Canal-expansion ripples spreading
Delays in the Panama Canal expansion works have hit the headlines in the past few months. This is likely to have a positive effect at least on the north–south trades, according to a scrutiny that the analyst Drewry has presented in its latest Container Insight Weekly report.
The continuous cascading, that is to say the transfer of ships from the Asia–Europe trade into other lanes, of ever-larger, surplus panamax vessels into north–south trades is still contributing to overcapacities there.
In the latest edition of its regular Container Insight Weekly report the English analyst Drewry has said that it is rather obvious that this problem is likely to get worse when the Panama Canal’s widened locks are opened at the end of 2015.
MSC as the engine
The extent and nature of the problem becomes clear in the light of the latest news presented by the Mediterranean Shipping Company (MSC). It is set to deploy a total of no less than ten vessels, all of them chartered and with an average capacity of 4,000 teu, in a new service between Asia and West Africa.
The excess supply of panamax ships with capacities of between 4,000 and 4,999 teu has ensured that charter rates for units plying their trade in these lanes have plummeted, and stayed low. This makes entering that particular market a relatively simple move for new service providers – at least initially. It is likely, Drewry elaborated, that other lines will follow MSC’s lead, especially once the Panama Canal’s new locks are opened and ships with outdated maximum sizes can increasingly be deployed in lanes for which they were not originally envisaged.
Delays in the planned opening of the enlarged Panama Canal – it has been put back from the middle of this year to the end of next year – have thus at least had a positive effect on most north–south trade lanes.
Drewry has said that currently, approximately 150 ships with capacities between 4,000 and 5,000 teu use the canal to sail between Asia and the US east coast. Another 58 vessels of this size sail between Europe and the South American west coast, as well as the US east coast and the South American west coast. Many of them will be replaced by larger units after the expansion is completed.
Not profitable
Economies of scale are at the heart of lines’ business strategies in these dire times – even though panamax units do not always generate satisfactory results. This development has again been brought to the fore by Evergreen’s recent decision to route more cargo from Asia to the US east coast via the Suez Canal instead of via the Panama Canal.
Too much by half
Drewry’s calculations have shown that 337 ships with capacities of between 4,000 and 5,900 teu are either deployed on routes that do not pass through the Panama Canal or have been laid up. Shifting even just a small proportion of the units that currently pass through the Panama Canal to deployment in other trade lanes would have a marked impact on the market for ships of this size. Thus a large proportion of panamax tonnage is expected to be scrapped, according to Drewry, independently of its age. Drewry pointed out that the average age of these vessels is 8.5 years, with almost three quarters less than eleven years old.
As many of these units are written off over a period of 15 to 20 years, however, scrapping a large proportion of this tonnage would result in the elimination of a great amount of book value on paper. Refurbishing or even enlarging these ships could be one alternative, though.
About half of the worldwide panamax fleet, which comes to about 2.8 million teu today, would have to be scrapped to eliminate oversupply after the Panama Canal expansion.
