Panama Canal: Shippers may have to curb their enthusiasm

Following labor disruptions on the U.S. West Coast in late 2014 and early 2015, as well as less dramatic port congestion issues in Europe and Asia, delays to containerized cargo movement have been a subject of understandable interest. Shippers have been lead to believe that the pending expansion of the Panama Canal will increase velocity while providing them with more vessel deployment options in their supply chains.

Not so fast, caution industry analysts, who note that shippers should consider that clear incremental spending will be moving in a timeline along with inventory carrying costs.

“Ocean cargo flowing through the Canal can take from 10 days to 20 days longer, generally, than using rail from the West Coast,” says John Morris, leader of industrial services for the Americas at commercial real estate firm Cushman and Wakefield. “Those extra weeks—especially for high-end luxury and electronic goods—represent additional expense. This can mean lost sales from limited store shelf.”

Furthermore, says Morris, West Coast ports can protect market share by improving their overall productivity—especially now that dockworkers finally have a new contract. “Generally, these ports have a distinct geographic advantage,” he says, “but some are more efficient than others. Market share within this context will be a relative measure of overall performance.”

And while the congestion problems of 2014 were especially acute on the West Coast, analysts observe that no U.S. port is invulnerable to this crisis. The Port of New York/New Jersey, for example, was backed up during Peak Season due to a sudden shift in redeployed vessels from the trans-Pacific. The Port of Virginia, meanwhile, was not prepared for violent weather-related events that snarled terminal operations.

“Unexpected surges in cargo volumes can be a problem,” says Chris Koch, president of the World Shipping Council, “especially if efficiency standards at terminals are inconsistent. Vessel operators may also have poor cargo stowage planning, and may not keep a reliable sailing schedule.”

As a consequence of the “hyper-globalization” of trade over the past two decades, ocean shipping costs have been dramatically reduced, notes Michael Nacht, a professor of public policy at the University of California at Berkeley. He predicts that this trend will continue, and that widening of the Panama Canal can be viewed within the “past-is-prologue” paradigm.

“Balance sheet investments by ocean carriers in bigger, faster, more fuel-efficient ships, new infrastructure investments by ports, newly completed intermodal rail investments, and continued exploitation by all of IT and mobile communication advancements will continue the long run in secular decline in shipping costs,” says Nacht. “But absent a significant increase in trade volume, this cost decline will be accompanied by potentially lower profit margins, lower revenues, or both, for all participants in the supply chain.”

At the same time, maintains Nacht, the canal expansion is likely to have a significant—and perhaps even a surprising—impact on global trading patterns. But forecasting short-term and medium-term timing is “uncertain” because of the complexity of shifting operational and pricing strategies by numerous players seeking competitive advantage.

“Most key players are studying their options intensively to optimize their financial returns,” he concludes.

Environmental impact
James Corbett, a professor at the University of Delaware School of Marine Science and Policy, says that health concerns may also figure into the development and that the new canal does not represent a “win-win situation.”

“To evaluate environmental impacts of these infrastructural enhancements, one must first look to emissions at the ports, starting with the ships themselves,” says Corbett. “Ships burn bunker fuel—a thick, high-sulfur by-product of traditional fuel-oil refining—and are large contributors to air pollution throughout the world, and especially in port communities.”

Another concern for expanding ports is the increased truck traffic that will result from larger ports, bigger ships, and a higher volume of containers, Corbett says. After leaving a port, each container has to be transferred to a diesel-fueled truck or a train powered by up to four diesel-fueled locomotives to move the cargo to inland destinations.

In a recent study, Corbett and colleagues analyzed various scenarios on what might happen to emissions of greenhouse gases and other pollutants if significant amounts of West Coast imports are shifted to East Coast and Gulf ports. “We considered cargo travel from West Coast ports to other parts of the country via truck and train, as well as via larger ships going through the canal to the Atlantic,” he says.

The research team concluded that while there are some reductions in carbon dioxide emissions on a per-container basis for larger ships going through the Panama Canal, the reductions were nearly negated by the longer distances the ships had to travel.

