IN DEPTH: Plans to deepen Suez Canal may make up for lost revenue

Theodore May
6 Min Read

CAIRO: The Suez Canal has long been one of Egypt’s most essential sources of revenue, but 2009 has the potential to be a transformative year for the canal.

While revenue took a significant hit at the beginning of 2009, infrastructure changes in the canal later this year might mean a positive swing in revenue.

The canal represents the third in a triumvirate of critical revenue streams for the country. After tourism and remittances from abroad, the Suez generates billions of dollars annually as shipping companies choose the canal as a means to save time traveling between the east and Europe.

But since the start of the year, there has been a dramatic shift – brought on both by conditions economic and political – that has left canal waters a little emptier.

First, the onset of the global economic recession took its toll. Consumers in Europe and North America were simply consuming less. As a result, global trade slowed and fewer ships were using the canal and paying the transit tolls.

Piracy off the coast of Somalia also had an impact. With pirates growing more brazen, a number of shipping companies lost millions as their ships fell hostage off the horn of Africa. Many shipping companies, as a form of insurance, chose to send their vessels the long way – around the Cape of Good Hope – to avoid any risks.

And so revenue fell dramatically. March numbers were off 21 percent from what they were in March 2008. They stabilized somewhat heading into April, when revenue was 22 percent off April numbers the previous year.

Canal revenue was down 29 percent year-on-year in May, Reuters reported.

March revenue was $327.9 million, while the April haul was $346.9. Canal traffic is cyclical, so the increase between March and April does not necessarily represent a rebound for the canal.

In April, 1,712 ships passed through the canal, representing more than a 13 percent drop in traffic from April the previous year.

Thirty percent of Europe’s oil passes through the canal; so do many of the manufactured goods consumed by Europeans.

A new plan

Despite the latest slumps in canal revenue, the government has been busy following through on a plan that would send the canal’s fortunes soaring and break the streak of months of slumping revenue.

The plan, that is already underway, is to increase the depth of the 120-mile canal so that ships that draw up to 66 feet can seek passage.

“The expansion of the canal from around 56 feet to the targeted 72 feet will allow a significant increase in vessels, accommodating the passage of larger vessels, currently passing around Africa, said investment bank Beltone Financial in a note.

Even though the Suez represents a major source passage for ships carrying oil to Europe, deepening the canal would contribute particularly to shipping companies’ abilities to send their largest oil tankers through.

According to the Suez Canal Authority, the move would open the canal up to nearly all container ships and the bulk carrier fleet. Still, only 60 percent of the world’s tankers with full cargo can pass through.

The decrease in oil tankers has contributed to decline in canal revenue. Even with the deepening of the canal, which is expected to reach completion this year, therefore, a spike in the numbers of oil tankers is not likely to occur until demand bounces back.

Oil tankers in April decreased in number to 266, down from 298 in April the previous year. That represents a 10.7 percent decrease in oil tankers, as compared to an overall 13 percent decrease in traffic.

This means that other goods, like manufactured products, have been greater contributors to the decrease in revenue.

Across the board

The decline in revenue that the Suez has experienced is magnified by the fact that the government has lost revenue practically across the board, including from its top revenue source: tourism.

In early May, the government reported an 18 percent decline in tourism over the beginning of 2008, putting pressure on over 10 percent of the workforce that contributes to the industry.

The government depends on industries like the Suez Canal and tourism to help pay wages of civil servants, to contribute to healthcare and education across the country, and to continue subsidizing staple goods such as wheat and gasoline.

The decline in canal revenue is expected to put a major dent in the government’s earnings.

“Canal revenues have totaled $4.1 billion, in the 10-month period of fiscal year 2008/2009, with our expectations of total revenues of $4.7 billion, compared to $5.2 billion in fiscal year 2007/2008, said Beltone in a note.

While deepening the canal may not contribute much at a time when a global recession has meant a decreased appetite for trade, the government stands to profit handsomely once the economy makes a comeback.

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