Will Suez benefit?

By Peter A. Buxbaum, AJOT

A 30% increase in Panama Canal container tolls is leading some carriers to consider diverting some cargo through the Suez Canal. The Panama Canal Authority announced it will implement annual increases of ten% for the next three years beginning in July. The heaviest burden of the toll increases will fall on container traffic.

The toll increases are but the latest round in a string of toll increases the canal authority has imposed since 1999, when the United States handed sovereignty over the canal to the Panamanian government. The ACP imposed two rounds of toll increases on the canal in 2002 and revamped the toll structure from a one-size-fits-all scheme to one charging on the basis of specific cargoes and services. In 2004, the commission hiked prices by six%. The latest round of toll increases will boost the costs of using the canal by around 60% since the canal was turned over to the Panamanians.

There are two aspects to the latest round of toll increases. One is to reflect the increased level of containers as opposed to other cargoes that traverse the canal. The other is a form of financing for a third set of canal locks that the authority is set to construct, at a cost of over $5 billion.

‘Carriers are not thrilled,’ said Tom Burke, senior advisor to K Line America CEO Toshio Suzuki and a former canal commissioner. ‘Increases of 10% per year for three years are high. But when we turned the canal back to Panama we realized Panama is a sovereign republic and that it had the right to do whatever it thought would be in the best interests of that country. It’s pretty hard to criticize if they are doing what they think is right.’

Indeed, one major difference between US and Panamanian canal administration is that the United States operated the facility on a break-even basis while the Panamanians view the canal overtly as a revenue generating enterprise.

The Asian Shipowners’ Forum lacks Burke’s compunctions about criticizing the canal authority, however. A meeting of the forum’s Shipping Economics Review Committee in February concluded with a statement saying that ‘the amount of the proposals is unacceptably large.’ The statement went on to express ‘grave concern that the PCA proposals clearly have major implications for shipping companies’ business planning.’

There are two economic factors which enter into the toll increases, according to Robert West, an economist with Global Insight, a consulting firm: raising prices on the canal’s fastest growing market segment and financing a much needed capacity expansion.

‘What the canal authority has done is looked at its cargo traffic,’ West said. ‘It’s almost going back to Economics 101 that when demand goes up you should raise your prices. In the case of the canal, the demand is going up fastest in containers and this toll increase reflects that fact.’

The other aspect of the toll increases is that, practically speaking, usage of the canal has reached full capacity, necessitating expansion. ‘Earlier projections showed the canal hitting capacity by 2012,’ West said. ‘Now it’s possible that level will be reached as early as 2008. The canal has made some small improvements that may postpone that date to 2010. But whether you believe it is 2008, 2009, or 2010, the point is that the canal for all practical purposes is being used to capacity. When you have limited resources and increased demand, you naturally raise the price. It has nothing to do with politics and I’m not saying if it is good or bad but that’s what the textbook says you should do.’

‘What it’s really all about is getting money up front for the canal expansion program,’ said Burke. ‘Increasing tolls and generating significant cash flow means the canal authority won’t have to go to banks to borrow the money for expansion. They can do what want with the money. If they had loans, there would be strings attached and they would not be able to move as quickly as they thought.’

Canal officials tacitly concur with th