Flexible pricing policies in Suez Canal Authority. "Long Haul Committee as a Case Study"

Flexible pricing policies in Suez Canal Authority "Long Haul Committee as a Case Study" Samer Hassan Okasha Mohamed Mahmoud Helal 1

Abstract S uez Canal Authority uses multiple pricing policies as marketing tools to encourage and attract more vessels to pass through Suez Canal. In April 1987, SCA adopted the long haul committee to ensure the flexible marketing policies so as to encourage vessels to use the Suez Canal and to attract new customers. Reduction to Long Haul vessels that don t use the Suez Canal, as the Canal tolls exceed the savings that could be achieved when using other routes. This reduction had been decided case by case after studying the total costs for such vessel via SC and the alternative routes. Methodology: The paper follows the Empirical approach to show the relationship between the bunker price, the time charter values and the rebate percentages of the long haul committee. 2

1. Overview on Suez Canal 1 1.1 Introduction about Suez Canal The Suez Canal is an artificial sea-level waterway running north to south across the Isthmus of Suez in Egypt to connect the Mediterranean Sea and the Red Sea. It provides the shortest maritime route between Europe and the lands lying around the Indian and western Pacific oceans. It is one of the most important waterways in the world. Egypt was the first country to dig a man-made canal across its lands to connect the Mediterranean Sea to the Red Sea via the branches of the River Nile. The geographical position of the Suez Canal makes it the shortest route between East and West as compared with the Cape of Good Hope. The Canal route achieves saving in distance between the ports north and south of the Canal, the matter that is translated into other saving in time, fuel consumption and ship operating costs. On November 17, 1869 the barrage of the Suez plains reservoir was breached and waters of the Mediterranean flowed into the Red Sea and the canal was opened for international navigation. Under the terms of an international convention signed in 1888 (The Convention of Constantinople), the canal was opened to vessels of all nations without discrimination, in peace and war. The canal was closed to navigation twice in the contemporary period. The first closure was brief, coming after the tripartite British-French-Israeli invasion of Egypt in 1956, an invasion primarily motivated by the nationalization of the waterway. The canal was reopened in 1957. The second closure occurred after the June 1967 War with Israel and lasted until 1975, when Egypt and Israel signed the second disengagement accord. 1 Suez Canal official website: http://suezcanal.gov.eg/ 3

1.2 Suez Canal Characteristics The Suez Canal's depth at the opening of the canal was about 22 Feet, its cross sectional area was 304 m 2 and the largest ship load that can pass through was 5000 DWT which was typical for ships sizes in these days. As the ships developed and increased its sizes, the canal needed to be developed, which happened when it was still a foreign joint venture before being publicized to take ships with depth of 35 feet and its water area to be 1200 m 2 by the end of 1956 and when the canal was publicized by the Egyptian government on the 26th of July 1956. The Egyptian administration was keen to develop the Navigation canal even more on different stages. In May 1962, the cross sectional area of the canal was to reach 1800 m 2 and the allowed depth to 38 feet. In June 1966, a development was to be executed on two stages as it was announced the depth would reach 48 and 58 feet consecutively. This program was started, but was soon halted due to the war that erupted on the 5th of June, 1967. It was reopened for international; navigation in June 1975 after purifying it from the ships that sank in its bottom during in the 1967 and 1973 wars, The canal still with the same cross sectional area and depth as before it was closed. Table 1- The navigational characteristics of Suez Canal Item Unit 1869 1956 1962 1980 1994 1996 2001 2010 Overall Length Km 164 175 175 189.8 189.8 189.8 191.8 193.3 Bypasses Length Km -- 27.7 27.7 77 77 77 79 80.5 Width at 11 m depth m -- 60 89 160/175 170/190 180/200 195/215 205/225 Water depth m 8 14 15.5 19.5 20.5 21 22.5 24 Max. Draft of ship Feet 22 35 38 53 56 58 62 66 Cross Sectional Area m 2 304 1200 1800 3250/3600 3600/4000 3850/4300 4350/4800 4800/5200 Max. Loaded ship DWT 5000 30000 60000 150000 170000 185000 210000 240000 Source: Suez Canal Authority, official website. The development projects then started significantly by the Egyptian administration and received to ships of a 210,000 tons load, especially after increasing the cross sectional 4

