November 09, 2015: Drewry Maritime Research expects carriers to resist the urge to flood the Asia/U.S. East Coast via Panama market with the biggest ships possible. Ships will get bigger and there will be fewer weekly services, but the vessel upgrades will be incremental and in line with demand growth:
The widening of the Panama Canal next year will allow much bigger ships to sail through. But should carriers rush to upgrade?
Despite some water leakage at the new Pacific Locks the US$5.2 billion Panama Canal expansion project is still slated for completion in April next year.
Soon after – barring any extension to the project timeline – carriers will have the opportunity to replace their 5,000-teu maximum ships that currently transit the Central American cut-through with ships of anything up to 14,000 TEU (depending on the physical dimensions).
The temptation to alleviate the stress on the Asia-Europe routes and cascade the biggest ships possible from there to the Asia to East Coast North America (ECNA) trade (clearing space for even bigger newbuilds in Asia-Europe) will be immense. But just because they can, it doesn't mean they should.
There are currently 15 Asia to ECNA via Panama services in operation, requiring 159 ships to maintain weekly frequency. The average size of vessel on this route is 4,600 TEU. There were 16 services before the G6 Alliance merged two of its loops as part of a now routine seasonal capacity withdrawal programme. Weekly services from Asia to ECNA via the Suez Canal currently number nine, with the average size of the ships being 8,000 TEU.
Carriers started a raft of new "all-water" services from May onwards to take advantage of the boom in container shipments to the East Coast, driven in large part by the congestion issues on the West Coast. After nine months of this year, volumes from Asia to the US East and Gulf coasts have increased by a staggering 20 percent, whereas traffic to the US West Coast has dropped by 2.4 percent.
The huge growth spurt seen this year to the East Coast has caused the biggest coastal shift in the Transpacific container trade this century, boosting the East Coast/Gulf share by four percentage points to 33 percent. It is part of a much longer-term trend as the East Coast/Gulf has been steadily eating away at the West Coast dominance as shippers and carriers have looked to diversify their routing options, spooked by previous labor disputes. This year's shift was accelerated by the most recent West Coast congestion but nonetheless Drewry anticipates the trend to continue, if at a slightly less aggressive pace.
Shipping lines on the Asia to the U.S. East Coast route initially pocketed a pretty bonus from the West Coast malaise as the freight rate premium for East Coast services soared. However, the introduction of the new all-water loops and the normalizing of West Coast operations have seen the pricing differential narrow with East Coast spot rates falling the hardest.
Spot rates from Shanghai to New York were down by 45 percent in September compared to January, whereas Shanghai to Los Angeles rates have shed "only" 37 percent, according to Drewry's Container Freight Rate Insight.
This is despite the fact that ship utilization on the headhaul leg has maintained itself in the mid-90 percent range even after the start of the new services.
Drewry suspects the recent pricing deflation was caused in some part by carriers looking to lure as much all-water business as it can get ahead of the Panama expansion through rate discounts and because the faster transit times afforded by the West Coast services were more sought after in the peak season.
How quickly and to what extent carriers introduce bigger ships into the Asia-ECNA via Panama route, assuming they will want to maintain the high ship load factors, will depend on the rate of demand growth to the East coast and on other factors, such as railroad intermodal pricing from the West Coast.
Recently, Zim president and CEO Rafi Danieli recently predicted that the East would gain parity with the West for container shipments from Asia by 2020, which were it to come true would provide carriers with the opportunity to introduce the biggest ships possible pretty quickly.
We do not share the Zim boss' view on the speed at which the East/Gulf coasts route will catch up. For that to happen the East and Gulf coasts would need to repeat roughly the same 20 percent growth as seen this year for the next five years, while over the same timeframe the West Coast would need to continue to shrink at the same rate of about 2.5 percent.
Even then the total Asia to US volumes would significantly exceed our short-term forecasts for the trade. A more realistic scenario in which the East Coast grows annually from next year onwards at 6.0 percent versus 3.0 percent to the West Coast would bring parity in 2040.
So, what will the average size of ship for the Asia to USEC via Panama route become when the Panama expansion is completed?
Table 1 (right) shows how many weekly services the trade could support depending on the trades' new average size ship, based on the current volumes, service speeds and port rotations (to account for wayports) and assuming lines will want to maintain the high ship load-factors.
If carriers decide to flood the market with 13-14,000 TEU ships Drewry calculates that the number of services would have to be reduced from 15 as there are now to just 5, or risk utilization and rates sinking fast. Another large increase in demand could support another one or two services on top of our base scenario outlined above, but it is clear that such a move would require a large-scale reorganization of the trade.
More likely, carriers will take an incremental approach with the average size of ships rising to between 6-8,000 TEU at the outset, rising as demand dictates, which will still provide carriers with improved scale economies and at the same time maintain satisfactory competition and conditions to generate profits.
- Based in London, Drewry is a specialist research and advisory organization providing analysis and reports for the global maritime industry.