It’s finally happening. After decades of planning and nine years of construction, 2016 marks the year the Panama Canal will unveil larger locks that will have far-reaching effects on container shipping.
What changes can shippers expect? There’s no consensus. Though ocean carriers already are factoring the canal expansion into their routing plans, most analysts expect the changes to play out gradually over several years. Wild cards include trade demand, intermodal rail rates, canal toll levels, fuel prices, carrier mergers and acquisitions, and shifts in ocean carrier alliances.
When construction of the new locks began in 2007, there were widespread predictions that the expanded capacity would unleash a surge in new services. U.S. East and Gulf Coast ports spent billions of dollars to deepen harbors, build or expand terminals, and improve intermodal connections in an effort to get ready.
As completion of the new locks has neared, port officials are tempering expectations. “We don’t expect a tidal wave of cargo because of the canal, but we do anticipate continued incremental growth,” said Ricky Kunz, chief commercial officer at the Port of Houston.
Canal volume ultimately will depend on economic growth that drives cargo demand. But the expansion is certain to affect carrier routings by providing container lines with a new way to deploy large ships being replaced by even bigger vessels on high-volume Asia-Europe and trans-Pacific routes.
The canal’s new locks will handle ships with capacities of up to 14,000 20-foot-equivalent units, depending on the vessels’ hull configuration. Panamax capacity at the existing 110-by-1,000-foot locks is less than 5,000 TEUs.
Despite carriers’ orders of ever-larger ships, the Panama Canal Authority calculates that by 2018 the canal’s new locks will accommodate all but 176 vessels in the global container fleet, said Eduardo Benitez, the authority’s deputy administrator.
In advance of the opening of the new locks, carriers already are expanding all-water services between Asia and the U.S. East Coast. This trend got an extra boost by the higher rates carriers were able to charge for all-water services during the West Coast port gridlock in late 2014 and early 2015.
A report last June by C.H. Robinson and Boston Consulting Group said the expanded canal could enable East Coast ports to raise their share of U.S. imports from East Asia from about 35 percent in 2014 to 50 percent by 2020, compared with a 40 percent share without the canal expansion.
“With the Panama Canal’s expansion, shippers will have more options, and carriers will compete to provide those options,” said Peter Ulrich, a Boston Consulting Group partner and leader of the firm’s transportation and logistics topic area in North America. Ulrich said shippers should be alert to these changes as they design their U.S. supply chains.
Panama’s Pacific terminals now handle about 3.4 million TEUs a year, including some 3.1 million TEUs of transshipments.
Expansion projects are being planned to increase Panama’s transshipment capacity. The planned Corozal container terminal at the canal’s Pacific end would have annual capacity of 5.2 million TEUs when initial construction and a planned second phase are completed.
Hutchison Port Holdings plans to spend $110 million to increase its existing terminal’s capacity to 5 million TEUs. PSA’s new 20-year concession for the nearby Rodman terminal reportedly enables eventual expansion to 1.8 million TEUs from 450,000 TEUs now.
The expanded Hutchison and PSA terminals could accommodate 6 million TEUs a year, and the first phase of the Corozal project could further boost the terminals’ annual capacity to 8.2 million TEUs.
Trade growth in Latin America and changes in carrier networks will drive transshipment activity for Panama’s Pacific terminals, Drewry said, but they’ll face competition from other Pacific hubs, including Manzanillo and Lazaro Cardenas in Mexico, Cartagena in Colombia, and Callao in Peru.
Asaf Ashar, research professor at the National Port and Waterways Initiative of the University of New Orleans, expects transshipment to grow at a slower rate, and said much of the increase will be at non-Panamanian ports.
The growing dominance of carrier alliances, rapid increases in ship sizes and the dredging of secondary ports are leading container lines to continue direct calls that once seemed destined to be replaced by hub-and-spoke transshipment, Ashar said. He cited Asia-Europe carriers’ extension of direct services to Baltic ports previously served by transshipments.
“Alliances can put together more traffic, and more traffic usually justifies more direct calls,” Ashar said. “If you have two parallel services with slightly different port calls, it makes sense to put them together.”
An alliance, for example, may replace two partly or wholly parallel strings of 4,500-TEU ships with one 9,000-TEU string, and add an extra ship or two to maximize coverage.
Expansion plans for Panama terminals are raising concerns about overcapacity. That 11 bidders have expressed interest in the Corozal project, however, is an indication that investors see a potential market.
The opening of the new canal locks will intensify competition with the sea-level Suez Canal, which has been gaining market share from Panama. The Suez Canal in 2015 completed an $8.5 billion expansion that created a parallel waterway to allow two-way vessel traffic and reduce vessel waiting times.
Benitez said he expects the expanded Panama Canal to regain its lost market share unless the Suez offers “a dramatic reduction in price.” Panama will offer an 11-day transit time advantage over the Suez for shipments from many Asian ports to the U.S., Benitez noted. “That’s a lot of difference in terms of costs,” he said.
There’s also a third potential interocean canal on the horizon. Chinese interests have announced plans to build a 272-mile, sea-level canal across Nicaragua that would accommodate ships that won’t fit through the expanded Panama Canal.
There’s widespread skepticism, however, about whether the Nicaragua project will ever be built. The planned start of work has been pushed back repeatedly, and the latest announced target now is late 2016.
Besides the Nicaragua project’s cost, reported to be as much as $70 billion, its environmental and engineering challenges would be immense. The Nicaraguan project would require estimated excavation of more than 10 times the total amount of material that’s been excavated at Panama since 1880, when Ferdinand de Lesseps first tried to build a trans-isthmus canal at sea level, Benitez said.