By Keith Norbury
Expansions to the world’s two major shipping canals are expected to alter global shipping patterns, but exactly how is open to a lot of debate and speculation. Impacts from the Suez Canal expansion will undoubtedly be felt first — if only because this August it was the first of the new routes to open.
The US$8.2 billion project, which was completed in a year, will eventually almost double the canal’s capacity to 97 ships a day from the current 50 and shave transit time to about 11 hours from 18, according to news reports. The original canal, which opened in 1869, was lengthened, widened and deepened several times over the years. While the expansion features a new channel that will enable large ships to pass one another, the maximum size of the vessels able to use the waterway hasn’t changed. Since the Suez Canal is a sea-level crossing, without any locks, its only limitation on vessel size is its depth. Only the largest ships, such as loaded supertankers, are unable to use the waterway. Suez can even accommodate Maersk Line’s massive Triple-E ships, which can carry loads of more than 18,000 standard shipping containers.
In contrast, the long-awaited expansion of the Panama Canal, originally slated to open in 2014, is now expected to welcome its first ships next April. Unlike Egypt’s Suez connection between the Red Sea and the Mediterranean, a sea-level differential between the Gulf of Panama and the Caribbean Sea requires locks on the Panama Canal, which has been in service since 1914. New locks on the canal expansion will accommodate ships of up to 13,000 TEUs compared with only 4,500 TEUs on the existing locks, as noted in a November 2013 report from the U.S. Department of Transportation’s Maritime Administration. As of June 30, the expansion project was 91.3 per cent complete, according to the official project website. The $5.25 billion project began in 2007.
Much depends on market demands
Vancouver-based transportation consultant Philip Davies said in an interview with Canadian Sailings that expansion of the two canals will give shippers additional options. For example, the reduced transit times on the new Suez Canal might cause reduced traffic through the expanded Panama Canal. Or it might reduce the share of Asian imports to ports on the West Coast of North America. A lot depends on how costs shake out, he said. “Particularly, I think, the Panama Canal is likely to be responsive to market demand in setting its tolls, which is to say in the event that the anticipated volume does not materialize, it may resort to discounts on the tolls,” said Mr. Davies, who has done extensive analyses of the cost impacts of larger container vessels being able to traverse the expanded Panama Canal.
Among the findings in a January 2014 presentation Mr. Davies prepared for BMO Capital Markets, for example, was that the cost per 1,000 container miles of an existing 2,500 TEU vessel was $77 per tonne compared with $29 per tonne for a new, optimized 13,000 TEU vessel. And he also concluded that that every $100 drop in the cost of a shipping container from Asia would result in 534,000 containers being discharged on North America’s East Coast or Gulf Coast rather than on the West Coast.
This June, a report from Boston Consulting Group and C.H. Robinson noted, “Two maritime battles are under way: one between West Coast and East Coast ports, and the other between the Panama and Suez canals.” In the former, the East Coast has been gaining ground, with its share of container traffic from East Asia rising to 35 per cent in 2014 from 32 per cent in 2012. In that same period, Suez has increased its market share of container traffic from East Asia to 38 per cent from 32 per cent. “After the Panama Canal expansion, the two canals will be in fierce competition for traffic between East Asia and the East Coast,” the report said. The report also predicted the Panama expansion would become “the headline event in shipping in 2016.”
Wendy Zatylny, President of the Association of Canadian Port Authorities, told Canadian Sailings that this country’s ports are ready to welcome the larger ships that the canal expansions will make possible. “There is tremendous potential for it to be shifting a lot more cargo to the East Coast,” Ms. Zatylny said. “But there are still so many imponderables or uncertainties that it’s very difficult to predict what the extent of that cargo shift is going to be.”
Suez impact expected to be more immediate
Shipping giant Maersk, Suez’ largest customer, welcomed the expansion in a posting on the company website. “The extension will enable larger vessels to transit, benefitting not only the shipping companies, but also our partners and world trade as a whole,” Maersk Group representative and CEO of Maersk Drilling Claus V. Hemmingsen said in the posting.
