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Sunday, 30 January 2011

Egypt, Suez Canal, and what next?

As published at MONEYLIFE.

http://www.moneylife.in/article/4/13522.html

How will the crisis in Egypt affect shipping?
January 29, 2011 11:31 AM
Veeresh Malik






Moneylife » Companies & Sectors » Sector Trends » How will the crisis in Egypt affect shipping?
 
How will the crisis in Egypt affect shipping?
January 29, 2011 11:31 AM
Veeresh Malik
suez-canal-2
As both ends of the Suez Canal have come under curfew, how does the shipping industry cope?

Egypt boils over, after Tunisia did a few weeks ago, and the Suez Canal Authority is offline. Curfew has shut down both ends of the Suez Canal and reports coming in from shippie friends suggest that there are delays in transit. About 9% of the world's trade by volume and slightly more by value moves through this vital artery-and an unknown amount shrouded in the mystery that is international oil trade, moves through the SUMED (Suez-Med pipeline) which trans-ships crude oil from Ain Sukhna on the Red Sea/Gulf of Suez end to Sidi Kerir near Alexandria-equally mysteriously converting "sanctioned" oil from Iran to legit oil at the other end, for example.

As commodity, forex and oil traders, as well as other people who make money out of information, move rapidly in the West-while the weekend closes most markets East of Suez-we get a ringside seat, once again, on how fortunes will be made and lost in shipping. Your humble correspondent managed a ringside seat the last time around, when Onassis, amongst others, made their fortunes, and seems the next cycle may soon be on us.

A successful shipping industry, as has been said before, is always ahead of the curve as far as the world's commercial outlook is concerned. The rest of the world may go through all sorts of geo-political changes, weather patterns may re-invent themselves, consumption and affluence as may go through seismic shifts impacting countries and continents-but ships have and will continue to keep the wheels of commerce turning. Face it; even wars cannot continue for long, without the shipping industry's support, no merchant ship will keep the wheels of battle turning.  Your correspondent has spent time detained in a West European port decades ago for being on a ship that was ostensibly carrying illegal arms which by a stroke of a dictat by pen on paper magically became legitimate cargo and then was delivered to the opposing regime it was originally intended for. The owners were just concerned about the freight and we were concerned about our salaries-and being detained while being allowed ashore was not all that bad, either.

By definition, shipping has for centuries ensured its survival only if it has been able to read the tea-leaves correctly, ensuring that its ships and support elements that are in the correct place just slightly ahead of the correct time. And with the correct kind of ships.

To understand this better, we have to first look at the typical returns that shipping as an industry gives-and then ask ourselves the question-why do people get into shipping if the real monetary returns are so low? Historically, from a variety of sources as well as part of Maritime Economics 101, return on capital employed in shipping for the past century has seldom been over 6.5% to 7% per annum, and usually lingers in the 2%-3% per annum region. Most certainly in days before the last 100 years, the commercial return was often negative, though the other long-term benefits like colonial dominance, religious evangelism and military might were more than compensatory.

Things haven't really changed much in the present day and age. However, what has changed is that shipping also has to turn a minimum profit as well as be ready to pick up the surges, since financial backing from royalty, religions and regents, in uniforms, cassocks or robes cannot be declared as openly as it was a few centuries ago. So, through an intricate web of ownership modules, the real controlling forces behind shipping worldwide remains the same but will simply not be able to declare this. In addition, the primary reason of global dominance remains the main pillar for anybody wanting to get further in shipping. As well as aviation, for that matter, but there is a vital difference there.

And the vital difference has to do with the age-old unchallenged concept of "innocent passage" guaranteed to commercial merchant ships worldwide, regardless of what they are up to-as long as the origin and destination ports are fine with things, and as long as global conventions on the subject in times of declared wars or similar are not in force. In other words, technically speaking, you cannot touch an enemy nation's ship even if all she is doing is running "innocent passage" through your territorial waters. Israeli ships will be and have been able to sail through the Red Sea and thence through the Suez Canal, and the Russians could use the Panama Canal, even at the worst of times-and that is how it has always been.

But when natural events-or in some cases, "sponsored activities"-cause a breakdown in and around the choke-points, then all bets are off on "innocent passage" and Black Swans kick in. A choke point in shipping, incidentally, would be a narrow waterway that impacts international trade as ships funnel through them. Malacca Straits near Singapore, Suez Canal in Egypt, the Straits of Gibraltar between Europe and Africa, Straits of Hormuz at the entry to the Persian Gulf, and the Panama Canal-are vivid examples. It is no coincidence that the colonial powers and now the developed world have always tried to and have succeeded in controlling these "choke points". Except, lately, the Suez Canal.

This now, for the second time in recent history, appears ready to re-write the way shipping fortunes are likely to fluctuate.


Shipping fortunes are made-and lost-but mostly made, during periods known as "volatile" when risk, same meaning actually, is factored in. And over the last few months various indices and indexes that track shipping rates have been behaving very mysteriously, almost as if they were predicting in some ways that a choke point was due to boil over. Shipping circles, more than any other commercial interests, are watching and positioning assets very strategically-backed by national interests-and turbulent times lie ahead. Watch this space for more.

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