Increasing congestion at West Coast ports, greater demand for predictability in the supply chain, and growing capacity constraints magnify the importance of the Panama Canal as a viable alternate route. Are global shippers and supply chain partners ready to take the all-water plunge?
In a world driven by web-based communication technologies and real-time access to information, it’s easy to forget that much of the ebb and flow of global trade relies on a construction from the Gilded Age rather than the global one.
The completion of the Panama Canal in 1914 brought to fruition an idea in the works for nearly 400 years, dating back to King Charles V’s initial interest in a shortcut to expedite the flood of riches from South America to Spain in the 1500s. Ninety years removed from its inaugural sailing, the Panama Canal’s legacy continues.
Transportation buyers are looking at the Panama Canal with an eye to the future as they reconsider the value of all-water routing, especially in the Far East/U.S. East Coast trade lane.
Increasing congestion at West Coast ports, greater demand for predictability in the supply chain, and growing capacity constraints are compelling global shippers and supply chain partners to pursue alternative routings.
The horizon is clear for the Panama Canal, Asian-origin shippers, and stateside consignees, according to Robert Blair, director of economics and policy analysis, World Shipping Council.
“As cargo volumes grow over the next two decades—and depending on how well West Coast ports, terminals, rail operations, and highway systems can accommodate that growth—more U.S. imports from Asia may move through the Panama Canal to East Coast destinations, or even on vessels that transit the Suez Canal and call on Europe before calling on the East Coast,” Blair says in a June 2004 web presentation, Perspectives from Freight Transportation Providers: Ports and Shipping.
“The normal movement of freight destined for eastern, southeastern, and central sectors of the United States has depended on freight cost and transit time needs,” says Jim McEwan, director of international freight, PBB Global Logistics, a Fort Erie, Ontario-based integrated logistics service provider.
“The past five to 10 years, however, have shown a move toward all-water sailings via the Panama Canal as a result of two main factors: congestion at West Coast ports, and increased charges for inland trucking and rail due to higher fuel costs,” McEwan says.
Roughly half the cargo moving through the ports of Long Beach and Los Angeles is destined for points east of the Rocky Mountains, notes Art Wong, spokesperson for the Port of Long Beach.
Given the heavy amount of transshipment volume inland, any delays at the ports ultimately impact available inland capacity—either via road or rail—and result in delivery delays to consignees elsewhere in the United States.
On average, ships sailing from Asia to the West Coast take about two weeks; ships going direct through the Canal to the East Coast require an additional two weeks.
The problem, however, is that West Coast shipments are increasingly compromised by port congestion, leaving supply chain partners challenged to find alternate transportation routings to prevent further delays.
Shippers first began seriously considering all-water routing direct from Asia to the East Coast following the Union Pacific/Southern Pacific railroad merger in 1997, and the congestion issues that followed, notes Mario Lopez, assistant vice president of business development for East Rutherford, N.J.-based P&O Nedlloyd Logistics.
The aftermath of Sept. 11 and the 2002 West Coast port lockout further cemented the notion that transportation reliability is equally as important as speed, especially within the framework of a global supply chain.
“All-water routing may take longer, but for shippers, it’s not always how fast, but rather how reliable the transportation is,” says Lopez. “Supply chain speed is driven by predictability.”
McEwan agrees. “Reliability should be the factor that drives more freight through the Panama Canal,” he says. “Once the volumes increase in that routing, we can expect a better balance of trade, and thereby reduce the pressure on West Coast ports.”
A shift toward using the Panama Canal during the next two to three years is likely, based on the direct requests of customers who have built the longer transit time into their supply chains, says McEwan.
In the apparel industry, timing is everything. Consumer fashion trends are as fickle as the tradewinds, while retailer demands are considerably less arbitrary.
For OshKosh B’Gosh, greater dependency on sourcing from Asia, increased congestion on the West Coast, and more stringent delivery demands from retail customers have placed a premium on the reliability of its inbound routings. As a result, the Oshkosh, Wis.-based childrens’ apparel manufacturer is considering all-water routing to the East Coast as a potential solution.
