Chasing The Horizon: Countdown to Panama Canal Expansion
As the Panama Canal celebrates its centennial, it has the "divided" attention of countless U.S. and global interests hoping to share in its fortunes.
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In the eight years since Panamanians passed a referendum to modernize the Panama Canal, there has been endless speculation about how an early 20th-century engineering marvel might shake up the future of global trade. The addition of a third set of locks, and further deepening along the waterway, will increase vessel capacity from 4,500 to 14,000 TEUs while allowing another 2,000 transits annually—in effect turning the spigot on trade flows moving between the Pacific and Atlantic oceans.
The end game for U.S. shippers and consignees is nebulous at best. But a number of current trends and trade dynamics add new color to the Panama question. Recurring labor strife on the West Coast, congestion concerns, equipment shortages, a sluggish ocean shipping industry, and nearshoring pose different quandaries.
"The Panama Canal situation has existed for some time," says Curtis Foltz, executive director of the Georgia Ports Authority. "Many shippers have diverted incremental freight to the East Coast as risk mitigation against the congestion issues and labor contract discussions at West Coast ports. Clearly, shippers are concerned about capacity in the short and long term."
The enduring impact of a widened Panama Canal has shippers gazing into their magic eight balls for answers. One year from its grand re-opening, the Panama Canal question is likely to elicit a hedged response: "Reply hazy, ask again later."
East Coast Renaissance
Today, the Panama Canal is buzzing with activity. Apart from the normal flow of ships in transit, construction activity is rampant at either end of the 50-mile ribbon of water. Cranes span the horizon at the new Gatun Locks. Waiting in the lake, a few containerships bide their time before making their scheduled crossings.
What's happening at the Gatun and Miraflores Locks in Panama is a microcosm of the upswell in port infrastructure investment throughout the Americas, but especially on the U.S. East Coast. The Port Authority of New York and New Jersey is in the middle of a $1-billion project to raise the Bayonne Bridge so it can accommodate the larger, new Panamax vessels. In Savannah, the Georgia Ports Authority and the Army Corps of Engineers have commenced dredging the port channel to 47 feet. PortMiami has completed a $1-billion tunnel beneath Biscayne Bay that connects the port to the Interstate, thereby circumventing downtown congestion. Dredging is ongoing—everywhere.
The Port of Baltimore is already deep enough to handle new Panamax vessels. So it is focused on improving terminal velocity—increasing gate truck lanes, creating a "back gate" to handle empty containers, expanding its fleet of RTG cranes, and investing $10 million to improve the terminal's main access road.
"We expect to see additional steamship lines, especially with our carriers' new alliance members," says Richard Powers, director of marketing for the Maryland Ports Administration. "They will bring new ports of origin and trade partners."
The sheer scope of investment and development from south to north is testament enough of the Panama Canal's effect. East and Gulf Coast ports, and their private sector partners, are expected to invest nearly $30 billion between 2012 and 2016, according to the American Association of Port Authorities. West Coast ports will contribute another $15 billion.
"If the canal was not being expanded would there be a less-compelling argument to spend money on deepening harbors? Yes. The canal justifies the investment," says Bill Rooney, vice president of trans-pacific seafreight at global third-party logistics provider Kuehne & Nagel.
Larger ships transiting the canal carry greater economies of scale. East Coast ports need to be able to accommodate 8,000 to 10,000 TEUs ships, then expedite transloading on and off port.
"It changes the economics of getting a box from Asia to the East Coast in a certain time," adds Rooney. "Coming through the Suez extends transits east of Singapore and Hong Kong. If shippers have the ability to move bigger ships, Panama to East Coast transit times are more attractive because they can deliver at a lower cost."
How trade flows adapt to a surge in volume through the Panama Canal has implications far beyond the Americas. The ocean freight industry has been awash in uncertainty the past several years. A global recession and capacity surplus has created unwieldy trade imbalances and underutilized assets, forcing industry to make some bold turns. Many carriers have idled vessels to artificially constrain supply, divested chassis ownership, found alliance partners to share capacity, reconsidered port calls, and identified new growth markets.
Changing global economics have an impact as well. China is no longer the low-cost manufacturing magnet it once was. Production is migrating into Southeast Asia. Reshoring is bringing manufacturing capacity back to the Americas. Even Africa is beginning to show signs of progress.
While the Suez trade has dominated freight flows the past few years, the Panama Canal's expansion will free up capacity and push trade patterns—to the point that even ports in the United Kingdom expect to feel the pulse of new demands.