Looking on the bright side
However, these caveats have not dampened the bullish outlooks of many port authorities on the U.S. East Coast and Gulf.

The Port of New York/New Jersey, for example, is deepening its harbor for 45 feet to 50 feet and elevating the Bayonne Bridge from 151 feet to 215 feet to accommodate the new generation of post-Panamax vessels by 2017. The “niche” Port of Philadelphia, meanwhile, is on the same deadline to deepen the navigational channel in the Delaware River from 40 feet to 45 feet.

The Port of Charleston is looking at 2019 as the year its harbor deepens from 45 feet to 52 feet, while it continues to post record inbound carrier calls in the meantime. Baltimore and Norfolk already have the deep water to handle mega vessels, and the Port of Savannah hopes to complete its dredging operations by 2017.

But analysts say that the major container ports in Florida—the nation’s third most populous state—are threatening to capture mega-vessel market share once their dredging efforts are completed.

This month, the Port of Miami hopes to complete its “Deep Dredge Project,” increasing the depth of its main harbor channel from 42 feet to 50 feet, thereby becoming the only major logistics hub south of Virginia capable of handling fully laden post-Panamax vessels. “This represents a major milestone for not only the port and Miami-Dade County, but for all of Florida,” says Miami Mayor Carlos Gimenez. “We all will benefit from increased trade opportunities once the expanded Panama Canal opens in 2016.”

More than $1 billion of capital infrastructure projects are currently transforming the port areas in Miami. Already in place are new super post-Panamax gantry cranes that can service cargo vessels up to 22 containers wide with up to nine containers above deck and 11 containers below. There’s also new on-dock intermodal rail service from the port to 71 percent of the U.S. population in four days or less, and a new tunnel linking Miami directly to the U.S. Interstate Highway System.

Game-changer for Gulf?
While several major East Coast container ports stand to attract more inbound capacity next year, industry analysts are quick to point out that there’s an outbound story to be told as well that will benefit the Gulf Coast gateways.

Marianela Dengo, an analyst with the Panama Canal Authority, observes that trade will open up on the East Coast of South America, particularly Brazil, which is an important emerging market. “The Panama Canal expansion impact will be felt in several market segments,” she says. “Grain, the second most important commodity to go through the waterway, will also benefit, as the expansion will facilitate the flow of grains originating in the U.S. Midwest heading to South America and Asia.”

Annually, around 40 million metric tons of grains—particularly soybeans, corn, and sorghum—move in barges through the Mississippi River to ports in the Gulf Coast where they are loaded into dry bulkers that reach Asian markets via the Panama Canal. The expanded canal, adds Dengo, will allow for the transportation of grains in vessels of around 100,000-deadweight tonnage, generating economies of scale in shipping.

Walter Kemmsies, chief economist at port and infrastructure consulting firm Moffatt and Nichol, says that the canal expansion should help agricultural shippers in Texas reach new markets in Latin America. “Project cargo, bulk, and breakbulk vessels are also getting bigger,” he says, “and they can profit by the new development just as super-sized container vessels.”

Furthermore, Kemmsies adds, the development of Interstate 69 down to Houston will make it faster and more cost effective for some shippers to truck their goods to Houston, rather than ship them cross-country to Long Beach.

Ricky Kunz, managing director at the Port of Houston, says that the port is investing $275 million for various capital projects this year in preparation for these changes. “Approximately $184 million will be allocated to our container terminals for continuing development of Bayport and modernization at Barbours Cut,” he says, “and another $35 million is geared towards improvements at the general cargo and bulk terminals in the Turning Basin area.”

The remaining 2015 capital budget funds, adds Kunz, will be used for railroad improvements, channel development, port security, building renovations and information technology.

For West Coast ports, meanwhile, the expanded Canal may be “a wake-up call,” says Peter Friedmann, executive director of the Agriculture Transportation Coalition.

“Many supply chains were reconfigured last year due to Pacific Rim gridlock issues,” says Friedmann. “The new development in Panama may only make that a more viable option in the future.”