U.S. Ports Update Part 1: Expanded Panama Canal Changes the Balance

At this time last year, industry analysts were waiting to see if the Trump Administration would deliver on its promises to enhance port infrastructure. While the jury is still out on that one, the focus has now been placed on finding the customized solution for U.S. ports reliant on the Suez and newly-expanded Panama canals.

According to its latest throughput figures, the Panama Canal transited a total of 13,548 vessels during its fiscal year 2017, representing a 3.3% increase compared to totals the year before. Thanks to the larger Neopanamax vessels now able to transit the expanded Canal, the growth in traffic translated into a 22.2% increase in total annual tonnage from 2016, and helped the Panama Canal surpass the already ambitious cargo projection of reaching 399 million tons.

“These record figures reflect not only the industry’s confidence in the expanded Canal, but also illustrate our continued ability to transform the global economy and revitalize the maritime industry,” says Jorge Quijano, Panama Canal administrator.

The past year’s results also include many significant milestones. Less than eight months after inauguration of the expanded Canal, it welcomed the YM Unity containership, its 500th Neopanamax vessel transit. In March 2017, Mediterranean Shipping Company’s MSC Anzu became the 1,000th Neopanamax vessel to transit the Canal, while the September 2017 transit of the COSCO Yantian containership marked 2,000 Neopanamax transits.

After setting similar records in December 2016 and May 2017, the Neopanamax containership CMA CGM Theodore Roosevelt became the largest ship to transit the Canal to date in August 2017, carrying nearly 15,000 twenty-foot equivalent units (TEUs). From there, the vessel called the Port of New York and New Jersey for the inauguration of the raised Bayonne Bridge.

Changing scenario

Several other ports along the U.S. East Coast have since announced significant increases in container throughput in 2017. Some even set year-on-year growth records in the total amount of tonnage received—all of which can be directly attributed to the widening of the Panama Canal.

“Other ports recently completed or are continuing to advance a number of infrastructure projects that will allow them to receive Neopanamax ships as well,” observes Quijano.

The Panama Canal currently serves 29 major liner services, including 15 Neopanamax liner services, primarily on the U.S. East Coast to Asia trade route. Chris Rogers, an analyst with the global trade consultancy Panjiva, notes that the diversion of Asian-inbound traffic from U.S. West Coast ports to those on the East Coast “took a step forward” last September.

“Our data shows shipments to Southeast ports increased by 26.9 % on a year earlier, while those to California increased by a more modest 7.7 %,” says Rogers. As a consequence, in the third quarter, Southeast ports handled 15.8 % of incoming traffic—the highest since February—while California’s handled 54.6%, down from a peak of 55.5% in May.

“The battle for market share between the two Canals continues,” says Rogers. “Most recently, Panama has announced additional Neopanamax slots and slot sharing across ocean carrier alliances.”

West Coast ports, meanwhile, are hoping that the new generation of “mega vessels” will restore their throughput this year. In a recent report developed by McKinsey & Company, “Container Shipping: The Next 50 Years,” analysts say that might not be such a bad bet.

“On balance, we don’t view 20,000 TEUs as the natural end point for container ships,” says McKinsey partner John Murnane. “In fact, 50,000-TEU ships aren’t unthinkable in the next half-century.”

However, Murnane adds that progress will probably be much slower than it was in the past decade, as overcapacity means that new ordering will be slower over the next five to ten years. Lower slot costs materialize only when demand fills up larger ships, which hasn’t happened recently.

“But if demand catches up with supply, as it may well do in the early 2020s, the logic of scale will once again drive orders for bigger and bigger ships,” says Murnane. “Nonetheless, since 40% of all shipyard capacity is unutilized, and it’s not conceivable that governments will allow shipyard bankruptcies on a large scale, they could find a way to prompt some level of new ordering.”

Infrastructure question marks

While some ports seek investment funds for a surge in Neopanamax traffic, and others look to upgrade their mega-vessel facilities, the question of where this money will come from remains unanswered.

In reviewing the details announced in President Trump’s fiscal 2018 budget request, the American Association of Port Authorities (AAPA) sees declines for most federally funded, port-related programs.

“The port industry has identified a need of $66 billion in federal investments to port-related infrastructure over that next decade,” says the association’s president and CEO Kurt Nagle. He adds that U.S. ports and their private sector partners plan to invest $155 billion over the next five years alone in port facility infrastructure, and it’s vital that supporting federal investments be made, primarily to improve the waterside and landside connections.

“While encouraged by the prospect of a sizable infrastructure investment program being considered, we’re concerned about the significant reductions proposed for fiscal 2018 in many of the programs critically important to ports, such as TIGER [Transportation Investment Generating Economic Recovery] discretionary grants, HMTF [Harbor Maintenance Trust Fund] outlays, port security grants, and assistance in reducing diesel emissions,” says Nagle.

The AAPA maintains that activities at U.S. seaports account for more than a quarter of the nation’s economy, support over 23 million American jobs and generate more than $321 billion a year in federal, state and local tax revenue.

Among the budget proposals for 2018 is eliminating the U.S. Department of Transportation’s TIGER grants program, which last year awarded U.S. ports $61.8 million in multimodal infrastructure grants such as dock, rail and road improvements. Additionally, the Department of Homeland Security’s Port Security Grant Program, which Congress last funded at $100 million and provided 35 port security-related grants in fiscal 2017, would see funding reduced to $47.8 million—a 52% cut.

All of this gives the AAPA cause for concern.

“As the fiscal 2018 budget process and the anticipated infrastructure initiative moves forward, it’s vital that significant federal investments be made in port-related infrastructure,” says Nagle. “Such investments will pay huge dividends in terms of our international competitiveness, economic growth, American jobs and federal tax revenues.”