of rival canal planned in Nicaragua continue to surround the project.
But the long term Suez Canal expansion project has come under intense scrutiny. The expected returns rely on the volume of shipping increasing significantly which is not such an easy thing to control. The canal has already seen an increase in traffic, not through port expansion but, ironically, port disruption. The strike action that affected the United States West Coast ports in 2014 and the early part of this year led a number of shipping lines to opt for the Suez route from Asia to the East Coast of the United States, rather than using the Panama Canal.
However, while such factors may work in Suez’s favour, falling oil prices and fuel costs can also mean less time-pressured sectors may opt for longer routes round the Cape of Good Hope in order to avoid the canal tolls and the higher fuel prices at Egyptian ports. While the trade routes work in Suez’s favour now, the changes highlight how shipping volumes will always be at the whim of global events.
The canal will also remain dependent on a secure and stable Egypt and while the capability of the military to stabilise the country and secure the canal may be visible now, companies should always be aware of the potential impact a major break in the global supply chain could have on their operations.