Making modern history
Egypt is an emerging market to watch due to its control of the Suez Canal and the Nile's potential.
As far as standing the test of time, the pyramids are pretty tough to beat.
But there's another monument in Egypt that bodes much better for its future from a trade perspective. That would, of course, be the Suez Canal, the key trade conduit in the Eastern Hemisphere, one that links Asia and eastern Africa with Europe and North America.
For that reason alone, Egypt would appear to be in line for
a rise in prominence in the world of container trade. Yet scratch below the surface, and there are other developments that make the country well worth watching.
First of all, Egypt has a sizable official population of 82 million ' maybe more, if locals are to be believed. It has a vibrant capital in Cairo that is home to more than the Giza pyramids and King Tut's riches. It's also a growing and prospering city intent on increasing its manufacturing output, while consuming more imports with each passing year.
Lastly, Egypt is home to the Nile, the world's longest river, and by all accounts, the most underutilized major waterway in the world, from a commercial standpoint.
All this and more led Singapore-based NOL and its liner carrier and logistics companies, APL and APL Logistics, to compile a report on the potential of Egypt as a freight transportation market.
The report, Connecting Egypt: Opportunities and Challenges in Freight Transportation and Logistics, authored by consultant Frost & Sullivan, was released in mid-October. It paints a picture of a country in transition, one with a great deal of potential but hampered by less-than-ideal infrastructure and bureaucratic bottlenecks.
On the surface, it's a similar picture to many other emerging markets. Opportunities abound, but the ground reality is fraught with difficulties that are uniquely local. In recent years, APL has produced similar surveys in China, India and Vietnam, and found (particularly in the cases of India and Vietnam) a woeful lack of world-class infrastructure.
In Egypt, the challenges are quite familiar. Port capacity needs to be expanded to handle the expected future demand. Clear road connectivity between major markets and those ports tends to be lacking. And an endemic underutilization of freight rail and commercial river transport means that roads are overused, and railroads don't get the upgrades they need.
But Egypt is a growing market, even during the downturn this year. Despite the global financial crisis, Egypt still has had higher than 4 percent gross domestic product growth in 2009 and GDP is projected to rise to 5 percent in 2010, investment ministry officials said in October.
Aside from its position as a fulcrum of Asia/Europe trade, Egypt is also on the way between North America and Asia, the Indian Subcontinent and the Middle East. And China's increasing desire to trade with Africa (Egypt included) could significantly alter trade patterns in the coming decades.
'Egypt's growing trade with China potentially changes the dynamics of eastbound/westbound trade,' or Asia/Europe, said V.G. Ramakrishnan, head of the transportation and automotive consulting practice with Frost & Sullivan, and author of the report. 'We expect the next five to 10 years to be an exceptionally high growth passage for Egypt.'
Rather than dwell on past inadequacies, the APL report tends to focus on what needs to happen to ensure Egypt reaches its potential.
Aside from the typical issues of infrastructure improvements to ports, roads, rails and the warehousing industry, what stands out most in the report is potential for the Nile. The river links the Mediterranean to the length of Egypt (as well as five other African countries) and yet there exists virtually no network of ports.
'There are no river ports or dry docks along almost the entire 1,700 kilometers of the Nile,' the report said. 'Moreover, the 42 cargo ports on inland waterways are very basic facilities, which are mostly privately owned by manufacturers with no rail or road connections.'
In all, less than 1 percent of the country's cargo transits the river.
The Suez Canal, meanwhile, continues to be a more effectively used maritime artery. Though traffic through the canal is down in 2009 ' due overwhelmingly to the economic downturn and not due to piracy near its southern entrance, Egyptian officials insist ' it still is a major source of revenue for Egypt. And once container demand rebounds, it promises to be a more valuable resource in future years.
APL ships began transiting the canal in the 1970s, and in 1994 APL set up an agency agreement in the country. In April 2008 the carrier set up a wholly owned subsidiary ' in essence going 'all in' on a country for which it sees has clear advantages over other emerging markets.
Compelling Case. APL officials said they had a number of potential markets they could have examined, but Egypt made for the most compelling case.
First, since it sits at the nexus of Asia/Europe trade, as controller of the Suez, its growing ports make for intriguing options as transshipment hubs. Its Mediterranean ports ' Port Said, Damietta and Alexandria ' cater to Med, Black Sea and southern European traffic, while the Red Sea port of Sokhna is effectively the best way to access Cairo.
Second, Egypt won't be reliant strictly on transshipment cargo, as its huge population will ensure that import/export cargo remains a significant part of the overall volume mix. Unlike other burgeoning hubs in the region ' like the primarily transshipment-driven Jebel Ali, Salalah or even Khorfakkan ' Egypt has significant manufacturing aims.
