Emerging Opportunities in the Indian Ocean Sea Trade Regime

Sea trade has been universally recognized as the principal driver of the global economy. It was however in the Indian Ocean that coastal trade as well as transoceanic passages are believed to have originated. This ocean is also unique in the sense that its wide expanse is enclosed on three sides by land, while the southern perimeter is hemmed in by the forces of nature, and indeed during most of its history, ships rarely ventured beyond the Tropic of Capricorn. On closer inspection, one can discern a number of seas and channels on its periphery, which enabled early traders like the Greeks, Egyptians, Phoenicians, Arabs, Indians and even the Chinese to move freely around, and even beyond the ocean, spreading and assimilating cultural and religious influences.

The Chinese Admiral Zhong He was arguably the first outside power to venture into the Indian Ocean, with his massive fleet touching all the major ports from Melaka in the east to Zanzibar in the West during the seven different voyages that he undertook between 1405 and 1433. It was however only when Vasco de Gama made his way round the Cape of Good Hope to reach Calicut in 1498 that the region was destined never to be the same again. The Portuguese were followed in quick succession by the Dutch, the English and the French and although their methods differed, the intent was the same: trade domination through mastery of the sea. What the colonial era managed to achieve, amongst other things, was the gradual replacement of traditional manufacturing hubs, traditional markets and traditional ports with new ones.

But as Britain was entrenching itself ever so firmly in the heart of the Indian Ocean, it could not have failed to appreciate the strategic and economic advantages that a direct trade route through the Red Sea and the Mediterranean would confer to the empire. The two seas had after all been historically linked for millennia till an eighth century Abbasid Caliph had it closed for supposedly tactical reasons.

A serious breakthrough in the construction of the canal however occurred at the hands of a Frenchman in 1858 when Ferdinand de Lesseps, a diplomat as well as an engineer, used both his skills to convince the Egyptian Viceroy, Said Pasha, of the necessity of the project. Construction officially began on 25 April 1859 and when the canal finally opened for traffic around ten years later, it had an immediate and significant impact on world trade.

After assuming full control of the canal in 1962 by buying off the Anglo-French owners, Egypt set up the Suez Canal Authority to regulate it’s working. Apart from income generation through transit fees, the canal also furnishes livelihood to a number of people, employed both within and without. From a single sleepy settlement of around 4000 inhabitants when the canal’s construction began, a large number of industries have crept up all along the western flank of the canal, as well as the ports of Said and Suez at either end.

Though the canal is a cash cow for a cash-strapped nation, it’s working is still plagued by delays and systemic inefficiency. All those who have traversed the waterway would know that each vessel has to stop four times during the 18 hour passage, once at the Port Said outer anchorage, then at Port Said mooring, then at the Great Bitter Lakes anchorage and yet again at Port Suez. Apart from the canal transit fee, each ship owner has to embark and pay for four separate pilots, one at each stop, as well as for a couple of electricians who do nothing but sleep( for if you don’t, the ship’s movement is held up on the pretext of not having the specified lighting arrangements on board). In addition, each pilot unfailingly asks for some gift, even if it is only a pack of cigarettes.

As construction work on the Suez Canal was winding down, the same French entrepreneur, Ferdinand de Lesseps, got Colombia, then the parent state of Panama, interested in a canal designed to furnish a much shorter trade route between the Pacific and Atlantic oceans, compared to the 8000 mile longer journey around the southern tip of South America, Cape Horn. But the construction which began in 1881 finally culminated in 1914, with the United States ultimately transferring its management to Panama in 1999. In case you are wondering what the Panama Canal has to do with a discussion on Indian Ocean trade, I’ll revert to that later.

This canal in due course gave rise to a new term, Panamax, which essentially refers to the largest carrying capacity of a ship that can safely transit the canal, 55000 dwt for tankers and upto 3999 TEUs for container ships. Those ships which could carry more than 4000 TEUs came to be referred to as post-Panamax. As ship payloads kept increasing, touching 20,000 TEUs by now, vessels beyond a carrying capacity of 8000 TEUs came to be known as neo-Panamaxes.

