The Suez Canal is the world’s most famous waterway. Wars have been fought over it and, after 100 years in operation, its importance to the global economy is undiminished. With international shipping enjoying an unprecedented boom, driven by exports from China and India, the canal is under constant redevelopment to ensure it retains its pivotal position on the world’s shipping routes.

Suez is vital to the Egyptian economy, contributing about 4 per cent of the country’s gross domestic product, and rising rapidly. After flat revenues throughout the 1990s and a slow start to the new century, as shipping slumped following the terrorist attacks on New York and Washington on 11 September 2001, the canal has produced record-breaking revenues for the past four years. In 2006, it hit $3.8bn, and a new high of $4.5bn is anticipated for 2007.

There are several reasons for the growth. First, there has been much more traffic through the canal over the past five years, driven by the strong growth in Europe and mass production from China and India.

“Most of the traffic goes from south to north,” says Simon Kitchen, a research analyst at Cairo-based investment bank EFG-Hermes. “In other words, from Asia and India to Europe.”

With Chinese exports pivotal to the supply of consumer goods worldwide, the Suez Canal has also benefited from severe bottlenecks at the world’s other great man-made waterway, the Panama Canal.

The accumulation of ships and freight in central America has meant that some vessels going from Asia to the Eastern seaboard of the US have been diverted through Suez. In recent years, congestion at Panama has made the canal the route of choice between China and the eastern US.

Deepening draught
Its critical contribution to the Egyptian economy means the waterway has been constantly upgraded over the past 25 years to ensure it remains accessible to the world’s biggest ships. The Suez Canal Authority (SCA), funded by the government, has supervised a series of major dredging operations, deepening the canal dramatically to accommodate larger vessels.

Since 1980, the canal’s maximum depth has increased from 38 feet to 62 feet, and work to lower this further to 66 feet will be completed by 2008. A feasibility study is already under way to investigate further increasing capacity, perhaps even deepening the canal to 72 feet.

The biggest container ships have capacity for about 13,000 20-foot equivalent units (TEUs), and this is expected to rise to 16,000 TEUs in future. The greater the number of units a ship carries, the deeper it sits in the water. This depth is the draught of the vessel.

“At 66 feet, the canal will be able to take almost 100 per cent of bulk fleet carriers, including container vessels of all types,” says Ahmed Elmenakhly, executive vice-president for planning and research at the SCA. “The only exception is the very largest crude oil tankers. We will only be able to accommodate 60 per cent of the world’s tanker fleet. This is why the study is under way for an increase to 72 feet.”

The largest oil tankers can have draughts of 80 feet, but a road tunnel running beneath the canal will prevent any increase to the draught beyond 72 feet. However, the SCA has developed solutions to accommodate oil tankers despite the inadequate capacity. A co-operative arrangement with the Sumed pipeline, which runs north to south alongside the canal, means ships arriving from the Gulf can offload sufficient oil to be buoyant enough to pass through to the Mediterranean, collecting their cargo at the other end.

The SCA is keen to reduce the number of tankers that are required to use the pipeline but will not deepen the canal if returns on investment cannot be guaranteed. Instead, the company is considering an alternative plan, to widen the canal along certain sections.

Currently, only 68 kilometres of the 190km route are wide enough for vessels to pass side by side. The study is considering a plan to add further 30km of double lanes to the canal, greatly increasing the rate at which ships can navigate through.

And the authority may decide that increasing the volume of general traffic will be more cost-effective than accommodating a few more oil tankers.

Development costs
“The cost of deepening the canal to 72 feet will be huge,” says Elmenakhly. “There are benefits but we do not expect to get an economic return on this project, which is why it has been postponed and is being studied again. The draught increase to 66 feet may not be the most cost-effective option and we may consider a width increase instead.

“This would allow greater transit up and down simultaneously, particularly of container vessels, which form more than 50 per cent of the canal’s revenue.”

Currently, the maximum daily number of vessels passing through the canal is 80, but the average is a little more than 50 and the SCA is keen to increase this.

“We will deepen or widen the canal, but for the moment we will not do both and bring other economic projects along as well,” says Elmenakhly.

The huge volumes of trade across the global shipping sector, coupled with record fuel costs, have dramatically pushed up costs for the world’s shipping lines.

“The costs of shipping have gone through the roof in recent years,” says Kitchen. “According to the Baltic Dry Index, (the London based index of the cost of moving dry goods by sea), the cost of shipping has risen by 150 per cent in 2007 alone.

“When the index rises, it becomes more expensive to send ships around the southern tip of Africa, rather than through the canal. This means that the canal authority can put its rates up, bringing in extra money.”

With daily rental costs on larger tankers and container vessels soaring, any time saved on the route is crucial to maintaining margins for the shipping groups.

A large vessel can cost $180,000 a day to hire, excluding fuel, staff and all other costs. When a trip between Asia and Europe can take up to eight days longer around the southern tip of Africa rather than through the Suez Canal, these mounting daily costs become critical.

The canal strengthens its position still further by applying a flexible long-haul pricing system tailored on an individual basis.

“Any captain who feels that a route through the canal would be more expensive than going via the Cape can send his costings to us and if we agree, we will reduce his toll to equalise costs to those involved in going around Africa,” says Elmenakhly.

“We look at each on a case-by-case basis, with individual pricing. The days saved are very valuable to the carrier owner. This is why most companies choose the canal rather than any other route.”

However, despite its monopolistic position, Elmenakhly insists the SCA does not charge unnecessary fees but grades its tolls after studying market conditions.

“We can charge more but we follow markets and fleets, and economic indicators,” he says. “We do not want to overcharge just because we can. This boom will not last forever and the slowdown will come back. We do not want to increase tolls for nothing. We want to optimise revenue but not overcharge.”

However, the canal itself is a profoundly influential force on world markets. In certain sectors, beneficial pricing by the SCA has opened up completely new trade routes.

“During the 1990s, we decided that our tolls on LNG [liquefied natural gas] carriers were much too high to encourage European countries to buy their gas from the Middle East rather than North Africa,” says Elmenakhly. “To encourage this new route, we have dropped the toll on LNG carriers by 35 per cent since 1994, and since 1999 have offered a further incentive: if ships carry above a threshold quantity of gas [depending on the size of the vessel], they get a further reduction.”

Increasing traffic
This manipulation of the LNG shipping market has been successful. In 1994, before the toll was lowered, no LNG carriers passed through Suez. In 2007, more than 300 LNG carriers have used the canal, and the SCA is optimistic this figure can be increased to 1,000 a year
by 2012.

Expansion is also planned for the shipyards dotted along the canal to service passing ships and the SCA’s own fleet of dredgers and tugs. New investment will also improve security and tracking systems for vessels.

The SCA is aware of other potential threats, such as the trans-shipment hubs of the Arabian Peninsula and the forthcoming Saudi Landbridge, but is confident that a flexible pricing system can meet these challenges.

Meanwhile, for ships on route between Asia and Europe, there is simply no alternative.

“The projects executed to keep the canal suitable for modern shipping mean that it is still the most important waterway in the world,” says Elmenakhly.