Of course, that means the country's logistics industry needs as much development as its physical infrastructure.
'The trucking sector, for example, is the main land-based mode for freight movement,' the report said. 'It consists of many independent truck owners who own three or fewer vehicles. They are loosely affiliated with other providers through booking agents who sell to the end users. This makes it extremely difficult for the users of trucking services to secure reliable services. It is not uncommon for consignments to be stuck at ports for longer than it took them to reach Egypt from the port of origin.'
Warehousing sophistication also lags, on the whole.
'In terms of warehousing, industries and/or companies have simply developed their own infrastructure that suits their requirements,' the report said. 'The garment and textile sectors, for example, have developed warehousing facilities in Alexandria to support exports to countries such as Turkey and Italy.'
Port Focus. While ports need to be upgraded to meet expected throughput growth, this is an area of need that is typically met in other emerging markets due to the ability of container lines and terminal operators to rapidly develop state-of-the-art container terminals. It's certainly easier to imagine vibrant new ports developing faster than Cairo's roads can be untangled or expanded.
But there do appear to be capacity shortfalls looming.
The report projects that Egypt will handle 16 million TEUs by 2025, compared to the 5.3 million TEUs it handled in 2008.
'If all planned port development projects and productivity initiatives are successfully completed by 2025, available capacity will be 15.7 million TEUs,' according to estimates by the ministries of transport and investment, the report said. 'It is not clear from the official sources exactly which specific projects would constitute the additional 10 million TEUs of capacity. Therefore, until there is more clarity on this expansion, it is feasible to assume potential capacity shortfalls by 2025 could exceed official estimates.'
Egypt's increasing acceptance of privatization in the country's ports could well bridge that gap.
As for existing ports, there is a clutch of container terminals on the Red Sea and Mediterranean that each provides respective advantages, like access to Cairo or more modern handling facilities. Aside from those advantages, there are ports that are clearly favored by certain container lines.
Mediterranean Shipping Co. and Maersk Line provide more than one-third of the throughput into Alexandria (a three-hour drive from Cairo, if traffic cooperates), while Maersk wholly dominates throughput at the APM Terminals-operated Suez Canal Container Terminal at Port Said East, at the Mediterranean entrance of the canal. Across the canal, Port Said West is overwhelmingly used by Yang Ming and UASC.
APL, meanwhile, has focused on calls at DP World-operated Sokhna, on the Red Sea, providing that port with nearly half of its volume (and nearly three-quarters of the port's volume when grouped with compatriot carrier PIL).
Only Port Said East (2.2 million TEUs of capacity) and Damietta (1.2 million) have current capacity of at least 1 million TEUs.
'In comparison to many ports in the Middle East region, Egypt's are strategically positioned to capture global transshipment and regional trade opportunities,' the APL report said. 'Egypt's larger ports have on the whole significantly higher capacity than others in the region and in some cases also have infrastructure to cater for the larger classes of vessels. The significant growth of exports from Asian nations such as India and China primarily to Europe and North America has also played a critical role in the ascendancy of Egypt's ports.'
Leading Lines. Maersk, CMA CGM, 'K' Line, Yang Ming and APL are the lines with the highest number of calls into Egyptian ports.
'While around 90 shipping lines call on Egyptian ports, eight handle around 70 percent of container freight movements,' the report said.
For now, Egypt remains a transshipment hub, with 80 percent of its ports' volume attributable to transshipment. Yet that number seems ready to come down, not because Egypt won't continue to figure prominently as a transshipment hub, but because more origin-destination cargo is bound to emerge.
'Another significant trend is the increase in investment potential for companies aiming to tap into the European market in Egypt and other North African countries ' notably Morocco,' the report said. 'Changing sourcing patterns and a plethora of trade agreements between Europe and countries such as Egypt and Morocco are expected to make the North African countries more attractive and cost-effective manufacturing/sourcing patterns for the European market. Moreover, over time, ports in Morocco and Egypt are poised to challenge their European counterparts for container transshipment business.'
Along with APL, Maersk has taken a key interest in Egypt. Not only does it have the most calls of any carrier into the country, its terminals division APMT manages the country's biggest container port, SCCT.
'Global sourcing patterns have changed and Egypt has benefited from this shift,' David Kennedy Browne, Maersk's director of Egypt cluster sales, told Lloyd's List in late October. 'Moreover the Egyptian economy has maintained a similar momentum in the first year after the global financial crisis, largely because of reforms carried out by the government since 2004. We are optimistic the Egyptian economy will stay relatively strong if the government continues its reform plans.'
