Panama Canal expansion

by Michael King
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The expansion of the Panama Canal locks is set to change how shipping to and from the Americas is conducted for all types of cargo, and in widely variable ways. But exactly what this will mean for the grain industry remains unclear.
When they open for trade, the new locks will allow a third lane of traffic and longer, wider ships to sail between the Atlantic and Pacific Oceans. Bulk carriers of up to 180,000 dwt with a draft limit of 50 feet able to carry 140,000 tonnes of cargo will be able to transit the canal, compared to current capacity of some 85,000 dwt.
In theory, this will give grain shippers more options to generate economies of scale. Certainly, this is the view of María Eugenia de Sánchez, dry bulk segment leader at the Panama Canal Authority (ACP). She points out that the new post-panamax channel will allow transit of bulkers with 49 meters of beam, a 52% increase compared to the existing locks.
“The construction of a third set of locks will result in a doubling of the Panama Canal capacity,” she said. “We will be ready to provide service to larger bulker vessels that operate primarily for the coal and iron ore trades, but we also envision that the grain trades will be favored with the possibility to use larger vessels of up to 95,000 to 100,000 dwt.
“Grain cargoes will probably evolve slowly into larger parcel sizes given limitations in some grain terminals in Asia, and also draft limitations in U.S. Gulf ports. The shipper will benefit from the derived economies of scale. Savings from moving larger lots should translate into a more efficient distribution system.”

Because the Panama Canal route will provide a shorter route from northern Brazil to Asia, De Sánchez believes this will open up new trades to and from South America.
“Once the planted area in Brazil for soybean and other agricultural products expands north of Mato Grosso, and the roads, waterways, and railways develop toward northern ports, it will make sense to move these products through the Panama Canal for destinations in Asia,” she added.
Archer Daniels Midland Co. (ADM), has evidently reached the same conclusion. The commodities major announced this summer than it has purchased a minerals port in Northern Brazil in the state of Pará. ADM, which already operates in all of Brazil’s major agricultural ports and owns a port terminal in Santos, São Paulo, said it would convert the unnamed facility to handle bulk grains and agricultural inputs and would upgrade vessel and storage capacity to increase throughput to 3 million tonnes per annum.
“This port will enhance ADM’s global reach, better connecting the Brazilian harvest to markets including Europe, the Middle East, and even Asia through the Panama Canal,” said Valmor Schaffer, president, ADM South America.

The picture in the U.S. is more complex. At present, the Panama Canal handles three out of every 10 bushels of grains and soybeans exported from the U.S. More than half of exports from the Center Gulf transit the canal. This compares to one-tenth of exports from the Texas Gulf and nearly 30% from the Atlantic Coast ports, according to analysis by Informa Economics.
For soybean exports, the canal is even more important. It handles 44% of total U.S. exports of the commodity, 63% shipped from the Center Gulf, 57% through the Texas Gulf, and more than half the volume through the Atlantic Coast.
In 2015, scheduled to be the first full year of operation for the new locks, regulations enter force aimed at preventing any additional U.S. corn from being used in ethanol production. Ken Eriksen, who heads up Transportation, Industrials and Energy services group at Informa Economics, predicts this will create more surplus corn in farming areas such as Iowa and other states tributary to the Mississippi River.
The question is how much of this potential extra export grain will be shipped through the Panama Canal?

Much will depend on the level of canal tolls and to what extent the ACP wants – or needs — to attract bulk carriers.
Transits of the Panama Canal by dry bulk carriers totaled 3,285 in fiscal year 2011, ahead of container ships as the most frequent user of the canal by vessel type. By volume, bulk carriers also led the way with 99.2 million tonnes, 40% of total Canal cargo, with grains accounting for some 40% of the total, coal 14%, ores and metals 14% and “others” 32%.
“In the last two years, cargo in dry bulkers has increased 12% and 14%, respectively,” said De Sánchez.
De Sanchez insists tolls will be set at levels that maintain the route’s competitiveness and that attract new business such as grains out of South America being shipped to Asia.
“The Panama Canal Authority will establish competitive prices in order to attract potential significant business in trade lanes where the Panama Canal route has a comparative distance advantage,” she added.
Even so, she admitted the ACP expects growth in dry bulk traffic to moderate from the double digits of the last two years. “In the long run, growth is expected to average 2% to 3% per year,” she added.

