Suez growth hints at recovery

19 May 2010

Shipping traffic and tonnage increases on the Suez Canal, indicating a recovering global economy

The level of traffic passing through the Suez Canal has long been an indicator of the health of the global economy. During the past decade, the famous waterway witnessed a period of unprecedented economic growth, bracketed by two severe downturns. And as the world emerges cautiously from the most recent recession, the Suez Canal is already charting the tentative signs of recovery.

After the contraction that followed the 2001 terrorist attacks on New York and Washington, the Suez Canal witnessed five years of surging growth as exports from Asia to Europe and the US rocketed to feed resurgent consumer demand and dry bulk volumes soared to supply a global construction boom.

Trade volumes between Asia and Europe – driven particularly by exports from China and India – increased by 157 per cent from 2000 to a peak of 229 million tonnes in 2007. That same year total tonnage from south to north through the canal reached a peak of 424 million tonnes.

Increased traffic

Total containerised cargo through the canal totalled 144 million tonnes in 2000. By 2008, this had increased by 139 per cent to 344 million tonnes. Total volumes of crude and other oil products also more than doubled during this period to 117 million tonnes in 2008, from 51 million tonnes in 2000.

Demand for raw materials to supply the boom in construction – not least across the Middle East – saw a surge in dry bulk traffic.

With oil prices exceeding $150 per barrel at their peak in 2008 and worldwide demand for goods of all kinds seemingly insatiable, shipping companies had no option but to take the quickest route available, through the canal.

The Suez Canal Authority (SCA), which manages the waterway, increased its toll charges for vessels to capitalise on the greater traffic volumes. In 2007, annual revenues from the canal hit a record $4.6bn. The following year another increase in toll charges raised this threshold a further 17 per cent to $5.4bn.

By the end of 2008 the economic downturn was starting to impact on the logistics industry. But revenues from the canal had been so strong earlier in the year that it was still a record breaking year for the waterway.

But the fall from the peak has been sharp. Between August 2008, at the height of the market, and February the following year, the average number of vessels passing through Suez each month fell by 36 per cent, with a corresponding slump in cargo volumes.

Although traffic recovered following the sharp drop at the start of the year, annual revenues collapsed from their 2008 peak to $4.3bn last year, a decrease of 20 per cent.

“A recovery of sorts began in April and May last year, but revenue levels are still down at around $400m a month. August 2008 was the record month with $500m, so there is still quite a way to go,” says Simon Kitchen, senior economist at Cairo-based investment bank EFG Hermes. “Trade volumes through the canal still haven’t recovered and total vessels numbers are still well below their peak levels.”

Marine trade from south to north through the canal, which was higher than traffic in the opposite direction even in the boom years, fell from 413 million tonnes in 2008, to 264 million tonnes last year, a drop of 36 per cent.

Exports from the Far East passing through the canal, particularly China, the powerhouse of the global economy in recent years, slumped by 41 per cent to 131 million tonnes – its lowest level since 2003.

This was matched by a corresponding 40 per cent fall in traffic arriving in northwest Europe and the UK – the main import markets through the canal for Chinese goods – to 108 million tonnes, the lowest level since 2002.

With consumer demand in Europe shrinking and rates for chartered vessels also decreasing, exporters able to conveniently avoid the canal began the longer route around Africa to cut costs. 

Exports leaving East African ports and Yemen’s strategic port at Aden fell by 91 per cent to barely 1 million tonnes in 2009, although the surge in piracy off the coast of Somalia was also a likely factor. Likewise, however, exporters from Australia also chose to avoid the canal prompting a 94 per cent fall in tonnage to just over 2 million tonnes.

At the height of the boom, Suez had started picking up traffic from the world’s other great man-made waterway in Panama. Shipping congestion in Panama made Suez the route of choice between China and the eastern US.

“There is always a strong correlation between global trade and Suez traffic and all cargo volumes are down, especially container traffic and dry bulk cargo,” says Ahmed el-Menakhly, vice-president of planning and research at the SCA.

“We were badly affected especially at the beginning of 2009, but it is impossible to really compare last year with 2008, because 2008 saw such an abnormal increase over 2007.

“There were many factors in this: the high price of oil, huge surge in demand for containers and dry cargo for construction. If you compare 2009 to an average of the previous five years 2003-8, 2009 actually comes out ahead.”

Traffic from north to south through the canal has remained much more stable, slipping just 5 per cent to 295 million tonnes last year, from 310 million tonnes in 2008. Exports from northwest Europe and the UK via the canal fell 18 per cent to 77 million tonnes. Imports in the Far East were less affected, dropping 11 per cent to 114 million tonnes.

Traffic heading south was kept stable not only by strong Chinese imports, but also steady traffic from local markets in southern Europe. The canal remains vital to the economies of the Mediterranean, and southbound exports volumes from these countries barely changed last year, although in one peculiar anomaly, exports from the Black Sea actually rose by 37 per cent in 2009.

Likewise, exports heading north from the Red Sea ports also rose by 30 per cent last year. The stability of this traffic demonstrates that Suez is more than just a just inter-continental trade route between east and west. For the economies at its mouth on either end it is an essential transit route for basic goods, not simply luxury items prone to wild market fluctuations.

On course

The slump in consumer demand in Europe, coupled with the lower fuel prices and charter rates for vessels means shipping groups have the option of diverting around Africa to reduce costs.

To keep the canal competitive against the longer, but cheaper route, the SCA froze its tolls at the beginning of 2009 and has announced they will remain unchanged throughout this year as well.

In addition, the authority operates an individually tailored fee system to encourage ships to use the canal. Any captain able to demonstrate that with his vessel’s cargo, charter rate and fuel consumption it would be cheaper to divert around Africa rather than pay the tolls in Suez, has his charge lowered to a corresponding level.

Suez contributes about 4 per cent of Egypt’s gross domestic product (GDP) and the drop in revenues from the canal has dented the national economy.

Since the SCA is a state-owned body with all revenues flowing directly to the government, it is unknown exactly how these monies are diffused into the economy, but EFG Hermes expects Egypt’s fiscal deficit to deteriorate this year to 8.1 per cent of GDP in June this year, from 6.9 per cent last summer, with the fall in canal revenues a major contributing factor.

“In 2010, we are projecting a small rise from the $4.3bn revenues recorded last year, maybe 5 per cent. This has had a very bad effect on the Egyptian economy,” says El-Menakhly.

First quarter traffic and cargo figures are up 14 per cent on the first three months of 2009, suggesting the worst is certainly past, but the recovery remains tentative. Consumer spending, particularly in Europe, remains weak.

“We are seeing a recovery in trade volumes in Asia, but Europe is still tentative, so trade flows between Asia and Europe are still quite depressed. A lot of the trade we are seeing is still intra-Asian,” says Kitchen.

A return to the peak levels seen in 2008 remains far off, but the Suez Canal will remain a crucial barometer of consumer confidence and the state of the global economy as the world rebuilds after the crisis on the months ahead.

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