Drewry: Carriers Jostling for Expanded Panama Canal Positions

Carriers are rushing to start new Asia to US East Coast services ahead of the opening of the wider Panama Canal, but unless carefully managed, they risk losing more of the East Coast freight rate premium, according to UK-based Drewry Shipping Consultants.

The USD 5.2 billion project to widen the Panama Canal is nearing completion – to be precise, the Panama Canal Authority (ACP) stated it was 89.8% done as of the end of May – with another important milestone reached earlier this month, the filling of the Atlantic side locks. Filling of the Pacific side locks is now underway, at a rate of 37,000 gallons of water per minute. It is expected to take 90 days.

From April next year container ships of up to 13,000 TEU will be able to navigate the Panama Canal, more than doubling the existing maximum size of 5,000 TEU. The opening up of this vital shipping lane to bigger ships will give carriers an extra tool in their box to try and fix the current supply and demand imbalance by providing more trade options in which to cascade ships and deploy newbuildings, Drewry says.

In readiness, carriers are starting new Panama-transiting services to build up their customer base. Since the start of the year there have been six new services created for the Asia to US East Coast trade with all but one of them routed via Panama.

Part of the allure of the all-water option is the sizeable freight rate premium that carriers can charge, which grew larger during the slowdown on the US West Coast.

However, that pricing differential is shrinking now that West Coast operations are normalising and because of all of the additional East Coast capacity.

According to Drewry’s Container Freight Rate Insight, in February the average spot rate for a 40ft container from Shanghai to New York was nearly USD 2,800 more expensive than for the same box moving from Shanghai to Los Angeles. By May that gap had shrunk to USD 1,700.

While the attraction of higher rates to carriers is obvious, they are also responding to the long-term shift towards the US East Coast. Since January 2013, traffic from Asia to USEC has grown by 26% whereas Asia to USWC volumes have grown much more modestly at around 6%. Asia-US Gulf Coast demand trumps them both, growing at just over 40% but it comes off a very low base and has barely shifted the GC share much beyond 2%, according to Drewry.

The US West Coast remains by far the most widely used gateway for Asian container imports but its share is dwindling quite rapidly. At the start of the century the split was more like 84% USWC to 16% USEC but the later coast has nearly doubled its share in 15 years. The transfer of cargo seems to be intensifying too. Since January 2013 the USWC’s share has fallen from 73% to 69%, while the USEC has gained those four percentage points to reach 29%.

Up to 10 percent of container traffic to the US from East Asia could shift from West Coast ports to East Coast ports by 2020, according to a new research conducted by The Boston Consulting Group (BCG) and C.H. Robinson.

In 2014, about 35 percent of container traffic from East Asia to the US arrived at East Coast ports. According to the report, current growth trends would push that share to 40 percent by 2020 without the canal’s expansion. But with the canal expansion in place, the East Coast’s share could reach 50 percent — a 10 percent increase in market share.

Much of the USEC’s recent ascent has come from greater use of Asia to US via Suez Canal services that are able to accommodate larger ships. But that trend is now reversing and Panama Canal loops are all the rage once again as carriers prepare themselves for the expanded Panama Canal.

There are currently 25 weekly Asia-USEC services with 16 going via Panama and nine via Suez. When measured in effective capacity (after deductions are made for wayport calls and operational restrictions) that takes into account the smaller size of ships on the Panama route, services via Panama now account for just over half of all the available Asia-USEC slots. In June of last year the Panama services share was around 41%.

The latest addition to the Asia-USEC via Panama roster is the TP10 from 2M carriers Maersk and MSC. Interestingly, the TP10 is the first such Panama service of the world’s largest carrier group, the two lines having previously focused on Suez. The CKYHE Alliance (Cosco, K Line, Yang Ming, Hanjin and Evergreen) has the largest share of Asia-USEC via Panama services, but such is their loose arrangement that not all of the carriers are partners on all of the services.

There are 37 ships of between 10,000 to 13,000 TEU (mostly at the lower end of the scale) scheduled for delivery before the end of 2017. Many of these newbuilds will find their way into the Asia-USEC trade, thereby inflating both the East Coast and Panama’s share of the Transpacific market.

Source: Drewry