Possible Impacts to Texas of Panama Canal Expansion Theodore Prince 7 September 2012 Fort Worth, Texas Panama Canal Stakeholder Working Group
Overview How should we look at the business today? What are the opportunities? What opportunities deserve serious considerations? 2 Panama Canal Segments Container Dry Bulk Liquid Bulk Reefer Vessels Car Carriers Passenger 3 1
Where is the Market for Texas? Local Mostly Houston metro Discretionary business Hinterland 4 First Cut Reefer Special niche Shrinking market Established gateways Car Carrier Houston s role is local Established gateways for intermodal Passenger Established gateways 5 2
Second Cut Does TX have a role today? Could TX have a larger role tomorrow? What are the issues? Markets Aspects General Concerns Texas Issues 6 Dry Bulk (Grain) Markets Aspects General Concerns US vs. Brazil and other sources Currency and other macroeconomic issues Mississippi River barge vs. Rail to USWC Cargo is grown not produced Climate change affects production -- and transportation Texas Issues North-south rail Port infrastructure 7 3
Dry Bulk (Other) Markets Aspects General Concerns Wide range of commodities: coal, steel, fertilizer, ores and minerals Rail to USEC and USWC Truck Gulf region is neither producer nor primary import gateway Texas Issues N/A 8 Liquid Bulk (Crude oil) Markets Aspects General Concerns Texas Issues Crude oil and related products Pipelines in US and Panama Geopolitical sourcing impacts (i.e., Venezuela) Port infrastructure 9 4
Liquid Bulk (Chemical Carriers) Markets Aspects General Concerns Texas Issues Liquid chemical products Panama pipeline not an issue Vessel upsizing Protect and grow 10 Liquid Bulk (LNG and LPG) Markets Aspects General Concerns Texas Issues Transitioning from import to export Pipeline preeminence? Permitting by other ports Mexican near-sourcing 11 5
The Great Port Hope/Hype 12 How Should We View Traffic? Movement Type Containers through USWC Cargo through USWC Containers through USEC Cargo through USEC Line (and Port) View Shipper View Geography 13 6
Line Decision Making Maximize Revenue Minimize Expense Optimize Load Factor Eastbound Panama Canal Cape Horn Westbound Suez Cape of Good Hope Eastbound via USWC Rail Ocean Carrier Financial Strategy Vessel Deployment Tactics Alliances 14 7 Trans-Pacific Deployment Characteristics North American Import Port Calls 6 5 4 3 2 1 All-water USWC 0 0 2,000 4,000 6,000 8,000 10,000 Vessel Size (TEUs) 15 Source Drewry, 2011 Q1 7
0 Order of Weekly Import Vessel Calls LA/LB OAK SEA/TAC VCR Prince Rupert 1 2 3 4 5 High Low Average Average Import Vessel Calls per-week 30 20 10 26 19 9 0 5 3 LA/LB OAK SEA/TAC VCR Prince Rupert 16 Source Drewry, 2011 Q1 0 1 2 3 4 5 6 7 10 Order of Weekly Import Vessel Calls SAV NY/NJ ORF CHS MIA BAL JAX WIL High Low Average Average Import Vessel Calls per-week 5 9 7 6 4 4 3 0 2 1 SAV NY/NJ ORF CHS MIA BAL JAX WIL 17 Source Drewry, 2011 Q1 8
Shipper Decision Making Minimize Transportation Expense Maximize Sales Optimize Supply Chain Shipper Transportation and Logistics Foreign inland Line haul U.S. inland Accessorials Insurance Packaging Purchase Price Price paid to seller INCOTERMS Payment terms Exchange rates over time Inventory Costs Cycle stock Safety stock Inventory intransit Cost of stockout Customs and Import Tariff rate Merchandise processing Local [port] charges Broker fee Less: Duty Drawback Overhead and Administration Sourcing staff Due diligence Relationship building/travel Learning curve Risk and Compliance Compliance costs (technology, staff, other) C-TPAT program costs Cost of potential risk of damage to reputation 18 2.00 Count of Marine Containers from USWC 1.75 1.50 TEUs [2000 = 1.00] 1.25 1.00 0.75 0.50 Line (and Port) View Impact of all water diversion 0.25 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Midwest & South Central Northeast & Southeast Total Source: IANA 19 9
75% Estimate of Import Cargo Movement from USWC USWC Discharged Cargo moving Intact 70% 65% 60% 55% 50% 45% 40% Shipper View Ascendancy of transloading 35% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Midwest & South Central Northeast & Southeast Total Source: IANA 20 What Explains Transloading? Slow steaming (for Midwest) ECUS = WCUS + 7-10 days Shipper View Consumer caution Transloading reduces required safety stocks and inventory risk Carbon footprint More DCs (placed closer together) increases safety stock requirements Total landed costs The customer s invisible hand 21 10
Port Connectivity Railroads offering competitive cost and transit connectivity Port NYC TOR ATL COL CHI MEM DAL HOU KCY LAX LA/LB 2 2 2 2 2 2 2 2 2 SEA/TAC 2 2 2 2 2 1 1 1 1 VCR 2 2 2 2 2 1 Rupert 1 1 1 1 1 1 Lazaro 1 Port NYC TOR ATL COL CHI MEM DAL HOU KCY NY/NJ 1 2 2 2 1 1 1 2 ORF 2 2 2 1 1 1 CHS/SAV 2 2 1 1 1 MIA 1 HOU Shipper View Source: TPLLC 22 Shenzen to Columbus SHZ-COL USWC The All-Water Math Shipper Math SHZ-COL via USEC SHZ-COL via USEC* SHZ-COL via USWC SHZ-COL via USEC Line Math SHZ-NYC via USEC SHZ-COL via USEC* Via USWC IPI $3300 $3300 Via USEC RIPI $3200 $2700 $3200 $3100 $2700 Inland Cost $1300 $500 $0 $500 Vessel Extra ($250) ($250) Contribution $2000 $2950 $3100 $1950 Days 20 28 28 A Today there is not much RIPI to Columbus because rate ( vs. ) does not compensate for extra transit time ( vs. ) B Line could make more moving it via USEC ( > ) because extra vessel cost ( ) is offset by cheaper inland expense ( vs. ) C After Panama Canal expansion, to attract more RIPI, line will need to cut rate ( < ) to offset longer transit ( > ) D No vessel cost reduction ( = ) if USWC moves to 12,000 TEU vessel E However, reduced rate ( < ) reduces contribution ( < ) to lower than moving via west coast IPI ( < ) F Also, reduced rate ( ) has incremental business diluting vessel contribution ( < ) G Of course, East Coast ports will debate proper level of ( vs. ) and railroads (eastern AND western) can impact ( vs. ) Source: TPLLC 23 11
Final Thoughts Low cost is not a guaranteed winner Unless shipper is vessel operator too Cost Drivers Vessel Operator Market Forces Shipper 24 Final Thoughts Shippers route cargo not ports or lines All water container benefits are there today no need to wait until 2015 Lots of benefits being a regional powerhouse Core competencies should complement regional economy Economic obsolescence is greater risk than physical deterioration 25 12