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Opening of New Suez Canal Creates Unfavorable Conditions for Shipping Companies

On August 6th, Suez Canal Authority (SCA) of Egypt opened New Suez Canal. New Suez Canal, of which the construction began last August, took a year and 8.4 billion dollars. New Suez Canal was built over a 72km sector that passes Ismalia, which comes in the middle of the old canal. As the addition of the new canal enables two-way passage in the canal, it will take much less time to go through it.

New Suez Canal Map
New Suez Canal Map (http://www.suezcanal.gov.eg/)

Effects from the opening of New Suez Canal

The Egyptian government expects that maritime logistics via Suez Canal will greatly expand as it takes less than half of what it used to take to pass through the canal. Also, it is forecast that ships passing through the old canal will double from currently 49 ships a day to 97 ships a day and the time it takes for a ship to pass through the canal will sharply decrease from currently 18 hours to 11 hours, while waiting time for ships will shorten considerably from currently 11 hours to 3 hours.

New Suez Canal Project
New Suez Canal Project (http://www.suezcanal.gov.eg/)

The completion of New Suez Canal gave birth to the shortest maritime transport route that connects the Mediterranean, the Red Sea, Europe, and Asia. Furthermore, the Egyptian government plans to focus on New Suez Canal the creation of large industrial complex and logistics infrastructure, thus turning the new canal into a hub for trade and maritime logistics that connects Europe and Asia. However, because the construction took just one year by unreasonably shortening the originally planned construction period of 5 years and invested a huge amount of money in the project, New Suez Canal is expected to charge a far higher transit charge compared to the old canal.

Increased ship’s capacity will aggravate oversupply in shipping market

Now that New Suez Canal is completed, shortened transit time between Asia and Europe increases ship’s capacity on the supply side. In other words, the already serious oversupply between Asia and Europe, the opening of New Suez Canal is expected to further aggravate the situation.

Moreover, the operating cost for New Suez Canal is exorbitant compared to the old canal (SCA estimates the operating cost for the old canal to be 5 billion dollars and puts 12.5 billion dollars for New Suez Canal), which leads to prediction of a steeply raised transit charge for the purpose of withdrawing investment and ensuring profitability for the canal. This way, the operating costs for ships that pass through New Suez Canal will go up accordingly.

Still, daily 14 hours minus the combination of a ship’s transit time through New Suez Canal and its waiting time can cut down on charterage to be paid by shipping companies. Korea Shipowners’ Association forecasts reduction of 3,000 to 12,000 dollars per ship. However, considering the total number of days required for a voyage between Asia and Europe, we can hardly expect a big reduction in charterage.

With the opening of New Suez Canal improving the timeliness of services, shipping companies can seek to improve the quality of services and get what little reduction it may get in charterage. On the other hand, we fear a steep hike in transit charges and increased ship’s capacity.

Notably, while we can’t be sure how much more of ship’s capacity will be made available, we think that it will negatively affect the business for container ships operating between Asia and Europe.

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 265