SUEZ CANAL ENJOYS RECORD YEAR, PLANS AHEAD

C O N F I D E N T I A L CAIRO 007250

SIPDIS

SIPDIS

STATE FOR NEA/ELA
LONDON FOR TSOU
PARIS FOR WALLER
NSC FOR WATERS

E.O. 12958: DECL: 12/20/2016
TAGS: EWWT ETRD EPET EG
SUBJECT: SUEZ CANAL ENJOYS RECORD YEAR, PLANS AHEAD


Classified By: CDA Stuart E. Jones for reasons 1.4 (b) and (d)

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Summary
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1. (SBU) Egypt's Suez Canal revenues will reach record levels
for 2006, and sustained high energy prices and
ever-increasing Chinese container traffic to the U.S. and
Europe bode well for the strategic waterway's near future.
Completion of an ongoing dredging program in 2007 will
facilitate greater petroleum shipments (VLCC's) through the
canal, further boosting the Suez Canal Authority's efforts to
woo foreign port authorities and governments to increase
trade flows. End summary.

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Record Revenues
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2. (U) Record revenues for 2006 are adding cheer to Egypt's
celebration of the 50th anniversary of the nationalization of
the Suez Canal. The canal generated USD 3.2 billion in the
first 10 months of 2006, an increase of USD 400 million over
the same period last year. Suez Canal Authority (SCA)
estimates place overall 2005 revenues at USD 4.1 billion and
anticipate 2006 revenues to exceed USD 5 billion. Receipts
have more than doubled over the last four years. The Suez
Canal is the third-largest source of revenue for Egypt,
following tourism and remittances from Egyptians working
abroad, and a key driver of economic growth.


3. (U) Analysts point to several factors influencing the 190
km canal's increased traffic and revenues, namely sustained
high oil prices and mushrooming container flows from China.
The canal's strategic location affords Asian exporters a
cost-effective link to European and American consumer
markets, and the development of modern, private-sector
container handling facilities, such as Maersk's Suez Canal
Container Terminal in East Port Said, enhance Egypt's
attractiveness as a container trans-shipment hub. The
canal's proximity to Middle Eastern oil and Liquified Natural
Gas (LNG) producers makes it an attractive -- and strategic
-- link to world markets.

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Looking Ahead
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4. (C) In recent meetings with the DCM and other Embassy
officials, SCA Chairman Ahmed Ali Fadel outlined his plans to
boost near-term revenues and ensure the canal's long-term
competitiveness. The Chairman said the canal's current
dredging program, which will bring the depth to a uniform 66
feet, should be completed in 2007. While he had expected to
complete it by the end of 2006, the increase in ship traffic
within the last year pushed the completion date into 2007.
With the canal already capable of handling 99 percent of the
world's container ships, he said the SCA has the luxury of
taking its time to properly complete the dredging.


5. (C) As deepening the canal increases its ability to handle
petroleum and LNG ships, there is incentive to keep the
current project moving, though. Currently, Very Large Crude
Carrier (VLCC) tankers must offload up to one-quarter of
their cargo prior to entering the canal. The completion of
the dredging program will allow VLCC's to transit the canal
unimpeded. To further take advantage of the petroleum trade,
the SCA has draft plans for a further dredging of the canal
to 72 feet by 2010-12, although the Chairman said they are
undecided about whether the marginal benefit will justify the
cost of the operation. (Comment: Based on conversations with
SCA officials, Post feels the SCA will likely pursue the 72
feet plan. End comment.) The canal is currently handling on
average 55 ships per day. The SCA believes that, in the
absence of dredgers in the channel or other holdups, the
canal could accommodate up to 85 - 90 ships per day.


6. (C) Under sustained high energy prices and growing demand,
the SCA is planning to increase tariffs for 2007. The SCA
has not announced the percentage increase, but SCA officials
told Emboff that they expected the increase to be around 7
percent. During a December 5 meeting with the DCM, Chairman
Fadel said he expected to announce the increase sometime in
December, although SCA sources tell us the announcement may
be delayed until around January 1. The SCA is also planning
to introduce a new edition of the "Rules of Navigation" for
the canal within the same time period. The last update to
the volume was published in 1995.

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Strategic Relationships
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7. (U) The SCA is seeking to encourage container flows
through the canal through agreements with foreign port
authorities and governments. In early December, the SCA
signed an MOU with the Maryland Port Authority (MPA) to share
commercial information and promote the movement of cargo from
the Suez Canal to the Port of Baltimore. The MOU opens the
way for the MPA and SCA to undertake joint marketing efforts,
share trade flow forecasting data, and exchange information
on training.


8. (U) The SCA has also announced that the GOE is pursuing a
tripartite agreement between Egypt, Italy, and China to
facilitate Chinese container traffic flows through the canal
to the southern Italian port of Gioia Tauro. News reports
quoted SCA Advisor Galal al Deeb as saying that the Gioia
Tauro port receives nearly 60 percent of Chinese containers
bound for Europe. Al Deeb also said that the SCA would not
provide discounts for Chinese shippers, but hinted that the
Egyptian Ministry of Finance may provide "tariff incentives"
to encourage the trade flows. According to the SCA, Chinese
cargo ships accounted for 14.2 percent of all traffic in the
past fiscal year.

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Visa Issues
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9. (SBU) When asked about ways we could increase the already
strong cooperation between the USG and the SCA, the Chairman
noted that delays related to obtaining security advisories
for U.S. visas have cost U.S. vendors some SCA business. In
one instance, Fadel said the SCA needed to purchase certain
technical equipment (NFI) within a relatively short
timeframe. Having chosen a U.S. supplier for the goods, the
Chairman instructed a senior technical team to travel to the
U.S. to inspect the equipment prior to finalizing the
purchase. However, after an alleged three months wait for
the visa, the Chairman said the SCA felt forced to turn to a
European supplier of a similar product. The Chairman did not
provide us with the specifics of the case, but it tracks with
the general impression among Egyptian businesspeople that the
U.S. is not a welcoming place to do business. DCM requested
that in the future the Embassy be notified of such delays so
that we may make inquiries.

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Comment
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10. (C) Mushrooming Chinese exports and continued strife in
the Near East region boost the Suez Canal's already
significant strategic importance for Egypt, the U.S., and
many of the world's trading nations. The canal also holds an
important place in the Egyptian psyche, and the GOE sternly
dismisses any talk of privatization. If the SCA is able to
expand its marketing of the canal through partnerships with
other ports or countries, and complete its dredging projects,
it will be well placed to enjoy further record revenues.
Although SCA insiders were forecasting Chairman Fadel's
likely retirement within the next year, the word now is that
the Presidency has unofficially asked him to stay on for
another year (they anticipate a January 2007 announcement).
With revenues soaring, this is not a surprising move.
RICCIARDONE