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January 19, 2005 Panama locked into claim for ‘fair value’ ACP continues its efforts to clarify a ‘misconception’

In a battle for $185m a year of additional revenue the Panama Canal Authority seems to have outmanoeuvred the lines 
The Panama Canal Authority (ACP) continues its efforts to clarify a ‘misconception’ by the container industry regarding its proposal to change the way boxships are charged.

However, the lines and their customers still face unprecedented increases in the cost of transiting the waterway.

Bids by industry bodies to fend off a 68.75% toll increase, phased in between May 2005 and January 2007, have had little impact on the long-standing ACP view that it is time the container industry paid as much as other users to transit the canal.

In a battle for $185m a year of additional revenue, ACP seems to have outmanoeuvred the lines who will now seek to re-coup the extra costs from their customers in forthcoming contract negotiations.

ACP marketing director Rodolfo Sabonge defended the authority’s position following fierce criticism of the plans by the International Chamber of Shipping, the World Shipping Council and representatives from key users of the canal such as Chile, Peru, Ecuador and South Korea at a public hearing held on Friday.

Importantly, Mr Sabonge has evidently ruled out key concessions requested by the WSC, while underlining the authority’s position that it wants a “fair value for its product”.

“The idea began because the canal wanted to be able to charge for the total cargo carrying capacity of the vessel. Since 1997 we have charged 8.78% of the total on-deck container capacity and we wanted to go to 100%,” Mr Sabonge told Lloyd’s List.

With most modern container vessels carrying as much cargo on-deck as below deck these days, lines have been paying just over half of the vessel’s carrying capacity for the last eight years.

Under the canal’s formal proposal, the Panama Canal Universal Measurement System (PC/UMS) will be scrapped for the container sector and replaced by a $54 per equivalent teu charge (see table) applied on the vessel’s capacity.

The changes will be phased in over the next two years, with a $42 per teu figure to be introduced in May, followed by an increase to $49 per teu in January 2006 and $54 per teu in 2007.

Both the WSC and ISC criticised the authority’s plans at last Friday’s meeting, arguing that the new figures lacked the transparency of earlier informal discussions centring on a scheme to charge $40 per teu for on-deck capacity.

In the WSC presentation made at the hearing the group said: “We must express our disappointment with the ACP’s summary abandonment of its own previously proposed logical fee per teu formula and the substitution instead of an increased charge per teu that is supported by no formula or explanation other than a desire to raise a particular, but unstated, level of revenue.”

While the WSC attacked the new proposal for having “no articulated logic or structural rationale associated with it”, Mr Sabonge defended the new price structure, saying that while the first on-deck calculation was based on external measurement for a container and the application of existing tolls of $2.96 per PC/UMS ton, a WSC suggestion to apply a teu charge for the whole vessel required an important adjustment.

“The under-deck area also includes other areas, other spaces, such as the engineroom, that are measured by the PC/UMS. When they [WSC] came back to us after our preliminary proposal, of course we had to include these other spaces and their interpretation was that we had increased the charge but what we are doing is including these spaces,” said Mr Sabonge.

These areas, he said, took the $40 per teu figure, which Mr Sabonge labelled a ‘pure’ charge for on-deck revenue earning capacity, and added $14 per teu for the non-revenue earning areas of the vessel to reach the equivalent price per teu of $54.

With containerships paying $32 per teu today, the $54 per teu figure represents a 68.75% increase or as much as $92,400 for a 4,200 teu panamax vessel.

The incremental element, described by the ICS as “totally unrealistic” and owing “less to justified need than to opportunism and an essentially captive market”, is set to increase the total costs of major users of the canal such as Maersk Sealand by around $35m a year and boost annual canal revenues by $185m in 2008.

Diplomatic representatives from Chile, Peru and Ecuador also argued that such an increase would have a negative impact on their competitiveness in key export markets, such as Europe and the US east coast.

But Mr Sabonge dismissed these concerns, saying that ACP studies suggested any impact would be minimal.

“We have concluded the impact analysis and a $20 additional per container is not something that is going to affect significantly the competitiveness of cargo moving in a container,” he said. “It’s quite insignificant.”

Efforts by the ICS and WSC to secure some kind of discount for empty boxes or unutilised slots, which both argued were non-revenue generating, have also been dismissed by Mr Sabonge.

“The whole principle of the canal in terms of charging is looking at capacity, because we are not in the shipping business,” he said. “We don’t look at the content of the cargo or the value, all we know is the capacity of the vessel.

“If they [the lines] are carrying empty containers, their commercial operations take into account that these containers have to be repositioned and their prices and tariffs reflect that.

“The operation of the vessels is really up to the discretion of the operator. If they carry full or empties, it is not of that much concern to the canal.”