“Any interest OshKosh has in the Panama Canal is based on current West Coast congestion and the fact that we believe it will continue as we move into 2005,” says Marty Smith, director of operations for OshKosh.
Smith also acknowledges that increasing pressure from U.S. retailers for more timely shipments necessitates a different approach to how OshKosh in particular, and importers in general, handle the supply chain at point of origin.
“The bottom line is that a set period of time exists, from presentation of product to the retailer until delivery of the product,” explains Smith. “The entire cycle is dictated by the lead times of raw materials, actual production time, and transportation.”
Retailers want to buy product closer and closer to the market, which drives down the number of days from purchase to delivery. “This puts more pressure on manufacturers to reduce the cycle, and transportation disruptions or delays cannot be accepted as a long-term problem,” he adds.
In June 2004, OshKosh awarded a large chunk of its Asia-origin logistics work to APL Logistics, including consolidation of vendor shipments in nine countries in Asia, as well as a multi-country consolidation program at the 3PL’s Asia hub. The partnership with APL Logistics gives the manufacturer and retailer much greater leverage in how it manages inbound transportation to the United States.
“It’s always important for us to balance our transportation options with the needs of the marketplace and APL will be a partner in any routing revisions,” Smith adds.
By contrast, Summer Classics, a high-end patio furniture importer, has been working with Averitt Express International to manage and route shipments from Asia, some of which go through the Panama Canal.
Summer Classics serves nearly 1,000 U.S. dealers and retail outlets including Brookstone, Home Depot, Crate & Barrel, and Neiman Marcus. The company has product coming inbound from Asia through the West and East coasts.
“We source cast-aluminum furniture from Shanghai and wicker furniture from Hong Kong,” says Andy Kennedy, director of purchasing for the Montevallo, Ala.-based importer.
Recently, Summer Classics made arrangements with customers in Florida to take direct container shipments from Asia through the Panama Canal because of cost considerations.
“We pay for all the transportation costs ourselves and going through the Canal is less expensive. Customers, by and large, don’t care how a shipment gets to their store as long as it gets there when it’s supposed to,” says Kennedy.
Generally, when a Summer Classics shipment comes through the Canal, it is transshipped through the Port of Charleston via rail to the company’s facility near Birmingham. “On average, a shipment takes 37 to 40 days,” he says.
Summer Classics, which also transships product through the ports of Long Beach, Los Angeles, and Tacoma, has built enough routing options into its inbound logistics strategy that it can accommodate delays and reroute shipments accordingly. This is an important consideration for consignees and shippers, especially as it relates to business continuity and contingency planning.
Companies want a better balance of transportation options to meet the demands of the market, notes P&O Nedlloyd’s Lopez. “It is essentially a tradeoff—accepting longer transit times in exchange for predictability. The advantage comes from creating an alternative route that adds flexibility to the supply chain,” he says.
A Blueprint for the Future
To accommodate the growing needs of shippers, forwarders, and end customers, while at the same time driving more container volume, the Panama Canal Authority (ACP) is looking to build cooperative business alliances with East and Gulf Coast ports. It also plans to invest heavily in infrastructure improvements, security protocol, and intermodal connections to enhance its value proposition for the long haul.
Allying itself with U.S. ports has helped the Panama Canal harness shipper interest in all-water routings. In 2003 the ACP entered a strategic partnership with several East and Gulf Coast ports to boost trade along the all-water route.
The port authorities—which include New York/New Jersey; Norfolk, Va.; Savannah, Ga.; Charleston, S.C.; New Orleans, La.; and Houston, Texas—will work directly with the Canal to generate mutual business opportunities in five specific areas:
- Joint marketing activities designed to generate new shipping business via promotions, advertising, and public relations activities.
- Data sharing to forecast future trade flows and market trends.
- Exchange of market studies to benefit either party in future product development or business ventures.
- Sharing modernization and improvement projects that serve as a benefit to business, and spur increased demand.
- Interchange of advanced technology capabilities to spur cutting-edge programs in the shipping and maritime community.
The Port of Houston, for example, has already seen immediate returns from its alliance with the ACP. “Shippers are increasingly interested in avoiding congestion on the West Coast, while still having access to diversified services, facilities, and ample labor,” says Thomas Kornegay, executive director of the Port of Houston Authority.