SCCT handled 2.4 million TEUs in 2008 (about 10 percent higher than its nominal capacity) and said in mid-October it is forecasting 13 percent growth in 2009. The terminal is planning an expansion to 5.4 million TEUs that would make it one of the biggest in the Middle East region.
The report does not ignore the continuing threat of piracy in the Gulf of Aden and how it might affect container traffic through Egypt.
'If the heightened risk and cost ' monetary and human ' continues it could drive traffic away from the Suez Canal,' the report said. 'It has already led to significant increases in cargo insurance premiums. Also, some shipping lines have already diverted vessels to navigate the Cape Horn bypassing the Suez Canal, even at the cost of increasing trip time by around 40 percent.'
But both APL and Egyptian transport officials downplayed the effect piracy has had on Egyptian container throughput. Gene Seroka, regional vice president for the Middle East and east Africa for APL, said containerships are generally too tall and too fast to make for easy prey for pirates (an attack on a U.S.-flagged Maersk vessel earlier this year notwithstanding), while an Egyptian transport official said that less than 2 percent of the drop in transits through the Suez can be attributed to piracy.
Nevertheless, it remains a worry.
Problem Areas. The Nile remains a much safer waterway to transit. Yet it also remains wholly underutilized, the report said.
A combination of shallow draft and a lack of suitable river ports are partly to blame. The construction of the Aswan Dam in the southern end of the country, according to the report, created choke points in the form of locks and low water points. But the real problems lie north of Cairo.
'While 960 kilometers of Nile between Aswan and Cairo is wide and deep, allowing free passage to barges, the smaller tributaries north of Cairo that flow through the Nile Delta to the Mediterranean Sea are too shallow for large freight carrying barges,' the report said. 'Shippers have complained about the poor condition of segments from Cairo to Alexandria and from Cairo to Damietta.'
Egyptian officials envision the river taking some of the burden off the country's highways, but much needs to be done to meet that vision. Former Egyptian Transport Minister Mohammed Mansour (see related story) said the country wants to develop six river ports and a corresponding river fleet to increase the Nile's use. Its numerical goals include shifting 20 percent of cargo transportation from the country's roads to rail and river transport (though it didn't specify what percentage currently moves on those two modes).
Egypt's roads provide a complete counterpoint to the Nile. Traffic within Cairo is painfully congested, while inter-city highways on the whole need widening. The transport ministry is doing just that ' taking two-lane roads to four lanes and four-lane roads to six lanes.
'About 75 percent of the roads are paved,' the report said. 'However, road quality in Cairo, Alexandria, Suez, Port Said and Fayoum are largely below international standards, while those in other areas are often in extremely poor condition.'
That's an important issue since 95 percent of cargo transport in the country occurs by road. Rail, as a form of cargo movement, is nearly as neglected as river transport, with less than 10 percent of total rail traffic dedicated to freight.
APL, along with the Egyptian National Railways, is trying to change that mindset. It will soon introduce regular service between the ports of Sokhna and Alexandria, an idea that roughly mimics its introduction of dedicated freight rail service in India.
'We hope the success of this venture will be the catalyst for other ventures which will aid the flow of trade,' said Goh Teik Poh, South Asia president at APL, at a press conference for the release of the report. 'We will be sharing this report with customers and the local business community. We'll be sharing it with anyone who is interested. This is only the first step.'
From a rail perspective, it will be a difficult change. The report estimates that only 28 percent of the country's 9,500 kilometers of track are double-tracked. Only 42 kilometers are electrified. Only 12 percent to 15 percent have modern signal operations.
'Experience in other emerging economies such as India suggests that rail freight services have a good chance of achieving profitability in Egypt, but they face stiff competition from other modes of transportation ' particularly roads ' and are not accorded the same as priority passenger services,' the report said.
Private Investment Key. While the country is embracing private investment and input, there are still barriers that make it difficult at times for private entities. Investment into Egypt is projected to drop by almost half in 2009, to less than $9 billion. While that's mostly attributable the global economic malaise, there are some private sector investment issues to overcome.
'There is an absence of a completely unified approach to deal with private sector involvement in the financing, construction and operation of infrastructure,' the report said. 'A plethora of institutions have various levels of responsibility for engaging the private sector. Investors are, for example, often required to obtain several levels of approval and/or licenses. These layers of procedure can have contractual complications and
even prevent the implementation of projects.
'And Egyptian law does not cover all types of private sector involvement, which results in legal ambiguity. This has led to difficulties in raising finance and additional cost to cover potential litigation.'
Ted Muttiah, APL's managing director for Egypt, said the responsibility for Egypt reaching its potential will be shared.
'The responsibility for making this happen lies with both the government and the private sector,' Muttiah said. 'We are quite willing to expand our commitment to public-private partnership development.'