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Panama Canal’s $5.3 Billion Upgrade Promises Faster & Cheaper Shipping

The Panama Canal's $5.3 billion expansion should have a significant effect on the worldwide supply chain, while those who pay for shipping will likely see benefits in the long term.

In the immediate future, the Panama Canal’s infrastructure upgrade will help to make shipping more efficient upon its scheduled completion this month. The main advantage is the canal's new capacity to handle mega-container ships, with capacities of 6,000 to 13,000 twenty-foot equivalent units (TEUs) and carrying loads up to 12,600 containers.

A conceptual view of the third set of locks on the Panama Canal.

A conceptual view of the third set of locks on the Panama Canal.

The 6,000 to 13,000 TEU mega ships will benefit from shorter shipping routes between Asia and the U.S. East Coast. A 13,000 TEU vessel, for example, will be able to reach Asia from a port in Texas in a fortnight, about half the time if would otherwise take to make the passage through the Suez Canal.

However, the existing over capacity problem among worldwide carrier fleets is expected to get much worse as the bigger boats are put into service to take advantage of the larger Panama Canal locks in June. More redundancy will especially impact 4,000 to 5,300 TEU carrier fleets. Their less-efficient and more-expensive carrying capacity on a per-unit basis will become even less in demand than they were before, thus triggering even more consolidation in the sector.

“This sector is already most affected by the general containership oversupply as classic Panamax ships have been massively displaced from service over the past eight months,” analyst firm Alphaliner wrote in a report. “Vessel cascading and service restructurings have forced these ships out of several of their core trades, with very limited alternative employment opportunities.”

Daily charter rates for 4,200 TEU vessels, for example, have fallen as low as $4,750 (net of shipbroker commissions), “well below the daily operating expenses for this type of tonnage,” Alphaliner reported. Over 200 container ships with 3,000 TEUs remain idle, according to Alphaliner.

However, while the deeper Panama Canal locks will have a major effect on container fleet capacity redundancy as larger ships are put into service, those paying to ship electronics and other goods will not necessarily notice cheaper shipping prices in the immediate future, despite increased pricing pressures. This is because the steep drop in pricing has been in such a free-fall state for several months, that there is not much more room for prices to go much lower.

“There is already so much underutilization that the effect on pricing in the immediate future will not be apparent, “Basil Karatzas, CEO of Karatzas Marine Advisors, told EBN.

The fact that U.S. seaports along the east coast largely lack the infrastructure to accommodate the larger 6,000 to 13,000 TEU vessels will also limit the supply chain advantages that the Panama Canal infrastructure offers.

“Most Eastern U.S. ports are not yet ready for these types of ships, because they do not have a deep enough drafts,” Karatzas said. “It remains a guessing game how and when the eastern seaports will benefit from the Panama Canal's expansion.”

However, in the long term, the prospects are good that the Panama Canal expansion will boost shipping efficiencies to and from Asia at most ports along the East Coast in the U.S. In anticipation of the 6,000 TEU and larger vessels passing through the canal, several U.S. seaports have committed to dredging and enlarging their ports to accommodate the mega Panamax ships to take advantage of their more efficient carrying capacity.

Greater shipping demand in the future if and when the worldwide economy bounces back will, by definition, give carriers more leeway to raise prices, but the larger ships' improved carrying capacity will lower per-unit shipping costs, representing savings that could be transferred to the customer.

“In the long term, in five years, when world demand is strong, the Panama Canal is fully utilized, and the U.S. ports are dredged; shipping costs will not increase as much as they did in the past thanks to the shipping efficiencies the larger Panama Canal will offer,” Karatzas told EBN. 

1 comment on “Panama Canal’s $5.3 Billion Upgrade Promises Faster & Cheaper Shipping

  1. patricklaber99
    June 24, 2016

    Since time they talking about this canal…

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