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The Panama Canal expansion is impacting supply chains from the Gulf Coast to the Great Lakes, and it’s poised to impact even companies not directly involved in the ports. Here’s everything you need to know.
Background: What expansion?
After more than a decade of work, an expansion of the Panama Canal finally opened on June 26, 2016. The expansion has doubled the canal’s capacity by adding two new sets of locks and widening and deepening existing channels. In addition to enabling a larger number of ships to pass simultaneously, the canal can now accommodate a larger ship size as well – up to 14,000 twenty-foot equivalent units (TEUs) from a previous maximum of about 5,000 TEUs (referred to as New Panamax and Panamax sizes, respectively).
Even before the expansion, the Panama Canal served a significant amount of shipments: some 340 million tons of goods, or 6% of global trade, passed through the canal in 2015. Yet it had been losing business – 10% to 15% of annual revenue – to the Suez Canal over the past three years, according to The Wall Street Journal. With the expansion, the Canal becomes more competitive.
Its impact on North American supply chain will be equally substantial, with ripple effects even for shippers who don’t deal directly with overseas shipping at all.
To start, the canal’s expansion will increase shipments to the gulf ports.
The most obvious and immediate impact of the canal’s expansion is an increase in traffic, with the additional shipments moving away from the West Coast to Gulf and East Coast ports.
According to Jones Lang LaSalle, as much as 25% of imports currently coming through the West Coast could shift. (More conservative research puts it at closer to 10%). In effect, the canal’s expansion turns an enormous area stretching from the New Orleans Gulfport up to the Great Lakes Region into a competitive “battleground region” representing 15% of GDP. In this newly competitive area, shippers will have to choose between West Coast ports and Gulf/East Coast ports-via-Panama.
Due to overcrowding and capacity issues at West Coast ports, it’s inevitable that many shippers will opt to take advantage of the new expansion. The Panama Canal’s executive vice president of planning and business development, Oscar Bazán, expects a 16% to 17% revenue increase in 2017.
In turn, truck capacity will decrease as carriers struggle to pick up the influx of new inbound and outbound cargo.
Importers who do business throughout the United States, and especially those who are specifically in the Midwest and Southeast United States, will have the most to gain from rerouting freight. The canal will continue (as it does currently) to best serve products that are lower value, high volume and do not require fast delivery.
Unfortunately, traffic moving through the canal could run into downstream capacity constraints in the U.S. For example, East Coast ports still require significant infrastructural work to expand their own channels in order to accommodate the larger ships that will be able to pass through the Panama Canal. The Ports of Savannah, Charleston, Jacksonville, Miami, Baltimore and Philadelphia have all announced such projects. But many of these projects are years out: work in Savannah, for instance, is already underway but isn’t expected to be complete until 2018. According to the American Association of Port Authorities, nearly $155 billion will be invested by 2020 to expand U.S. ports to handle bigger ships.
Similarly, OTR transportation will strain to meet demand. The 24th Annual Study of Logistics and Transportation Trends from Logistics Management noted in 2015 that “demand for transportation has exceeded the available capacity in several surface transportation modes.”
The increased shipments coming through the Panama Canal are likely to tighten available capacity from the Gulf Coast to the Great Lakes Region. In such a capacity-constrained environment, carriers will be forced to be selective about the loads they carry. That selectiveness is likely to translate into carriers prioritizing existing service agreements.
Shippers are advised to lock in truck capacity now to ensure they aren’t left high-and-dry.
The market has not yet fully responded to the expansion; no one knows how trade flows, shipping network configurations, and future competition (like the possible but increasingly unlikely Atlantic-to-Pacific Nicaraguan Canal project) will affect the supply chain marketplace.
What we do know is that shipments through the Panama Canal will increase cargo moving to and from Gulf and East Coast ports, with even conservative estimates putting the increase at 10%. We also know that those shipments will run into downstream capacity constraints in the U.S. supply chain. Shippers who wish “to capitalize on efficiency gains and infrastructure improvements already taking hold,” as Inbound Logistics writes, need to move quickly to ensure they have motor carrier relationships in place before capacity tightens.