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Container Shipping & Trade

Container Shipping & Trade

The age of extinction for Panamax ships

Wed 24 Aug 2016

The age of extinction for Panamax ships
How long will it be before a 10-year old Panamax container ship is sent to the world’s scrapyards?

The mid point of this year finally heard the death knell of the traditional Panamax vessel. With the formal opening of the Panama Canal expansion in June, the very definition of what constitutes a Panamax vessel – that is to say, the maximum dimensions of a ship that can pass through the canal’s lock gates – has been radically upsized, leading analysts to coin the term neo-Panamax to refer to the new type of ship that can now transit the waterway.

“The term neo-Panamax ship refers to modern wide-beam vessels with a cross section of 19 container rows on deck. This corresponds to the new permitted maximum breadth in the Panama Canal and its locks,” Alphaliner wrote recently.

However, as the analyst also noted, a full sized neo-Panamax ship with a container-carrying capacity of 13,000 teu, a length of 365m and beam of 19 rows has yet to be sent to the Panama Canal.

The first container ship transit of the expanded canal took place on 26 June, when 9,443 teu COSCO Shipping Panama made the passage – although it was effectively a ceremonial transit, as the vessel was deployed on a service between the Mediterranean and Asia and was off-schedule, carrying mostly empty boxes.

However, since the opening of the waterway’s new lock gates, six Far East–US East Coast services are deploying vessels in the 6,000-10,000 teu range, effectively signalling the end of demand for Panamax vessels.

In the run-up to the opening of the enlarged canal, the major east–west vessel sharing alliances redesigned their trans-Panama Canal networks to employ much larger tonnage. For example, six services operated by the G6 Alliance and the CKYHE Alliance – the G6’s NYX and PA2 Asia–US East Coast, and the CKYHE’s AWE1, AWE3, AWE4 and NUE services – have all deployed vessels of over 6,000 teu, some of them over 10,000 teu.

“More than 50 vessels in the size range from 6,000 to 10,000 teu are to be assigned to these strings, replacing some 80 classic Panamax ships of 4,000 to 5,100 teu.” The shift is corroborated by the latest idle fleet figures recorded by Alphaliner as at 13 June. While the idle numbers for neo-Panamax vessels are falling, the headcount of unemployed classic Panamax ships is on the rise again.

“This trend is expected to continue over the next two months, as the larger ships are being phased into the new all-water services,” Alphaliner said.

The Panama Canal expansion also allowed Maersk Line and its 2M partner Mediterranean Shipping Co (MSC) to shift one of their Asia–US East Coast services that had previously been transiting the Suez Canal, transforming it into a stand-alone, around-the-world service that bore the hallmarks of the innovative round-the-world services operated by Evergreen Line in the 1990s.

On the eastbound transpacific headhaul leg out of Asia, the reconfigured TP12 service will transit the new Panama Canal locks and call at the ports of Newark, Norfolk and Baltimore on the US East Coast. On the return leg to Asia, vessels will go through the Suez Canal and call at the ports of Salalah in Oman, Colombo in Sri Lanka, and Singapore.

Klaus Rud Sejling, head of Maersk Line’s east–west network, says: “We are changing our TP12 service to provide a better product to shippers in Korea and northern and eastern China. By transiting the expanded Panama Canal, we will significantly reduce transit times into key ports on the US East Coast. At the same time, we will reduce our CO2 and exhaust gas emissions because of the shorter distance.”

In addition, Maersk Line will connect its TP11 and TP8 services to form a pendulum service that expands the coverage of both services. The TP18 service will remain unchanged, although the line deployed the 6,000 teu ER Los Angeles to the service in late June. “But it is the only large ship employed on this service, operating alongside nine classic Panamax ships of 4,200-5,100 teu for the time being,” said Alphaliner.

However, there will be no changes to capacity in Maersk Line’s Asia–US East Coast network, with 11 vessels of 8,500 teu deployed in the redesigned TP12 service, and 17 vessels of 8,500 teu operating in the TP11–TP8 pendulum service.

Meanwhile, MSC has upgraded its Europe–Caribbean–West Coast South America service, with 8,819 teu MSC Brunella joining the service and making its inaugural Panama transit in July. While initially the neo-Panamax ship will operate alongside smaller Panamaxes of 4,500-5,300 teu, the service is expected to be upsized during the remainder of this year.

As has been widely predicted over the past two years, the exodus of old Panamax vessels from Asia–US East Coast, Asia–South America East Coast and Europe–South America West Coast services has meant daily charter hire rates for this class have dropped precipitously in recent months. This has had a disastrous effect on the finances of non-operating owners, as most recently evidenced by the half year results from Singapore-based Rickmers Trust Management, which reported a net loss of US$57 million for the first six months of the year as it battled to stay afloat in severe market conditions. Revenues for the period declined by 31 per cent year-on-year from US$57 million last year to US$39 million in the first half of 2016.

The company said it was “likely to face even stronger headwinds” in the remainder of the year from the impact of a depressed market compounded by Panamax vessel redeliveries driven by the expanded Panama Canal.

Chief executive Søren Andersen said: “We have 11 [Panamax] vessels trading in the spot market, and we need to take practical measures and actively consider decommissioning some of these vessels by laying them up when they are redelivered.

“This will reduce operating costs significantly while the market is depressed. The shipping market is volatile, and we have to strike a balance between minimising costs through this extremely adverse time by decommissioning vessels, and at the same time keeping some vessels active in the spot market for the flexibility to capitalise on any upturn in the market,” he added.

According to Alphaliner’s latest list of idled tonnage, some 85 of the 269 container vessels laid up are ships of between 3,000 teu and 5,100 teu capacity. This compares with just 10 vessels in that category at the same point last year.

Looking at the history of container shipping, in the normal course of events the Panamax vessels that had been superseded would be cascaded to other trades, displacing smaller tonnage by virtue of offering better economies of scale. The intra-Asia trade was one area where demand was expected to soar for Panamax vessels.

However, replacing vessels in the 1,800-2,000 teu range with ones that are double the size has had a deleterious effect on rates, because demand for intra-Asia container transport has not doubled. Furthermore, for many routes vessels of that size are not suitable. One reason why the 1,800 teu Bangkok-max class remains so popular with intra-Asia carriers is because it can access such a variety of ports including, of course, Bangkok, which is one of the ports that lie at the heart of the trade.

With so many Panamax units on the market it is hard to see how other trades can soak up that capacity. It would appear that the only option left for shipowners, given the costs of lay-up and the improbability of the vessels finding alternative trades, is that they will head to the breakers’ yards.

The recent case of 2003-built 4,646 teu Seaspan Excellence (previously known as MOL Excellence) probably shows what is in store for the sector. It became the youngest container ship to be sold for scrap in July for a sum reported by VesselsValue.com to be US$280 LDT, equating to a total demolition value of US$5.96 million.

Seaspan bought the vessel from Mitsui OSK Lines (MOL) in March 2013 for US$17.2 million, only to be forced to sell it for scrap for US$11.25 million less than it had paid for it, just three and a half years later and at least a decade before the end of its operating lifetime.

And if the market does not show signs of improvement it would seem only a question of time before 10-year old Panamax container vessels are being consigned to the recycling yards, too.

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