The importance of these two canals to the health of the international maritime community and indeed to the global economy did not go unrecognized. The 1888 Constantinople Convention(which Britain was reluctant to sign till 1904) required the Suez Canal to be kept open to ships of all nations in both peace and war, but could not prevent its prolonged closure following the 1967 Arab-Israeli war. Similarly, the US-Panama treaty of 1977 confirmed the status of the Panama Canal as a neutral international waterway where every vessel is guaranteed safe passage at all times.

As ship sizes were seen to be continuously increasing, the Panama Canal Authority(ACP) launched an ambitious $5.4 billion expansion plan in 2007 aimed at garnering a greater share of shipping. Though the ACP was expecting a windfall from this endeavour, with ship-handling capacity having been enhanced from 5000 TEUs to 14000, in actuality it has made little difference thus far. Preliminary assessments show that while the average ship size has risen from 4600 to 6400 TEUs, the number of vessels transiting the canal has correspondingly decreased. Overall, since its completion in June 2016, ship transits are running well below the canal’s current capacity, with less than a third of the available slots being taken. The new lock chambers now allow for an estimated 79% of all cargo carrying vessels to transit the canal, up from 45%.

Strange as it may seem, the two canals, Suez and Panama, although half a world apart, figuratively speaking, are also in competition for that significant chunk of shipping traffic that takes place between the South China Sea region and Western Europe or even the US East coast. In addition, with low bunker prices favouring the use of the longer route round the southern tip of Africa by larger ships, the Suez Canal was faced with another unlikely rival. General Sisi, on taking over the reins of a financially distressed nation, made the canal’s upgrade his topmost priority in a bid to enhance revenue generation. After all, he had history on his side: the number of ships using the canal had risen sharply from 486 transits in 1870(the first full year of operation) to 17,148 in 2014, with the net tonnage also registering an increase from 444,000 MT to 963 million MT during the same period. Net revenue for the year 2014 was touching $5.5 billion. An ambitious $9 billion upgrade was thus launched with the objective of not only permitting larger ships to transit but also to reduce wait times by allowing both Northbound and Southbound ships to pass simultaneously. This project, completed on 6 August 2015, added nearly 30 km of side channels to its original length of 164km. The high expectations which the Suez Canal Authority had(the traffic doubling and revenue tripling over next 8 years) doesn’t seem likely to materialize, with revenue generation during 2016 not much different from 2014.The Suez Canal has, in one respect at least, been outmanoeuvred by the Panama Canal: the latter has succeeded in garnering a greater share of the container traffic between the United States and East Asia, raising it from 48% to 57% at present.

The third major waterway, much more natural and far more busier than the two afore-mentioned canals is the Malacca Straits straddling the Malaysian peninsula and the largest Indonesian island of Sumatra. Its importance as the major and most convenient gateway linking the Indian Ocean with the outside world has not faded over the ages. This is the strait that has propelled the rise of Singapore as the greatest port city in the Indian Ocean.

The delicate balancing act between the world’s three major waterways, the Suez Canal, the Panama Canal and the Malacca Straits may face some turbulence in the years ahead if Chinese plans to generate alternate and competing routes to the latter two materialize. Flush with money, technology and wherewithal, China’s ambitions know no bounds. As part of its maritime Silk Road, which criss-crosses the world’s oceans, China is contemplating a canal across the Kra Isthmus in Thailand which would skirt the congested and pirate-infested Malacca Straits. The $50 billion plan envisages a 30 mile long canal linking the Andaman Sea direct to the South China Sea through southern Thailand, with ports and industrial zones at either end. Apart from the two countries involved, the proposed canal would be extremely beneficial to Indo-China especially Vietnam which is constructing a new Deepwater Port, Hon Khoai, with US help, directly opposite the mouth of the said canal. China would however be the major beneficiary, as apart from shaving upto 4 days of transit time to Chinese ports, the Kra Canal would reduce the vulnerability of Chinese ships transiting the Malacca Straits, aptly termed as the ‘Malacca Dilemma’. Though the Thai government is yet to take a decision in the matter with local politics in play, it is surmised that the opportunity of becoming a regional maritime center, with direct benefits to its impoverished southern region, will be too tempting to pass up. Singapore is obviously not thrilled at all as its entire economy revolves around shipping passing through the Malacca Straits.

