The plummeting price of oil on international markets has had many effects – one of which is that it may be cheaper for ships to travel right around Africa than go through the Suez Canal.
By Chris Baraniuk, 4 March 2016.
The Suez Canal was one of the most significant engineering projects of the 19th Century. It was a gargantuan task that took nearly 20 years to build and an estimated 1.5 million workers took part – with many thousands dying in the process. But when it finally opened in 1869, ships could travel from the Red Sea – between Africa and Asia – to the Mediterranean, cutting weeks off a journey. It was a revolution for trade.
Ever since, passage through the canal has been considered more or less vital to global business. Shipping firms pay what amounts to several billion dollars every year to the Suez Canal Authority, an Egyptian state-owned entity, for the privilege of travelling via the canal.
To take an example, it cuts a modern journey from Singapore to Rotterdam in the Netherlands by nearly 3,500 nautical miles (6,480km) – saving vessel owners lots of time and lots of money.
However, more and more some ships are deciding not to take the Suez route. Instead, they are travelling around the Cape of Good Hope, right at the southern tip of Africa. Over 100 ships did this between late October 2015 and the end of the year.
“I’ve been covering shipping for the last eight years,” says Michelle Wiese Bockmann, from oil industry analysis firm OPIS Tanker Tracker. “It is very rare to see this volume going round the Cape.” Right now, she’s keeping tabs on half a dozen diesel and jet fuel-carrying ships on this very route.
One of the big factors here, explains Bockmann, is the low price of oil. This means that “bunker fuel” – the thick, heavy fuel the ships themselves run on – is currently very cheap. Indeed, Singapore prices for such fuel have fallen from around $400 (£286) per metric ton in May 2015 to around $150 (£107) today.
As a result, sea journeys aren’t as costly as they have been in recent years. But is there any sense in taking longer than you need to? Ship manufacturer Maersk estimates that a vessel travelling at 13.5 knots will take an extra 11 days to go via the Cape. Why bother?
For one thing, there are steep fees for using the Suez Canal – Maersk says these can be approximately $350,000 (£249,000) per ship. There are other costs, too. Rose George, author ofDeep Sea and Foreign Going, was on board a ship using the Canal a few years ago. She notes that vessels must agree to taking on a Suez crew for the transit.
“[The Suez crew] seem to do nothing but listen to tinny radio and try to sell souvenirs,” says George, adding the ships often have to pay a cigarette ‘tax’.
“On each voyage, Suez costs a ship about £400 ($560) of cigarettes, as well as dozens of chocolate bars from the bond locker.”
These irritations aside, there is also the tricky economics of oil and shipping markets.
For one thing, at the moment traders are playing with what’s called a “contango” – more and more oil and refined oil products are being kept at sea or in storage as traders wait for prices to rise again. Currently there is an oversupply of crude oil around the world, and while we have more crude than we need, the demand for gasoline – a refined oil product – is quite high. This situation has led to volatility in the market and that’s where traders are making their money, says Bockmann.
“One of the trading strategies would be that they haven’t sold the cargo and they need additional time,” she points out. She also adds that ships can sometimes be anchored offshore – a situation known as “floating storage” where they simply wait for the market to favour what they have on board. “Floating storage hit a five-year record in December and it hasn’t really dropped that much since then,” Bockmann says.
For ship owners, then, the ball seems to be mostly in their court. They can choose to be at sea longer in certain cases and they can take longer routes, even shopping unsold cargo round various ports in Asia, Africa and Europe, in an attempt to find the right buyer at the right time. The ships must be the right size for a given port, and the products on board need to meet required standards in the local market – but as long as someone suitable does, eventually, buy that cargo at a favourable price, then the traders will do well. If not, they could lose money.
For now some ships have decided to take those additional thousands of miles round the Cape, hoping that at the end of the voyage they’ll come out in profit. It may seem strange – but in the world of oil, sometimes you’re better off taking the long way round.