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Datamyne Blog

Covering trade & transport, with tips on using import-export data to advantage

PanaMAX (or mini) Prospects?

Category: Markets, Transport

A bigger canal still faces competition from the Suez, rail

by Bill Armbruster, blog anchor

The Panama Canal will become a more viable option for trade between Asia and the eastern U.S. after the waterway’s expansion is completed in 2014, but I question whether it will see much additional cargo movement.

As Chris Koch, president of the World Shipping Council, told me, “carriers will offer more all-water services only if there is sufficient demand for them.” But carriers could satisfy much of the expected growth in demand from its likeliest sources through an increase in Suez Canal services.

Hong Kong-NewYork: Same Distance Both Ways

Currently, about one third of imports from Asia are shipped on all-water routes to the East Coast – this includes Suez traffic. These services have been growing rapidly. The Port of Savannah, for example, now has seven Suez services, up from just two a few years ago.

One reason for the increase in Suez business is the expansion in container fleet capacity. The carriers have more and bigger ships that they have to deploy somewhere. The Suez Canal can easily accommodate them, and the major East Coast ports – New York, Norfolk, Charleston and Savannah – are all handling services with ships in the 8,000- to 8,500-TEU range.

Once the new locks are completed at the Panama Canal, ships with capacity of up to 12,000 TEUs – more than twice the current maximum of 5,000 TEUs – will be able to transit the waterway. That will make it immensely more competitive against Suez services because carriers will be able to achieve equal economies of scale on both all-water routes. “The result may be that some of the strings moving via Suez will be rerouted via Panama,” said Mary Ann Kotlarich, a spokeswoman for Maersk.

But it’s far from a given that Maersk or any other carrier will do so, meaning that it’s far from certain that Panama will regain business that it has lost to Suez.

It used to be that Suez services were viable only for cargo originating in Singapore and points to the west. But now Suez services are competitive as far north in Asia as Hong Kong, and they probably will remain competitive for decades to come, barring major shocks to the system such as a shutdown at the Suez Canal.

The distance between Hong Kong and New York is about the same on both all-water routes, so fuel costs will probably be about the same, and transit time is about the same, too, depending primarily on the number of port calls. So the real difference in costs could boil down to tolls at the two canals. The Panamanian authorities have to be careful that they don’t raise tolls too high.

Increased manufacturing in India and Vietnam has driven much of the increase in Suez traffic. Some cargo from Vietnam and other Southeast Asian nations that now moves through the Suez could shift back to Panama once the canal expansion is completed.

Rail Rates Can Give Intermodal the Edge

Despite the growth in Suez services, the Panama Canal’s main competition for most Asian cargo will continue to come from intermodal services via the West Coast. Shippers and carriers shifted a lot of business to all-water services from 2005 to 2008 in the wake of the immense logjams on the West Coast in 2004. West Coast ports and the western railroads learned their lessons and have eliminated the key bottlenecks. As a result, there was no congestion on the West Coast in 2010 even though it was handling more cargo than in 2004.

The real battle for Asian cargo is in the Ohio River valley and other interior regions of the eastern United States. As long as rail rates remain competitive, intermodal services via the West Coast will continue to have the edge, according to Ben Hackett of Hackett Associates. The western railroads have invested huge sums in improving their services to this region, and will do their best to remain competitive, Hackett notes. But the eastern railroads aren’t rolling over. Norfolk Southern opened its Heartland Corridor from Norfolk to the Midwest last September, and CSX is developing its National Gateway, designed to speed the flow of cargo between the Mid-Atlantic and the Midwest.

From the shipper perspective, the decision will come down to freight rates, transit times and reliability. Rail service has become more reliable, and the Panama Canal will become more reliable after the expansion is completed. West Coast services will continue to enjoy a time advantage, and freight rates will certainly be competitive.

From the carrier perspective, it’s all about costs and revenue. Toll increases at the Panama Canal that have already taken place and that are planned for the future are affecting its cost-competitiveness. Surging bunker fuel costs will also affect carrier decisions on whether to offer more all-water services.

But the biggest obstacle for both Panama and Suez routes is the shortage of high-paying return cargo. If carriers can’t make enough money on the backhaul to justify the higher costs of all-water service, don’t expect big increases in capacity on either route.

About Bill Armbruster

Bill Armbruster, the anchor for the Datamyne Blog has covered shipping and trade for 30 years as a reporter and editor with The Journal of Commerce and Shipping Digest. “I’ll be blogging on headline news and current issues in oceangoing commerce, trying to shed some light on the backstories and, wherever I can, supply some sound advice for shippers.” Write Bill care of [email protected]

The opinions expressed in this article are those of its author and do not purport to reflect the opinions or views or Descartes Datamyne. In addition, this article is for general information purposes only and it’s not intended to provide legal advice or opinions of any kind and my not be used for professional or commercial purposes. No one should act, or refrain from acting, based solely on this article without first seeking appropriate legal or other professional advice.

Date posted: March 1, 2011

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