Panama Canal Expansion

Recent History

More than 14,000 ships, carrying roughly 300 million tons of cargo, pass through the Panama Canal every year. Since the late 1960s, the number of annual transits has plateaued near the maximum capacity of 14,000-15,000 ships, while tonnage has tripled from roughly 100 million  tons to over 300 million  tons today. Rising fuel prices and rapidly growing international trade has necessitated ever larger vessels to achieve greater economies of scale. Panamax vessels - so named because they maximize the space in the Canal's locks - are currently the largest ships capable of transiting the Canal with a cargo capacity of 4,500 TEU.² Once the expansion project is completed, the Canal's larger locks and deeper channels will accommodate "Post Panamax" container vessels up to 14,000 TEU.

The container segment, despite hitting five-year lows in total volume during fiscal 2010, remains the most important segment for the Canal at 35% of 2010's total volume. Container volume remained depressed in fiscal 2010 due to still sluggish global trade. The Canal's second most important segment is dry bulk at 24% of 2010's total tonnage. Dry bulk was the fastest growing segment in 2010. Combined, these two segments represented roughly 59% of the Canal's total 2010 volume.

Source: Panama Canal 2010 Annual Report

According to a 2008 study, 70% of the Canal's $100 billion in containerized cargo is destined for, or coming from, U.S. ports.³ Containerized cargo from Asia to the U.S. East Coast is the Canal's primary service route, representing roughly 40% of the Canal's 2010 total tonnage.⁴

Panamax class vessels represented 49.5% of the Canal's total oceangoing transits in 2010. In 2000, 85% of the world's container fleet was composed of Panamax-sized ships and below. However, by 2010, this number had shrunk to 60% and is expected to continue shrinking as the shipping industry transitions to larger, Post Panamax vessels.

Implications

The Canal's primary competitors for its flagship containerized cargo route, Asia to the U.S. East Coast, are the U.S. intermodal rail system and the Suez Canal. Using the U.S. rail system, goods are shipped from Asia to West Coast ports (primarily LA/Long Beach, Seattle/Tacoma, and Oakland), loaded onto rail cars, and shipped to their destination city. According to a study by the United States Department of Agriculture, this route accounts for 75% of total Asian imports and takes an average of 18.3 days to reach the East Coast (12.3 days from Asia to the U.S. West Coast and six days from the West to the East Coast on rail).⁵ The Asia-Panama Canal-U.S. East Coast route takes approximately 21.6 days and accounts for 19% of Asian imports. While cargo may take several days longer to reach the East Coast using this route, shipping costs are generally less. The Asia-Suez Canal-U.S. East Coast route takes approximately 21.1 days and accounts for 6% of Asian imports. The Suez Canal route is primarily used by South East Asian nations such as Vietnam, Thailand, and the Philippines, to ship goods to the U.S. East Coast.

The Canal's expansion will reduce shipping costs by decreasing congestion and allowing larger volumes of goods to transit the Canal. During 2010, the average Canal Waters Time (CWT) – total time spent waiting and transiting the Canal – was 21.1 hours (9.4 hours transiting and 11.7 hours waiting), which was an improvement from 23.1 hours in 2009.⁶ Vessels with reservations averaged a CWT of 13.3 hours, and non-booked vessels averaged 24.7 hours. However, several years ago before the recession hit, waiting times were sometimes as long as 10 days for vessels without transit reservations.⁷ In addition to decreased wait times, the capability to handle much larger vessels and achieve greater economies of scale is expected to further reduce shipping costs.

The potential cost savings for shippers will expand the Canal's area of influence. For containerized cargo in the U.S., the Canal's area of influence - the area where it becomes more cost effective to ship goods using the Canal rather than another route - will likely expand from the coastal states to areas as far inland as Chicago. East Coast railroads have been investing in their intermodal networks in anticipation of increased traffic that may come at the expense of the more crowded West Coast ports and railroads. For example, Norfolk Southern⁸ recently completed its Heartland Corridor project, which dramatically increased its capacity for intermodal traffic and reduced transit times between Norfolk, Virginia and Chicago.

It's not yet clear exactly how or which East Coast ports will benefit from increased container traffic. Currently there appears to be only three U.S. East Coast ports that will be capable of accepting the larger, Post Panamax container ships in 2014: New York, Norfolk, and Miami. These ports will almost certainly benefit from increased container traffic. However, it would be inefficient and costly for the Post Panamax vessels to stop at multiple ports (i.e., Asia to Miami, Norfolk, and New York). Thus, it seems likely that shipping lines will develop some sort of hub and spoke shipping system to serve smaller ports. For example, Post Panamax ships from Asia would unload at an East Coast hub where the cargo is then divided and loaded onto smaller ships serving regional spurs to the Gulf of Mexico, Southeast, and Northeast. Currently, three ports make sense as hubs: Miami (the closest deepwater U.S. port to the Canal), Freeport Harbour in the Bahamas, and Kingston, Jamaica. All three ports are undergoing, or have recently undergone, expansions in preparation for 2014.

Outside of containers, dry bulk shipments through the Canal should also increase with the Canal's new ability to handle vessels with deeper draft requirements. Grain from the U.S. Midwest represents much of the Canal's current dry bulk traffic. U.S. coal shipments through the Canal are expected to increase as well. Asian coal demand is growing rapidly while local supplies are constrained. The Canal may become one possible solution to Asia's coal needs, especially if proposed U.S. West Coast ports fail to materialize. Colombian coal headed to Asia, Chile, and Mexico will become more competitive as well. Venezuelan iron ore shipments may also benefit. The expansion will also allow larger liquid bulk vessels to transit the Canal. This could prove advantageous to Ecuador if their crude oil shipments to the U.S. become more competitive. Venezuela may develop a deeper trade relationship with China if the cost of exporting their crude to Asia becomes more competitive.