The other major project being eyed is a 278 km long canal through Nicaragua as a direct rival to the Panama Canal. Envisaged to be over 3 times the length of the 100 year old Panama Canal, it is expected to be much deeper and wider than the latter, enabling the largest ships to pass through. The United States, which is understandably not pleased at the prospect, has tried to cast doubt on its viability, but there are far more serious concerns about its environmental impact, particularly as it transits through Lake Nicaragua, the largest source of freshwater in Central America. Though Nicaragua appears keen on its implementation, the $50 billion Interoceanic Grand Canal project, as it is known, would not automatically translate into economic prosperity for the impoverished region for the next 50 years at least, much like the Panama Canal.

The Government of China, possibly because of US resentment, is maintaining a safe distance from the project, with a Chinese company, Hong Kong Nicaraguan Development Investment(HKND), led by a flamboyant Chinese billionaire, hogging the limelight. The Nicaraguan government approved the route in July 2014, but despite the construction work having officially begun later that year, there is not much to show for it yet on ground. If and when completed, the new canal is envisaged to attract around 5% of global trade, approximately the same as Panama Canal is drawing these days.

With all this talk and action on the canal fronts, Turkey did not want to be left behind. After all, the Bosphorus Strait controls all the traffic, including warships, to and from the Black Sea. Traffic in the Bosphorus has risen sharply in recent years, owing to increased oil production in the Caspian Sea fields, which is mostly being shipped through the Black Sea. The new 45km long Istanbul Canal running parallel to the Bosphorus, announced in 2011, is controversial owing again to environmental concerns, but the Turkish President has recently vowed to get the job done. Turkey feels that the requirement of an alternate route is inescapable as the Bosphorus is incapable of handling more than 150 million tonnes of oil annually, which limit has already been reached. A cost estimate of $10 billion is being floated, though outside experts claim that it’s construction may well be 4 to 5 times this figure. Its financial viability may thus well depend on which figure is closer to reality.

On the home front, the China Pakistan Economic Corridor, once complete, has the power to transform the Indian Ocean sea trading regime. For one thing, it will propel the rise of China’s impoverished western region into a Special Economic Zone, the country’s seventh. Though this vast region shares a border with as many as eight countries, the route passing through the entire length of Pakistani territory to the port of Gwadar would furnish it with the most convenient linkage to international shipping lanes and international markets.

So much for shortened trade routes. The next arena where opportunity presented itself was in the field of shipping which rose steadily in the decades following the Second World War. This was the era when most nations still licking their wounds were embarking on the rocky road to recovery, with ships carrying raw materials and manufactured goods serving as the workhorses. Cheap oil from the Middle East, which acted as the catalyst for growth, was most in demand. Until 1956 when war over the Suez Canal resulted in its closure, all tankers conformed to the size restriction imposed by the canal. This crisis, during which tankers had to perforce use the longer route around the Cape of Good Hope, generated a new opportunity, an opportunity that gave birth to the era of the supertankers. So from 47,500 dwt in 1955, the world’s largest individual tankers ballooned in size to 564,763 dwt in 1979. As the new-build order book for huge supertankers kept increasing, fate again intervened in the form of the first oil crisis of 1973, sparked by the Arab-Israeli conflict, which caused oil prices to quadruple overnight. Apart from engineering a drastic slowdown of the booming global economy, it also resulted in a downward spiral of the overall fleet capacity from a peak of 350 million dwt prior stabilizing in 1987 at 250 million dwt. Much has however admittedly changed in the oil trading patterns over the past four decades, with bulk of the Mid-east oil now making its way eastwards.

The steadily increasing global oil requirements led to the growth of dedicated oil export terminals, the offshore ones becoming capable of handling the biggest supertankers. The Ras Tanurah complex of Saudi Arabia is still counted amongst the largest of such terminals, with the Ras Juaymah facility a distant second. It’s closest rival, Iran’s Kharg Island terminal, had made an impressive start in the early fifties by establishing a linkage through a submarine cable with a major mainland oilfield. Located 16 miles off the coast of Iran, the port was incessantly bombed by the Iraqi Air Force during the Iran-Iraq war, which succeeded in reducing it to rubble by the fall of 1986. The port has again risen from the ashes, though the process has been painfully slow owing to the sanctions the country has been perpetually burdened with.

