"Shipping slump: Why a vessel worth $60m was sold as scrap"

From the BBC, mainly because of over-supply of ships, but also:

The Panama effect

And there was another reason to buy - and to buy big: the Panama Canal.

Last year it got a serious upgrade. The old locks could take container ships up to only 5,000 TEU (Twenty-Foot Equivalent Unit, roughly one container). These are known as Panamaxes.

But the new locks, with gates weighing 700 tonnes or more, are designed to take so called Neo-Panamaxes. These are giants, equivalent to the width and length of three football pitches laid end to end, and can carry about 13,000 TEU.

So shippers looking to carry cargoes from Asia to the American east coast ports, can now take Neo-Panamaxes through the new canal - and sell off their smaller Panamaxes. That's why Panamaxes like the Hammonia Grenada are going cheap - in fact, they're going nowhere...

Hitherto, from the point of view of Chinese exporting to Europe or the US Eastern Seaboard, they were pretty indifferent between using the Suez Canal (simple, cheap to build and maintain) and the Panama Canal (stupendous and expensive feat of engineering), so the tolls (largely rent to use that location) which either canal could charge was roughly the same.

Assuming people prefer using larger ships, whichever canal allows larger ships is obviously as a huge advantage and can charge extra tolls, but this suggests that Suezmax ships are still slightly larger than Neo-Panamax ships, in which case the Panama Canal has miserably failed to leap-frog the Suez Canal in terms of size, but nice try anyway.

The North West Passage vs Suez and Panama Canals

John Burns left a comment on my post of three years ago explaining the pricing policies of the two canals and how they would be affected if the North West Passage became ice-free.

The Northwest Passage is operating. The 69,000 ton Crystal Serenity will be the largest ship ever to navigate the Northwest Passage. Starting on 10 August 2016, the ship will sail from Vancouver to New York City with 1,700 passengers, taking 28 days for the journey. It needs pilots on board to get through.

If large container ships use the passage in summer it will knock off a substantial time from China and Japan to the UK/Europe. From Shanghai to London Thamesport it is 11,866 nautical miles. From Shanghai to Liverpool via the Northwest Passage is approx. 9,211 (using Google Earth). That 2,600 mile less is substantial. Liverpool is soon bringing on-line its container terminal extension capable of handling ships with 20,000 containers - average now is around 4,000 containers. So imported Far East goods may become cheaper*.

His source, CBC News.

We will have to keep an eye on the Suez and Panama Canals' prices; these are based on the days saved compared to any alternative route multiplied by the daily cost of having a container ship at sea. It's a rental payment like anything else.

If going via the North West Passage is a week shorter than going round the Capes of Horn/Good Hope, container ships cost $10,000 a day to run and the pilot/additional insurance is $20,000, we would expect to see their tolls fall by $50,000 per ship.

* This bit is highly unlikely. Chinese factories sell for cost-plus; container ships cost what they cost; Western retailers sell goods for what they can get; everything else goes to rent (Canal charges or higher rents for retail premises). In any event, the cost of shipping per unit is insanely low so even if it fell by half and the entire saving were passed on to consumers, this would only knock 0.05% off selling prices (or something).

"Oil tankers swing round the Cape to create profit"

Emailed in by MBK from The Times:

It is a treacherous route that mariners thought they had seen the back of when the Suez Canal opened a century and a half ago, but low oil prices have made the trip from Asia to Europe via the Cape of Good Hope more attractive.

As the price of crude was sent lower again yesterday, research from Bloomberg showed that tankers have been making longer voyages to take advantage of market conditions. At least five have gone as far as avoiding the short-cut to Europe via Egypt, a diversion that adds 4,000 miles to the journey...

The article goes on to suggest that people are not in a hurry to bring the oil to the market because they expect prices to rise, so they are effectively storing it on tankers, which has been observed before.

The other point is:
- Suezmax tankers use a lot of oil per day. Based on this specification, the oil costs about $40,000 a day at $100/barrel and $20,000 at $50/barrel. They also cost $30,000/day to charter. So your daily cost has gone down by about a third over the last year.
- The price you pay for using the Suez canal is largely rent. They know how many days you can save by using the canal and roughly what it costs you per day. As long as their toll is less than this, you are happy to pay it. Panama does the same calculation and both canals cost about the same (they are to some extent competing on e.g. the China to Europe route).
- The toll for a Suezmax tanker is about $300,000 (fun online calculator). (This implies that tanker owners place a value of only $20,000 per day saved which doesn't tie in, does it?)
- So if your daily costs have gone down by a third, the price you are willing to pay to use the Suez canal also goes down by a third.

To sum up, cheaper oil makes the Suez toll worse value and so fewer tankers will use it until toll charges fall. And we would expect to see that there is some correlation tolls and oil prices (if anybody can find a history of changes in tolls).

Panama Canal and Suez Canal - pricing policies

In engineering terms, the two are at opposite extremes.

The Panama Canal is a titanic feat of engineering, which cost $9 billion to build (in today's money). It requires constant maintenance, the locks are very complicated and manpower intensive and enlarging or improving the canal is very expensive (the current enlargement project will cost another $5 billion).

In contrast, the Suez Canal is just a 101-mile long groove scraped out of the flat desert sand. It is full of sea water from end to end and has no locks. All it requires is a bit of dredging every now and then to stop it silting up.
---------------------------------
In economic terms, they are almost identical. The USP of either canal is to shorten journey times by two or three weeks. If it costs $10,000 a day to have your container ship or oil tanker at sea, you are happy to pay $200,000 to use the canal if it means saving 21 days at sea @ $10,000 per day.

So how much do the canals charge..?

The Panama Canal charges about $200,000 for an oil tanker or large container ship, see also here.

The Suez Canal had average income per larger oil tanker of $325,000 (in 2008).

The economic value of the two canals is pretty much the same, so the prices they charge are pretty much the same (adjusted for days journey saved and size of ship the canals can accommodate).

The uninitiated observer who does not understand economics might think that the tolls for using the Panama Canal would be a lot higher than for the Suez Canal to reflect their much higher actual costs. Nope. These are not "cost-plus" businesses, they are not in a competitive market*, their potential income is actually rent, and is entirely down to the location and nothing do do with their costs.
----------------------------------
* One of the linked articles says that the two canals are to some extent in competition, i.e. if your journey takes you half way round the world, you might be pretty indifferent which route and canal you use, so you'll choose whichever works out cheapest. Interestingly, the number of ships using each canal each year is very similar, around 20,000 each and each canal has similar total revenues. Whether this is a technical limitations or the result of the limited competition between the two is unknown.

It'll be interesting to see what happens if and when the North West passage is navigable again. Let's assume it's only navigable six months of the year and the journey from China/Japan to Europe is quicker than using the Panama or Suez Canals. In that case, the canals will lose a huge chunk of income.

Or let's imagine a hypothetical journey from X to Y using a ship which costs $10,000 a day to run, with the following possible journey times...

Via North West Passage - 20 days (when it's open)
Via Suez Canal - 14 days
Via Panama Canal - 17 days
Via Cape of Good Hope - 35 days
Via Cape Horn - 38 days.

The shipping company is only prepared to pay $60,000 to use the Suez Canal and $30,000 to use the Panama Canal during the summer months when it can use the North West Passage. The marginal cost of allowing a ship through the Suez Canal is more or less zero, so they can drop the prices as much as they like and stay profitable. There is a large marginal cost of getting a ship through all the locks in the Panama is quite high (let's guess $50,000, no idea really), which sets the lower limit for the tolls it has to charge.

When the North West Passage freezes over again in Autumn, the two canals will be able to reinstate their old prices of $200,000.