"It lifts the lid on some opportunities, especially for Liverpool's future," notes David Appleton, principal container shipping advisor to Peel Ports.
"The same goes for the north-south trade. MSC, for example, is running 12,000-TEU ships in South Africa and coming up into northern Europe and the Americas. Bigger ships—9,000-TEU, shallow draft vessels—are going into South American ports. They will be able to go through Panama in the future; they can't today," he adds.
The Port of Liverpool, which is owned by Peel Ports, is in the midst of a major redevelopment project—Liverpool2, which will deepen the Mersey channel, and add a new container terminal with berthing capacity for two new Panamax vessels. Come 2015, the port will be able to accommodate 13,500-TEU ships—triple the size of what currently transits the Panama Canal.
Larger 8,000- to 10,000-TEU ships coming out of the Asia-Europe trade are slowly displacing Panamax vessels. Atlantic-served ports can't handle them now. But that will change.
"Carriers have to look at deployments in the Transpacific and Asia-Europe-Atlantic as separate entities. Once Panama widens, they can more easily homogenize vessel sizes and rationalize deployments," explains Appleton.
"Carriers can implement end-to-end pendulum services that were constrained by 4,500-TEU Panamax ships and became too expensive to operate," he adds. "Round-the-world services become viable again. That was Evergreen's business model for 20 years. Then ships became too big. Now, shipping lines can make these services possible."
Closer to home, similar permutations are percolating as ports ready for a cascade of new Panamax containerships coming through the canal. Consider Georgia Ports Authority's current trade portfolio: 65 percent of its inbound container volume comes all-water from Asia. Upwards of 35 percent is through the Suez versus 30 percent from Panama.
"The Suez has become dominant because of the Panama Canal's Asia limitations," explains Foltz. "It has been Georgia's fastest-growing trade route the past few years. But that will turn once the canal expands."
Strapped to reduce operational costs, steamship lines have been shuffling Asia-U.S. East Coast all-water services from the Panama Canal to the Suez Canal over the past few years. In 2013, Maersk notably made the switch, asserting that it was all about economics. If an ocean carrier can double the number of containers on a vessel through the Suez—from 4,500 to 9,000 TEUs—that means it needs fewer ships in the service. Fewer tolls. Less fuel. It makes business sense.
Sailing times are slightly longer (by days, depending on origin) and tolls marginally more expensive via the Suez. When the Panama Canal can accommodate larger vessels, the economics will balance out.
APL, for example, is closely monitoring the cost position of the Panama route. It will base any decision regarding future deployments via the expanded canal on costs necessary to meet demand, as well as potential collaboration opportunities with partners.
"As containerships get larger, port calls in a service rotation tend to be more selective," notes an APL spokesperson. "Terminals must be able to handle high cargo density and move count, offer transshipment capabilities, and be geared to in gate/out gate containers to intermodal connections via rail or truck efficiently."
From a shipper perspective, Foltz identifies two scenarios that are likely to unfold.
"First, freight coming out of Hong Kong and mainland China has artificially migrated to the Suez because of economies of scale with larger ships that are coming to the East Coast," Foltz says. "Once the Panama Canal expands, that volume will revert back to the Panama-serviced route.
"Secondly, the canal will gain market share via intermodal freight that's currently moving from the U.S. West Coast to the East Coast," he adds.
Powers agrees that more cost-effective East Coast service will alter the current paradigm.
"With more cargo coming directly to the east, shipping patterns will change, specifically cargo shifting from West Coast discharge," says a spokesperson for the Maryland Ports Administration.
A claw back situation is plausible, given that Suez transits to the East Coast are marginally longer. But that also presumes rates will remain competitive. As a result of cost overruns that delayed construction earlier in 2014, the Panama Canal Authority will increase tolls to offset a final bill that could top $7 billion.
The bigger unknown is how much volume East Coast ports can realistically expect to siphon from the West Coast intermodal land bridge. That will depend on how carriers and railroads respond in terms of setting rates.
"The Panama Canal has a new mousetrap," says Rooney. "Bigger ships allow for better cargo economics, which drives more volume in that direction. But it opens new questions into how other actors respond to that. Because they will."
West Coast ports haven't been sitting idly by—even if labor negotiations have stalled. The Port of Los Angeles announced plans early in 2014 to invest $3 billion in infrastructure enhancements over the next decade. Officials say it's part of a long-term growth initiative, but it's hard to imagine the Panama Canal hasn't hastened the cause.
