Egypt turmoil and world shipping

The world shipping and oil trade are leafing through the pages of history to examine ‘what if' scenarios, in case the 120-mile long Suez Canal shuts in the wake of the present turmoil in Egypt.

The canal was closed in 1956 during the Suez Crisis and it was blockaded for eight years following 1967 Arab-Israel Six Day War. But oil was not traded on spot market then, and therefore the impact on the tanker market was limited.

The so-called tanker war in the Persian Gulf between 1984 and 1987, when Iran and Iraq were embroiled in a skirmish and the tankers were targeted, did cause some shipping problem. But the impact on price was muted.

This time around, as the turmoil in Egypt intensified and the country's ports remained shut, oil surged, with crude breaking $100 million for the first time in more than two years.

The shares of world's major tanker operators like Frontline, DS Torm and Euronav were also up, sending shockwaves. However, according to experts, such fear will be short-lived unless the unrest spreads to other countries in West Asia.

IMPORTANCE OF SUEZ CANAL

Oil prices might head higher but are unlikely to breach the record high of $146 in July 2008. However, nobody is panicking yet, it is pointed out. Several reasons are given as to why the market may “stay calm”. First, the Suez Canal's convoy system — where ships go through in batches and pass each other at designated points — is still operating.

The military has taken control of the canal and convoys operating after 3 pm are provided with military escorts. The crude movement through the 200-km Sumed pipeline linking the Red Sea with the Mediterranean too has remained unaffected.

Second, reports in the Western media suggest there is enough spare OPEC capacity — estimated at around five million barrels per day. According to the International Energy Agency, oil stocks in rich countries are currently adequate to cover about 61 days of forward demand, nearly the highest in 10 years.

Third, there has been a structural shift in oil demand since the last closure of the canal in 1967. Earlier, the centre of gravity for demand was in the US and Europe and the canal, therefore, was crucial. Not anymore.

Nowadays, oil demand has shifted to Asia, with India and China emerging as major consumers; they do not rely on the canal for oil transportation. According to one estimate, only 4.5 per cent of the global production of crude is shipped through the canal and the pipeline that runs adjacent to it.

According to Barclays, the closure of the canal will, at the most, remove two to three million barrels of crude and another two million barrels of refined products from the system.

Finally, there is enough idle tanker capacity to meet the probable extra oil transportation demand, should the tankers travelling between Asia and Europe opt for the far longer route south of Africa and around the Cape of Good Hope. In other words, the impact of the closure of the canal is likely to be far more limited than in the 1950s and 1960s. But the worries persist. More than the tanker operators, it is container shipping that has been hit by the present unrest in Egypt. This is because container ships taking manufactured goods from Asia and Europe and the US account for 50 per cent of the transits through the canal.

Impact on cargo routes

The turmoil has forced many container lines either to suspend or rework their services. For example, Maersk, the world's largest container line, has already declared Port Said as “no go”. South Korea's Hanjin is re-routing some of its container vessels and its chief executive has been quoted as saying that the shipping line's operation at Port Said and Alexandria has been affected by the lack of labour and IT system. As a result, some of the trans-shipment boxes are being discharged at the nearest next port. Some container vessels that were initially supposed to discharge in Egypt are instead unloading and docking at Singapore. The shutdown of Egyptian ports has suspended transshipment operations of many container lines.

According to one estimate, more than 34,000 ships passed through the canal in 2009 and half of them docked at Egyptian ports to pick up supplies, military escorts and crew.

In first three weeks of 2011, till the trouble started in Egypt, more than 300 container vessels passed through the canal. APM Terminals, the arm of Maersk than runs container terminals in Egyptian ports, as also DP World, the Dubai-based container terminal operator, have closed their operations in Egypt.

The shipping industry is concerned that the unrest in Egypt — and to a lesser extent in Tunisia, Algeria and Yemen — points to wider instability in oil-rich West Asia.

COMMENT NOW