Some analysts believe the reason why even the ACP has low expectations for bulk carrier traffic growth via the canal is that the new locks, and the tolls levied on vessels using them, will primarily be marketed toward the more lucrative container market. At best, this theory supposes, bulk cargoes will be used to set floor rates for container transits or as a swing supplier of vessel numbers. At worst, post-panamax bulk carriers will be entirely priced out of using the canal’s new locks by ACP managers desperate to increase revenues to recover construction costs.
“If one considers that a 4,500 TEU vessel transiting the canal today pays a toll of roughly $450,000 while a dry bulk vessel with grain pays a toll of about $155,000, the ACP will want to attract container transits,” said Eriksen. “However, if there is available capacity, the canal will welcome the heavier vessels and will have to allow small capesize vessels through the new locks.”

Peter Malpas, global research director of Braemar Seascope, said only about 5% of the existing panamax fleet had ever used the canal. He does not believe the new locks will attract a higher percentage of the fleet.
“Most bulk trades have no reason to use the canal,” he said. “Shippers have always wanted reliable and low-cost freight for commodities. They’ve never wanted cargoes that quickly, they want them cheaply. So there has never been that much appetite for the Canal.
“I can see some coal and grains from the U.S. Gulf using the Canal’s new locks depending on the tolls, but not that much more. The bulker fleet will be a swing factor in the pricing structure of the Canal, but container traffic is what it has been expanded for.”
Indeed, Malpas argues that the expanding fleet of post-panamax vessels in the 85,000-100,000 dwt range and mini-capes of 100-120,000 dwt were designed with draft limitations in Asia in mind, rather than the confines of the new locks.
“Both designs fit the new locks, and there is a degree of comfort in this for owners in building Canal-suitable vessels. But that’s coincidental,” he said. “These ships were built for trades such as coal from Australia into Asia, not for the new Panama Canal locks.
“Established large bulk carrier trades such as coal imports to India or South American grain exports are unlikely to use the Canal, having a range of other route options.”
However, as Eriksen points out, some shippers and owners are positioning themselves to use larger ships via the new locks. ADM, for example, has ordered three 97,000 dwt vessels. These are designed to both maximize the draft of 45 feet on the lower Mississippi River and to take advantage of the 50-foot draft through the Canal.
“Based on economies of scale, as shippers fully load panamax vessels and use small capesize ships, certain benefits will accrue to the inland navigation system and the Center Gulf export position in particular,” he added.
These economies of scale could be further boosted if the lower Mississippi is deepened to 50 feet, as proposed by one U.S. Congressman earlier this year.

Another factor in Canal usage will be the availability and capacity of other export outlets. With its deep harbors and handy location, ports on the Pacific Northwest coast of the U.S. and Canada often remain the fastest, shortest route for many U.S. shippers to access Asian markets when shipping cargo as bulk.
Although environmental objections have prevented some bulk ports in the U.S. from moving forward at the speed expected, capacity is expanding.
“In the PNW, export capacity has increased by about 30 percent including the brand new EGT facility at the Port of Longview earlier this year and other expansion efforts announced just recently,” said Eriksen.
The EGT group is a partnership between Bunge, Itochu Corporation from Japan and STX Pan Ocean, a leading ocean tramper company. The $200 million facility will have loading and unloading capacity of some 3,000 tonnes per hour and an annual capacity of around 8 to 9 million tonnes.
Efforts are also under way to boost capacity at Grays Harbor, Kalama, Cherry Point and Vancouver, all projects located in Washington State.
In the future, greater volumes of U.S. grains could also be shipped by container, whether via the Panama Canal or by using alternative routes.
The jury may be out on how big a role the new Panama Canal locks will play in the grain trade, but shippers seem certain to have a lot more options in the very near future.