By Scott Lovell, Cushman & Wakefield | Commerce in Salt Lake City
The Panama Canal is a 48-mile-long waterway that traverses the country of Panama, linking the Atlantic and Pacific oceans. The canal shaves off about 8,000 miles of travel around the tip of South America, significantly saving time and fuel for shipping companies. Despite this great reduction in travel time, the size of the canal restricts larger container ships from taking advantage of a shortened trip.
The size of ships has also expanded significantly since the 1970s when the first ships were built exclusively for hauling containers. A large reason for the canal’s expansion is the economies of scale that occur from increasing the number of containers on the same ship, thereby reducing manpower and fuel. The current Panamax ships can haul up to 4,500 Ton Equivalent Units (TEUs). With the expansion, Post Panamax and New Panamax ships will be able to traverse the expanded canal. These larger container ships are able to haul up to 12,500 TEUs. Class E ships, the largest of the ships, will not be able to move through the expanded canal.
The increased capacity of the Panama Canal will have long-lasting effects on trade routes. Ships that previously navigated around South America will now have the ability to traverse the expanded Panama Canal and arrive on the East Coast much faster. Shipments from China to the United States have long included large ships that primarily stop in West Coast ports like Los Angeles or Long Beach. This cargo is then loaded onto trains and trucks, which carry the cargo across the United States. With the expansion of the Panama Canal, shippers will have the option of taking these larger ships through the canal and stopping in the ports along the East and Gulf coasts. Some ports like Baltimore and Norfolk are already capable of handling these larger ships. With the potential for additional shipping ping contracts, other East Coast ports are making large investments to make sure they’re ready when the expanded canal is operational.
In response, several ports out West are making changes to their ports and systems to increase capacity and the flow of inventory. Some of these changes can be readily seen as the two largest seaports in the United States, the Port of Los Angeles and the Port of Long Beach, upgrade facilities. These efforts include dredging the bay to accommodate larger vessels and expanding rail access to increase efficiency. Further to the north, the Port of Prince Rupert in British Columbia, Canada, has expanded its TEU capacity by 235 percent over the past six years. Additional plans are underway to increase this capacity to 2 million TEU by 2016.
With the added competition over the past several years from ports to the north and south, the rival ports of Seattle and Tacoma have announced their plans to join forces. The alliance will allow them to better compete against the expansion by the East Coast ports, as well as with existing West Coast ports, as they vie for additional shipping contracts. The two ports will maintain asset ownership and port commission governance, but will work together to position themselves to deal with the challenges and opportunities in the region. Most of the port of Seattle is able to handle modern ships, though some upgrades are needed. The port of Seattle is currently undergoing a Terminal 5 modernization plan. The planning stage is currently underway, which will include how funds will be raised to support the heavy costs of this project. Although specifics are not yet determined, the modernization will likely include power upgrades that will be scalable for future use, berth deepening to allow larger ships and dock strengthening for larger cranes. The improvements are expected to be completed by 2018.
While the West Coast specializes in reaching inland regions, some ports will likely be less impacted by the Panama Canal expansion due to their locations. Northern ports like Seattle, Tacoma and Prince Rupert are positioned well to ship goods to Chicago and Minneapolis, while the ports in Southern California have a competitive advantage when shipping to the Gulf Coast region. The northern ports are expected to see less competition from the East Coast ports, as it is still quicker to unload in Seattle and ship across country to Minneapolis than it is to go through the Panama Canal and unload on the East Coast. The southern ports will see increase competition, however, as the distance from those ports through the Panama Canal and to the Gulf Coast region is short enough that it competes with the transit time of shipping across country.
Kevin Thomas is a Senior Vice President and Principal of Lee & Associates-Newport Beach. Kevin specializes in Industrial and Office brokerage in the Airport Area of Orange County, California.
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