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Thursday, April 24 2014 @ 10:25 PM EDT

Trade in the Americas: Expanding the Panama Canal for the 21st Century

Canal Expansion By Gail Dutton for World Trade Magazine - The Panama Canal Authority is experiencing every company’s dream—a steady influx of business with more than it can handle in the wings. Fueled by the rapid growth of Asian exports, the canal has to expand to remain viable. And when it does, it will ensure that the fleet of post-Panamax (PPX) ships, which grew 143 percent since 2002, can finally transit the canal—raising the threshold of trans-Pacific trade up a magnitude. Today, ships carrying more than 4,000 TEUs generally are too big for the Canal’s existing locks. In planning a new lane, with longer and wider locks and deeper channels, the Panama Canal Authority (ACP) expects to double cargo transiting capacity. With that capacity, say industry observers, should come reduced overall shipping costs and expanded shipping options after the new lane opens in 2014, in time for the canal’s centennial. (more)

Rodolfo Sabonge, vice president of research and market analysis for the Panama Canal Authority, suggests this all-water route may also reduce pollution, help distributors to locate distribution centers closer to the population, and boost the economies in states where those new facilities may be located.

U.S. carriers and businesses, while less ebullient, are optimistic.

A spokesman for Procter & Gamble Coffees, notes that although “most of our coffees don’t come through the canal, it could help with our Asian imports,” namely coffee beans from Vietnam or Indonesia. As an alternative to landing at West Coast ports and being hauled to processing plants in New Orleans, Kansas City and Sherman, Texas, shipments could come into New Orleans directly. “It’s too far out,” cautions Lars Atorf, to figure a cost/benefit analysis.

For Tokyo-based container ship operator Kawasaki Kisen Kaisha Ltd. (K Line), seven years isn’t too far ahead to start planning. Last June, it launched a weekly container service linking Asia with the East Coast of South America, “to meet fast-growing market demand,” and as a prelude, say observers, to pushing northward up the Atlantic.

Another very large Asian shipping line, which asked to be unnamed, sees other benefits, too. “It will let us get rid of uneconomical vessels,” an executive notes. The company expects to take delivery on 5 PPX ships by about 2010. But, he adds, terminals, cranes, capacity and infrastructure all need improvement. “Some ports will have to grow.”

Port improvement is, in fact, a recurring theme when discussing the Panama Canal expansion. APL’s Bob Sappio, senior Vice President, Transpacific Trade, says the new lane will allow economies of scale possible with PPX ships of 8,000 to 10,000 TEUs to be passed on only “if the terminal infrastructure in the U.S. is capable of handing them.” APL is hammering that message home at every opportunity. “If the terminals are incapable of handling the volume, the benefits of the expanded canal will be less.”

Port expansion

Today, only four U.S. ports can handle PPX ships—Seattle, Tacoma, Los Angeles-Long Beach, and Norfolk. East Coast and Gulf ports are preparing to change that.

“Once we heard about the canal expansion, the Army Corps of Engineers began to study its likely impact on Port Everglades,” notes Allan Sosnow, Port Everglades’ environmental project manager. It’s dredging channels now; in the future there are plans to increase capacity and intermodal operations, add new berths and enhance operational efficiency.

The expanding canal is only partially responsible for the burst of activity, though. U.S. ports need extra capacity regardless of what’s happening in Panama. “We all hope to move forward, and we all need to deepen channels and construct facilities,” to handle increased cargo, notes Richard Wainio, port director and CEO, Tampa Port Authority.

At the Port Authority of New York & New Jersey, expansion is underway. Half of its cargo, by value, comes from Asia already. To accommodate PPX ships, dredging is underway to deepen the harbor to 50 feet by 2014, according to spokesman Steve Coleman. (That project is designated a national priority by the U.S. Army Corps of Engineers, with a fiscal 2008 budget of $91 million.)

“We expect cargo levels to increase about 7 percent per year, and to double in 10 years from 5 million TEUs per year today,” Coleman says. The port authority is also in the midst of a $600 million project to add intermodal rail access to all terminals. In 2006, it added the capacity for 350 additional lifts and expects to handle 1.3 million by 2011,

Being able to accept PPX ships is only part of the issue for the ports. Even without the canal’s expanded capacity, “Significant delays are likely in the next few years,” notes Tampa’s Wainio. “The only part of the business expected to grow is the container business. So, to be a major player, you have to expand.”

For manufacturers or importers, though, there are some tradeoffs. “You should get lower unit costs,” Wainio says, by sailing 8,000 to 12,000 TEU vessels, but moving from Los Angeles-Long Beach by rail is faster than sailing through Panama and up the East Coast. But, rail doesn’t carry as much as ships.” In fact, one 4,000 TEU ship carries the equivalent load of 16 trains. In the tradeoff between cost and time, Wainio speculates that high value time-sensitive goods will still use West Coast ports and that commodities will save money and choose the canal route.

Today’s challenge for the Port of Long Beach is overcoming an environmental bottleneck that is delaying infrastructure and terminal expansion. As spokesman Art Wong elaborates, “The EIR (environmental review) has to be approved before we can even vote on going forward,” with terminal and intermodal expansions.

West Coast ports, he points out, have some significant advantages over their East Coast counterparts, including proximity to the West Coast population centers, and reliable rail connections. Most notable, however, is the fact that three of the four U.S. ports deep enough to handle PPX ships are here. So, “If the East Coast can’t handle PPX, they’ll come here,” Wong says, noting that the Port of Long Beach can handle PPX ships up to 8,000 TEUs.