The Panama Canal, already recognized as a wonder of the modern world, is doubling in size. The project is massive enough to recalibrate key variables in the international shipping equation and change the playing field for global trade. Its impact on economic growth within the Americas will be felt for the next decade or two. Clearly, there will be both winners and losers. Long-term investors should take actions to minimize risks and take advantage of opportunities by considering the total potential impact of such changes in 2014 and beyond.

(http://www.saturna.com/sextantnewsletter/20111003.shtml)

Introduction of Panama Canal Expansion

The Panama Canal expansion project (Third Set of Locks Project) is to enlarge the capacity of the Panama Canal by creating a new lane of traffic. Panama has spent over 5 billion US dollars to widen and dredge the Panama Canal to support a new class of supersized cargo ships. After that, it will allow more and larger ships to transit in the canal. The expanded Canal will open in 2015.

The project will:

• Build two new locks, one each on the Atlantic and Pacific sides. Each will have three chambers with water-saving basins.
• Excavate new channels to the new locks.
• Widen and deepen existing channels.
• Raise the maximum operating level of Gatun Lake.

1.Deepening and widening of the Atlantic entrance channel.

2.New approach channel for the Atlantic Post-Panamax locks.

3.Atlantic Post-Panamax locks with 3 water saving basins per lock chamber.

4.Raise the maximum Gatun lake operating water level.

5.Widening and deepening of the navigational channel of the Gatun lake and the Culebra Cut.

6.New approach channel for the Pacific Post-Panamax locks.

7.Pacific Post-Panamax locks with 3 water saving basins per lock chamber.

8.Deepening and widening of the Pacific entrance channel.

http://www.oil-electric.com/2011/08/panama-canal-expansion.html

Logistics Impacts From Widening The Panama Canal

The North America to Asia trade lanes have mainly relied on the Ports of Los Angeles and Long Beach.  Then intermodal shipments via rail and truck have brought a high proportion of this cargo to the Midwest and East Coast.  But now, a higher proportion of freight can start to flow to East Coast and Gulf ports.   In fact, this is already happening:  Colliers International reported that “for the first time since World War II, the East Coast surpassed the West in container traffic growth.  Eastern ports saw traffic grow by 5.5 percent in Q1 2012 over the same quarter in 2011, as compared with 3.0 percent in the Western ports.”  And that trend is expected to accelerate once the widened canal is open.

It will allow for lower cost shipments to the East Coast, allow large retailers and manufacturers to start to reconfigure their network of factories and distribution centers so that more inventory can be stored closer to East Coast population centers, will help them with their Green scorecards (big ships have a smaller CO2 footprint per load), and provides their supply chains more flexibility and resiliency (the big West Coast ports and the Intermodal facility in Chicago can become congested choke points).

As large companies seek to rebalance their supply chain network, where they can position new warehouses will depend in part on theinvestments of major railroads to improve their intermodal capabilities. And of course, companies themselves do not reposition company owned warehouses quickly or easily.

Many ports will not get the funding they need to become Pananmax ready. The Boston Globe wrote an editorial favoring expansion of the Port of Boston, but admitted the ROI of these investments was far from an “easy sell.”

West Coast port economics are also improving – Four East Coast ports will be ready to handle Post Panamax ships by 2015: Baltimore, Miami, New York and Norfolk.  But four West Coast parts are already ready:  Los Angeles, Long Beach, Oakland and Seattle. While Post Panamax ports will improve the costs of shipping to the East Coast, they also improve West Coast economics. The lead time versus cost tradeoff will not disappear; Longer lead times equates to holding more inventory, and higher inventory carrying costs, to maintain the same service levels.

But perhaps the key tipping point will be whether the widened Panama Canal will lead to better backhaul opportunities for ocean carriers.  Because of the trade gap with Asia, too many ships move from Asia full and then back across the Pacific far from full. Too many empty shipping containers end up in North America. If the flows were more even, ocean shipping would cost less.

Just as a widened Canal improves the economics of shipping to the East Coast from Asia, it will improve the economics of shipping from eastern Latin America to Asia.  This raises the prospect of a new form of triangular trade – consumer goods from Asia to the East Coast, higher end consumer goods and pharmaceuticals from North America to South America, and coal and iron ore from Columbia, Venezuela, and Brazil to China. Such trade flows would allow for Ocean carriers to charge less for shipment to East Coast ports.

Nevertheless, the best guess is that growth of ocean cargo to the East Coast from Asia will exceed that to the West Coast, but not be dramatically larger in any given year.  Still, over the course of a few decades, cargo flows could look dramatically different.

Vessel evolutionary 

Vessels that are specially designed to travel through the Panama Canal are known as Panamax ships. Their dimensions are maxed out using specific and often inefficient designs to fit the Canal’s two original channels, which can accommodate ships no larger than 965 feet long and 106 feet wide. Post-Panamax ships are those capable of fitting the Canal’s expanded third lane, they're much larger and much more fuel efficient. One of the largest costs in shipping bulk goods between the Americas and Asia is fuel. Up to 16% greater fuel efficiency is just the beginning of the benefits post-Panamax ships could potentially bring to the United States. It’s estimated that three-fourths of the new cargo traveling through the expanded canal will arrive on the East Coast, which would be a potential boon for US trade if only the United States were better prepared.

http://www.minyanville.com/business-news/markets/articles/natural-gas-port-canal-Panama-Canal/8/17/2012/id/43178
http://people.hofstra.edu/geotrans/eng/ch3en/conc3en/containerships.html