Recent statistics validate the Port’s optimism. Between 1998 and 2003, containerized volume has increased from slightly more than eight million short tons to almost 12 million short tons.
The growth trend is expected to continue. Asian import and export volume nearly doubled between 2002 and 2003, from 46,330 TEUs to 81,370 TEUs. Import volume in particular nearly doubled during the same period, from 22,984 TEUs to 41,584 TEUs.
A more compelling challenge for the Canal is making the necessary infrastructure enhancements to accommodate not only increasing volume, but larger cargo vessels as well.
In 2004, the Panama Canal handled a total of 266,916,576 tons (Panama Canal/Universal measurement system), an increase of more than 10 percent from the prior year. Transits rose 6.7 percent from 13,154 in 2003 to 14,035 in 2004—of those, more than 5,000 were Panamax vessel crossings, a 12.5-percent increase over 2003.
Despite record numbers in tonnage, current structural limitations restrict cargo vessels that exceed approximately 950 feet in length and 40 feet in draft. The Canal is in the process of widening the Galliard Cut, and deepening Gatun Lake and the channels so larger ships can navigate the waterway.
“To continue operating at high levels, and to meet growing demand from the maritime industry, as well as our customers, we must modernize and expand our facilities,” says Rodolfo Sabonge, corporate planning and marketing director for the ACP.
With this in mind, the ACP conducted formal studies to develop a master plan—a long-term strategic business blueprint to determine the fundamental direction of the Canal to 2025.
Meeting Growing Demands
These studies are related to the Canal’s modernization, improvement, potential expansion, and the future of the maritime industry, including how to satisfy the growing demands of international trade, and allow for the transits of post-Panamax vessels.
“In the last few years, the ACP has invested more than $1 billion in modernizing the Canal’s infrastructure,” says Sabonge. “This includes replacing its locomotive towing fleet, upgrading 53,000 feet of tow track, increasing its tugboat fleet, widening the Gaillard Cut, and installing an enhanced vessel traffic management system that uses global positioning satellites to track vessels.”
On the security side, the Canal has implemented requirements from the International Ship and Port Facility Security Code, and received fulfillment certification from the American Bureau of Shipping to enhance compliancy among all its supply chain partners.
“Enhanced security will streamline the way the Canal works with ships and port facilities to detect and deter security threats within a standardized and consistent framework,” says Sabonge.
“Enhancements include exchanging pertinent security information, establishing methods for assessing security, and ensuring the enforcement of safety measures.
“We have implemented an Automated Data Collection System (ADCS) to send and receive data with vessels planning to transit the Canal. The ADCS substitutes data collection via paper with an electronic exchange of information between the ACP and its customers,” he adds.
In terms of safety compliance, the investments seem to be paying off. In 2004, the ACP recorded the fewest accidents in 81 years, despite an increase in traffic. The official accident rate dropped 22 percent—to 0.71 accidents per 1,000 transits in 2004, down from 0.91 accidents in 2003.
Before there was the Canal, there was the Panama Railroad, the first transcontinental railroad in the world. Today the Railroad and the Canal are mutually connected.
A vital part of the Canal’s infrastructure is the location of the two ports—Port of Balboa and Port of Colon, respectively—at the Pacific and Atlantic entrances of the waterway. Both ports are primarily dedicated to transshipment activities.
Large ships unable to utilize the Canal can move materials from ocean to ocean via rail. The system allows containers to be transloaded at port terminals and shipped over land in one hour, providing secure in-bond, port-to-port service.
This gives shippers different options for moving their cargo, including unloading part of the cargo in a Panamanian port prior to transiting the Canal, or moving it to a port on the opposite side of the Isthmus, where it can then be rerouted.
“The intermodal connections indirectly enhance the value of the Canal to shippers as it complements their operations,” says Sabonge. “As a result, some shippers use the Panamanian ports as a hub for transshipment activities within the Caribbean and South American regions.”
East Coast Transshipment
Another important indicator of the Panama Canal’s growing importance is the simple fact that ocean liners are assessing investment opportunities in new vessels and routings with East Coast ports and shippers in mind.