area to 4800 m 2 and a ship draft of 62 feet, with a length of 191.8 km, and also dredging a new bypass starting from the 17 th km south of port Said heading directly to the Mediterranean east of port Fouad to allow the loaded ships going north to go to the sea without passing through West port said port. The ship draft reached 66 feet by 2010, this stage can accommodate all container vessels. 1.3 Suez Canal navigation Statistics Table 2- The Suez Canal navigation Statistics (2000-2013) Year *World seaborne trade (m. ton) Seaborne Trade via Suez Canal (m. ton) Suez canal share of the world seaborne trade (%) Total number of transits via Suez Canal Total Suez Canal net ton (m. net ton) Suez canal revenues (m. $) 2000 6242 368.0 5.9 14142 439.0 916291 2001 6201 372.4 6.0 13986 456.1 9.1991 2002 6335 368.8 5.8 13447 444.8 917999 2003 6603 7.991 6.9 9.229 549.4 6.9296 2004 6787.6995 7.7 92..5 621.2 15999. 2005 7122.9999 8.0 9.667 672.0 17.199 2006 7878 26.92 8.0 9.227 742.7 1.9.9. 2007 8140 99599 8.7 651.7 848.2 725999 2008 8286 96195 8.7 6979. 910.1.1.991 2009 7832..196 7.1 9966. 734.5 76.19. 2010 8444 27299 7.7 99111 846.4 792.91 2011 8769 2199. 7.9 99911 928.9.66692 2012 9197 91191 8.0 99667 928.5.96199 2013 9548 754.5 7.6 92.12 915.5.99599 Average growth rate % 3.4 6.3 1.6 6.3 8.6 *Sources: UNCTAD, trade and development report. Suez Canal Authority, Economic unit. 5

The seaborne trade via Suez Canal in terms of Cargo ton achieved an average growth rate 6.3% annually during the period (2000-2013), it is higher than the growth rate 3.4% that was achieved by the world seaborne trade during the same period. The Total number of transits via Suez Canal reached 16596 transit in 2013 with an average growth rate 1.6% annually during the period (2000-2013). The Suez Canal Net Ton achieved an average growth rate 6.3% annually during the period (2000-2013). The Suez Canal revenues achieved an average growth rate 8.6% annually during the period (2000-2013). Figure 1- Suez Canal share of the world seaborne trade 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 8.7 7.6 5.9 7.1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 The graph shows the increasing Suez Canal share of the world seaborne trade from 5.9% in 2000 to 7.6% in 2013. 6

2. Ongoing Suez Canal development projects 2.1 The New Suez Canal project The fact that the canal allows for only one-way passage forces ships to travel in convoys. So there is a need to dig a second Suez Canal alongside the existing waterway to keep pace with growing traffic on the Asia-Europe shipping lanes. This Project Consists of two main Parts, the first part is the Digging of a new parallel waterway from km 60 to km 95 to a depth of 24m (66ft), the second part is deepening and widening of the Great Bitter Lakes by-passes and Ballah by-pass, with a length of 37 km, So the Total length of the project is 72 km and it is targeted to be completed within only one year. Doubling the size of the canal will not only eliminate the need for these one-way convoys, it will also double the number of ships able to pass in one day and will reduce passage through the canal from the current 18 hours to 11 hours through reducing waiting times for vessels using the canal. The current 100-mile-long canal might also be widened as part of the project in a bid to better compete with the enlarged Panama Canal, which will be able to handle much bigger container vessels than the current 5,000-TEU limit. 2 This very ambitious project is set to cost around EGP60 billion (USD8.4 billion) and the Financing is totally internal, as the Egyptian government sold debt certificates to Egyptian citizens denominated in 10, 100, and 1,000 Egyptian pounds, bearing 12% interest. Egyptians living abroad can buy certificates in dollars bearing 3.5% interest. The World Bank has announced its support for the project, and agreed to provide assistance and advice for the construction phase, which is already commenced. World 2 Egypt unveils plan for second Suez Canal, Journal Of Commerce, August 2014. 7

