What canal toll plan means to shipping, rail and trucking

Proposed changes to the Panama Canal transit tolls would provide further incentives for container ships and hike prices for other vessel types.

The consequences could ripple beyond ocean shipping – the more container lines are convinced to bring Asian exports to the U.S. East Coast via the Panama Canal instead of unloading in California, the worse for intermodal rail and the better for trucking.

The Panama Canal Authority (ACP) is proposing toll changes to be effective January 1, 2020. It announced its preferred changes on June 14, with a public comment period to extend until July 15, after which a decision will be finalized.

Panama Canal locks cater to two different vessel sizes. The original ‘Panamax’ locks can handle container ships up to a maximum capacity of around 4,500 twenty-foot equivalent units (TEU), as well as smaller and medium-sized dry and liquid bulk ships.

The ‘Neopanamax’ locks, which debuted in June 2016, allow for container ships with capacities of up to around 15,000 TEU, as well as liquefied natural gas (LNG) carriers, and 84,000 cubic meter very large gas carriers (VLGCs), which transport liquefied petroleum gas (LPG).

One of the rationales for building the Neopanamax locks was that the use of much larger container ships would significantly reduce carriers’ unit costs, which would theoretically sway them to shift more of their Asia-U.S. volumes to the East Coast via the Panama Canal, as opposed to Los Angeles/Long Beach.

Pricing revisions

The latest toll proposal keeps pricing the same for container ships but expands the loyalty program that provides discounts to the highest-volume users.

Currently, container shipping users that transit between 450,001 and 999,999 TEU of total capacity in a 12-month period receive a $1 per TEU reduction in tariffs for one month; those with 1,000,000-1,499,999 TEU receive a $2 reduction; and those with 1.5 million TEU or more, a $3 reduction.

The new proposal calls for the $3 reduction to apply to volume from 1.5-2 million TEU; for a $3.25 per TEU reduction for customers with 2,000,001-3,000,000 TEU; and for those with over 3 million TEU, it creates a ‘Loyalty Plus’ plan providing a $5 per TEU reduction, based upon the number of TEU exceeding 3 million.

LNG carriers will have to pay more to transit. Photo courtesy of ACP

The ACP disclosed that liner customers have saved over $95 million in tolls since the loyalty program was established in 2016. There are currently three customers with 1.5 million TEU or more per year in volume, two with 1 million to 1,499,999 TEU, and four with annual capacity between 450,001 and 999,999 TEU.

In contrast to its strategy for container ships, which seeks to incentivize more transits, the ACP is proposing price increases for most other categories.

The plan calls for tolls to increase 10 percent for crude and product tankers through the Panamax locks and 8 percent through the Neopanamax locks, plus a variable factor; 8 percent for chemical tankers; 8 percent for LPG carriers through the Panamax locks and 15 percent through the Neopanamax locks; and for LNG carriers, 8.5 percent when laden, 9 percent when in ballast, and 8 percent on the return transit of a round-trip.

Tolls would rise 5-15 percent for vehicle carriers; for cruise ships and other passengers vessels, 2-3 percent for the Panamax locks and 12 percent for the Neopanamax locks; and for dry bulkers, 14-17 percent for carriers of iron ore using the Neopanamax locks and 25-27 percent for certain vessels ballasting through those locks. There would be no toll increase for bulkers using the Panamax locks (bulkers now represent the most important vessel category for the original Panamax locks).

These toll changes mark the second time the ACP has revised its pricing since the expansion project was completed. In October 2017, the ACP provided special backhaul incentives for container shipping customers, while increasing tolls for LNG and LPG ships by 14 percent and 29 percent respectively.

The Neopanamax locks were primarily conceived with container ships in mind. The initial planning of the new locks predated the U.S. shale gas boom and the prospects for U.S. LNG exports to Asia, while the volume of VLGCs using the canal to bring U.S. propane to Asia is much higher than expected.

According to the latest figures from the ACP, container ships account for 47 percent of Neopanamax locks transits, LPG ships (VLGCs) for 24 percent, and LNG carriers for 13 percent.

Rail and trucking effects

As global trade volumes continue to rise, the combination of continued Neopanamax locks toll increases for non-container ships and rising incentives for container ships could equate to more boxes being routed to the East Coast. Ships bringing more containers to East Coast ports could steal market share away from cross-country intermodal rail shipments of containers from California to the eastern states.

Deutsche Bank transportation analyst Amit Mehrotra. Photo courtesy of Chris Preovolos/Marine Money

Deutsche Bank transportation analyst Amit Mehrotra explained during an episode of FreightWaves Radio on June 8, “We think there are staggering and underappreciated implications for the ‘middle mile’ – i.e., between the container offloading from the ship and the beginning of the final mile.”

Mehrotra continued, “Port infrastructure projects are continuing to allow more container ships to call on the East Coast. That’s driving an acceleration of the decrease in length of haul. When the length of haul goes down, trucking takes more market share of the moves – and we are certainly starting to see that.

“If you look at a company like J.B. Hunt [NASDAQ: JBHT], which is an intermodal bellwether, you see a year-on-year decline in the length of haul in every quarter for the past six quarters,” Mehrotra continued, adding, “They’ve seen a massive mix shift benefitting the lower-length-of-haul eastern network as opposed to their transcontinental network.

“So, we think there are real structural challenges for the intermodal,” he said, referring to the shift from boxes being unloaded in California and railed eastward towards boxes being shipped via the Panama Canal to the East Coast and brought to their destination by truck.

“The trend in port infrastructure [on the East Coast] is undeniable. Savannah is investing a significant amount. In New York/New Jersey, they raised the Bayonne Bridge to allow larger ships to call. And when you combine that with the fact that the majority of the U.S. population actually lives in the East, we think there’s a market shift [in ocean shipping networks] toward the East – which therefore moves volumes away from intermodal and into trucking.”

Box rates from China to California (FBXD.CNAW) are not keeping pace with rates to the East Coast through the Panama Canal, which could in part be due to higher demand for the East Coast route.

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Greg Miller, Senior Editor

Greg Miller covers maritime and finance for FreightWaves. He took a circuitous route to get here: After graduating Cornell University, he fled the harsh winters of upstate New York for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he escaped the tropics for the safety of New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at Fairplay magazine in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shi Tzus.

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