Since it opened in 1914, the Panama Canal has been a vital part of international trade. However, the growth of worldwide shipping over the course of the last century has increasingly strained the Canal’s capacity, causing the Panama Canal Authority (ACP) to estimate in 2006 that the Canal would reach its current operating capacity before 2012. This capacity squeeze resulted in significant waiting times and demand for reserved transit slots, a problem compounded by the canal’s size limitations.
At present, the canal can accommodate the operation of vessels of up to 965 feet (294.1m) in length, 106 feet (32.3m) in width (beam), and 39.5 feet (12m) in depth (draft). Accordingly, vessels of this size are called Panamax, reflecting their status as the largest ships able to navigate the series of locks. Panamax vessels generally can carry 4000-4500 Twenty Foot Equivalent Units (TEUs). Ships larger than the Panamax standard now operate along most major trade routes but exceed the limitations of the canal’s lock system. In response to rising demand for international shipping and the increasing prominence of these “post-Panamax” vessels, canal authorities proposed a major canal expansion that was overwhelmingly approved by the citizens of Panama in a referendum on October 22, 2006. The $5.25 billion expansion project will add a third set of locks to the canal system, as well as deepening and widening existing channels. New locks will be able to accommodate much larger post-Panamax ships that are expected to dominate the route with dimensions of up to 1200 feet (366m) in length, 160 feet (49m) in beam, and 49 feet (15m) in draft. When completed, the expansion promises to reduce wait times and cut shipping costs through the Panama Canal. A new toll structure, combined with decreased transit times and larger vessels, will affect the shipping dynamics of a wide variety of products. ACP estimates 7 percent to 17 percent savings for shippers of switching to post-Panamax due to economies of scale.
How does this expansion impact trade and highway operations in the Midwest? The answer is truly a mixed bag. There is intense competition for the market in Midwest for imported goods. The same is true of exports. The intermodal land bridge formed by the rail connections to West Coast ports provides a slightly faster connection from and to Asian markets. This competitive area is shown in figures 1 and 2 (below).  A 4000 TEU Panamax ship has a more limited competitive area, while the 8000 TEU ship can serve more markets inland.  The percentages indicate the percent of total US population east of the marked line. This is important for many higher value commodities. Railroads have been investing heavily of their own initiative. The response of West Coast ports and railroads will greatly impact whether cargos take an all-water route to East Coast or Gulf ports or travel by rail from the Pacific Northwest, and the ports of Los Angeles/Long Beach and Oakland. The Panama Canal Authority recognizes this as well (as seen in figure 2).

The expansion of the Canal will have several key effects, all of which need to be considered when making transportation policy in the Midwest.

Commodities

Historically, the dry and liquid bulk cargo shipments have generated most of the Canal’s revenues. Bulk cargo includes dry goods, such as grains (corn, soy, and wheat, among others), minerals, fertilizers, coal, and liquid goods, such as chemical products, propane gas, crude oil and oil derivatives. In the last decade, containerized cargo has displaced dry bulk cargo as the Canal’s main income generator. Vehicle carriers have become the third income generator, replacing liquid bulk cargo. A shipping industry analysis conducted by the ACP and top industry experts indicates that it would be beneficial for both the Canal and its users to expand the Canal because of the demand that will be served by allowing the transit of more tonnage.
Agricultural exports present a striking example that is directly relevant to the economy of the Midwest. The growth of the Chinese market will ensure record agricultural exports in 2011. The forecast for U.S. agricultural exports, which are expected to reach a record $135.5 billion in fiscal year 2011, will move China ahead of Canada as the most important destination for US agricultural products. Department of Agriculture Secretary Tom Vilsack noted “Today’s quarterly forecast shows that U.S. agriculture continues to be on track for its best export year ever in fiscal year 2011, eclipsing the previous record set in 2008 by more than $20 billion. Compared to fiscal year 2010, export value is expected to grow 25 percent and volume by 10 percent.”
Routing decisions following the expansion will ultimately be determined by the demands of the shippers and receivers in the interior of the United States. Shippers control supply-chain decisions that will influence the use of the canal. While the expanded capacity of the canal will make size less of a concern for routing decisions, routing strategies will continue to be assessed based on fuel prices, sourcing decisions, and delivery times. Added value (by expanded capacity) enables the shipper to capture economic opportunities along the supply chain. Off-shoring is a common added value strategy where producers improve their productivity by lowering their input costs (mostly labor) while actors in freight distribution add revenue opportunities through the growth of long(er) distance trade. Off-shoring and its added value opportunities could not have worked effectively without intermodalism, which has permitted supply chains to internalize several added value functions. Despite what governments push for, the supply chain is mostly privately operated and privately owned.

