Panama Canal expansion a game changer

by Arvin Donley
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With the expansion of the Panama Canal targeted for completion in 2015, the shipping industry and those who export and import agricultural products are speculating about how trade flows will be impacted by this development.
John Vickerman, president of Vickerman and Associates, LLC, spoke about the Panama Canal expansion and other important shipping topics during his presentation, “Impact of Investment in Port Facilities on New Origin and Destination Markets,” at the Soy and Grain Trade Summit on Sept. 19 in New Orleans, Louisiana, U.S.
The expansion of the Panama Canal, which is scheduled to be completed in 2015, will double that waterway’s capacity by allowing larger ships to come through. Between 1970 and 2009, the number of vessels going through the Panama Canal leveled off but the size of the vessels continued to get larger, which is what prompted Panama to invest in this current expansion.
“Panama is spending $5.2 billion, which is 16% of its GDP, on this expansion,” Vickerman said. “That’s a huge expenditure.”
The project includes:
•The construction of two lock complexes, each with three chambers, which includes three water-saving basins. The expanded locks will be able to accommodate vessels carrying over 250% of present maximum capacities.
•Excavation of new access channels to the new locks and widening of existing navigational channels.
•Deepening of the navigation channels and the elevation of Gatun Lake’s maximum operating level.
In terms of its impact on one of the world’s largest grain traders, the United States, the expansion is expected to increase the amount of agricultural dry bulk going through the Panama Canal from the U.S., he said. As of today, 55% of U.S. agricultural products are shipped through the Panama Canal. After the expansion, up to 80% of those products are expected to be shipped through that waterway.
“It is the primary gateway for all agricultural products in North America,” Vickerman said.
But even with the expansion, the amount of shipments going through the Panama Canal may not increase significantly unless the toll rates are set to be competitive with the Suez Canal, which has gained more shipping traffic in recent years.
“We don’t have the new rates from Panama yet so we are waiting to see if they adjust their rates,” he said. “If the new Panama Canal tolls are set to maximize revenue and not volume, we may not see a dramatic change in shipping patterns.”
The Suez Canal, an artificial sea-level waterway in Egypt, connecting the Mediterranean Sea and Red Sea, has become in recent years an emerging new corridor for movement of freight from Europe to Asia.
“A couple of years ago there was a shipping line, Neptune Orient Lines, which realized that they could go from Southeast Asia through the Suez and get shipments to New York one day faster than going across the Pacific Ocean,” Vickerman said. “Today, we have seen reverse flow through the Suez as big as it has ever been in the history of that canal. The Suez is basically a big river with a trench in the middle of it. There are no locks. There are two convoys every day to the north and one convoy every day to the south.”
The Suez Canal is 193 kilometers long, 24 meters deep and 205 meters wide. Vickerman noted that the new Maresk Triple-E vessels, which have a container capacity of 18,000 TEUs, can fit through the Suez Canal but will be too large for the Panama Canal even after it is expanded.
Vickerman said there is no guarantee that current shipping patterns to and from the United States will be dramatically altered once the Panama Canal is expanded.
“If the West Coast ports and rail system remains congested, if the East Coast ports are expanded to accommodate the new larger vessels, if the Panama Canal remains competitive from a pricing standpoint with the Suez and doesn’t get greedy, then carriers are going to cram as much cargo through the Panama Canal as humanly possible,” he said.
“But if the Panama Canal tolls are set to maximize revenue and not volume, if the East Coast ports cannot accommodate the new larger vessels, and if the Class I railroads exert their pricing flexibility, then you will have a Y2K event … nothing happens.”
Massive Asian ports
One factor that will impact trade patterns in the coming years is the shift in economic power that is occurring on a global basis.
Vickerman pointed to the great recession of 2009 in which developed economies such as the U.S., Canada and Japan compressed while developing companies maintained positive GDP growth, albeit at a slower rate, during the recession.
“In the 20 years through 2009, the NAFTA countries (U.S., Canada and Mexico) were two-thirds of the economic engine of the world and the emerging economies were one-third,” Vickerman said. “When you look 20 years into the future, the NAFTA countries will decline as economic engines and the emergence of the BRIC countries (Brazil, Russia, India and China) will comprise more than two-thirds of the world’s economic power. When you are planning a port system, you will pay attention to that dynamic.”
In addition to the growing economies in the BRIC countries, another emerging driver in world trade is the Association of Southeast Asian Nations (ASEAN) trading bloc that includes 10 countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Brunei, Burma, Cambodia and Laos.
In 2010, its combined nominal GDP was $1.8 trillion. If ASEAN was a single entity, it would rank as the ninth largest economy in the world behind the U.S., China, Japan, Germany, France, Brazil, the U.K., and Italy.
“The ASEAN common trading bloc will create a mega trading giant the equivalent of the European common market, and it will have an influence on vessel traffic,” Vickerman said. “The ASEAN nations serve China and India from a trade standpoint. They do transshipment, what we call ‘feeder volumes.’ They are forming a trading bloc that will impress the world.”
Without question, this part of the world, with its enormous population and growing economies, has become the epicenter of world trade.
Nine of the 10 busiest ports are located in Asia, with China being home to six of the largest ports, all of which had record-breaking volumes last year.
“Last year the Port of Shanghai overtook the Port of Singapore in terms of volume,” Vickerman said. “Do you know how large those ports are? There are 380 public port authorities in North America. If you add their throughput up and double it, you get the volume of the Port of Singapore.”
PSA International of Singapore is world’s largest terminal operator, having handled 47.6 million TEUs in 2011 for an 8.1% world throughput share.
“That’s a single company that moved the equivalent of 4.4 times the volume of all U.S. ports combined last year,” he said. “It also made a profit last year that was about $1.2 billion.”
The world’s largest container port was recently completed on Yangshan Island which features a 20-mile bridge that connects it to Shanghai.
“It’s the second largest ocean bridge in the world and it took just three years to construct it,” he said. “The port has 20 container frames on a single key. The biggest terminal in North America, for instance, is a terminal in Los Angeles that has seven berths. This has 54 berths on a single key.”
Port selection factors
Vickerman said a recent survey published in the Journal of Commerce, the top 1,000 shippers were asked what their criteria were for port selection. Of the respondents, 43% listed reliable, consistent service, 38% put competitive freight rates as their top priority, and 12% said moving the product on time.
“Those three factors make up 90 percent of the decision to move any product through any port,” he said. “They will dictate both container and dry bulk trade.”
Of course, there are other factors that must be considered.
“You have to increase the velocity of that commodity going through the port, you must do it securely and you must do it as an environmental steward,” he said. “Gone are the days of thinking about environmental compliance afterward. It is now the first step in accomplishing a project.”
The bottom line, he said, is customers are looking at ports where the cost is the lowest and the service is the best. Anyone who achieves that balance will achieve the desired volume in the logistics chain,” Vickerman said.