Panama Approves Lower Tolls for Container Ships

Ashley Boroski MendozaGeneral, News, Shipping Guide, Shipping Rates2 Comments

Freight ship passing through the panama canal

The Cabinet Council of Panama has approved a proposal to modify the toll structure that is currently being used at the Panama Canal. One of the modifications relates to the rates for container ships which will now be reduced. The mechanism for achieving this will be by way of a pre-existing loyalty program that has now been substantially extended. The motivations behind these changes are related to the long term goal of expanding cargo volumes traveling along the famous waterway. Moreover, the Panama Canal has had to contend with stiff competition from the Suez Canal. By expanding the incentives to carriers and their customers, this move offers the Panama Canal a distinct competitive advantage. The notice of changes stated that the new regime will take effect in a series of phased implementations. The schedule will be determined by the type of vessel. Currently, it is expected that the first phase will occur on the 1st of January 2020. This will be followed by another change on the 1st of April 2020. The last phase in this series will occur on the 1st of May 2020.

What will change?

The most significant changes will relate to shipping tolls according to the Panama Canal Authority (ACP). The Suez Canal has been particularly competitive in this respect, with the most affected route being the Asia-USA East Coast trade route. The changes are also thought to be influenced by the escalation of trade hostilities between the USA and China over a host of issues including American’s burgeoning trade deficit with China and intellectual property protections. For about 2 years, there have been ongoing skirmishes in a trade war that is likely to have a significant impact on the shipping industry as a whole but with particular emphasis on the trades between China and the USA. Moreover, there are other contextual issues like the International Maritime Organization (IMO) 2020 low-sulfur mandate which is bound to come into effect soon. The effect of that mandate will be to significantly increase the cost of fueling a carrier. ACP released a statement to the effect that they have modified the toll structure in order to remain competitive without compromising on the safety and reliability of the route for all its customers.

The actual mechanism for reducing the rates is based on a sliding scale. This is categorized in three phases. The first category includes those vessels that send between 1.5 and 2 million TEU through the canal over a period of 12 consecutive months. The second category will include those vessels that send between 2 and 3 million TEU over the same period. The third category includes those that are transiting more than 3 million TEU under the qualifying rules. In fact, the three-tiered approach to these changes is closely related to the loyalty program that had been operating for the most frequent customers of the Panama Canal. The ACP clarified that for the container segment, there will be two new categories that are now incorporated into the existing loyalty program. The reason for this is primarily to provide an incentive for customers to increase their cargo volumes. Additionally, it is expected that these customers will deploy additional services from the canal which will ultimately expand the amount of business that is taking place on the routes.

How were the rates decided?

The tools were decided based on existing patterns and the uptake of the loyalty program that had been operating on the Canal for some time now. Research had shown that tolls were a major factor in determining the number of carriers as well as their volume on the canal. This was particularly true on the Asia-USA East Coast voyage. The charges that are applied to the customers can be quite complex. They tend to vary depending on the size of the ship, whether or not it has empty containers and the number of tiers that it has on the deck. The rates may also be determined by the direction in which the ship is sailing. Industry statistics indicate that the charge to a carrier for a loaded 15,000-TEU ship sailing through the Suez Canal was between $700,000 and $900,000 per northbound transit. However, if that ship was traveling the Panama Canal, the rate for a loaded 14,500-TEU ship heading from Asia to the US would be charged up to $1.1 million per transit. Any significant changes to these rates by way of incentives could potentially change the number of ships that were using the Panama Canal and also the volume of goods that they were carrying. Ultimately, this would mean that the Canal was expanding its reach and increasing its revenue stream.

How will this affect the industry?

The full impact on the industry as a whole will not come into play until the entire scheme has been put in place for some time. However, some experts have speculated that these changes will have the effect of increasing the popularity of the Panama Canal and also ensuring that the customers that use that route increase their volume of trade. The changes must also be read in conjunction with other competitive strategies that are being undertaken elsewhere. For example, the IMO 2020 mandate that goes into effect on the same day as the lower tolls are expected to increase costs anywhere from $80 to $300 per TEU carried according to the estimates given by the experts.  Such increases can change the dynamic of the operating costs. It is not surprising that carriers are planning to review their routes for next year in order to ensure that they are taking advantage of the best offers. There are other considerations such as the length of the voyage itself which mediates the relationship between the offer and the behavior of customers. For example, services leaving from Hong Kong and north are shorter to the US East Coast via the Panama Canal, while transits originating in southeast Asia generally favor the Suez route.

What shippers need to know

Shippers need to read the new rules carefully and any additional statements that are released by the ACP. This will allow them to ascertain whether or not they are eligible for the discounts and loyalty programs. At that point, those that are eligible will have to balance their operational needs with the potential benefits that are associated with the proposed changes.

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Ashley Boroski Mendoza
Ashley has worked in the George W. Bush Presidential Administration in both the White House and DHS. She later worked as a policy advisor in the Senate and representing top retailers to the federal government at the premier retail trade association. Currently, she is the Head of Business Development at ShipLilly ensuring exceeded growth annually.

2 Comments on “Panama Approves Lower Tolls for Container Ships”

  1. Dr. Paul A. Light

    My name is Dr. Paul A. Light, my phone number is 352-345-8934, and I live in Brooksville, Florida. I have a 40 foot container here, a high qube, which I need to send to Douala, Cameroon in the near future. Can you give me the rates for its shipping.

    1. LILLY + Associates

      Hi Paul, It seems one of our representatives is already taking care of your shipping needs – Thank you for contacting us.

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