The expansion of the Panama canal : a study of consequences in the container shipping industry

Abstract

The Panama Canal has become a constraining factor on trade across the Pacific and Atlantic Ocean, and the expansion of the Canal is expected to have a positive influence on world trade. Our research investigates the competitiveness of the Panama Canal in the container shipping industry and the possible macroeconomic consequences of the canal expansion. We have designed a model that compares costs and earnings for single voyages and round-trips, and with a basis in opportunity cost theory we compare the Panama Canal with alternative routes and analyze the sensitivity of key variables for different scenarios. From our analyses we see that the current bunker price forces vessels to slow-steam to maintain profits. This has led shipowners to prioritize cost savings at the expense of fewer annual voyages. Simultaneously, operators in the container industry are constantly seeking to exploit large-scale advantages and we find strong evidence that the unit cost and the size of vessels are inversely proportional. This has led to a relentless upsizing of container vessels, and our calculations suggest that the expanded Panama Canal will face competition from the Ultra-Large Container Vessel segment. Further, our findings suggest that the current Panama Canal toll system with a constant price per TEU transited will not be applicable when opening for Post- Panamax vessels. Therefore, the Panama Canal toll system should be adjusted to facilitate for economies of scale in order for the Canal to stay competitive with alternative routes. As the world shipping market is still adjusting after the financial crisis in 2008, the expansion comes at an interesting point in time and the possible consequences are multidimensional. Our research suggests that the effects can be both positive and negative for shipowners depending on whether the expansion leads to an increase in tradable volume or a shift in existing trade.