Panama Canal 2.0
01/07/2016

Panama Canal 2.0

In the midst of all the market turmoil that emerged from the Brexit vote, other major developments in the shipping markets took a backseat. One of the most significant of these was the inauguration of the new Panama Canal locks on Sunday the 26th of June (i.e. one week ago). Being one of the most vital passage ways in shipping, it is set to create a real shack up in several shipping sectors, while current trade patterns might also be set to change as transportation cost drop dramatically as better economies of scale can be utilised from the use of larger ships.
The Panama Canal as it stood before the expansion was a passage way mainly utilised by containerships. Its restrictions had meant that certain size groups enjoyed an artificially supplied demand which will be now under considerable pressure. Over the past years containerships have been noting a significant structural change, with the main line operators undertaking a massive expansion program looking to better utilise their existing operating fleet in a better structure and adding a massive amount of ever larger vessels in order to create massive cuts on the cost of shipping a container around the world. This aggressive competition amongst the operators has meant that a large portion of older vessels owned by independent owners have become ever more squeezed by the “cascading effect” that has been undertaken with the larger size segments squeezing market share from each respective size segment below and as such leaving some size group with hardly any market to operate in and in turn an excessive amount of tonnage supply that needs to be retired sooner then its original investment horizon. Panamax vessels have been the size that has felt the biggest brunt of this force, being a size group that is no longer offering the best economies of scale, while too big (and gearless) to be able to be shifted easily in smaller developing trade routes. Up until now they have had some small protection from the fact that they were the best suited to fully utilise trade routes which passed through the Panama Canal, as such allowing them a small market share which was their domain and could not be shifted to any other larger size segment. This obviously will be under change now, as the Neo-Panamax vessels will be the ones that will quickly replace these vessels on these routes, creating a rapid shrinking on the available markets where the old Panamaxes will still be in demand and will be used.
Beyond this, the new panama canal is expected to create a shake-up in other sectors as well as it reduces costs for other commodities in the market. The LNG trade is one that has been wildly discussed, with many seeing a huge opening up of US Gulf exports to key Asian markets. The new canal can fully accommodate the typical (with cbm rating between 120,000 and 185,000) LNG carrier and as such allowing for their voyage time to be cut by around half. Having said that however, The LNG market is more inflexible, characterised by its very long term charter hires, as such it will likely only bring about a slight increase in interest in the spot market where vessels will likely be taken up to utilised the price arbitration gap between the U.S. market and that of the Far East only as far as the excess import capacity of the Far Eastern markets allow.
To a lesser extent we will see some disruptions in the tanker and even less so in the dry bulker trade matrices. These disruptions will focus on exports from the U.S. Atlantic coast and the areas of S. America close to the canal, with the expected trade heading towards Far East. This is likely to be seen more so in the LR product tankers, where U.S. refineries could take on the opportunity to increase their market share in the Far East.

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