Bank director Hartwig Schafer has stated that the project will change the economic landscape of Egypt and make foreign investment flow into the country. 2.1.1 The Project Objectives: Boosting the hard currency earnings for the Egyptian national income. Increasing the doubled parts of the Suez Canal to 50%. Shortening the transit time from 18 hours to 11 hours for the southbound convoy by minimizing the waiting time for vessels. Increase the number of ships that the Canal can handle on a daily basis in order to cope with the expected growth of world trade. Support the Suez Canal Area Development Project. 2.1.2 Project Returns and Outcome: Increase the daily average of transiting vessels to 97 ships by the year 2023, up from 49 ships at present. Achieve direct unstopped transit for 45 ships in the two directions and stepping up the permissible draft to 66ft all through the Suez Canal. Increase the Suez Canal revenues from $ 5.3 billion at present to $ 13.226 billion by 2023. Maximize competitiveness of the Suez Canal, excel its ranking among other alternative canals, and world classification societies due to the high rate of safety accomplished during transits. 2.2 Suez Canal Region Development Project (SCRDP) The area where the Suez Canal is located could play a strategic role for the world trade by creating an area for international maritime services, industries and logistics. Therefore, there is a need to utilize the economic potentials of this unique location and maximize benefits to provide the added value services for the ships transiting the canal. 8

2.2.1 The project objectives: Developing and boosting the national economy of Egypt Creating new industrial and logistic centers Increasing volume of cargo transported via the Suez Canal Creating an economic boom in the area and generating job opportunities. Defining the volume of demand in the international markets and exploring investment opportunities in the region. 2.2.2 The potential industries that will be introduced within the project: Car assembly plants Petrochemical and electronics industries Food processing and canning industries Ship building and ship repair industries Distribution logistics centers Manufacture and repair of containers Ship Bunkering This project goes side by side with the New Suez Canal Project. The two projects will add to the importance of the Suez Canal, and will make it the route of choice for ship owners over the world, putting any alternative routes out of competition. The project will also have positive impacts on the Egyptian national income. 9

3. The Flexible pricing policies 3.1 Philosophy of Suez Canal Tolls: The philosophy of Suez Canal tolls is based on: 1. Considering the earning capacity of the transiting vessel. 2. Comparing the ship cost through the SC route with other alternative routes. 3. Enlarging the number of potential canal transit beneficiaries as a step to increase the canal revenues. 4. Sharing part of the saving achieved by transiting vessel. 5. Giving due consideration to market condition and economic variants. 6. Considering the vessel type and size, loading condition and cargo type. 7. Maintaining the application of non-discriminatory measures. 3.2 Flexible Pricing Policies: Suez Canal Authority adopted flexible marketing policies so as to encourage vessels to use Suez Canal and to attract new customers, such as: 1. Tolls Permanent Reductions. 2. Cargo Incentive Rebate Policy. 3. Co-operation with SUMED pipeline. 4. Time Saving Service. 5. Long Haul Rebate System. 11

1- Toll Payment Reductions Exemption of ships Transit the Suez Canal for Repair or maintenance in the SCA Shipyards or its affiliated companies from transit fees. 25 % on SC tolls for LNG Carriers. 50 % on SC tolls for Cruise Vessels and calling on Egyptian ports at the Red Sea or Mediterranean Sea. 35% on SC tolls for the round trip of dry bulk ships working between ports of east coast of the Americas and the Caribbean heading to (or coming from) ports of Indian sub continent and Asian countries east of India. 2- Cargo Incentive Rebate Policy Further rebates to LNG Carriers transiting SC as follows: 5 % on SC tolls for quantities exceed 1 million Ton up to 3 million Ton. 10 % on SC tolls for quantities exceed 3 million Ton up to 5 million Ton. 15 % on SC tolls for quantities exceeds 5 million Ton. 3- Co-operation with SUMED pipeline: SCA allowed super tankers to transit SC partially loaded after lightering part of their cargo through SUMED pipeline. Tolls of USD 0.63 shall be levied on each metric ton of crude oil cargo. Crude oil cargo carried by the tanker shall be calculated by deducting the volume discharged at SUMED from the total cargo indicated in the cargo manifest and the bill of lading. VLCCs (loaded in Algeria and in Mediterranean ports west of Algeria, as well as the North Sea and North West Europe) that lightering part of their cargos into medium size tankers at SidiKrair, whereby the two tankers can transit the Suez Canal south bound. 11

