The Port Community
Game Changer:
Expansion of the Panama Canal will reshape global trade patterns

By Bill Armbruster

August 15, 1914 marked the start of a revolution in global trade and transportation. It was on that day that a cargo ship called the S.S. Ancon made the first passage through the Panama Canal. And if all goes according to plan, on August 15, 2014 or some day soon afterward will mark the dawn of another new era, for it’s then that the Panama Canal Authority expects to complete the expansion of the canal, just in time for the 100th anniversary of the waterway’s opening.

Two new sets of locks one on the Pacific side, the other on the Atlantic side — will be able to accommodate 12,000-TEU ships. That’s more than twice the current maximum capacity of 5,000 TEUs.

“It opens a wide range of possibilities to both carriers and customers,” said Frankie Lau, OOCL’s marketing director for North America.

“You can deploy larger vessels, which will create economies of scale. It creates greater flexibility in the size of ships you can deploy.”
That flexibility will make all-water services between Asia and the U.S. East and Gulf Coasts, as well as other routes through the canal, far more viable.

“It will be a game changer,” said Peter Keller, president of NYK Line North America. “This is going to be a major, major logistics change. It will create a whole new look at the Gulf. It will create a whole new look at the East Coast,” he said, “and it’s not just going to be in the container world.”

The breakbulk, bulk and roll-on, roll-off sectors will be affected, too, Keller said. The NYK executive said the expansion will also make Panama more of a logistics center.

The new workhorses
The “workhorses” in all-water services via the Panama Canal after 2014 will be in the 4,500 to 7,500-TEU range, said John Martin, president of Martin Associates, a consulting firm. John Wheeler, general manager of trade development for the Georgia Ports Authority, puts the figure higher, at around 8,000 TEUs.

But even at the lower level predicted by Martin, those ships will provide a lot more capacity than ships now used in all-water services, which typically range from 3,200 to 4,500 TEUs.

While the canal will be able to handle 12,000-TEU ships, vessels in the 10,000-12,000 range will be confined to Asia-Europe routes. Trans-Pacific services most likely will be dominated by ships in the 7,000 to 9,000-TEU range.

Port preparations
All major East and Gulf Coast ports have been dredging and upgrading their infrastructure and say they will be ready to handle ships in the 7,000 to 8,000-TEU range — some are already there — but only Norfolk can handle ships in the 10,000 to 12,000-TEU range now, or is likely to have that potential when 2014 rolls around.

As a practical matter, though, it wouldn’t make much sense to operate too many services at the East Coast, with ships
bigger than the port with the largest market — New York-New Jersey — can accommodate.

The APM terminal in Elizabeth, N.J., can now handle ships with capacity up to 6,500 TEUs, but “unless they do something about the Bayonne Bridge,” the terminal won’t be serving anything larger,” said Mary Ann Kotlarich, a spokeswoman for APM and Maersk Line, which are sister companies.

“Since the vessels run on a string they are limited by the least common denominator,” she said.

The low clearance under the Bayonne Bridge, which spans the narrow channel leading into the port’s main terminals in Elizabeth and Newark, will prevent larger vessels from calling there even after the port’s 50-foot dredging project is completed in 2014. Keller of NYK said the height of the vessel’s mast is the key determinant of whether it will be able to pass under the bridge.

There will certainly be more services after 2014 that call only at mid-Atlantic, South Atlantic and Gulf ports, and that’s a frightening prospect for maritime interests in New York and New Jersey. Port Authority officials are studying alternatives to the bridge, such as elevating it or tearing it down and replacing it with either a taller bridge or a tunnel, but no replacement is likely to be in place at least until 2020.

Despite the challenges posed by the bridge, the port authority has been moving aggressively in other ways to accommodate larger vessels and increasing all-water cargo moving to the interior. Deepening of the main channels to 50 feet will be completed by 2014, while the expanded ExpressRail system can accommodate 850,000 containers a year.

Labor and technology
The ability to operate larger vessels on all-water strings will alter the economic dynamics of Asia-U.S. trade, but other considerations will determine the willingness of carriers to increase their all-water services. The other factors include intermodal rail rates, the quality of rail service, and the flexibility of waterfront labor.