The ICS had argued for the tolls to be reduced by a standard fixed percentage before the charges are calculated, while the WSC urged the canal, “in the interest of equity, that unutilised on-deck space for cellular container vessels be given the same treatment as non-cellular container vessels and not charged for unutilised deck space”.

Both requests, however, would place the additional burden on the ACP of validating the actual, rather than the potential, revenue-earning capacity. Mr Sabonge said it would be “almost impossible” for the ACP to ascertain with any great accuracy the validity of this type of information.

Facing daunting increases, the WSC also urged the authority to phase in the changes over a longer time period in order to enable lines to pass the cost on to their customers. Lines are concerned that it will prove difficult to assimilate an increase of 31% in forthcoming contract negotiations.

Independent observers in Panama offered little sympathy to lines posting record profits on the back of soaring demand. However, these profits, the WSC argued, would come under fire if the lines have to bear the cost of the increase. “While the ACP may observe that the dollar amount of the proposed change may not be a large percentage of the total revenues for the transportation of a loaded container, the increase is a very large percentage of the net profit a carrier receives for the transportation of a container,” said the WSC.

P&O Nedlloyd posted an operating profit of $138m, or $131.42 for each of the 1.05m teu the company handled in the third quarter of last year.

ICS secretary-general Chris Horrocks said he did not suspect the increases would lead to lines dropping the canal but in the long term it may have an impact on their strategies. “One has to recognise that they [ACP] have a captive market,” Mr Horrocks said.

“Whether, looking ahead, this sort of thing has the impact of making the industry invest more money in Los Angeles and the landbridge, only time will tell.” Whatever the final increase, the WSC has urged the canal to introduce the changes over a four-year instead of a 20-month period. In addition, the WSC also argued that tolls should be “stabilised and guaranteed through 2010, with the understanding that the shipping industry will face a separate surcharge for the third set of locks should the Panamanian government decide to proceed with that project”.

Difficulties in forecasting how the canal would react to demand from different sectors in the next five years, however, said Mr Sabonge would make such a commitment difficult.

“I don’t think that anybody can hold a price that long without really knowing what is in the future,” he said. “There is no way that the canal can commit to that. From the outset when we did this proposal we said that this had nothing to do with the long-term expansion of the canal. What we are aiming at is to recover the toll for the full cargo carrying capacity of the vessel.”

If plans to build locks capable of handling vessels up to 10,500 teu in size are approved in a national referendum, which is now pencilled in for November, it is certain the users will be asked to pay for that expansion through a special surcharge. Mr Sabonge refused to give any indication of how much a 10,500 teu ship will need to pay to transit the canal, following such an expansion, but based on the new proposals it will be at least $550,000.

With the estimated cost of the expansion ranging between $4bn and $8bn, a $1m transit is becoming a distinct possibility. The ICS, says Mr Horrocks, is hopeful that the increase in canal revenues resulting from the proposed changes would at least be discounted in some way from future surcharges linked to any proposed expansion.

However, Mr Sabonge would make no commitment on future toll structures. “This process is still pending with board of directors’ approval required and then the Cabinet and the National Assembly will make their recommendations before a referendum. Then we will have more information regarding the cost and time that a project like that will take and the amount of money we need to recover from the users.”

Original Calculation: External volume of container = 8 ft x 8.5 ft x 20 ft = 1,360 cu ft. 1,360 cu ft is equivalent to 13.6 PC/UMS net tons x $2.96 (current toll charge per ton) = $40 per teu.

Formal proposal: $54 per equivalent teu* introduced in three phases as follows:

  • $42 per teu — May 1 2005
  • $49 per teu — January 2006
  • $54 per teu — January 2007

*equivalent teu figure = $40 per teu of vessel’s carrying capacity plus $14 per teu charge for non-revenue earning areas below deck previously paid for under PC/UMS system

A review of Canal Authority rate increases shows the following:

  • 1979: 29.3% increase. There had been no rate increase the two prior years, and this new rate level lasted four years, which is a 7.3% average annual rate of increase.
  • 1983: 9.8% increase. This rate level lasted six years, which is a 1.6% average annual rate of increase.
  • 1989: 9.8% increase. This rate level lasted three years, which is a 3.3% average annual rate of increase.
  • 1992: 9.9% increase. This rate level lasted five years, which is a 2.0% average annual rate of increase.
  • 1997: 8.2% increase. This rate level lasted one year, an 8.2% annual rate of increase.
  • 1998: 7.5% increase. This rate level lasted four years, which is a 1.9% annual average rate of increase.
  • 2002: 8% increase. This rate level lasted one year, which is an 8% annual average rate of increase.
  • 2003: 4.5% increase.
  • 2004: No increase. Proposal to create a 55%-88% increase depending on ship’s size and calculated on the basis of $40 per teu, rather than on the new proposed fee amount.

- The average annual rate of increase over this time period is roughly 5%.

Source: World Shipping Council

Writes Rainbow Nelson, Lloyd's List

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