Expansion on the Southeastern United States Bruce Lambert, Executive Director Institute for Trade and Transportation Studies - 10 Veterans Blvd., New Orleans, LA 70124 T: 540-455-9882 E: bruce@ittsresearch.org Working Paper No. 4 December 2016
Expansion on the Southeastern United States 2 The Institute for Trade and Transportation Studies provides research data and expert opinions to its members concerning the effects of commercial freight movements on domestic and international activities, regarding infrastructure and transportation needs, and safety implications. The ITTS member states include: Arkansas State Highway and Transportation Department Florida Department of Transportation Georgia Department of Transportation Kentucky Transportation Cabinet Louisiana Department of Transportation and Development Mississippi Department of Transportation Missouri Department of Transportation Virginia Department of Transportation West Virginia Department of Transportation
Expansion on the Southeastern United States 3 Executive Summary With much fanfare, the long anticipated third set of locks officially opened in June, 2016, with the passage of China Ocean Shipping Company s aptly named Panama. The expanded Panama Canal should benefit trade with the Southeastern United States in the future. However, the Panama Canal has not seen the immediate boom in shipping that was anticipated when the project was first approved in 2006. Part of the reason is that carriers have already shifted some trade from the West Coast to Suez Canal services, worldwide trade has not grown as strongly as anticipated, and such large infrastructure patterns take time for ship chains to fully adjust to these new systems. It is anticipated that over the next several years, carriers will transit the Canal with larger vessels heading to/from the Southeast, from both Asia and Latin America, but the forecasted boom to the Eastern U.S. will continued to be shaped both by world markets and shipper s anticipated service needs.
Expansion on the Southeastern United States 4 CONTENTS Executive Summary 3 Table of Figures 5 Trade Activity Through the Panama Canal 6 Why Expand the Canal? 6 Transits Through the Panama Canal 9 Conclusion 11 Works Cited 13 Appendix 14 Appendix 1. Growth of Containerized Vessel Size 14 Appendix Table 2. Panama Canal Traffic Along Principal Trade Routes, Ranked in Panama Canal Toll Tonnage, (in Thousands) 15 Appendix 3. Containerized Trade Between ITTS Port Districts and the Asia (excluding the Middle East and Turkey, 2013-2016) 16
Expansion on the Southeastern United States 5 Table of Figures Figure 1. Panama Canal Authority, Top 15 Countries by Origin and Destination Cargo, Fiscal Year 2015, (in long tons)... 6 Figure 2. Vessel Transiting the Gatun Locks. Marine Architects have designed Panamax Vessels to maximize the space available for a vessel to safely transit the Panama Canal.... 7 Figure 5. U.S. Regions affected by Panama Canal Expansion- Container Trades (U.S. Department of Transportation, Maritime Adminstration, 2013)... Error! Bookmark not defined. Figure 6. Trade Activity Through the Panama Canal... 9 Figure 7. Containerized Traffic Through ITTS Port Districts, by Millions of Tons, 2015-2016... 10 Figure 8.Bulk Traffic Through ITTS Port Districts, by Millions of Tons, 2015-2016... 10
Expansion on the Southeastern United States 6 Trade Activity Through the Panama Canal There is a unique relationship between the Panama Canal and the United States. The United States is the largest market that utilizes the Panama Canal, not only for shipments terminating or beginning on the U.S. East coast, but also for shipments to the West Coast from Europe or Africa, or even intracoastal trade moving between U.S. ports. 1 Given the dependence on the Panama Canal, many ports and logistics officials throughout the Southeast were excited about the potential for an expanded Panama Canal to promote more trade opportunities. The hope in new diversions to the East Coast was captured well in a Wall Street Journal Article that estimates that 10% of all US. Asian imports could potentially shift to East Coast ports (Mufson, 2016). The recent opening of the third set of locks, combined with some increased trade in Asian containerized service through the Canal, has lead others to see the anticipated traffic is now occurring (Bonney, US Gulf ports look to Asia for growth in containerized trade, 2016). Figure 1. Panama Canal Authority, Top 15 Countries by Origin and Destination Cargo, Fiscal Year 2015, (in long tons) This paper will largely discuss containerized shipments, as bulk cargos tend to move in different supply chains and do not possess the same flexibility as containerized shipping. Also, containerized shipping tends to pay more regarding wharf age, etc., than bulk cargos, while also generating more port related jobs. As such, the focus largely centers on containerized cargo. Why Expand the Canal? The Panama Canal Authority recognized they were becoming technically obsolete. The growth in the physical dimension of shipping vessels resulted in the Panama Canal being unable to handle larger vessels that are becoming the workhorses in world containerized trade. The Panama Canal s locks, Gatun on the Atlantic Side and Pedro Miguel and Miraflores on the Pacific, were 110 feet wide by 1,000 feet long, with a maximum beam of 106 feet wide and 965 feet long. This size became known as a Panamax Vessel. 1 Appendix 2 reports on the Panama Canal s principal trade routes.
