by Lloyd's List
11 October 2024 (Lloyd's List) - THE historic Panama Canal drought is over. Now it’s time to assess how long it will take for traffic to fully recover, what are the lessons learnt, and how shipping can navigate the next drought, which will surely come.
Ship agents shifted from a more passive role to proactive problem solvers amid the water crisis. For perspective on how the drought played out and what happens next, Lloyd’s List spoke with Alexei Oduber, managing director of GAC Panama.
Oduber gave his views on prospects for the main segments – containerships, liquefied petroleum gas, liquefied natural gas and dry bulk – as well as his take on the Long-Term Slot Allocation (LoTSA) programme introduced by the Panama Canal Authority (ACP), and the Rio Indio reservoir project, which is designed to inject much more water into the system in the medium term.
A key message for shipping today, said Oduber, is that the canal is being underutilised. There are more daily slots available than actual transits.
“On any given day, one to two transits are not being used,” he said. “You can transit through the regular booking process. You’re not going to auction.”
Container shipping
Container lines faced major disruptions due to the drought. First, draught restrictions forced liner operators to transit with fewer containers. Then transit reductions forced Asia-US east coast services to the Cape of Good Hope.
The liners handled the disruption very well, and their experiences will help them in the next drought, said Oduber.
“The malleability of the shipping industry and its ability to adapt is remarkable. We lived through it during Covid, when the Panama Canal was a solution, but this time was different, because the canal was the problem. We were the bottleneck.”
He said the drought was a good “teaching lesson” for the ACP because the canal authority realised “it can only go so far”, and saw “how elastic” ship routing can be. In other words, once liners face too many hurdles, they can find another way.
When draught restrictions forced carriers to limit the number of containers aboard their ships, they used the transshipment hubs on both coasts of Panama, and cross-isthmus rail and road connections to bring boxes to the other side.
When transit restrictions curtailed services, liners used slot-sharing agreements to maximise flows on services that remained, increased use of rail and road connections across Panama, used more Caribbean transshipment hub capacity for services that shifted to the Cape of Good Hope, and tapped the cross-Mexico railway system.
The net result, given liners’ deft ability to reroute, was that the ACP and shipping customers are now “working together more to fix the problem”, said Oduber. “One of the lessons learnt is that Panama needs to listen to the market.”
The LoTSA programme – which allows ship operators to have certainty on future transit costs and schedules – “is one example of listening to the market”, he said. Container shipping bids for the LoTSA programme, which covers bookings via the neopanamax locks in 2025, were fully subscribed.
LPG shipping
Very large gas carriers that transit the neopanamax locks shifted away from Panama during the drought. Delays caused VLGCs on backhauls to miss their laycans in the US Gulf, prompting owners to switch to the Cape of Good Hope for ballast runs from Asia. VLGCs switched to the Cape of Good Hope for fronthauls, as well, as the situation worsened.
VLGC economics were also heavily impacted by the auction process, with one LPG operator paying $4m for a transit in November 2023 and many others paying $1m-$2m in 1H24.
According to Oduber, VLGC owners “were basically obligated to pay these outrageous amounts – millions – for a transit to be scheduled. They were very upset. They thought, ‘This is the only way to get through? It’s not right. It’s not fair.’
“I think the canal has now realised that yes, this is income, but this is not sustainable nor desirable. They’ve realised, in my opinion, that they don’t want to be seen as an auction-only product. They want to be seen as a reliable and certain product.”
He said that “many of the LPG and LNG players have now become accustomed to the route around the Cape of Good Hope – it works and it’s predictable. They have certainty.”
Even so, LoTSA programme slots have been fully subscribed by LPG and LNG companies. The long-term booking process will be “extremely helpful for LPG and LNG because they know they’re not going to be subject to a volatile auction process”.
Oduber opined that once LoTSA is in place, it could be further improved by switching from an annual period of bookings to quarterly. He recounted a recent conversation with a client who did not participate in LoTSA. “I asked what would work for you? He said: a shorter window.”
Consider the case of the VLGC market, which is highly volatile, and is a tramp not liner business. The complication with booking a long-term window a year out is that the VLGC market could be terrible by then. “If that happens, you’re stuck with the slot and have to pay 100% of the fee,” noted Oduber.