"In the short term, disruptions in Los Angeles and Long Beach put shippers in the position to ship where they can via East or West Coast ports," says Rooney. "But what about the long-term effect? Will the share of cargo shipped to the East Coast increase relative to the West Coast?"
It's not as if U.S. shippers and consignees haven't faced similar questions before. The 2002 West Coast ports lockout catalyzed short-term interest in all-water sailings from Asia to the U.S. East Coast. Continuing congestion through the 2000s similarly fed that value proposition. But the shift has never been sustaining.
Rooney suspects East Coast ports will capture some of that market share. "The combination of better economics through the Panama Canal and West Coast problems may have a lasting impression," he says.
Gulf Coast Heats Up
Consensus is also building that Gulf Coast ports could play a bigger role. Houston and New Orleans are the top two U.S. ports in terms of tonnage, largely due to oil, gas, and chemical business. They have ample opportunity and incentive to diversify commodity mix and grow container volumes. Releasing product directly into the U.S. heartland, which offers excellent rail connectivity, might sway shippers who are also contending with truck capacity problems.
"The Gulf has always been problematic for carriers because they couldn't serve both East and Gulf coasts. Or the Gulf didn't have enough cargo to justify a dedicated string of ships. Now distribution centers are opening up in Houston," says Rooney.
"Then there's Mobile, Ala., which may have a future serving parts of the country that run from the Gulf Coast through the car manufacturing belt in the Southeast," he adds. "Mobile can become a reasonable option for that part of the country."
The railroads are another wild card. The Panama Canal now becomes competition.
"For West Coast shippers who have a long-term contract with Union Pacific, and own a terminal, all-water through the Panama Canal is not a good idea. My guess is the railroads aren't in favor of it either," says Appleton.
How railroads react on the rate front could impact decisions. Will they remain focused on the lucrative business coming out of the ground in the upper Midwest in lieu of intermodal? Despite the current labor environment, chassis shortages, and recurring congestion, the West Coast has the advantage of rail infrastructure and network density. Odds are, railroads will respond to the extent they need to. That's how markets work.
The Final Countdown
Whether East Coast ports will experience a sea-change shift in the size of vessels coming through the canal is an open question, but an intriguing one. Carriers that put 10,000-TEU vessels into service will be looking for ports that can accommodate the necessary draft, as well as the freight volume that needs to be transloaded. The alternative is more transshipment activity farther afield, and feeder services delivering to port.
Foltz strongly believes redistribution will happen when product hits the port, as it does today, not at a transshipment hub. Too much critical mass and volume come up the eastern seaboard for anything to replace direct port calls.
"The freight will come to us," Foltz says. "I don't see the trade being dominated by ships that come in and transship cargo in Panama or other transshipment hubs in the Caribbean, then feeder that cargo to the main centers on the eastern seaboard.
"The trade can't take the incremental cost of handling containers, nor will commerce accept the delay," he adds. "The main hub and service requirements into the Northeast, Mid-Atlantic, and Southeast will continue to be served directly with mainline ships from Asia."
Foltz does allow for an increase in cargo being transshipped in Panama and other Caribbean hubs, but that will be for the balance of Latin America.
Naturally, opinions diverge. There's some accord in Panama, for example, that the country's ports can become a major transshipment hub for freight moving throughout the Americas. Colon is Latin America's largest container port in terms of volume—85 percent of its throughput is transshipment.
Speculation surrounds U.S. big-box retailers considering using Panama as a distribution hub to replenish inventory weekly. The country is a seven- and eight-day sail from New York and Los Angeles respectively, and three days from Miami.
For East Coast ports and shippers, the Panama Canal value proposition also assumes a significant surge in volume. That's far from assured, given that U.S. imports from Asia aren't as robust as they were several years ago. Reshoring to the United States, Mexico, and Brazil will further erode some of that trade. There's also more competition—from Canada and Mexico, notably—as well as other U.S. ports. How many winners can there be?
West Coast optimism that larger Panamax ships will become a common visage is also speculative. Currently, the largest vessels coming on line are being deployed in the Asia-Europe trade. That's unlikely to change. Given the East Coast port renaissance, will there be enough volume to go around for West Coast ports to see larger vessels?
Despite the many unanswered questions, one thing is clear: significant change is happening at ports across the United States as the silhouettes of 10,000-TEU-plus behemoths loom on the horizon. Investments in much-needed infrastructure have been massive. That's a win for U.S. business, regardless of how the Panama Canal question plays out.