Panama Canal expansion will affect shipping — but how?

Panama Canal expansion will affect shipping — but how?

The Panama Canal with the new, larger locks at left. Credit: Panama Canal Authority.

Nine years and $5.4 billion in the making, the Panama Canal’s new, larger locks are opening amid questions about the impact they’ll have on an uncertain global trade and container shipping environment.

The biggest questions involve trade between Asia and the U.S. East and Gulf coasts, where ports have invested tens of billions of dollars in dredging and other investments aimed at cutting into the West Coast’s dominant trans-Pacific market share.

East and Gulf ports have been nibbling away at the West Coast’s market share, and hope the Panama Canal’s added capacity will accelerate their momentum. During the nine months ending in March 2016, their market share inched up to 33.9 percent, from 29.1 percent two years earlier, according to PIERS, a sister product of JOC.com within IHS.

The canal’s new locks will open Sunday, June 26, when the Cosco Shipping Panama, with a capacity of 9,443 twenty-foot-equivalent units, will make the first commercial passage. The expansion project was completed this spring, two years behind the original target of the 100th anniversary of the canal’s opening in 1914.

The new locks measure 1,200 feet by 160 feet and will accommodate container ships that carry up to about 13,000 TEUs, depending on the design, and that draw up to 50 feet of water. That’s nearly triple the 4,500-to-5,000-TEU capacity of current Panamax vessels using the century-old, 1,000-by-110-foot locks, which have a maximum draft of 39.5 feet.

The canal expansion is the product of years of studies, notably a tripartite report that the U.S., Japan and Panama funded in the 1980s. Construction began in 2007 and has been punctuated by controversy involving repeated delays, a messy dispute over construction overruns, and the 11th-hour discovery of concrete flaws that pushed back the opening. Dry weather from the current El Niño weather pattern has renewed questions about draft restrictions.

But by any standard, the expansion is a monumental project that will affect global transportation for decades, as the existing canal has done. Even before the new locks open, the project already is influencing industry decisions about routes, rates, capacity and more.

The industry reacts

Anticipating a surge in trans-Pacific container shipments that now move via the U.S. West Coast, East and Gulf coast ports have spent more than $150 billion to deepen harbors, expand terminals and improve rail and road connections from their docks.

Carriers have begun upsizing Asia-East Coast services to take advantage of the new locks. Six vessel strings — four from the CKYHE Alliance and two from the G6 Alliance — have announced enhanced Asia-U.S. East Coast services using more than 50 ships with capacities of 6,000 TEUs to 10,000 TEUs.

These ships replace nine current strings, eight of which use Panamax ships. Separately, Mediterranean Shipping Co. has replaced Panamax ships with 8,000-TEU to 9,000-TEU ships on a Europe-West Coast South America route through the canal. The 2M Alliance of Maersk and MSC plans to shift one of its Asia-East Coast services that use the Suez to Panama.

Many consultants and industrial real estate developers predict the canal expansion will accelerate a gradual shift of U.S. containerized imports from Asia, now dominated by West Coast ports, toward the East and Gulf coasts.

The canal expansion “marks a fundamental shift in the shipment of Asian goods to the Eastern U.S.” said David Egan, head of industrial research in the Americas for real estate firm CBRE. “The short term won’t bring massive, game-changing gains for East Coast ports, because much of that repositioning already occurred in recent years,” Egan said. “But it will shift U.S. cargo from slightly favoring the West Coast to a more even split between the two coasts.”

East and Gulf coast ports expanded their share of containerized cargo during severe West Coast congestion during International Longshore and Warehouse Union contract negotiations in late 2014 and early 2015, and retained some of the increase.

What will determine the overall impact?

All ports, however, may not see the containerized cargo growth they were counting on to justify their investments in dredging and terminals. In deciding on East versus West routings, shippers will also factor in transit times, the costs of canal tolls in comparison with intermodal rail, port reliability and distribution strategies.

“Just because you have a larger set of locks and larger ships through Panama doesn’t mean you’re going to have a huge increase in business,” said Richard Wainio, a consultant and former Port of Tampa executive director and former chief economist at the Panama Canal. “It all comes down to the market.”

Walter Kemmsies, managing director for the U.S. ports, airports and global infrastructure group at real estate company JLL, said shippers could enjoy lower costs because of bigger ships’ economies of scale, but that this won’t automatically translate to a big shift in cargo from the West Coast.

An “x-factor,” he said, will be the degree to which West Coast port operators and western railroads adjust their rates to meet Panama’s competition. “There could be a long competitive battle ahead,” Kemmsies said.

Another question is trade volume. Growth in U.S. containerized imports has slowed from the heady years before the recession, when China’s manufacturing exports expanded rapidly and traditional breakbulk cargoes were shifting to containers and inflating growth in box volume.

Mario Moreno, chief economist at IHS Maritime & Trade, forecasts U.S. containerized imports this year will rise 5.7 percent, to 20.9 million TEUs, while exports increase 1.3 percent, to 11.6 million TEUs.

Wainio expects containerized volume growth to remain modest. “I don’t see huge growth in container business on the primary routes the canal serves, namely the bread-and-butter route from North Asia to the East Coast of the United States,” he told JOC.com. He expects Panama will skim off marginal cargo from West Coast intermodal routes and regain some business lost in recent years to the sea-level Suez Canal, but that the overall pie will expand slowly.

But that doesn’t mean the canal authority erred in adding a third set of locks, Waino emphasized.

“Has it made business sense for Panama to do what they’ve done in expanding the canal? Yes, for a couple of reasons,” he said. “They needed more capacity, because with only two lanes, if you take one out of service for maintenance, you have backups. And if you’re going to add a third lane, it was a no-brainer to make it larger, in order to handle the larger ships.”