Expansion on the Southeastern United States 7 This vessel size was the workhorse of the U.S. maritime industry until the 1980s, when shipping companies began investing in vessels unable to transit the Panama Canal. As one of the largest carriers in the Transpacific, APL's ability to generate sufficient revenues was limited and it decided to commit itself to capturing more discretionary cargos by offering dedicated double stack train services and ordering vessels larger than could transit the Panama Canal. To increase its cargo volumes, APL formed the first Transcontinental double stack train services. APL recognized that an intermodal routing provided a ten-day service advantage over an allwater service through the Panama Canal to New York. While the transit time was important, APL also offered more services to the shipper. The customer could receive a single through bill of lading while knowing that APL had committed service schedules. The idea of receiving only one through bill of lading was very attractive to shippers. Before intermodal routings developed, shippers had to secure inland transit separate from the ocean transit, which added additional costs and time. Figure 2. Vessel Transiting the Gatun Locks. Marine Architects have designed Panamax Vessels to maximize the space available for a vessel to safely transit the Panama Canal. The growth of discretionary cargos allowed APL and other ship lines to expand their capacity in the Transpacific. By using larger, faster ships, a carrier could offer a fixed, weekly sailing schedule, while the additional capacity reduced the per container cost. With the double stack train, these larger ships could now offer a competitive service to the Eastern U.S. via West Coast ports. These new services were competitive, because they increased the amount of revenue that each unit train could generate, provided a shipper with a single through bill of lading and lowered the net cost of inland transportation. At the same time, faster transit allowed carriers more flexibility in managing inventory carrying costs, as shipments arrived at eastern U.S. destinations roughly a week faster than the all-water Panama Canal option. The result was that trade patterns changed and intermodalism in the United States developed, which allowed West Coast ports to be more competitive to services to the Eastern United States when containerized cargo was integrated with rail services. (Monios, 2013). While bulk cargos are important in the U.S. trades, the discussion on the Panama Canal expansion has focused on the competitive repositioning of imported containerized shipments from Asia into the Eastern U.S., which this paper will largely focus on for evaluating the Panama Canal s expansion on the Southeastern U.S. 2 While this transformation of intermodalism allowed West Coast ports to capture a larger share of the U.S. Asian trade, several work stoppages and labor disputes caused shippers and carriers to examine alternative routings. As such, the share of Asian Containerized trade by coast shifted over the past ten years, as firms utilized larger ships in the Eastern U.S. trades, with services through the Suez Canal (which also increased its operational size in 2015). In 2015, labor unrest in the West Coast led shippers to route cargo away from the West Cost to other ports. It appears that the shift was temporary as cargos returned to the West Coast, based on relative shares on the year-to-date in 2016. 2 Other trade routes involving the Southeast that could benefit from the expanded Panama Canal, such as trade with the West Coast of South America, but for the sake of this paper, I will focus only on Asian Trade flows. Furthermore, several bulk exports could potentially benefit from the expanded Canal, such as Liquefied Natural Gas and grains, but are also not highlighted here.
