Egypt’s Suez Canal Authority is conducting talks with the world’s largest container-shipping operators to change the way it charges tolls for crossing the waterway by levying charges for three or five years in advance, its chairman says.

 

“We’re talking with the big carriers about a scheme to deposit a certain balance and every time their ships transit, a deduction will be made,” Mohab Mamish, Suez Canal Authority chairman, recently told The Wall Street Journal. “We will offer—in return—a discount of around three percent in transit rates.”

 

Mamish says the talks with Maersk Line, a unit of Danish conglomerate A.P. Moller Maersk A/S, Geneva-based Mediterranean Shipping Co. and France’s CMA CGM are going well, and an agreement may soon be reached—and could go into effect at the beginning of next year. A spokesman for Maersk Line, the world’s largest container operator by capacity, confirmed the talks. MSC and CMA didn’t immediately respond to WSJ requests for comment.

 

The canal authority spent $4 billion last year on an expansion to deepen the waterway, introducing two-way traffic in August 2015 and vastly increasing the canal’s capacity, but revenue this year came in only marginally higher. The Suez generated $3.18 billion in the first half, up four percent from the corresponding period in 2015.

 

The Suez Canal Authority’s proposal aims to secure revenue as the waterway faces increased competition for ship transits from the recently expanded Panama Canal, during one of the longest-ever downturns in the shipping industry. Freight rates for container operators have been well below break-even levels for the past two years. It’s worth pointing out that the Suez Canal Authority said it earns more than $1.5 billion a year in tolls from Maersk, MSC and CMA.

 

If a deal for advance payment is reached, it will be separate from the pricing for other operators crossing the isthmus. The Suez Canal Authority will announce its tolls for 2017 in January, and Mamish says it will take steps to stay competitive.

 

“A cut in tolls is under consideration,” Mamish says.

 

Such perspective isn’t universally shared. Jorge L. Quijano, the Panama Canal Authority’s chief executive, told The Wall Street Journal during the Danish Maritime Forum conference that Panama doesn’t plan to follow Egypt’s Suez Canal in asking major shipping lines to pay tolls three to five years in advance in return for a discount.

 

“In these difficult times, I think shipping companies would prefer to have flexibility in paying tolls rather than signing up for long-term commitments,” Quijano said, a second Wall Street Journal article reports.

 

The Panama Canal handles about a third of Asia-to-Americas trade. It’s canal authority spent $5.4 billion on an expansion that included a new set of wider locks which opened in June, accommodating Neo-Panamax ships carrying up to 13,000 containers, rather than 5,000 containers previously. The new locks have made the Panama Canal more competitive with the Suez Canal for larger vessels, shortening the one-way journey by sea from Asia to the U.S. East Coast by roughly five days and eliminating the need for a trip around Cape Horn to get to the Atlantic.

 

Quijano expects the canal to generate $2.86 billion in revenue this fiscal year, up $350 million from last year. That’s because the canal authority projects cargo volumes through the canal to increase by 10 percent to 12 percent in the year ending September 2017, as well as continuous growth in coming years as the shipping industry emerges from its downturn. Container ships make up 47 percent to 50 percent of the canal’s revenue, bulk carriers make up approximately 20 percent and tankers around 15 percent of the revenue. Other ships such as car carriers and general cargo ships make up the remainder.

 

What are your thoughts about costs of using the two canals? Does paying in advance at a discounted rate make better sense, or is it better for shipping companies to avoid long-term contracts?