Intermodal

There may be a catch, though. “The increase in Asian imports—primarily from China—is forecast to exceed the capacity of the ports to handle it,” based on existing rail and road infrastructure, according to Rodolfo Sabonge, vice president of research and market analysis for the Panama Canal Authority.

Admittedly, the Panama Canal expansion “could shake up U.S. logistics, but that’s not a given,” Wainio says. Many factors are in play, including how the widening is handled, how tolls are adjusted, West Coast port growth, intermodal rail expansion and plans for ports and intermodal links from Mexico. The right choices, expanding the elements of the infrastructure, will enable U.S. channels to prevail. To fail, however, will cause severe dislocation.

The largest intermodal line in North America, BNSF, is expanding its major intermodal hubs in Dallas, Chicago, Kansas City and Memphis and is developing logistics parks—industrial parks built around intermodal hubs, “with a lot of land around them for further development,” Steve Branscum, BNSF vice president of consumer products, notes.

Union Pacific doesn’t expect any major repercussions from the expanded Panama Canal, according to Brian McDonald, Vice President, Intermodal Marketing and Sales. It’s expanding its facilities and tracks, with emphasis on double-tracking the Los Angeles to El Paso run and expanding intermodal hubs in San Antonio, Dallas, and Salt Lake.

BNSF’s Branscum predicts that no more than 35 percent of the freight coming from Asia to the U.S. will go through the Panama Canal. Right now, he explains, about 75 percent of the Asian imports come through the West Coast and are distributed throughout the West and Midwest. “It’s quicker to ship from the West Coast than to send goods through the Panama Canal to the East Coast and then ship backwards to interior markets,” he says.

A widened Panama Canal is just one of the shipping options, though. From Vietnam and points south and east, the Suez Canal route is shorter. Therefore, Robert West, managing director of global trade and transportation at Global Insights in Lexington, Massachusetts, suggests that value-added goods from India may choose that route to the U.S. East Coast, while goods from China may choose West Coast ports and intermodal shipping or choose the Panama Canal.

Another option being explored by some of the Chinese shipping lines and U.S intermodal operators, focuses on expanding Mexican ports and then developing rail lines north. This offers an alternative to southern Californian ports to relieve any bottlenecks. “If we can’t improve the throughput or productivity on the West Coast, there’s a real crunch coming,” one shipping executive said.

The port most often mentioned as a major entry point, Lazaro Cardenas, is a deep-water port about 1,000 miles from the U.S. border. Branscum discounts it as a serious option, though. “A port city, to be part of a core intermodal network, needs to be near a big market,” Branscum says, and the Mexican markets haven’t developed to that point. Right now, it handles less than 100,000 containers and is expanding to handle nearly 200,000 containers by 2017. In contrast, the ports of Los Angeles and Long Beach handled 15 million containers in 2006.

Transshipping

Although Post-Panamax ships certainly will use the expanded Panama Canal, there are some powerful economic reasons not to. Global Insight’s West points out that it’s not cost effective for PPX ships to make multiple ports of call. The result, he says, may be increased transshipping in the Caribbean, with a PPX ship traversing the canal for a major hub port and reloading there for the trip back through the canal. The potential transshipping benefit is increased backhaul and more efficient distribution.

Another possibility, raised by Panama, is the creation of a megaport at the western entrance of the canal. In the past decade, Sabonge says transshipped cargo has grown from about 250,000 TEUs to 3 million TEUs. The proposed megaport would increase that number by allowing PPX ships to off-load there. Construction costs are estimated at $600 million.

The great unknowns

The effects of the new lane of the Panama Canal on U.S. businesses depend on a lot of outside factors. The first two are that Asia will continue to be the source of most of America’s imports, and that the Panama Canal will be the most desirable route to the East Coast.

The third unknown is what the government of Panama will do to the toll structure, although Francisco Miguez, manager, contracts and administration division, ACP, points out that toll increases are set in consultation with the canal’s customers and that no increase is planned in the foreseeable future. “Long term, we’ll consider market conditions in the toll structure. The idea is to capture for the canal the value we provide and encourage commerce and vessel traffic to continue to increase,” Miguez says. Right now, the canal is debt-free, with $1.7 billion in revenues.

The timing, also, “is ambitious,” notes APL’s Sappio. “It’s an extremely large project for a small country like Panama. With projected costs running $5.25 billion “they have to get it done, on time, with minimal cost overruns and in a way that sends a message to the world that’s it’s been done properly.”

Sidebar: Progress Update

In the year since Panama’s national referendum approved the expansion, financial and legal experts have been hired and requests for proposals have been issued in numerous areas. The first construction contract was this past July.

Expanding the Panama Canal is a huge project, “but it’s do-able,” notes Robert McMillan, chairman of the Panama Canal Commission until the 1999 handover. “I honestly believe Panama is trying to be above-board and transparent in what they’re doing,” he says.

Panama consistently has said the canal would be self-financing, but that really means the people of Panama won’t be stuck with the bill, Miguez explains.

“Funding hasn’t yet been arranged,” Miguez says, noting that the need for financing will come during the heavy construction phase scheduled for between 2010 and 2013 (financing is being coordinated by Japan’s Mizuho Corporate Bank, Ltd). Right now, Panama is evaluating options, including obtaining a credit rating for the ACP for the possibility of issuing bonds, he continues.

Gail Dutton

Gail Dutton is a veteran journalist, covering national and international business and technology issues from her office in Montesano, Washington.

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