Australia's iron ore exporters are going to have to start dealing quite soon with the implications of the upgrade to the Panama Canal.
As if Australia's iron ore exporters didn't have enough excitement looming with the minerals resources rent tax, a new set of locks at each end and a dredging program in the Gatun Lake that makes up much of the 80 kilometers canal will allow significantly heavier ships to pass through than the current Panamax size.
Panamax is a definition of what are effectively middle sized carriers with a maximum deadweight of around 80,000 tonnes and a maximum carrying capacity of around 52,000 tonnes. That's been creeping up in recent years as ship design has become more sophisticated, but that's just a bit over half the size of the Capesize bulk carriers that look after most of the world's seaborne iron ore and coal trade, and which are now anchored outside Australia's east coast coal ports in large numbers.
The upgrade won't happen straight away; the 5 year USD 5.25 billion contract won't be complete until 2015, but corporates must already be planning for the consequences. It's not exactly clear how big the ships will be in tonnage terms, but the bigger ones will be the same size as some of the smaller Capesize bulk carriers currently working the Australia and China trade.
To give you some examples, the existing Panama locks allow ships up to 294 meters long with a maximum draft of 12.5 meters. The upgraded canal with its much bigger locks will take ships up to 366 meters long with a draft of 18.3 meters. The lake's also been dredged and will have its surface lifted by 1.5 meters, not least because ships sit lower in fresh water than they do in denser salt water. It's the draft that is particularly important in calculating capacity increases, and the planners are catering for 46% increase in maximum draft.
That bigger capacity will accept a good number of Capesize ships, which will therefore at least double the size of the cargoes that Vale and other Atlantic based producers can send straight through to China. Bear in mind that while Australia enjoys a geographical advantage over Brazil as an iron ore supplier to Asia, Vale's iron ore is of slightly higher quality, so competition to ship ore into China is going to heat up.
The biggest ships will still have to go the long way round from Brazil past Cape Town and the Cape of Good Hope. It takes around 46 days for a ship to travel from Brazil to China around Africa, the usual route, which is about a week longer than using Panama. The upgrade would mean an iron ore cargo of close to 100,000 tonnes from Vale's loaders in the south Atlantic could go straight through the upgraded canal to a Chinese port.
Shipping's only a part of the iron ore business and different producers have different arrangements, some leaving it entirely up to the buyer to arrange shipping but any overview of the industry has to include shipping cost, and in that instance our exporters will have lost a comparative advantage. But a Panama upgrade is not all bad news for Australia. Most of the drive to raise the canal's capacity has come from the container ship industry, which measures capacity not in tonnes but in TEUs. The imperial measurement system dies slowly in the shipping business and that's the length of your standard shipping container.
Shipping sources said that the Panama upgrade will almost triple the maximum capacity of the container ships or box boats using it from 5000 TEUs to around 12,000 or 13,000 TEUs.
Another thought is that Australian mining companies don't only export from Australia. For instance, Rio's so far undeveloped Simandou iron ore deposit in the West African state of Guinea would greatly benefit from the Panama upgrade, given that the major buyers are in the Pacific.
BHP Billiton, meanwhile, owns a one third share in the world's biggest open cut coalmine at Cerrejon, which is on the Atlantic side of Colombia. Any increase in the size of ships servicing the China trade via the canal will have a double whammy benefit in terms of not only reducing unit transport costs, but also getting what's historically been a higher price for the coal than that offered in Europe, which is actually much closer.
And there a raft of other elements of bulk and container trade those Australian companies are involved in such as the containerized high quality wheat trade into Europe that would also enjoy the economies of scale being offered by the upgrade. And how about the bigger size of passenger liners that will now be able to come through the canal en route to Pacific destinations including Australia? Suddenly the arithmetic is starting to look like a boost to trade all round. We just have to be ready for it.
(Sourced from www.theaustralian.com.au)
