New Panama tolls that aim to lure carriers to re-route backhaul voyages probably won't work immediately, but more revenue will come with bigger ships passing through the expanded locks.
There has been a lot of positive news surrounding the Panama Canal Authority (ACP) in recent weeks. Firstly, to mark the anniversary of the expansion of the canal year-one operating statistics were revealed to far exceed forecasts with an average of 5.9 daily vessel transits when two to three were originally expected. Secondly, a new toll structure that will offer discounts on return voyages was approved by government officials earlier this month.
The quick adoption of the widened canal by container lines was expected, given that the $5 billion project enabled them to upsize vessels from a maximum of around 5,000 teu to nearer 14,000 teu; in the process adding a new release valve for the cascade of ships from other over-tonnaged lanes. As Drewry said prior to the canal expansion, the vessel upgrade process would be gradual as at the time there was insufficient demand, as well as physical restraints at US East Coast ports, to enable all services to immediately deploy the maximum ship size available.
To maintain a healthy utilisation on the overall Asia-East Coast North America trade (the biggest using the canal) carriers did indeed adopt a careful, step-by-step approach, incrementally upgrading the ships on their Asia-ECNA via Panama services without adding to the number of weekly loops and at the same time reducing the offerings via Suez. There are now 14 weekly Panama loops, the same as before the canal expansion, whereas the number of Suez-routed services has shrunk from nine to five (see Figure 1). This process has seen overall capacity (ignoring the temporary impact of void sailings) deployed across the two routes broadly stay put in the past year or so; effective capacity in July 2017 was actually down by 1.5% on the same month last year.
The upgrade in the size of ships used on the Asia to East Coast North America via Panama trade has been quite rapid, rising by 60% since May 2016, from 4,900 teu to 7,900 teu as of July 2017. This inflation saw the average ship size finally eclipse (just) those transiting the Suez Canal in June (see Figure 2) so in terms of vessel size economies of scale, Panama is now on a par with Suez.
The two Canal routings offer comparable transit times from Asia to ECNA although they tend to cluster in different origins; Suez services generally starting in Southeast Asia ports and Panama loops in the more northerly Asian manufacturing zone. Drewry's consultancy arm can advise shippers on selecting themost competitive shipping routes and forecasting freight rates.
While the Panama routeing is clearly flavour of the month for the headhaul Asia to ECNA leg, only eight of the 14 services that follow that path towards the US and Canada make the same journey on the return voyage. Three services completely avoid any canal tolls on their return leg by navigating back to Asia via the Cape of Good Hope, while another three loops swing back via Suez.
Undoubtedly motivated to secure some of those return voyages they have missed out on, the ACP has drawn up a new toll structure that will reward southbound voyages heading back towards Asia via Panama with discounted tariffs. The new tolls that will come into effect on 1 October will maintain the same maximum capacity base tariff, but instead of a single tariff for one-way voyages, the lesser-used southbound leg the tariff will be either $10 or $15 per loaded teu lower than the (unchanged) northbound tariff, depending on the size of ship deployed.
Even if the ACP fails to secure any return voyages it should continue to generate additional revenue through further upgrades of ships on the headhaul market. Continued strong demand – inbound ECNA volumes from Asia were up 8% in 1H17, versus 5% to WCNA – and the completion of the Bayonne Bridge raising project in in New York will drive carriers to add even more of the larger ships, with the obvious candidates being the sub-14,000 teu units still serving in the Asia-Europe trade. In the Asia-North Europe trade alone there are still about 80 such vessels, of which a large number will need to find new homes as more Ultra-Large-Container Vessels (ULVCs) arrive from shipyards.
We do not expect to see much, if any, change to carriers routing plans this year. That could change in 2018 if the Suez Canal ends its rebate scheme, in which case Panama's return leg discounts will provide a more compelling argument to switch.