Expansion on the Southeastern United States 8 Table 1. Share of U.S.-Asian Containerized Trade, in Tonnage, by U.S. Port Range, in millions of containerized vessel dollars, 2012-2016. Direction/U.S. Coast 2012 2013 2014 2015 2016 YTD Exports $106,114 $107,927 $109,148 $98,753 $82,708 Atlantic 29% 28% 29% 32% 29% Gulf 5% 5% 5% 7% 7% Pacific 66% 67% 66% 61% 64% Imports $475,693 $481,649 $499,231 $509,248 $839,561 Atlantic 27% 27% 29% 31% 30% Gulf 11% 11% 11% 11% 10% Pacific 63% 63% 60% 58% 60% The following graph from the Maritime Admiration s Panama Canal Expansion Study shows the competitive area where changes in the Panama Canal expansion could influence shipping patterns. The argument suggested that larger vessels on the East Coast would benefit from lower per container costs when compared to West Coast intermodal services, and the expanded Panama Canal would be an attractive option for shippers in the eastern United States (U.S. Department of Transportation, Maritime Administration, 2013). Figure 3. U.S. Regions affected by Panama Canal Expansion- Container Trades (U.S. Department of Transportation, Maritime Administration, 2013) The areas in orange and white are assumed to be competitive because of their location to a port area, as lower vessel costs and lower inland costs would make the Eastern ports more competitive in these markets. The hinterland area in blue could be served by either rail from the West Coast or rail/truck from the East Coast, and that is the area where the Panama Canal competes with West Coast intermodal traffic. The Panama Canal, competing against the growth of U.S. intermodal traffic to
Expansion on the Southeastern United States 9 generate the necessary tolls to support the Canal s operations, began discussion on the potential for a third set of locks to accommodate the larger vessels. 3 Seeing the larger ships and the importance of the Panama Canal, the people of Panama approved the expansion of the Panama Canal by a public referendum in October, 2006. 4 To accommodate the larger ships, the project included not only two new sets of locks, but also dredging the main channel to accommodate larger vessels, at a total cost of $5.3 billion (Michael D McDonald, 2016). Transits Through the Panama Canal Despite the opening of the third locks, traffic through the Panama Canal remained flat immediately following the opening of the third locks. The following figures, accessed from the Panama Canal Authority, show that volumes have not dramatically Figure 4. Trade Activity Through the Panama Canal changed since June, 2016, and in fact, the number of both net transits and tonnage remain below comparable figures in 2015. 5 The Panama Canal Authority expressed surprise at the fact that more containerized ships are not transiting the cargo, but that ships are using the Canal and are also switching some traffic from the Suez Canal to do so. When looking at trade containerized import tonnage through the ports located in the ITTS region, the same trend emerges. Overall, containerized imports did increase through the ports in the ITTS region, with volumes peaking in 2015 largely in response to the labor conditions of the West Coast. 6 3 The United States began construction of a third lock in the 1930 s, but the project was abandoned. 4 The history of the Panama Canal Expansion is available at the Panama Canal Authority Website (http://micanaldepanama.com/expansion/) 5 http://www.pancanal.com/eng/op/transit-stats/2016/table02.pdf 6 Maritime trade by value is used throughout the document, as value is
Expansion on the Southeastern United States 10 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exports-2015 Exports-2016 Imports-2015 Imports-2016 Figure 5. Containerized Traffic Through ITTS Port Districts, by Millions of Tons, 2015-2016 For the non-containerized (bulk) cargos, import trade has also declined over the summer. Both declines reflect market conditions in the United States, as the U.S. economy slowed during the summer months, leading firms to reduce expectations for Holiday retail sales (Knowler, 2016), and imports of iron and steel declined (Bonney, Global spat over steel trade could shift supply patterns, 2016). 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exports-2015 Exports-2016 Imports-2015 Imports-2016 Figure 6.Bulk Traffic Through ITTS Port Districts, by Millions of Tons, 2015-2016