Equipment and Positioning

All-water routings from Asia through the Gulf of Mexico or East Coast ports will certainly change the positioning of equipment and shipping patterns for imported goods. Third-party logistics providers will look at lowest cost options in most cases to move products. The current dominance of West Coast ports for imported consumer items is reliant on containerized movements and an efficient intermodal system. Approximately 40 percent of the goods clearing the Port of Long Beach are destined for interior markets. This Interior Point Intermodal (IPI) traffic is generally distributed on double-stacked container loads into regional distribution facilities. At these facilities, the goods are unpacked and often trucked to final destinations. Under a model that allows all-water routes to East Coast and Gulf ports, some shifts in location of full containers is likely. Eastern railroads have already made significant investments to encourage improved container service from Hampton Roads and the Ports of Virginia. Kansas City Southern has improved rail connections to eastern markets and the Norfolk Southern’s Crescent Corridor project will move intermodal loads more efficiently from the Gulf (as seen in figure 3).

Highway Connections

The Panama Canal expansion will likely increase the number of international containers moving into the Midwest. There are several considerations, including permitting and definitions of divisible loads, highway interchange locations and capacity around intermodal yards, and general capacity on critical trade routes. Railroads will likely bring containers and IPI traffic into key points, regardless of whether the port of entry is east or west of Gulf, but the ultimate final delivery will be by truck. Highway planners need to be aware of these intermodal decisions. Savannah provides a case in point. The Port of Savannah has increased its container volumes significantly as major retailers have located facilities there. However, these distribution facilities are on relatively short lease arrangements (10 years). Leasing arrangements may allow these importers to move their operations, leaving significant capital improvements made by the public sector to accommodate such facilities overbuilt for current or future usage. Trade reallocation to the East Coast would also increase truck traffic and overall vehicle congestion on major interstates such as the I-95 Corridor. Many variables, however, cloud the forecast for the impact of the Canal expansion on the Midwest region. First, the primary competing force for the Canal is the land bridge formed by the major railroads operating from West Coast ports. Railroads have been investing annually what the Panama Canal Authority will spend on the construction of the third locks—some analysts have noted that the railroads have spent as much as the ACP will spend on the entire canal expansion effort in capital improvements every year since 2004-2005.

Inland Waterway System and Port Capacity

All-water options inherently have lower costs since they can reduce land bridge requirements and take advantage of the lower operating costs of East Coast ports. The impacts however will likely vary based on commodity, final destination markets, and ultimate timeliness of delivery. This all becomes a moot point however if the infrastructure cannot meet the demands of the markets. “Unless the US does a better job of maintaining its navigation channels, our channel dimensions will not keep pace with larger ships,” says Kurt Nagle, chief executive of the American Association of Port Authorities. The problem is intensified up and down the inland waterway system for bulk commodities and agricultural products “Everything is connected – the rivers, the railroads, Panama. We’re concerned about the logistics up and down the [Mississippi] river and our ability to feed the canal,” says Kendell Keith, president of the National Grain and Feed Association. The impact of the Panama Canal on imports and exports depends on other pieces of our interconnected network. If barges cannot feed into Cape-sized vessels to transit the canal because of the outdated locks on the Mississippi River, it won’t matter if the canal is expanded. If channel depths are not properly maintained, larger vessels won’t be able to access ports directly.

Transshipment

One of the more interesting potential impacts of the Canal expansion would be the development of large transshipment and relay services points in the Caribbean area. Planning is in full force throughout the Caribbean for these transshipment locations. Under this model, larger container services would transit the canal and their cargoes would be divided at several ports of call and loaded on smaller feeder vessels. This option would allow for ships of a lower total TEU and draft size into East Coast and Gulf ports. In many ways, this will encourage more optimal use of funding rather than public sector gambles on massive dredging and expansion projects. Ocean carrier strategies including transshipment options and efforts in Panama and throughout the Caribbean should be considered when making investment and policy decisions in the United States.

Slow Steaming

Rising fuel prices are spurring container liners to operate more of their ships at slow speeds – a trend that is expected to continue, according to the February 14 issue of the Alphaliner Weekly Newsletter. Approximately 2.3 percent of the world container ship fleet is expected to be extra slow steaming by the end of February 2011, the newsletter said. That is the equivalent of 47 vessels of 3,000 to 13,500 TEU capacity that otherwise would be idle operating at 17 to 19 knots instead of full speed of 23 to 25 knots. Figure 4 shows the relative distances of the all-water routes.  Any additional time may impact goods movement due to these longer distances. This practice adds additional time to the all-water routes and could impact decisions that shippers make regardless of the Canal capacity. While we hope that fuel prices won’t make slow steaming a new normal, it is a consideration in comparing the land bridge option for imports.

On the Horizon

The ACP continues to be on target for the massive expansion. “The most important detail to note is that we are on schedule and under budget,” declared Rodolfo Sabonge, marketing director for the ACP at the Transpacific Maritime Conference in February 2011. The project, set to open on the 100th anniversary of the Canal’s opening will certainly add new alternatives for the global movement of goods. The Panama Canal expansion is a profound undertaking; in many ways, rivaling the initial project itself. Time will tell if the expansion results in new patterns. At a minimum, the expansion ensures that competition for delivering imports and exports will be strong for years to come.
For more information about recent research about the effects of the expansion of the Panama Canal, visit cfire.wistrans.org/research/projects/03-18.
Figures 3 and 4 are reprinted from Factors Impacting North American Freight Distribution in View of the Panama Canal Expansion with the permission of Dr. Jean-Paul Rodrigue, Hofstra University.