Panama Canal Expansion: Factors Influencing the Potential Economic Impacts

on the U.S. Economy

Stephen Fitzroy

Economic Development Research Group, Inc.www.edrgroup.com

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Panama Canal Expansion: Key Economic Factors

Vessel Economics and Operations Suez Canal and US West Coast Competition Caribbean Transshipments Competition from Canadian and Mexican Ports Measures of US Port Capacity Changes in Landside Logistics US Energy and Export Policy What We Should Expect

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So, Where is the Panama Canal?

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Google Maps, April 2014

Panama Canal Volumes - 2012

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Northeast Asia-East Coast U.S.

East Coast U.S.-West Coast S. Ameerica

Europe-West Coast S. America

South America Intercoastal

East Coast U.S.-West Coast C. America

Europe-West Coast U.S./Canada

U.S. Intercoastal

East Coast S. America-West Coast U.S./Canada

East Coast U.S. Canada-Oceania

All Other Routes

0 10 20 30 40 50 60 70 80 90

Tonnes (millions)

Potential Impacts on US Infrastructure and Markets Lower Relative Costs for Containerized Cargo

Between Northeast Asia and US East Coast Major shifts of container volumes to US East Coast

Greater Export Opportunities for US Bulk Commodities Larger bulk vessels lower US costs

Increased US Container Port Capacity More surge capacity, more calls

More Demand for Landside Road, Rail and Distribution Center Capacity Move containers to inland markets

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Container Vessel Operations Move to larger vessels (13,000 to 18,000TEUs)

driven by operating costs and thin profit margins Savings can range from 40% to 60% per “slot”

compared to 5000 TEUs and under. Cascading has already begin – moving larger

vessels into current rotations New Alliances (P3, G6, CKYH(E) and Chinese

lines) forming quickly Members will consolidate loads on larger vessels Fewer calls, but larger volume discharges

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Container Vessel Economics

Vessel Operating Costs: Capital costs Manning (labor) Fuel use for main (HFO) and auxiliary (MDO) engines Stores and lubes Maintenance Port costs, insurance, etc.

Maximum Economic Vessel Calls Three to four after passing through canal

Discharge Rates – Number of TEUs Loaded/Unloaded Larger vessels (13k to 18k) discharge 8k to 10k per call

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Effects of Bunker Fuel Costs

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Source: Mercator International, Panama Canal Expansion Study, June 2012

Suez Canal and US West Coast Competition Larger vessels (up to 18,000 TEUs) will begin

calling of US West Coast ports this year. 13,000 TEU vessels will begin calling on NY and VA

Ports in 2014Q3 US East Coast will be served by Suez from Asia Railroad pricing margins for mini-land bridge operations

Pooling of cargoes by alliances will accelerate this trend

Operating cost will decline well before Panama Canal expansion is complete

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Canadian and Mexican Ports Competition Canadian ports, especially on West Coast, have

drawn a large share to US-bound Cargo Productivity and connections to US Midwest are keys

Mexican ports are emerging as low-cost alternatives Less congestion and strengthening rail links to Central

US markets Emergence of manufacturing and “near-shoring

in Mexico may combine with lower labor costs to stimulate shipment of intermediate goods through Mexico

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Caribbean Transshipments Marine transshipment hubs function in several

ways: Like the air hub and spoke system – allows for more

efficient operation of larger vessels based on smaller feeders

Vessel loads can be reconfigured while cargo is in transit – very important for logistics management

Costs for transfers are low relative to US ports Locations are directly on routes to/from Panama

Canal and US East Coast or Europe

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Location of Caribbean Transshipment Ports

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Mariel

Measures of US Port Capacity Navigational Channel Depth/Vessel Capacity

Only New York, Jacksonville and Houston exceeded 50%

Berth Capacity Charleston (47%) and Savannah (74%) exceeded 50%

Crane/Lift Capacity Savannah exceeded 50%

Container Yard Capacity New York, Virginia Ports, Miami and Houston exceeded

50% Gate Capacity and Chassis Availability

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Source: Container Port Capacity Database, U.S. Army Corps of Engineers, 2010

Factors Affecting Cost Savings Panama Canal Tolls Transshipment Costs Port Charges Terminal Operator Costs Rail Transportation Costs Drayage and Chassis Management “Net” Cost Savings Accruing to Shippers

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Changes in Landside Logistics More On-Dock Rail, Intermodal and Inland Port

Operations Supporting Major Container Ports Accommodate surge loads and expand market access Greater emphasis on value-added logistics services

Intensifying Use of Transload Facilities At or Near Ports Convert cargo from 40-foot international to 53-foot

domestic loads Accelerating Trend Towards both Larger and

Smaller Distribution Centers Larger DCs near ports to redirect imports Smaller regional DCs to handle same-day fulfillment

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US Energy and Export Policy Trade Agreements Affect Volumes and Prices

TPP (Trans-Pacific) TTIP (Trans-Atlantic) Bi-Lateral (Columbia, South Korea, Panama)

Commodities Most Likely Affected: Agriculture

Corn Soybeans

Energy LNG Natural Gas Liquids Coal

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What’s Should We Expect? Likely

Cascading to larger container vessels More rapidly than expected, but

not due to the Panama Canal More competitive US

Exports Driven by reduced costs for

deep draft bulk vessels and emerging LNG/Energy

More emphasis on logistics and supply chain innovations To handle container surges in

larger ports)

Unlikely Big savings for shippers

Most captured by TSPs Major Shifts of

Containerized Cargoes to US East Coast

Re-shoring of “traditional” manufacturing Near-shoring may shorten

supply chains for US Major highway

investments Alternatives – Rail/Barge

should be considered

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More Information

Contact: Stephen FitzroySfitzroy@edrgroup.com

For a copy of this presentation and other EDR Group Presentations:

http://www.edrgroup.com/ited2014

To access the library of past EDR Group Papers, Projects and Presentations:

http://www.edrgroup.com/library

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