Expansion on the Southeastern United States 11 Conclusion While the immediate effects in the first few months of the Panama Canal are not necessarily explosive, there remains some optimism that cargo will eventually move through the Panama Canal for several reasons (Bonney, US Gulf ports look to Asia for growth in containerized trade, 2016). Listed here are a few trends that suggest that Eastern U.S. ports will see more services through the Panama Canal: Labor unrests along the West Coast ports lead more firms to develop alternative supply chains through East Coast ports. As shippers rely more on these services, the ongoing discussion of longshore labor makes the Eastern ports a good alternative, especially as most of the U.S. demand (excluding the western coastal states) lies in the Eastern United States. The Panama Canal Authority does charge tolls, and the larger vessels are expected to pay a larger toll to service the debt financing of the Third Locks. While the industry argued against paying higher tolls, it appears that larger vessels are beginning to transit the Canal (Bonney, New Panamax ships total 11 percent of canal transits, 2014). Carriers have begun examining routing traffic from the Suez Canal to the Panama Canal, which will not lead to a growth in total traffic along the Eastern U.S., but would benefit the Canal. There appears to be some interest in shifting back from the Suez Canal services to the Panama Canal, which will not change total traffic patterns, but will change only the relative market share between the two canals. There are always factors that could negatively influence the growth of U.S. trade with Asia, and by extension the benefits of a larger Panama Canal, to the East Coast: The potential change in U.S. trade policy that the passage of the Transpacific Partnership agreements seems unlikely, which will limit the expected trade growth associated with the agreement. World growth, while still positive, is forecasted to remain low over the next few years, limiting the growth of overall world trade (International Monetary Fund, 2016). The question of reshoring and nearshoring, when combined with the manufacturing renaissance, may reduce the demand for Asian materials and components. The financial condition of containerized carriers remains very unstable, as highlighted by Hanjin Shipping s bankruptcy, and the potential shakeout of various vessel consortiums. As most ports are landlord ports, there always remain questions concerning where will cargo go in the aftermath of any changes by these new consortiums. 7 Also, the pace of vessel scrapping may suggest additional consolidation in the containerized sector. The question of port growth often is determined by the ability of the port to attract and secure cargos. As such, increased traffic through a port has implications not only on ports themselves, but their surrounding communities. There are physical limitations as larger ships require deeper channels, berths and facilities, and given the heavy scraping of the Panamax vessels, the world fleet is getting larger. As ports not only require deeper channels, but landside access and other services, there will be more demand for moving cargo quickly to and from the terminal. (Institute for Water Resources, U.S. Army Corps of Engineers, 2012). This change in larger vessels discharging more cargo per transit means that those ports unable to handle these larger vessels may find themselves in a fruitless game of catch-up, without a guarantee that any service will ever materialize. 7 Port authorities do not necessarily own the cargo, but provide the facilities for maritime activity to occur.
Expansion on the Southeastern United States 12 Containerized services often call multiple posts during a service call in the U.S., which means that the smallest port often determines the size of vessels in a particular service, whether that port s location is in the U.S. or overseas. The role for State DOT s could evolve into one of funding port related projects, both for water access (dredging), and for landside infrastructure. The continued growth of larger ships means more truck volumes in the area around the port, resulting in more traffic for local communities. In addition to potentially more local traffic in a port area, this also raises the question concerning whether State DOTs should to look at other non-highway options, such as waterways or rail intermodal. While ports benefit from increased traffic, their customers may be limited by the ability to connect cargos efficiently to and from inland markets (Institute for Water Resources, U.S. Army Corps of Engineers, 2012).
