The ability to move larger ships through the Panama Canal will reduce the cost of all-water service between the Far East and the eastern part of the United States, but speakers at a conference held last week in Tampa, Fla. were divided on how significant theimpact of the canal will be on cargo routing.
"We are not the fat hog waiting to be cut," said Dean Wise, vice president of network strategy for the BNSF Railway. "We are not going to sit back and see the market go away."
Wise said railroads and ports on the West Coast will work to retain business that might be attracted to the economies of scale that the widened canal will present to all-water services to East and Gulf coast ports.
He was one of the panelists at a meeting sponsored by the American Association of Port Authorities and the U.S. Maritime Administration.
Rodolfo Sabonge, vice president of market research and analysis for the Panama Canal Authority, told participants that over 70 percent of the cargo transiting the canal is either destined for or originates in the United States. That includes 32 differentcontainer liner services, including 13 between Asia and the U.S. East Coast, as well as movements of bulk, breakbulk, and roll-on/roll-off cargo.
Sabonge predicts strong growth in containerized trade using the canal, forecasting volumes will grow from about 6.58 million TEUs in 2011 to 8.4 million TEUs in 2015.
Anne Kappel of the World Shipping Council, a trade organization which represents the liner shipping industry, said that by 2015 about 21 percent of container ships will be too large to fit through the current Panama Canal locks and those large ships will represent 52 percent ofthe world's container carrying capacity.
She said these ships are both more cost effective and environmentally friendly, and predicted larger ships will come almost immediately to the U.S. East Coast from Asia when the widened canal route is open. Initially they will be in the 6,000- to 8,000-TEU range, she said,though some may be larger.
"The economies are so enormous that carriers will look to deploy the largest ships possible in the trades they are serving," she said. "Shippers and carriers need gateway or port options, and expanding the canal creates additional options."
Robert West, an economist with the WorleyParsons group, noted that other things being equal, carriers moving cargo on an 8,000-TEU rather than a 4,000-TEU ship from China to New York ought to be able to save $123 per TEU.
West said because most Americans live in the East, the expanded canal would make an all-water routing to both East or Gulf coast ports attractive for reaching a bigger share of Americans - 63 percent using an 8,000-TEU ship after the expansion compared to 46 percent witha 4,000-TEU ship today.
West cautioned, however, that he was not making a forecast. He said other factors come into play when deciding to route cargo such as the location of distribution centers or factories.
And Sabonge said routing decisions are highly dependent on the value of cargo and whether cargo can tolerate a longer transit time.
Scudder Smith, a consultant with Parsons Brickerhoff, explained that ocean carriers calling West Coast ports are likely to benefit from the economies of scale as bigger ships are brought into services between Asia and the U.S. West Coast.
Sabonge said there is a Samsung design for a 13,200-TEU ship that will be able to use the expanded canal. He predicted the ability to operate such large ships may result in a revival of “round-the-world” services that stop at a limited number of ports as they circumvent the globe and then use feeder ships to reach more destinations.
He said the impact of the expanded canal will depend largely on the deployment strategies of carriers.
“One of the things we are trying to find out from the carriers right now is exactly how they plan to take advantage of the expanded canal. Because they have network strategies - it’s like the airlines - American hubs in Miami, Continental hubs in Houston, Delta hubs in Atlanta - each carrier has its own competitive analysis and strategy to capture market.”
West noted that both Asia and Latin America have had some of the strongest economic growth in recent years and said trade between the two blocs are growing rapidly. Where today one in every 10 boxes moving into Mexico originates in China, he believes that ratio will rise to one in four.
West said that if ships in the Asia-U.S. trade lane transship through hubs in Latin America or the Caribbean, then the same ships plying the transpacific will be able to move cargo to and from multiple locations in the United States, Latin America or the Caribbean.
“You need to understand that Panama has more importance to the carrier, because the carrier can make the asset more profitable by picking up and downloading cargo in Panama,” Sabonge said. “They are picking up very good additional freight. A lot of the Latin American services that hub in Panama are very expensive in terms of the per-TEU basis.”
He said Panama plans to expand port capacity near the Pacific entrance to the canal
Rick Gabrielson, director of international transportation for the retailer Target which uses ports on both coasts, said the expanded canal will give shippers "a lot more options" for discretionary cargo moving to the Ohio Valley or Mid-Atlantic that today moves though West Coast ports.
He suggested U.S. ports need to be more engaged with carriers and shippers as they plan whether to change their routings when the expanded canal opens.
Jerry Bridges, executive director of Virginia Port Authority and chairman of the AAPA, said while the Ohio Valley and Chicago are currently the "sweet spot" for railroads offering intermodal service from the East Coast. The Hampton Roads ports are positioned to capture some of that business because of 50-foot channels to their container terminals and Norfolk Southern’s construction of the so-called “Heartland Corridor” which has reduced transit times to inland destinations in the Midwest.
But he warned the port "can't live on one route alone" and is looking at penetrating into markets in the Southeast. He also said railroads are showing more interest in shorter intermodal serivces, particularly as shippers' interest in sustainability grows.
Kappel noted that one brake to simply putting the largest ship into any trade lane is the desire by some shippers to have multiple sailings per week to smooth the flow of cargo through their supply chains and control inventory costs
For example, if a shipper gives a carrier 100 containers a week - 50 on one string that departs Shanghai early in the week and 50 on a string that departs several days later - it may be reluctant to give that same carrier all of its business if it decides to consolidate all its business onto a ship with a single sailing once a week.
Thomas C. Scorsune, vice president of business development at Yusen Logistics (America), said shippers moving cargo through the West Coast faced capacity constraints because of a lack of room for expansion at West Coast ports and on the railroads. “Quite candidly, we had more trackage in the United States in the 1960s than we do today, so there is significant capacity issues,” he said.
But Wise of BNSF said "capacity is not the problem," noting the railroad has double- and triple-tracked key corridors.
He said there are offsets to the lower slot costs that carriers will realize by putting bigger ships into all-water services to the East and Gulf Coast such as higher dredging costs, canal tolls, and bunker costs.
Wise said the decision of what port to move cargo through was "highly situational," varying from shipper to shipper based on inventory costs, supply chains, commodities and geography
Omar Benjamin, executive director of the Port of Oakland, highlighted expansion projects at ports up and down the West Coast, both at marine terminals and intermodal yards that will improve connectivity. Many are designed to help fuel exports, he said.
"We really don't feel that the Panama Canal is going to hurt us in a big way. We believe that when things all level out or reach equilibrium, we will be able to retain share," Wise said. — Chris Dupin