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Expanded Panama Canal open for business but questions linger on its ability to be a game changer

The long-awaited expansion of the Panama Canal, which was roughly ten years in the making, became a reality yesterday, with the expanded Canal holding an inauguration yesterday in Panama City, Panama to herald the next chapter in its history.

By Jeff Berman, Group News Editor ·June 27, 2016

The long-awaited expansion of the Panama Canal, which was roughly ten years in the making, became a reality yesterday, with the expanded Canal holding an inauguration yesterday in Panama City, Panama to herald the next chapter in its history.

The Canal’s expansion is the largest enhancement project in its history, with more than 75 percent of Panamanians signing off on it in a nation-wide referendum in 2006 and construction on the $5.25 billion project kicking off in 2007. This project was comprised of the construction of a new set of locks on the Atlantic and Pacific sides of the waterway, coupled with the excavation of more than 150 million cubic meters of material subsequently creating a second lane of traffic and doubling the cargo capacity of the waterway, according officials.  The Expanded Canal’s locks are 70 feet wider and 18 feet deeper than those of the original Canal along with using less water due to water-savings basins that recycle 60 percent of the water used per transit.

And they added they view this expansion as a “game changer” that will usher in a new era of global trade, with more than 170 reservations for Neopanamax ships (that hold 12,000 TEU) and commitments of two new liner services to the Expanded Canal and a reservation for the first LNG vessel set to transit in July. Another benefit cited was greater economies of scale to global commerce through new routes, liner services, and various segments like LNG.

“Our customers care that their supply chain is reliable and that they have a diversity of shipping options,” said Panama Canal Administrator and CEO Jorge L. Quijano in a statement. “And the Canal has always been reliable; today, we offer the world new shipping options and trade routes.”

Yesterday, the Panama Canal had its first commercial transit, with the COSCO Shipping Panama Neopanamax containership that left the Port of Piraeus in Greece on June 11 and entered the Canal’s new Agua Clara locks yesterday morning.

The Canal’s expansion came two years after its original deadline. LM previously reported that the Canal’s designers failed to anticipate the scale of the new generation of mega container vessels that are already too large to transit Panama. Instead, they are being deployed in all-water service in the Transpacific.

While ACP officials are viewing the Expanded Panama Canal as a logistics game changer, some industry observers are taking more of a wait and see-type of approach.

“The new canal will not be a game changer but it will alter the way the game is played,” said Ben Hackett, founder of maritime consultancy Hackett Associates.  “As a follow on from the cascading of large vessels being replaced by even larger vessels on the Asia-Europe trade we will see a shift of 5,000-to-8,000 TEU ships to the Trans Pac all-water route to the East Coast via Panama.  This is not due to increased trade, just a surplus of ships. There will be the occasional 12000-to13,000 TEU ship but [it is] unlikely on a regular basis.  The pricing structure treats all the vessels as if they are fully utilized so any gap between laden boxes and empties has to be paid for by the carrier.”

FTR Senior Analyst Larry Gross said he views the Expanded Canal as a “non-event” based on how there has been a migration of freight from the West Coast to the East Coast that has been underway for a number of years either in the smaller Panamax ships via the Canal or bigger vessels coming the other way around via the Suez Canal.

“The bigger ships and too many of them have created a global container shipping capacity glut so rates are in the tank and I don’t see the [ocean carriers] further reducing them if they can reduce costs via bigger ships, they will try and hold onto the margin,” he said. “Yet lower rates are the only thing that will shift additional freight.  Shippers don’t care what size ship their container travels on, any more than you would care whether you fly on a 737 or a 767.  The only thing you look at in choosing a flight is the price of the ticket.  So I don’t see much effect.

Gross also noted that many of the East Coast ports are not ready for the bigger ships, as they are either currently lacking the depth (Savannah, Charleston) or height (New York’s Bayonne Bridge), explaining that not many of the bigger ships will be deployed if they can’t call on New York.

He likened this to the equivalent of an economic continental divide running north-south through the eastern U.S. somewhere around the middle of Ohio, with freight from Asia destined for east of that line wants to go to the east coast, west of that line to the west coast and then rail beyond.

“The bigger ships coming through the canal may shift that line a bit westward, and it is the freight contained within that zone that may move,” he said. “It is not a big deal.”

Leading up to the opening of the Expanded Panama Canal there had been a broader conventional wisdom that the East Coast would see tremendous gains but that sentiment was ultimately misguided, noted David Egan, Head of Industrial & Logistics Research in the Americas, for CBRE Group Inc.

“The larger reason for that was that much of the gains the East Coast were expected to capture, they already did,” he said. “They captured the gains for a variety of reasons, and the balance between the volumes of the major ports on the east and west coast were around 52 percent-48 percent favoring the West coast, which is pretty sharply down from closer to 60-40 ten years ago, when this expansion began. The thought at the time was it would end up at 50-50, due to the Canal and larger ships and things like that. The wider canal does not generate demand, all it does is facilitate the movement of cargo a little bit more easily.”

What has happened, he said, is that demand has shifted and the way that people have wanted access to the U.S. has changed, but not in the way that was expected in the form of greater demand for the East Coast.

“But what has happened is that shippers have found different ways to get to the East Coast, with the east-west coast split more even than it used to be, so I would suggest that the East Coast has already been the winner for the past decade, and over the short term there is not likely to necessarily be a winner or a loser,” he said. “We are at a point now where the East Coast will likely gain a little bit more share but not so much to make a major difference. We are at a point now where the balance is going to have to stabilize a bit and this is about where it is going to stay for a while in the short-term.”

 

http://www.logisticsmgmt.com/article/expanded_panama_canal_open_for_business_but_questions_linger_on_its_ability?utm_source=TWIL&utm_medium=NLT