While ports on the North America’s Pacific Coast are trying to bolster their positions in anticipation of the competitive changes triggered by a larger Panama Canal, U.S. and Canadian railroads in the West are quietly investing in infrastructure and equipment to handle the increased container volumes they expect to see at West Coast ports.
Maybe the railroads are on to something. “They don’t seem to be as concerned about the canal, which indicates to me they have pricing flexibility,” Sean Strawbridge, managing director of trade relations at the Port of Long Beach, told the Transportation Research Forum last month in Long Beach.
Although it is almost certain that cargo volumes moving to the East and Gulf coasts will increase when post-Panamax ships capable of carrying more than 5,000 20-foot equivalent container units can transit the canal in 2014, it is questionable whether East Coast ports will gain market share from West Coast ports.
That may be determined less by capacity than by pricing and efficiency. And all players in this game — East and West Coast ports, the railroads and the Panama Canal Authority itself — will have a say in whether market share shifts after the enlarged canal opens in 2014.
The Panama Canal Authority believes efficiency, not price, will determine who wins. “The most effective and reliable supply chain will determine the winners,” Onesimo Sanchez, leader of economic research and intelligence in the canal authority’s office of market research, told the Transportation Research Forum.
Big ships of 8,000- to 10,000-TEU capacity, such as the post-Panamax vessels now calling at West Coat ports, reduce the per-unit cost of transporting a container from Asia to North America. In fact, economies of scale appear to be becoming the dominant economic factor in shipping. Maersk Line in February ordered 10 huge 18,000-TEU vessels, which will be so big they will not even be able to transit the enlarged canal.
Panama’s decision to enlarge the canal was necessary to maintain its relevance. Sanchez noted 48 percent of the global liner fleet in 2014 will be post-Panamax, too large to transit the existing facility.
But even with all of the bulk, breakbulk and container services that transit the canal, he said, the all-water container services from Asia to the U.S. East Coast still comprise the largest and most important segment of the business.
For shippers and carriers, the big question is whether the canal authority intends to price its tolls at a level where they will encourage a diversion of container traffic from West Coast ports, or will tolls be set at a higher level that will not only retire the debt on the $5 billion project but will also generate healthy profits for the canal authority?
Dan Smith, a principal at the Tioga Group, said early indications are the canal authority considers revenue to be more important than cargo volume. The canal authority projects annual growth in cargo volume after 2014 will be about 3 percent, the natural growth expected to occur with no diversion from the West Coast.
Pricing will have a significant impact on cargo routing, but pricing is a complex issue involving canal tolls, freight rates on all-water services from Asia to the East and Gulf coasts and railroad intermodal pricing from the West Coast to the U.S. interior.
The U.S. railroads, and the Canadian railroads, which have direct service to Chicago, will invest billions of dollars in capital projects leading up to 2014. Smith said that indicates the railroads intend to at least maintain their market share to the U.S. interior, if not increase it. “The railroads won’t price themselves out of cargo they want. It’s not going to happen,” he said.
East Coast ports are competing fiercely for federal money to deepen their harbors, and those ports also are enlarging their marine terminals and expanding connectors to inland transportation networks. Paul Bingham, economics practice leader at Wilbur Smith Associates, noted the competition is fueling more spending on infrastructure in the United States than Panama is spending to enlarge the canal.
Still, predictions about actual shipper choices after 2014 remain little more than guesswork. “Decisions are now being made on imperfect information,” Bingham said.
Contact Bill Mongelluzzo at email@example.com.