Panama Canal Expansion May Worsen Panamax Surplus: Analyst

Posted by George Backwell April 29, 2014

The continuous cascading of surplus Panamax vessels into North-South trades is still contributing to over-capacity, and the problem is likely to get worse when the Panama Canal’s widened locks are opened at the end of 2015, according to the latest edition of Drewry Container Insight.

MSC’s recently announced service between Asia and West Africa deploying 10 ships averaging 4,000 teu underlines a growing difficulty for North-South trades. Surplus Panamax vessels between 4,000 teu and 4,999 teu are still keeping charter rates low, making it easier for competing carriers to penetrate the markets more deeply, regardless of need.

Only four of the ships deployed in MSC’s Africa Express service have so far been identified, but as they are all chartered, the inference is that this is one of the drivers behind it.

If so, others are likely to follow, and the problem will increase dramatically once the Panama Canal’s enlarged locks are opened at the end of 2015, when many more Panamax vessels will become surplus to requirements.

In this respect, the progressively delayed expansion of the Panama Canal – from mid-2014 to end 2015 – has given North-South routes a welcome reprieve, even though it has cost Panama Canal users dearly. At present, around 150 vessels between 4,000-5,000 teu still use the canal between Asia and East Coast of North America alone, and another 58 are deployed in services between Europe/West Coast of South America, and between East Coast of North America/West Coast of South America, many of which need to be replaced by larger vessels.

Ocean carriers desperately need more economies of scale than are available with Panamax ships to turn losses into profit, as evidenced by Evergreen’s decision last month to route more cargo from Asia to the USEC via Suez instead of Panama.

Another 377 vessels between 4,000 teu and 4,900 teu are currently employed on routes not passing through the Panama Canal, or laid up, so the transfer of just a small proportion of the remaining 258 vessels currently using the Canal would cause a shock to the system

Some of the surplus will be scrapped, and ocean carriers clearly see this as part of the solution. Nineteen vessels between 4,000 teu and 5,000 teu were already scrapped in the first three months of this year, compared to just seven over the whole of 2013, and one at the very end of 2012.

The problem here is that the average age of ships in the sector is only 8.5 years, with 73% of them being less than 11 years old (see Table 1). As many of ships will be depreciated over 15 to 20 years, this means that much book value will have to be destroyed, which many shareholders will find hard to accept. Some owners will be looking to re-engine the youngest vessels, therefore, or even jumboize them.

Total vessel capacity of the Panamax sector is 2.8 million teu, 16% of the total cellular container vessel fleet. If half of this capacity were to be scrapped after the Panama Canal is widened, the current over-capacity would disappear.

In the meantime, more will be laid up unless alternative deployment can be found. Thirty four vessels between 4,000 teu and 4,999 teu were inactive in the middle of April, compared to 40 at the beginning of the year.

Drewry's view
The opening of the Panama Canal’s enlarged locks at the end of 2015 is likely to lead to a massive surplus of Panamax container vessels between 4,000 teu and 4,999 teu, many of which will have to be scrapped regardless of age. It will also be further bad news for North-South trades not using the Canal.