Worries about a possible closure of the Strait of Hormuz led Saudi Arabia to construct a 745 mile East-West pipeline from Abqaiq, whose huge processing complex handles about two-thirds the country’s oil output, to Yanbu on the Red Sea. Such concerns became more real during the US-Iran nuclear standoff which not only helped propel oil prices to a record $147 per barrel in 2008, but also prompted a tangible response from other regional oil producers. Billions of dollars in investment has converted Fujairah from a sleepy sheikhdom into a global energy transshipment hub, with enough capacity to store up to two-thirds of daily global demand(60 million barrels of crude) and more being planned during next two years to rival Singapore. The largest supertankers or VLCCs as they are called can now be seen making a beeline for this port. This has been achieved by linking the UAEs biggest oilfields with a 240 mile long and 48 inch wide pipeline to its only seaport east of Hormuz.

The next great opportunity arose out of what can be termed as an earth-shattering development in the mechanics of global sea trade. From a humble beginning of just 58 containers being carried in a vessel converted for the purpose way back in 1956, containerization has now become the new all-pervasive norm. It can be said to be the unheralded harbinger of globalization, as without its anti-theft, pro-efficiency and cost-effectiveness features, transoceanic shipping may well have remained a mirage.

As the concept took hold in the Indian Ocean region also, terminals dedicated to handling container trade sprang up, as they were bound to, in all the major regional ports. Globally, the share of countries with container ports rose from about 1% in 1966 to nearly 90% by 1983. Pakistan was a bit slow in appreciating this phenomenon as its first container terminal only commenced operations in 1998.

As ship sizes, measured in Twenty-foot Equivalent Units, kept increasing to achieve economy of scale, the larger ships commenced liner services, touching only a few well-located ports, with feeder services transporting the off-loaded containers to their ultimate destinations. Ports in the Indian Ocean best placed to capitalize on this trend were Aden, Colombo and Singapore. By the nineteen nineties, Singapore had gone on to become both the busiest port in terms of shipping tonnage as well as the largest transshipment hub. Colombo, though plagued by a unmanageable insurgency in the 1980s, which lasted for nearly three decades, still managed to hold its own as the largest and busiest port in South Asia. Despite being gifted with an ideal location and a natural harbour, Aden had to struggle to retain its position as terrorism and turmoil both took their toll. Salalah in Oman, which was a sleepy fishing and bunkering port in the 1990s, suddenly surged ahead to fill the void created by Aden’s volatile environment, particularly after the USS Cole bombing of 2002, and become a major regional transshipment hub catering to the East African region as well as the eastern coast of the Arabian peninsula.

Dubai’s Jebel Ali, constructed in 1979, did not take long to establish its credentials as the busiest and best-equipped port in the Middle-East, and was amongst the foremost in the region to attract containerized traffic. The US-Iran nuclear standoff at the beginning of the current century, which stoked fears of a possible blockage of the Straits of Hormuz, led to the emergence of such transshipment hubs as Sohar in Oman and Sharjah’s Khorfakkan, both located outside the Gulf. Khorfakkan in particular has established itself in a short period of time as the best transshipment port in the region.

From what has been recounted so far, it can easily be gauged that in every crisis lies an opportunity, particularly for those discerning enough to take the plunge, and that every opportunity needs to be seized at the right moment. Risk taking works both ways and the sensible thing to do is to always have a Plan B ready to forestall possible disaster. Every crisis brings turbulence in its wake and the only maritime entities able to weather such storms are the ones who distinguish themselves by virtue of their efficiency, their recourse to best management practices and above all, by their ability to monitor and predict global trends likely to leave an impact on the maritime industry.

Note: This forms the script of a talk delivered on 12 February 2017 during the 7th International Maritime Conference 2017 organised by NCMPR at PC Hotel, Karachi.

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