“In the face of current trade growth forecasts, shipping lines have to decide how much to invest in new vessels and equipment, and where to put those resources,” says the World Shipping Council’s Blair. “But those choices are closely bound to related decisions about which routes to operate, and what ports to call on.
“Decisions about investing in new equipment and new vessels, route choices, logistics services, and inland transportation are made to accommodate expected demand—particularly the demands of the line’s major customers,” he adds.
Maersk Sealand, one of the largest and oldest Canal customers, currently operates two weekly strings—the Transpacific TP3 and TP7—offering all-water service from Asia to the East Coast. The New World Alliance, which consists of APL, Hyundai Merchant Marine, and MOL, offers two fixed-day weekly services to the East Coast.
NYK also operates three strings—two direct and one indirect—between Asia and the East Coast. As customer interest in the all-water route grows, shipping lines will revamp their schedules to meet these demands.
U.S. importers are also expressing increased interest in setting up transshipment and distribution facilities on the East and Gulf coasts to facilitate cargo movement from Asia.
“Many importers in the United States are developing distribution centers along the East Coast, so we anticipate continued interest in the all-water route as a competitive alternative—even when congestion issues subside,” says Sabonge. “In the short term, we see congestion woes continuing into 2005.
“With this in mind, many U.S. importers who were unable to place their containers on vessels where services were fully booked this year, will most likely secure container slots for next year,” he adds.
The Port of Houston expects continued investment in distribution and warehousing space at its facilities. Major retailers such as RadioShack, JC Penney, and Target continue to locate major distribution facilities in the region, a fact Kornegay sees as validation that all-water routings have traction.
“The diversion of Asian ships to Houston and the Gulf Coast is not a short-term phenomenon,” he says.
PBB Global’s McEwan similarly recognizes the potential for importers to set up transshipment facilities on the East Coast as a logical next step, but says reliance on forwarders and 3PLs is a more realistic progression.
“It’s more likely that importers will outsource to integrated logistics companies,” he says. “Outsourcing gives shippers the flexibility to move freight to East or West Coast ports or inland logistics operations that are most geographically suited to their end-user demands.”
One irony of the Panama Canal’s recent success is that it has given its foremost competitor similar leverage in attracting new business. Explosive growth in Southeast Asia, especially in India and Singapore, has greatly amplified the efficiency of westbound all-water routing via the Suez Canal.
By contrast, the Suez Canal has a more advanced infrastructure and can accommodate the largest post-Panamax ships, while offering competitive sailing times to the East Coast.
Container traffic growth has similarly exposed other concerns that will ultimately need attention. Canal Waters Time (CWT), the average time it takes a ship to transit the Panama Canal, increased 17.4 percent in 2004, from 22.7 hours to 26.7 hours. This was primarily attributed to more and larger vessels navigating the waterway, as well as periodic lane closures for improvements.
Greater demand for all-water routings through the Canal will also eventually mitigate cost savings.
“The current delays at West Coast ports will not ease up in the foreseeable future, so companies are re-examining their lead time from production to delivery to incorporate the longer transit time through the all-water option, or to allow for delays at the West Coast ports,” says McEwan.
“The volume moving all-water will certainly increase, and the market demand for this routing will likely boost ocean freight costs,” he adds.
This past fall, the Canal’s peak season surcharge was extended through November, marginalizing any cost savings that might have been achieved versus going through the West Coast, notes Kennedy of Summer Classics.
These growing pains present even greater challenges for the ACP to increase capacity as volume and ship sizes continue to grow. But part of the Canal’s legacy and success has been its ability to adapt: first, as a conduit in opening up new markets during the Industrial Age, and now as a major container gateway for global trade.
It is within this continuum that Sabonge recognizes the timeliness of the Canal as it relates to globalization.
“The Canal’s geographic location makes the waterway the fastest-growing and most vital trade route in the present and foreseeable future,” he says. “It is an international resource that must be further developed to maximize potential benefits for the Canal and global trade.”
Fifty years from now, historians and logisticians may very well talk about the Panama Canal’s Golden Age within a much different context: the 21st century.