The lighter vessel shall be exempted from transit dues on its northbound return trip provided it is Ballast and the return trip is made right after the discharge operation at Sukhna Port and within ten days of its loaded trip. 4- Time Saving Service: Reducing the waiting time for vessels that arrive after the convoy dead -time limit by allowing them to transit against extra charges as follows: 3 % of SC tolls for ships that arrive 2 hours later with max. of SDR 7000. 5 % of SC tolls for ships that arrive 2-3 hours later with max. of SDR 10500. 10 % of SC tolls for ships that arrive more than 3 hours later with max. of SDR 20000. 5- Long Haul Rebate System In April 1987, Suez Canal Authority adopted Long Haul Rebate System so as to encourage vessels to use the Suez Canal and to attract new customers. The reduction is given to Long Haul vessels that don t use the Suez Canal because of preferring the other route due to the distance, as the Canal tolls exceed the savings that could be achieved when using other routes. The reduction is decided case by case after studying the total costs for such vessel via Suez Canal and the alternative routes. The long haul vessel should send a fax to the attention of director of Planning Research Department before its sailing date by 48 hours at least attached with the rebate required form. S.C. Tolls without any reduction to be submitted before transiting by the agent. The granted rebate will be realized upon receiving the following documents: Document 1 : Port of Origin Document 2 : Port of Destination Document 3 : Port of Bunkering Document 4 : Owners Certificate 12

Rebate Conditions: 1. The validity of reduction is 70 days from the first date of SCA response to the rebate request. However, when the 70 days are over no rebate is to be enjoyed. Therefore if this duration ( 70 days ) may be exceeded a new rebate request form shall be submitted to SCA to restudy the case provided that the request is received by SCA before the sailing date. 2. Should the vessel, for any reason, change load or discharge port from those stated in the original Bill of Lading or manifest, a revised calculation is to be presented to the S.C.A. showing the new reduction required. New documentation is to be presented accordingly. 5.1 Long haul rebate determinants: 5.1.1 The distance between the origin and the destination There is a positive relationship between the long haul rebate and the Difference in distance between the Suez Canal route compared with the cape of good hope, as when the voyage Distance via Suez Canal route is getting long, the savings in distance that Suez Canal offers is getting low, so Suez Canal provides higher rebate amount. 5.1.2 Bunker cost There is a negative relationship between the long haul rebate and the voyage bunker cost, as when the voyage Bunker Cost is getting low, the voyage cost savings that Suez Canal offers is getting low so Suez Canal provides higher rebate amount. 5.1.3 Time charter rate There is a negative relationship between the long haul rebate and the time charter rate, as when the time charter rate is getting low, the savings that Suez Canal offers is getting low so Suez Canal provides higher rebate amount. 13

5.2 The long haul statistics development The long haul statistics changed very much along the period from 2000 till 2014, by the beginning of the millennium and by the increasing growth rates in the seaborne trade, the long haul movement decreases. Year Table 3- Long haul Statistics ( 2000-2014 ) NO. ( Vessel ) Net Ton (1000 net ton ) Tolls (1000 $ ) 2000 793 38,692 86,457 2001 739 37,256 75,862 2002 808 36,250 84,536 2003 410 15,143 46,486 2004 155 5,275 17,911 2005 111 3,758 12,695 2006 117 4,479 14,723 2007 36 1,401 4,880 2008 24 980 3,728 2009 91 3,182 14,612 2010 31 1,101 6,480 2011 13 324 1,474 2012 43 1,249 6,336 2013 120 4,348 23,291 2014 249 9,756 50,003 Source: Suez Canal Authority, Economic Unit. Figure 2 1,000 500 0 793 808 38,692 36,250 249 120 4,348 9,756 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Net Ton (1000 net ton ) NO ( Vessel ) 60,000 40,000 20,000 0 Source: Suez Canal Authority, Economic Unit. 14