Neopanamax VLGC transits – as with neopanamax containership transits – have now rebounded to pre-drought levels. Many VLGCs “are transiting the Panama Canal northbound, on the empty leg, through the normal booking process. They’re not going to auction.”
And there’s room for more, said Oduber. The biggest challenge is to convince the shellshocked VLGC segment that “space is available so there is an opportunity here”.
LNG shipping
LNG shipping, unlike LPG and container shipping, has failed to return to the neopanamax locks following the end of the drought.
LNG cargoes from the US Gulf shifted toward Europe and away from Asia in the initial aftermath of the Russia-Ukraine war, but no longer. Most US cargoes are once again headed to Asia, but they have overwhelmingly stuck to the longer Cape of Good Hope route.
According to Oduber, this is not only because LNG shippers have become comfortable with that route, but also because LNG carriers face more transit restrictions in the canal than any other vessel category.
“LNG shipping is heavily restricted in the Panama Canal, with the highest precautions and no nighttime transits because of the nature of the cargo. It is limited for booking allocation purposes to two transits per day, one southbound and one northbound, or two northbound.”
The canal will become a more attractive option to LNG shipping when the ACP is comfortable enough from a safety perspective to “allow more flexible transit operations” and offer “two or three southbound transit slots per day, including a nighttime transit”.
Even without such an increase, the LoTSA programme should support more LNG carrier transits next year, he added.
The need to cater to LNG shipping customers is about to intensify. An enormous amount of LNG liquefaction capacity is under construction in the US Gulf states, with US LNG exports poised to double between 2024 and 2028. Some of that new volume will go to Europe, replacing Russian pipeline gas, but much will head to Asia, creating a future growth opportunity for the canal – if it can handle more LNG ships.
Oduber highlighted the importance of the Rio Indio reservoir project to support future LNG carrier transits in the medium term. The project will happen “without a doubt”, he affirmed. It is scheduled to boost the canal’s water supply when completed in five to six years.
“That solution will provide assurances that we will have water reserves during the summer, which would in turn allow a higher commitment for LNG transits. The [US] LNG production process will come into play earlier than that, probably as early as two years from now, so in the meantime, the canal is using better water utilisation systems to allow for 15% to 20% less water per transit.”
Dry bulk shipping
Dry bulk was yet another shipping segment heavily impacted by the drought. Restrictions caused a major shift of US Gulf grain aboard panamaxes to the Cape of Good Hope, as well as a rerouting of US crop exports to Pacific ports.
Bulker transits through the canal have increased over recent months, and there is speculation that there will be a wholesale return to the Panama Canal in the upcoming US grain export season in late 2024 and early 2025. If so, this would have a negative effect on panamax spot rates due to lower tonne-miles.
Oduber does not see this happening, based on his conversations with customers.
“The bulkers were affected in two ways during the drought,” he said. “One was that the panamax-plus vessels with beams that could transit either the neopanamax or panamax locks were taken out of the auction process and they were not getting a reliable product.
“The second part was that bulkers’ ranking is very low,” he added. The canal uses a customer index based on frequency of transits and amount of toll payments, with containerships ranking highest. “Dry bulk’s ranking is very low because it doesn’t have the combination of high frequency and high tolls, which made them very disadvantaged when it came to competition [for slots].
“And of course, when the market turned to auctions, bulk carriers do not have the economics to support $2m auction fee. So, it was a triple-hit.
“We are seeing a bit of a return of some bulk carriers, but it’s a modest return. In my opinion, they’re being cautious,” he said. In the upcoming grain export season, he expects many to “sit back and watch”, then return the following season if all goes well.
“I think it’s just too late for the market to take a gamble on transits out of the US Gulf for this season. It was a big slap [during the drought]. I don’t think they feel comfortable enough yet.”
Oduber believes the ACP’s bulker business would benefit from more segmentation within the booking process – by specifically reserving slots for dry bulk in light of its inherently low ranking on the customer index – as was done temporarily when drought congestion was extremely high.
He also believes bulkers should be offered special deals, given that all the available transit slots are still not being used.
“If a bulker was to show up and want a transit, give them a $45,000 booking as a kind of last-minute sale. It should be a manageable solution, for this segment only, with certain conditions. The canal has the capacity.”