Expansion on the Southeastern United States 13 Works Cited (n.d.). Retrieved from http://qz.com/164994/maersk-and-lego-are-both-going-to-profit-off-the-worlds-biggest-cargo-ship/ Bonney, J. (2014, Nov 2016). New Panamax ships total 11 percent of canal transits. Journal of Commerce. Bonney, J. (2016, Oct 11). Global spat over steel trade could shift supply patterns. Journal of Commerce. Retrieved from http://www.joc.com/breakbulk/global-spat-over-steel-trade-could-shift-supply-patterns_20161011.html Bonney, J. (2016, Nov 26). US Gulf ports look to Asia for growth in containerized trade. Journal of Commerce. Retrieved from http://www.joc.com/port-news/us-ports/port-mobile/us-gulf-ports-look-asia-growth-containerizedtrade_20161126.html Institute for Water Resources, U.S. Army Corps of Engineers. (2012). U.S. Port and Inland Waterways Modernization: Preparing for Post-Panamax Vessels. Retrieved from http://www.iwr.usace.army.mil/portals/70/docs/portswaterways/rpt/june_20_u.s._port_and_inland_waterways _Preparing_for_Post_Panamax_Vessels.pdf International Monetary Fund. (2016, Sep 26). Keeping-the-Wheels-of-Trade-in-Motion. Retrieved from IMF.org: http://www.imf.org/en/news/articles/2016/09/26/na092716%20keeping-the-wheels-of-trade-in-motion Knowler, G. (2016, Aug 25). Supply chain manager Li & Fung: Second half worst since 2008. Journal of Commerce. Retrieved from http://www.joc.com/international-logistics/tough-first-half-drags-down-lifung-result_20160825.html Michael D McDonald, N. M. (2016, March 22). Panama to Open $5.3B Canal Expansion June 26 or `Lose Face'. Bloomberg News. Retrieved from Journal of Commerce: http://www.joc.com/port-news/us-ports/port-mobile/us-gulf-portslook-asia-growth-containerized-trade_20161126.html Monios, J. B. (2013). Intermodal freight corridor develoment in the United States. In R. Berqvist (Ed.), Dry Ports A Global Prespective: Challanges and Developments in Serving Hinterlands (pp. 197-218). Ashgate Publishing Limited. Mufson, S. (2016, June 26). An expanded Panama Canal opens for giant ships. Wall Street Journal. Retrieved from https://www.washingtonpost.com/world/the_americas/an-expanded-panama-canal-opens-for-giantships/2016/06/26/11a93574-37d1-11e6-af02-1df55f0c77ff_story.html U.S. Department of Transportation, Maritime Adminstration. (2013). Panama Canal Expansion Study, Phase I Report. WISERTRADE, data from U.S. Census Bureau Foreign, Trade Division. (n.d.).
Expansion on the Southeastern United States 14 Appendix Appendix 1. Growth of Containerized Vessel Size
Expansion on the Southeastern United States 15 Appendix Table 2. Panama Canal Traffic Along Principal Trade Routes 8, Ranked in Panama Canal Toll Tonnage, (in Thousands) 8 Panama Canal Authority, http://www.pancanal.com/eng/op/transit-stats/2016/table00.pdf
Expansion on the Southeastern United States 16 Appendix 3. Containerized Trade Between ITTS Port Districts and the Asia (excluding the Middle East and Turkey, 2013-2016) 9 (Containerized vessel value (Millions) Port District Description ANNUAL 2013 ANNUAL 2014 ANNUAL 2015 OCT 2015 YTD OCT 2016 YTD Exports TOTAL ALL PORTS 17,118 17,476 16,789 14,394 12,265 1703 Savannah, Ga. 9,434 9,072 8,868 7,650 6,020 1401 Norfolk, Va. 6,014 6,643 6,329 5,367 4,648 2002 New Orleans, La. 364 440 627 559 770 1803 Jacksonville, Fla. 657 668 456 383 341 5201 Miami, Florida 390 435 396 341 381 1701 Brunswick, Ga. 94 79 32 31 10 1801 Tampa, Fla. 60 54 30 26 23 5203 Pt. Everglades, Florida 76 42 24 22 12 2004 Baton Rouge, La. 12 15 19 8 13 Other ports 17 28 8 7 47 Imports TOTAL ALL PORTS 52,299 62,898 75,214 64,645 60,656 1703 Savannah, Ga. 27,440 33,992 43,212 37,265 33,810 1401 Norfolk, Va. 15,207 17,999 20,987 18,035 17,602 5201 Miami, Florida 4,698 5,041 5,351 4,525 4,441 1803 Jacksonville, Fla. 3,079 3,639 3,728 3,132 3,300 2002 New Orleans, La. 1,067 1,198 951 826 682 1801 Tampa, Fla. 366 393 456 378 466 5203 Pt. Everglades, Florida 282 441 366 337 178 2004 Baton Rouge, La. 74 98 100 93 12 1701 Brunswick, Ga. 18 47 23 22 16 2010 Gramercy, La. 15 8 12 10 18 Other ports 53 42 28 22 131 9 Port Districts do not necessarily match up specific port authority jurisdictions. For example, tonnage for the Port of South Louisiana is located within the New Orleans, Gramercy, and Baton Rouge port districts.
Expansion on the Southeastern United States 17 Institute for Trade and Transportation Studies ITTSRESEARCH.ORG 540-455-9882 10 Veterans Blvd, New Orleans, LA 70124