Since the expansion began, carriers have built dozens of container ships with capacities of up to 20,000 TEUs — too large to fit through the new locks. Those ships will continue to use the sea-level Suez Canal on Asia-Europe routes.

Panama officials are making a strong bid for ships that will fit through the new locks but now use the Suez. After ratcheting up tolls for several years, the Panama Canal Authority has offered container lines an incentive plan based on ships’ volume.

To counter increased competition from Panama, Suez Canal officials are offering increased rebates to encourage container ships that now use the Cape of Good Hope in order to avoid Suez tolls and take advantage of low fuel costs on backhaul routes  to Asia.

Transit time for a direct voyage from Hong Kong to New York is the same, although actual times depend on port coverage and intermediate stops. Panama has an advantage for origin points north of Hong Kong.

Consultant Chaim Shacham, a former Zim Integrated Shipping Services executive, has estimated that based on recent fuel prices and tolls at the start of the year, carriers’ average per-TEU round-trip costs on a Panamax sailing would be $1,150 to $1,175 per TEU via Panama and $1,210 to $1,185 via the Suez, but that Panama’s roundtrip cost for an 8,000-TEU ship will drop to about $850 per TEU.

Container lines need all the help they can get. Industry analysts say the carriers’ losses could hit $10 billion this year because of overcapacity that has dropped rates to record lows. Carriers have struggled to fill big super-sized ships they ordered in a bid for economies of scale. This makes it uncertain whether carriers’ cost savings from bigger ships using the canal will be passed to shippers.

The Panama expansion will provide additional routes for deployment of those big ships, but is bad news for owners of traditional Panamax vessels. Many of which will be laid up or scrapped, especially those with long, narrow hulls that fit the older locks’ dimensions but require extra ballast that’s needed for stability and cuts into cargo deadweight capacity.

All but overlooked amid talk about the higher-capacity new locks have been draft restrictions that at least initially will prevent neo-Panamax vessels from using the new locks’ full 50-foot draft.

In recent months, dry weather from the El Niño weather phenomenon has forced the Panama Canal Authority to impose draft restrictions in response to lowered water levels at the reservoirs that feed canal locks. The canal authority recently restored drafts at its existing locks to their maximum 39.5 feet. When the new locks open, they initially will provide drafts of up to only 43 feet (13.11 meters), well below the maximum 50 feet (15.2 meters). Canal officials say they expect water levels to be sufficient to meet long-term demand.

To benefit, ports have more work to do

Despite billions of dollars spent on deeper channels and new and expanded terminals, the East and Gulf coasts still aren’t fully prepared to handle a surge of neo-Panamax ships. Terminals in ports such as New York-New Jersey and Virginia have struggled with congestion, especially when large ships arrive in bunches off schedule.

For the next couple of years, the biggest constraint on the size of ships using the Panama Canal to reach the U.S. East Coast will be the 151-foot clearance under the Bayonne Bridge, which stands between four new York-New Jersey container terminals and the Atlantic.

Expected completion of a $1.3 billion project to raise the bridge to 215 feet has been pushed back to the end of 2017 by construction delays. Because New York-New Jersey’s concentrated consumer import demand makes the port a must-call stop for most all-water services to the East Coast, most ships in the route are sized to fit under the bridge. In recent years, several carriers have installed lower exhaust stacks or collapsible antennas under “Bayonne-max” vessels, but that’s only a stopgap move.

During the last decade, New York-New Jersey, Baltimore and Miami have deepened their channels to 50 feet, joining Virginia as East Coast ports with channels deep enough for fully loaded neo-Panamax vessels. Savannah is deepening its channel to 47 feet, and Charleston is on track to have 52-foot depth within five years. Houston’s container terminals now have 45-foot depths.

Other ports such as Jacksonville and Port Everglades, Florida, also are seeking authorization or funding to deepen their channels. Multimillion-dollar terminal expansions and upgrades are under way at other ports, even smaller ones that don’t currently handle Panamax vessels.

At Gulfport, Mississippi, the state-owned port authority has sunk $30 million into three new cranes that can span 18 rows of containers, even though the port’s current users don’t even operate 13-across Panamax ships and the port’s channel is only 36 feet deep.

Not all of the port projects will produce a positive return, Wainio warned. He said the need for deeper channels has been overemphasized. “I’ve said all along that we don’t need 50 feet of water at most ports, even with the new locks at the canal,” he said.

Wainio expects 8,000-TEU to 10,000-TEU ships to be the “workhorses” of all-water canal services to the U.S. East and Gulf coasts. Even larger neo-Panamax ships won’t arrive at ports at full capacity, and won’t need drafts to match the locks’ operating draft, Wainio said.

“With new ship designs, a 9,000-TEU ship might draw only 40 or 42 feet,” he said. “Channel length, width, turning basins and road and rail connections are more important than having 50 feet of water.”

Panamanian officials are promoting the isthmus as a transshipment hub where large vessels can exchange cargo with smaller regional vessels to support distribution and light assembly. The canal has authority has authorized construction of a 3 million-TEU-per-year transshipment hub with 60-foot water depth at Corozal, at the canal’s Pacific entrance.

Other terminal operators in the region have warned that the region’s transshipment capacity is on its way to being overbuilt. Asaf Ashar, professor emeritus at the University of New Orleans’ National Port and Waterways Institute, has questioned assumptions that the expanded canal will produce double-digit growth in transshipments.

Ashar predicted transshipment will grow at a slower rate, and that much of the increase will be at non-Panamanian ports such as Cartagena, Colombia. He said that instead of transshipping, carriers are more likely to combine smaller services into direct services that use larger, more efficient ships.

Contact Joseph Bonney at joseph.bonney@ihs.com and follow him on Twitter: @JosephBonney.