The use of modern cargo-handling technology will be a key issue in contract negotiations with the International Longshoremen’s
Association and the International Longshore and Warehouse Union. The contract with the ILA, which represents dock workers at East and Gulf Coast ports, expires in 2012, while the West Coast contract expires in 2014.

Another key determinant will be cargo volume, which probably will not return to the peak levels of 2007 until 2014 or so. But even if there is less cargo, there may be faster introduction of all-water services simply because carriers will have so many more ships capable of transiting the canal. While they have laid up dozens of ships due to an ocean of overcapacity and plunging cargo volumes, they have many more new ships that will be coming out of the shipyards in the next couple of years, so it makes sense to increase their deployment of vessels, other factors being equal. It takes eight or nine ships to operate a weekly all-water service, compared to four or five vessels in a West Coast service.

Most of all, decisions about vessel deployment will be a function of the market. If shippers demand all-water service for shipments to and from East and Gulf Coast markets, and if they prefer all-water routes for 3.shipments to interior points, then the carriers will want to
oblige them.

“Customer demand will determine what happens over the long term,” said Bob Sappio, APL’s senior vice president of Pan American trades. But Sappio does not expect the canal expansion to have much impact on APL operations. “Most of the import cargo APL carries to the U.S. enters through West Coast gateways. We don’t see that changing.”

The price of tolls
One of the carriers’ biggest concerns is the cost of Panama Canal tolls, which have more than doubled over the past five years, from $32 per TEU in 2005 to $72 per TEU currently.

“We have seen significant increases in the canal passage costs. If this continues, the competitive advantage for moving larger vessels via the Panama Canal will be lost and therefore the traffic via the canal will not increase,” said Lars Mikael Jensen, the Maersk Line vice president at corporate headquarters in Copenhagen responsible for Pacific route services.

Maersk has said in the past that it could reroute vessels from Asia to the U.S. East Coast around Cape Horn at the southern tip of South America and still save money on the trip by avoiding the Panama Canal tolls, despite the longer route.

While Maersk may be bluffing about that possibility, canal officials are sensitive to the carriers’ complaints. “We are very much aware of the current situation. We continually monitor costs, we continually monitor alternatives. We have to make sure we are competitive,” said Rodolfo Sabonge, director of corporate planning and marketing for the Panama Canal Authority.

But the canal authority’s options are somewhat limited. “Back in 2006, when we put together the (expansion) proposal, we included a pricing plan that we have to stick to” in order to finance the $5.25 billion project, which was approved in a voter referendum that fall. Sticking to that plan will require 3.5 percent annual increases in the tolls over the next 20 years.

Despite the toll increases, the costs of shipping through the canal are still lower than the alternatives, Sabonge said. The existing locks will remain in service, he added.

Due to the recession, the project may come in under budget because of fierce competition among contractors eager for work. All contracts awarded thus far have been lower than budgeted, Sabonge said, and material prices have also been lower than estimated.

A matter of pride
Meanwhile, as the canal authority looks ahead to 2014, it also paused to look back at the past. On Dec. 31, it celebrated the 10th anniversary of the canal’s return to Panamanian sovereignty after 86 years of U.S. control.

In a ceremony commemorating the anniversary, Panama President Ricardo Martinelli emphasized that the Canal has been managed in a safe, reliable and efficient manner over the past decade. “The Canal is a matter of pride not only for Panamanians, but also for the international community.” 

It will be cause for even more pride come 2014.

In This Issue

Up Front

News, Trends & Analysis
New Items

Trade Tools: How Uncle Sam helps exporters

Capital Watch: Larger issues loom behind federal transport agendas

Supply Chain
Chris Steele: Development opportunities north and south of the border

Compliance Corner: Denied Party Screening Make sure you comply...
comprehensively and timely

Tech Trends

Product Review: Invoicing and Auditing solutions

Commentary
David Bennett: Early signs of trouble

Gateway Glance
Panama

China

The Port Community
Game Changer: Expansion of the Panama Canal will reshape global trade patterns

All-weather ports are “all-in”

Breakbulk Quarterly: East Coast - Thinking outside the box

Breakbulk Quarterly: Brighter outlook for West Coast breakbulk in 2010

The Shipping Environment

Casualties
Navy tanker breaks loose, container crane topples,
longshoreman dies at Virginia port ... and much more

Final Say
Getting TIGER by the tail