The Panama Canal is without a doubt one of the most widely-used waterways in the entire world. Utilizing this relatively small strip of sea in Central America allows shippers to cut straight through the two American continents, rather than sailing all the way down and around the tip of South America. Even for one trip this “short cut” is incredibly cost effective, and over the long term the savings are almost too enormous to calculate.
Pay up or get out
Of course, the Panama Canal Authority (PCA) understands just how in-demand their services are. Shippers have always had to pay tolls to use the canal, and just as with any industry, prices rise over time. The PCA readjusts their prices every few years, taking into account economic conditions and the general traffic patterns in and around the area. In the 2012 and 2014 toll adjustments, the Authority kept things pretty simple, moderately increasing fares for all customers. But 2015 has brought talks of a different, perhaps “smarter” kind of toll.
Smarter, or just more complicated?
The new structure has been proposed not only due to fluctuating demand, but also the plan to open a third set of locks. This new shipping lane will not only increase traffic, but also allow larger vessels to use the canal. In response, the PCA has suggested a toll policy that takes into account a ship’s size, cargo capacity, and even the frequency with which they travel through Panama. This “customer loyalty program,” similar to what airlines offer for frequent flyers, will provide premium prices to the busiest carriers. Understandably there are stipulations, and customers are only eligible for this program once they hit an average TEU volume on their vessels.
Interestingly, the new policy doesn’t mean everyone will pay more. Tolls will feature significant reductions on capacity-based charges, as well as less differentiation between vessel sizes. As the canal authority reports, the idea is to make customers share in the risk of unpredictable economic conditions. The authority also contends that the policies will encourage shippers to utilize higher-capacity return voyages. What’s more, not all ships will be measured the same way. Container ships will still be assessed on their TEU capacity, but dry bulk vessels will now have to report deadweight tonnage capacity and metric tons of cargo, while passenger ships will be charged based on their berths.
LNG vessels a focus of the new policy
Since the new construction will soon allow large LNG ships to move through the waterway, canal authorities have also proactively established charges for these vessels. They plan to charge LNG cargo ships based on cubic meters, a method that will hopefully make calculations much simpler for new customers. Carriers utilizing LNG ships will also receive special discounts for round trip voyages, enjoying cheaper ballast fees when their vessels return through the canal. To qualify as “round trip,” carriers only need to schedule their LNG ships to return through the locks within 60 days of their initial journey – a fairly lenient stipulation for many.
Fighting back against competition
Discussions are already underway regarding how this move will affect Panama’s competition. Although they might be the original “shortcut” waterway, they are certainly not the only one. If the new price structure turns out not to be cost effective, shippers may reorient routes to rely more heavily on canals in Asia or other global ports. Panama Canal Administrator Jorge Quijano defended the move, insisting that the tolls “safeguard the competitiveness of the waterway” and “charge a fair price.” As an agency known for providing impeccable service and reliability at the canal, Quijano argues the new charges are reflective of this quality.
Obviously the PCA conducted their own analysis before releasing the details of the new price structure, and now it is everyone else’s turn to form their own judgments. Shipping line CEOs around the world are crunching the numbers, taking into consideration the money they will save once the third set of locks allows them to move large, Post-Panamax ships through the canal. As with any new policy, the adjusted tolls aren’t likely to help and hurt everyone in the same way. Admittedly, they are mostly geared toward providing cost reductions for larger vessels, with the intent to cultivate loyal relationships with new customers itching to take advantage of the widened waterway.
Early analyses support the authority’s defense
In a more general sense, the new structure will charge shippers more closely based on their company revenues, which could be great news for smaller businesses. Early, independent analyses are quite promising. Andy Lane, a partner with the Container Transport International Consultancy, ran some calculations that revealed overall cheaper voyages, especially round trip transport between Asia and the U.S. For example, a standard 4,600 TEU ship filled to 85% capacity at the outset and 30% capacity on the return trip would ultimately pay $12,000 less in round trip costs – a reduction of only 2%, but nonetheless a significant value over time. Even more promising, Lane’s analysis suggests that the newly-approved larger vessels will save even more. An 11,000 TEU ship with the same capacity (85% and 30%, respectively), would enjoy a 9% lower price-per-TEU than a 4,600 TEU vessel.
The new tolls won’t officially go into effect until April 2016 when the third set of locks open, giving skeptical shipping lines plenty of time to weigh the pros and cons. The PCA insists that the adjusted rates will make them more competitive against alternative routes in Asia, and will especially help them to combat the rising popularity of the Suez Canal. As with so many new policies, only time will tell the actual impact this will have on shippers. In the mean time, the canal authority is encouraging members of the public to submit their comments for review in a public hearing. Their transparency regarding the 2016 changes, their early release of the new information, and their willingness to work with public comments all suggest that the authority has reliable math skills and trustworthy financial analysts – plus the good intentions to back it up.