In 2000 the long haul number of vessels was 793 vessels with 38.7 million net ton, then after 2002 the long haul movement fluctuated decreasingly till 2008 which in it the total number of vessels reached 24 vessels with 980 thousand net ton. In 2009 the long haul statistics improved and there were 91 vessels with 3.2 million net ton. And then decreased in 2010 and reached the minimum at 2011 by only 13 vessels with 324 thousands net ton. Suez Canal always has its own flexible pricing policies that used to attract more vessels and look after its clients. When the maritime industry had a shortage in the demand of the vessels and the time charter rate collapsed, Suez Canal released a circular in June 2013 which takes the piracy cost in consideration which helped the vessels to get a rebate instead of not getting ( if the piracy cost had not been taken in consideration). And as a result of that flexible policy, the statistics of the long haul increased in 2013 and 2014 respectively. Figure 3- world seaborne trade (2000-2013) (m. ton) 12000 10000 6242 6201 6335 6603 6787 7122 7878 8140 8286 7832 8000 6000 4000 2000 8444 8769 9197 9548 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: UNCTAD 15

Practical applications: In an attempt to make the Long Haul Rebate System mechanism more illustrated, the paper present three Scenarios for L.H repayment cases in different three years. In order to clarify how the changes in values of The Bunker Cost and Time Charter Rate could affect the L.H Reduction rate practically, holding other factors constant for the three scenarios, the Reduction rate is calculated based on the following assumptions: Same dry bulk vessel with 50,000 DWT. Same Origin and Destination Ports (Same distance). Same Suez Canal transit tolls. SDR rate equals 1.40 $. Table 4- Long Haul Applications Summary First Scenario Jun-07 Time Charter per day Bunker price per ton Second Scenario Jun-09 Time Charter per day Bunker price per ton Third Scenario Jun-14 Time Charter per day Bunker price per ton ($) 35000 $ 215 $ 12700 $ 300 $ 9563 $ 622 $ Piracy Via Suez - - 70,000 Suez Canal Tolls (b) 176,120 176,120 176,120 Total Voyage Cost Via Suez Canal 1,445,729 855,707 1,141,676 Cape 1,566,387 834,060 1,102,118 Difference (a) -120,658 21,647 39,558 Reduction Rate (a/b) -69% 12% 22% * Piracy cost via suez canal Route started to be applied since June 2013 16

As shown in table 4, The First Scenario for L.H Reduction rate calculation in June 2007express the global trade boom period which was reflected in a high time charter rate that lead to make the total voyage cost via Suez canal route is cheaper than the cape route with 120,658 $, therefore Suez canal did not offer any reduction rate for this case. The Second Scenario for L.H Reduction rate calculation in June 2009 express the global trade recession period which was reflected in a low time charter rate and low bunker price that lead to make the total voyage cost via cape route was cheaper than Suez canal route with 21,647 $, so the Suez canal provided 12% Reduction rate on its tolls to equalize the voyage cost via Suez route and cape route. The Third Scenario for L.H Reduction rate calculation in June 2014 express how the Long Haul Rebate System adjustment made by Suez Canal authority in June 2013 had affected the reduction rate. Although this Scenario contained high voyage bunker cost, Suez Canal did not offer low reduction rate as the following two reasons: a) The voyage cost via Suez Canal route increased by 70,000$ as a piracy cost. b) This Scenario contained low time charter rate. Because of these reasons, the total voyage cost via cape route became cheaper than Suez Canal route with 39,558$ which lead Suez Canal to provide 22% Reduction rate on its tolls. Conclusions: Both the first and the second Scenarios are considered to be perfect representative cases for two different conditions in the shipping market as the High L.H reduction rate in the second Scenario shows the great importance of the long haul repayment system which increases During the shipping market crisis periods. The non-l.h reduction rate in the first Scenario shows the decreasing role of the long haul repayment system during the shipping market flourish periods. 17

A Appendix: Table A.1: Long Haul Application For First Scenario Jun-07 18

Table A.2: Long Haul Application For Second Scenario Jun-09 19

Table A.3: Long Haul Application For Third Scenario Jun-14 21

References: Suez Canal official website: http://suezcanal.gov.eg/ Suez Canal Authority, Economic unit Data Base. Trade and Development Report, UNCTAD 2014. Review of Maritime Transport Report, UNCTAD 2014. Barnard, B. (2014).Egypt unveils plan for second Suez Canal, Journal of Commerce: (http://joc.com). 21