Source: Journal of Commerce
January 25th 2016
The Panama Canal Authority is shooting to open its third set of larger locks that can handle post-Panamax ships in May, but it doesn’t expect the larger locks to attract new services for several months.
Panama Canal Administrator Jorge Quijano said the canal has already regained some of the services it lost to the Suez Canal over the last three years. Carriers switched to the Suez route so they could use their more fuel-efficient post-Panamax ships and cut costs at a time when vessel overcapacity has prevented them from raising freight rates. Quijano said the Panama Canal gained five all-water container services last year, two for the full year, and three for the peak season. The canal currently handles 33 container services that deploy Panamax vessels with a capacity of up to 4,800 20-foot-equivalent units through the old locks.
“I don’t expect our customers immediately move to use the expanded Panama Canal. I expect them to give us a wait and see of maybe three or four months before they start making their major decisions of, ‘Okay, now I’m going to re-network using the expanded Panama Canal,’” he said in an interview with JOC.com. After the initial shakedown period, he expects the new locks will gain two new post-Panamax services this year and as many as four next year.
If carriers begin to add larger ships to their services, they may reduce the number of services, said Lars Jensen, CEO of Sea Intelligence Consulting in Copenhagen. “I expect them to halve the number of services through Panama,” he said in a Journal of Commerce webcast. “This means shippers will have less choice.” At the same time, he expects the carriers that deploy larger ships through the expanded locks will pass some of their cost-savings along to shippers in the form of lower freight rates on all-water services to the East Coast.
Tioga Group partner Dan Smith agrees with Quijano’s scenario of a gradual ramp-up in new services. “You will get one or two new services by carriers that want to dip their toes into the water this year, but you will see a gradual increase in the size of vessels on the existing services,” he said.
But Smith said that weak U.S. import demand means that carriers won’t want to pay the higher tolls the canal authority will charge on post-Panamax ships unless they are full. “If you (a carrier) want to achieve those economies of scale, you’ve got to wait until the cargo ramps up,” he said. “The underlying growth of cargo has slowed, and carriers are not filling their Panamax vessels right now, so there is actually unused capacity on those services.”
That’s why he doesn’t expect a rash of new services with larger vessels right away. “There’s just not enough demand to fill them quickly.”
When the new locks open to commercial traffic in the spring, they will be able to handle ships that can carry up to 13,000 TEUs, or more than two and a half times the capacity of the current Panamax vessels. But it will take at least a year for container lines to redesign their all-water networks from Asia to the East Coast.
Quijano expects the 2016 volumes and transits by container ships to continue at about the same levels as 2015. “Basically, no growth because of the wait-and-see situation from our customers, and I can understand that. But remember, it’s a new route that’s opening.”
The canal chief does expect to claw more services back from the Suez route once the new locks open because he said the Suez route from Asia to the East Coast takes 12 to 14 days longer.
“I believe we will be able to recapture, not all, but most of what is going through the Suez Canal now,” Quijano said.
It is likely to take some time for the canal to regain those services. “Diversion from Suez is going to be relatively slow because carriers are happy with their Suez services and have been able to use the larger vessels there,” Smith said.
The expanded canal is also not likely to touch off a shift in import volume of Asian cargo to East Coast ports from the West Coast. Some shippers vowed to switch more import deliveries to the East Coast after the port congestion that slowed West Coast deliveries last winter, but this is not likely to produce massive changes.
“Considering time and cost differentials, it’s the carriers’ call as to whether they are going to route through the Suez Canal or the Panama Canal,” said Dean Tracy, managing director of Global Integrated Services, a logistics consultancy in Winston-Salem, N.C.
“From an importer’s perspective the new locks won’t have much of an impact on how we move volume,” said Tracy, who was formerly director of international logistics at Lowe’s. He said that Lowe’s historically has taken delivery of 60 percent of its Asian imports at East Coast ports by all-water through the Panama Canal, and in “dribs and drabs” through the Suez Canal. “Even with the expansion of the canal coming there would not have been a change in business for us, and many of the retailers I’ve talked to agree with me.”Over time the carriers may decide to shift more services from Asia to the U.S. East Coast to the Panama route because of savings in time and slot costs.
Chaim Shacham, a former Zim Integrated Shipping Services executive who is now a consultant, estimates that a vessel can steam directly from Hong Kong to New York via the Panama Canal in 25 days and 22 hours without making any intermediate port call. A vessel plying the same route via the Suez Canal will take 26 days and 20 hours, or almost a day longer. But a vessel on the Suez route is probably going to call at one or more transshipment hubs in Asia or the Mediterranean to drop off or pick up cargo before it resumes its voyage to New York, and this can add a lot more time.
Given current bunker fuel prices Shacham estimates that the average roundtrip slot cost of a Panamax ship on the Hong Kong to New York route via the current Panama locks ranges from $1,150 to $1,175 per TEU, compared to $1,210.50 to $1,185.50 via the Suez Canal.
When the new Panama locks open, Shacham estimates the round-trip slot cost on a post-Panamax vessel of 8,000 TEUs will drop to $850 per TEU.
Carriers will not immediately start deploying the largest ships that the new locks will be able to handle. “At the very beginning I expect 9,000 to 10,000-TEU ships will be the workhorses for the first, say, half a year to a year, and then we will see them going to the next level, which could be anywhere from a 12,000-TEU to a 13,000-TEU vessel,” Quijano said.
Carriers are not ordering new ships of this so-called neo-Post-Panamax size. “They are counting on being able to cascade vessels of this size from other trades,” Smith said. New ships of the 12,000 to 13,000-TEU size that have been delivered over the last few years have been designed to fit through the canal.