Strike on the Suez Canal

Not a military strike - a workers' strike.

Feb. 8 (Bloomberg) -- Shipping on Egypt’s Suez Canal, used to carry about 8 percent of global seaborne trade, is transiting on schedule after service workers linked to the waterway began striking, the Suez Canal Authority said.

Workers from Suez Canal Co. began a sit-in today, Al-Ahram newspaper reported earlier today in its online edition, without saying where it got the information. The 6,000 workers are from Suez, Port Said and Ismailia, Al-Ahram said.

“This doesn’t have anything to do with Suez Canal traffic and the canal is operating normally,” Mohamed Motair, director of companies at the Suez Canal Authority, said by phone. The striking employees belong to seven service companies linked to the waterway and are not involved in operations, he said.

So far, no effect on shipping operations, but the strike mentality could spread. About 2.1 million barrels per day (MBD) of oil and oil products are trans-shipped through the Canal in both directions. There is also the Sumed pipeline, running from the Red Sea to the Mediterranean coast, that has a capacity of about the same (crude only, though) but is presently pumping just more than 1 MBD.

No matter who winds up in charge in Egypt, it will not be in their interests to shut down or even much reduce the traffic flow through the Canal, whether of oil or other cargo. The income is just too important to Egypt. Nor will it be possible for them to raise fees much of various kinds that are now charged ships for transit. Suez-transit costs are far below costs of sailing all the way around Africa instead, but this is mainly because ships' fuel oil ("bunker oil") is priced so high right now.

Total costs to shippers of transiting piracy water off Somalia and navigating the Canal and its approaches and exits would have to rise a lot to make the route around the Cape of Good Hope the more economical route. As present costs, it would cost almost $9 million more per year for a single Very Large Crude Carrier (VLCC, the second-largest crude-oil tanker afloat) to sail the Cape rather than the Canal. "Need for rethinking about when to sail around the Cape of Good Hope?" explains the implication of routing through the Canal compared to sailing around Africa. A summary:

1. "... a fully laden VLCC cannot go through the Suez Canal without a partial discharging of cargo to the Sumed Pipeline at Ain Sukhna Terminal in the Rea Sea before picking up an equivalent shipment at Sidi Kerir Terminal on the Mediterranean Coast." The reason for the stop is that the Canal has a maximum depth of 66 feet; VLCCs cannot transit the Canal fully laden. And the offload/onload stops costs money.

2. "One important issue that has changed the picture dramatically is the potential repercussions for ship owners of the executive order issued by US President Obama."

The order is called, "Executive Order Blocking Property of Certain Persons Contributing to the Conflict in Somalia." For shippers, the order lay additional compliance requirements before they can deal with pirates who capture a vessel and/or crew. For example,

... the shipping company whose vessel is captured off of the coast of Somalia, in addition to determining whether to negotiate with the pirates, will also have to determine whether any sanctioned pirates are involved anywhere in the chain of events. Out of an abundance of caution, one would expect that a U.S.-based shipping company would presume an SDN is involved and would work with his insurance company and its financial institution to obtain the necessary authorization from OFAC before dealing with the pirates. One also would expect that OFAC will institute expedited licensing procedures to reflect the danger and urgency of pirate hostage-taking situations. Where a non-U.S. shipper is a victim of piracy but a U.S. insurer, reinsurer or financial institution is involved, the compliance burden is likely to shift to those parties.

Passage into out out of the Suez Canal in the south unavoidably entails sailing through piracy waters. The executive order raises compliance costs of the risk, though in a rather fuzzy way. However, these costs are part of the total costs of Canal passage, which are also affected by:

3. "[B]unker [fuel oil] prices have gone up by 4%, time charter rates and ship values have increased for container vessels while Suez Canal tolls have declined by 5%."

What matters the most in the cost calculations?

For a liner company it is primarily a question of higher bunker expenses due to the large consumption of fuel oil for the very powerful engine, while a tanker company primarily is concerned with the added capacity costs even though the fuel consumption also plays a significant part.

4. Comparing costs of the Canal versus around Africa:

The costs incurred from going round the Cape is related to the extra fuel consumption but also to the extra capacity required and related insurance premium increase in order to lift the same quantum of cargo in the same amount of time. Conversely, the costs incurred in going through the Suez Canal consist of canal tolls, extra insurance risk premium and the use of services such as tugs, pilotage and mooring. Canal costs have decreased by 5% over the last five months.

Right now bunker fuel is expensive. Freight markets are low because of the recession. This makes the Canal option much less costly than sailing around the Cape, provided, of course, that the vessel is not hijacked by pirates. However, if bunker fuel's price drops below $370 per tonne, the Cape route becomes more economical even though much longer. This is significantly less than today's prices, which are (click for larger image):

The bottom line is, well, the bottom line. Costs of Canal transit would have to increase very sharply to make the Cape route more economical for crude and container ships. For example, piracy insurance premiums would have to quadruple.

A VLCC charters for one-year terms at $36,000 per day, so its calculations are different than for a container ship, which charters for about $13,000 per day. However, VLCCs are much more fuel efficient than container ships, so total daily costs from all sources have to be compared. Dry bulk vessels have an altogether different calculation since they are chartered for each voyage, so total revenue weighs more heavily than costs, per se.

Here is a handy Excel calculator of comparative costs of sailing the Cape or the Canal that informs just how complex and assumptive the decision can be - click here.

Related:

-- a primer on the world's oil-transit choke points.

-- "Tech Talk - Oil Tankers in the wake of the Egyptian Crisis"