SIMON SAYS: The Panama Canal Transition

Submitted by Simon Hill on Wed, 08/14/2019 - 17:00
The Panama Canal Transition

One significant piece of the U.S. LPG export puzzle, taking something of a back seat behind record LPG production, NGL takeaway problems, lack of pipelines, fractionation constraints, Mariner East 2, export terminal expansions, IMO 2020 and the strong VLGC market, to name but a few, is the Panama Canal, which will have to come more into focus, it’s just a matter of time!

I checked out the numbers in RBN Energy’s recent NGL Voyager report, applied a few conversions and came up with the following for LPG exports. If average exports through July this year were maintained for the balance of the year, we would expect to see around 38.3 million Mts of LPG exports compared to 34.0 million Mt last year. But, if we were to maintain current levels, i.e. post Mariner East 2 / Marcus Hook start-up, then the number will end up over 40 million Mt, and dare I say nearer to 41 million Mt. I have to admit, I’m a little shocked by these numbers, they’re much bigger than I had expected. I think we know where it might all be going.  

In July this year over 50.5% of U.S. LPG exports went to Asia, while Latin America’s share of the cake has dropped to 21.3% from last year’s average of 25.6%, as imports have held steady. Europe is up to 18.3% from 13.8%, as imports from the U.S. have jumped post Marcus Hook’s LPG export expansion starting-up. The increase is some 25% higher than last year’s numbers, but the base volume was still relatively small compared to Asia. It’s not therefore totally right of us to just say that all the new production is heading east, but I also think Europe and Latin America are going to struggle to import more each year than low single digit percentages. So yes, it’s got destination Asia written all over it!

If that’s the case then the Panama Canal is going to get a lot busier for the LPG trade going east, but that’s only part of the equation, the other’s going to be how busy the canal will be overall. To give you some numbers, for the period May through July this year there’s been just under 230 VLGC transits, including northbound and Southbound, versus less than 190 transits for the same time last year and just above 140 transits in the same period in 2017.

The Panama Canal has been open for over 100 years and was expanded in 2016 with a 50-mile-long (80km) stretch of canal, and also adding a third set of locks. The $5.2 billion canal expansion project was aimed at accommodating the huge new container ships that now dominate the world’s maritime trade but were not able to fit through the canal’s original locks. Previously only Panamax built vessels could fit, but now the new or Neo Panamax vessels are able to transit.

Panama Canal

So far through July 2019, only 3% of the Panama Canal transits have been made through the old locks by Panamax LPG ships, while 24% of the Neo Panamax transits have been made by those LPG ships converted or built to be neo lock friendly, not a huge investment and most LPG vessels have now had the work done. Combined, LPG ships account for only 7.8% of total transits. Containers are still the biggest users of the canal at 18.3% overall but accounting for nearly half of the Neo Panamax transit trade. Dry cargo ships are the biggest users of the Panamax locks accounting for 21% of those movements but are less than 10% of the Neo Panamax transits. After containers, the LPG and LNG Neo Panamax ships are the type of vessels making most impact. The expectation is that we will see more LNG and smaller crude oil tankers using the new section of the canal, and as they pay more to transit because of their size, this may give them priority over LPG ships.

As concerns grow over traffic, especially LNG ships, the Panama Canal will never remain static, and the Panama Canal Authority is keen to assess future expansion if it is required. When the recent expansion project was first started in 2007, it was only the start of the U.S. shale revolution and U.S. exports were not even bracketed at the time. Now LNG shipments alone are predicted to reach 15 million Mt this year with a jump to nearly 30 million by 2021. There are currently only eight slots for all ship types using the Neo Panamax locks. LNG ships were allowed to enter the canal by night as long as they exited in daylight. In October 2018 the Panama Canal Authority made a second LNG slot out of the eight available, and reservations have been made easier. In fact, the canal has handled 12 ships in one day through the Neo Panamax locks. Without doubt LNG is getting all the future attention.

The big fear for all traders involved in moving LPG cargoes out of the U.S. to the Asian market, is the potential lack of available slots, and with it the likely delay of those ships before they can transit. However, it’s hard to be certain what will happen, the saying, how long is a piece of string comes to mind. The threat is there, and it comes about because there are more shipments being forecast to take place and limited transits. Yes, there can be greater frequency but even that has a limit. The reality is that most LPG players are in a false sense of security, as there’s been relatively smooth vessel transits over the last couple of years, in fact owners are not even pre-booking slots at the moment, however the predicted increase in LNG, and yet more LPG transits in the future, are going to make it more difficult, not less.

With SIMON SAYS predicting that freight levels are likely to remain strong, the economic option of taking the longer route around the Cape of Good Hope is just about zero. At current Houston to Chiba freight levels of $105-110 / Mt via the Panama Canal, the equivalent around the Cape is $25 / Mt higher, or a million dollars plus a cargo. Taking such a longer route would only reduce the availability of ships and push rates and differentials even higher. Even if waiting is cheaper, the impact will be the same.

There will always be a counter argument made that we are going to see more cargoes move east from the west of Canada and the U.S. But in real terms, this is going to be overwhelmed by the cargoes coming from the expansion projects in the U.S. Gulf, as well as cargoes heading to the Panama Canal from Marcus Hook, especially as it’s only a day further, and Europe looks as if it will become easily saturated with only half of the extra cargoes flowing post Mariner East 2 start-up. Others will say ships will still move around the Cape of Good Hope in order to supply Indonesia, Indian Ocean floating storages and even India, but how many and how often? To me that’s number “rounding”.

So, the thought of such delays has impacted a number of owners and decisions to order Panamax size vessels. The upside is that the chances of delays via the old Panamax lock is probably far less, say a couple of days maximum. The problem is that with a strengthening market, the dollar per Mt rate starts to become a lot higher than for Neo Panamax ships, as the payload is circa 3-4,000 Mts less. Panamax ships only pay if there are delays to the Neo Panamax’s. The order book still looks strong for the 80,000 CBM Panamax vessels, but there have been minds changing, notably Exmar/Equinor, who decided to go for an 86,000 CBM after their Panamax ships were cancelled due to the Hanjin Heavy Industries Subic Bay yard failure earlier in the year. The decision is not an easy one, and I would today be in the bigger camp, it feels like money straight into your pocket, not an IOU that might never materialise.  Maybe there is a brighter light if the tariff war continues and container traffic drops, maybe there isn’t, time will tell!