The Future Impact of the Panama Canal

Panama_dsasso - flickr

When the Panama Canal opened in 1914, it revolutionized shipping, dramatically cutting the amount of time it took to ship goods to North American and South American ports, both east and west. But as trade between the Americas and Asia grew in the 20th century, the engineering marvel known as the Panama Canal became increasingly obsolete.

Massive ships that carried up to three times the freight of ships a generation earlier became more prevalent in the shipping industry. But these supersize ships were too big to navigate the Canal.

In 2006, however, the voters of Panama approved a $5 billion project to expand and modernize the canal in order to accommodate today’s larger cargo ships.1 As when it first opened, the Panama Canal once again has the potential to have a revolutionary impact on the shipping industry. Indeed, some analysts have claimed that the canal expansion will lead to “the biggest shift in the freight business since the 1950s, when ocean- going ships began carrying goods in uniform metal containers.”

The canal expansion, expected to be completed in 2015, is anticipated to dramatically re-chart American shipping routes, especially those to and from Asia, creating new distribution patterns and leading to the formation of new logistics hubs.

3 KEY FINDINGS

  • The expansion of the Panama Canal to accommodate larger container ships beginning in 2015 will have a significant impact on shipping routes and distribution centers.
  • East Coast ports in the US are expanding in anticipation of increased freight traffic to and from Asia through the canal.
  • While West Coast ports will likely lose some traffic, changing maritime patterns will unfold slowly.

3 DRIVERS OF PANAMA CANAL EXPANSION

A range of factors is driving the ambitious expansion of the Panama Canal to accommodate larger ships. These factors include Panama’s economic interests; congestion at the Panama Canal; the rising numbers of these larger ships; expanding international trade; and growing US exports.

  • Panama’s economic interests: The economy of Panama depends heavily upon traffic through the canal—traffic that would increase significantly through expansion. According to economist and former Panamanian president Nicolás Ardito Barletta, every dollar in canal revenue generates an additional $1.27 in the local economy.10 In total, traffic through the Panama Canal and related activity accounts for almost 15% of Panama’s GDP. The Panamanian government also depends on activity through the canal—and the ACP anticipates contributing $30 billion to Panama’s government between 2015 and 2025— $8.5 billion more than it would have without expansion.
  • Canal congestion: The immense growth of global trade in the second half of the
    20th century created lengthy—and costly—traffic jams at both the Atlantic and Pacific entrances to the Panama Canal. Ships navigating the canal—14,000 every year—carry 280 million tons of cargo, which accounts for 5% of the world’s ocean-borne freight. Yet these ships—carrying grain, coal, and computer/ electronics products from East Coast ports to Asia, and bringing consumer durables and electronics from Asia to American ports on the East Coast—are often forced to wait to enter and cross the canal.
  • Expansion of the post-Panamax fleet: Companies all along the supply chain have realized that employing larger ships can improve operational efficiency, productivity, and profitability. (For example, the estimated cost of shipping coal from Baltimore to China will fall from about $35 per ton to about $25 per ton by using the larger ships that shipping companies now favor.)25 As a result, much-larger ships are becoming predominant among shippers.

3 BUSINESS IMPLICATIONS

Suppliers of natural resources and manufacturers of consumer products will need to reevaluate the placement of manufacturing and distribution centers and reevaluate shipping routes to maximize their efficiency in serving foreign markets.

  • Companies based in either the east or midwest may find that intermodal transport and shipping from West Coast ports—a system that has previously proved most efficient in reaching Asian markets—may no longer be the most cost- or time- effective means of exporting their goods.
  • National retail chains will also need to reevaluate their supply chain and distribution strategies in light of the canal expansion. With two-thirds of US consumers located east of the Mississippi, retailers may find it more advantageous to construct new distribution centers or expand old ones closer to these consumers. Distribution centers in the east could find that shipping imports directly to East Coast ports will minimize time and distance on train and truck and cut costs, while distribution centers in the midwest may find that Gulf Coast ports (and, to a lesser extent, Atlantic ports) offer the least land travel—and thus the least costly shipping alternative.
  • Since shipping from Asia to the East Coast via the Panama Canal will still likely take several days longer than intermodal systems through West Coast ports, supply-chain managers will need to weigh the relative advantages of time versus cost. This evaluation will likely differ greatly depending on the product being shipped. Managers will likely end up developing different tiers of products: high-value products (e.g., perishables, in- demand electronics such as newly released smartphones), where speed is of the essence and therefore intermodal transport is preferred; and more durable products (e.g., furniture) in which shipping costs are prioritized, and direct shipping to the East Coast may offer cost advantages.