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Will the New Panama Canal Save the Shipping Industry?

Posted by Jenina Borromeo | August 22, 2016

The expansion of the Panama Canal, which handles about a third of Asia-to-US trade, is poised to boost trade and shipping services by shortening the one-way journey by sea from Asia to the U.S. East Coast.

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The expanded canal, which started commercial operations on June 26, is expected to alleviate cargo bottleneck caused by smaller ships. The US $5.4B expansion more than doubles the canal’s cargo capacity through a third lane that can accommodate ships carrying up to 14,000 containers, compared with the previous 5,000. By 2020, it is expected that about 10% of the Asia-to-US container traffic will be shifted from West Coast ports to East Coast terminals.


However, analysts say that this development may not be a cure for the one of the shipping industry’s worst slumps ever, at least in the short-term. Container lines are currently facing what they call “peak season blues” as international trade remains sluggish at a time when carriers are supposed to be at their busiest. While ship transits through the Panama Canal rose 3.7% last year, the increase in cargo volumes slowed to less than 1%—from about 7% the prior year. In addition, cargo volumes through China’s ports grew at the slowest pace in seven years in the first half of 2016. The container shipping industry faced a slow start to the year in terms of container volumes, with record-low declines including a 2.9% dip on box volumes on services heading from Asia to Europe in January. A maritime research firm also ruled out any improvement in the traditionally strong third quarter.

While ship transits through the Panama Canal rose 3.7% last year, the increase in cargo volumes slowed to less than 1%—from about 7% the prior year.

As container ship operators remain uneasy waiting for an upturn in demand, they are gradually pulling significant capacity from the market to prop up pricing and push through peak season surcharges. According to a report by a research and consultancy firm for shipping, carriers have dramatically increased their idled capacity since early July. For instance, five of six vessels of about 6,600 TEU operated by the G6 alliance became idle after the alliance halted its CC1 transpacific service. The Ocean Three alliance also suspended its Manhattan Bridge service at the start of the second week of July, with nine ships of about 4,000 TEU becoming idle. The report also found that over 300 container ships, with a combined capacity of over 800,000 TEU, were idle in early July—when the Asian peak export season is supposed to start. In addition, a growing number of panamax ships, with capacities of about 4,500 TEU to 5,000 TEU, are now idle following the opening of the expanded Panama Canal. Even vessels of less than 3,000 TEU may be moving towards inactivity as well.

This excess capacity, along with muted demand, has spurred freight rates to historic lows. A 40-foot container from Asia to the U.S. West Coast is transported at an all-time low rate of US $800, less than a third of the 2010 price. A 40-foot container from Shenzhen to Rotterdam is transported at a cost of around US $400 as of March 2016, a rate barely enough to cover the fuel costs and port fees. According to shipping sources, medium tanker freight rates for ships sailing the Northwest Europe-US Atlantic route also hit their lowest in nearly seven years in the first week of August.

A 40-foot container from Asia to the U.S. West Coast is transported at an all-time low rate of US $800, less than a third of the 2010 price.

Furthermore, the supply-demand imbalances on global trades has caused spot rates to plunge, dragging down contract rates. According to reports, container spot rates between Asia and Europe recorded a 23.5% drop in spot rates to North Europe, reducing the rate to US $861 per TEU; while spot rates to Mediterranean ports also declined to $865 per TEU.

Given the current state of the shipping industry amid one of its worst downturns, analysts say that container lines desperately need to hold onto arbitrary spot rate gains and squeeze as much out of shippers as possible during the peak season to regain profitability in the third quarter this year. However, the third quarter is likely to be more critical than ever for ocean carriers—particularly those that need to recover from losses in the first two quarters—as they build a platform for contract negotiations in 2017.

On the upside, analysts suggest that shipping lines face a long rebound, with global freight rates predicted to hike by about 8% in 2017. In addition, demand is expected to grow by less than 2% this year. While the projected figure may seem as a small gain in the industry compared with the declines of 2015 and early 2016, it is a gain nonetheless.

 

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