Other reaction to the Suez expansion has been lukewarm. A recent Bloomberg News article, for instance, played upon the notion that the project is “Egypt’s gift to the world” by arguing that it’s a gift the world may not even need. Dr. John Taylor, Associate Professor and Chairman of the Department of Supply Chain Management at Wayne State University in Detroit, said in an interview that he expects any impacts of the Suez expansion, and of the expanded Panama Canal, to be incremental. In the future, though, the significance of the Suez expansion will depend on what happens if the shift among Asian exporters continues to move southwest to locales such as Vietnam and India. If northern China, South Korea, and Japan maintain their dominance, then the Suez will be less of a factor. “But if you start talking about India becoming a major source of goods then Suez has a bigger role to play certainly,” Dr. Taylor said. One knock against India gaining that upper hand is that it still lacks the infrastructure to move those goods even if it produces them. “And so far it hasn’t been dealt with at all,” Dr. Taylor said.
Michael Broad, President of the Shipping Federation of Canada, said it’s possible that the expansions will cause the two canals to become more competitive with one another — a thought that others expressed. “And that might do something to bring down the costs of getting through there, which are huge,” Mr. Broad said. However, he also uttered another common sentiment when he pointed out, “To say whether there is going to be more cargo or not, I guess we’ll have to wait and see.”
According to the Panama Canal Authority website, container ships are charged a total TEU allowance, or TTA, based on their capacities as well as a charge per TEU for each loaded container on board. Effective April 2016, for ships over 6,000 TEUs, the TTA is $50 compared with $60 for ships under 6,000 TEU. However, the loaded container charge is less for ships under 5,100 TEUs [$30 per loaded TEU] than for ships of 5,100 to 9,000 TEU capacity [$40 per loaded TEU] and over 9,000 capacity [$35 per loaded TEU]. The Suez Canal calculates its tolls differently, charging for tonnage even for container ships. Those tonnage fees decline as total tonnage rises — and they differ depending on if the ship is laden or in ballast. A toll calculator on the Suez Canal website provides an estimate of the tolls for a ship depending on such criteria as its draught, beam, and the number tiers of containers on deck.
In 2013, the Journal of Commerce calculated the relative “all-in” round-trip slot costs for the two routes of ships going between Hong Kong and New Jersey. For a 4,800 TEU ship through Panama, the cost was $1,250 per TEU. For an 8,000 TEU ship passing through the Suez canal, the cost was $850 per TEU. The tolls on a 4,800 TEU ship were $450,000 for the Panama versus $489,600 for the Suez. The Panama route was slightly shorter, 11,205 nautical miles versus 11,589, and the nonstop transit time a day shorter, at 26 days, for Panama.
Halifax ready for Suez boost
Port of Halifax is preparing for increased traffic from the expanded Suez Canal, said Patrick Bohan, the Port’s Director of Supply Chain Solutions. As a harbinger of that, the port received its two largest container vessels ever this August. 8,500 TEU CMA-CGM Vivaldi arrived at the port’s Halterm terminal Aug. 3 while 9,200 TEU Budapest Express arrived Aug. 7 at Halifax’s Ceres terminal.
Since 2011, container volume at Halifax rose steadily to reach 3.76 million tonnes in 2013. But that fell back to 3.66 million tonnes in 2014. And in the first half of 2015, volumes were down 8.9 per cent compared with the first half of 2014. For imports that decline was 6.1 per cent.
Mr. Bohan said the port is projecting annual growth of four to 4.5 per cent and that increased traffic from the expanded Suez Canal will contribute to that. “We have built for long-term growth here,” Mr. Bohan said, noting that the two container terminals can handle 1.4 million TEUs annually with their existing facilities. That’s triple the current levels of 400,000 to 500,000 TEUs. “This will make the Suez deployments a lot easier for the shipping lines and it comes at a time when they’re moving the bigger ships out of some of the Asia trade lanes and putting them into the transit lines to North America,” Mr. Bohan said. “So this is really good from our point of view at Port of Halifax because in Eastern Canada we’re the only existing container terminal that can work this size of vessels.”
(Two other deep-water container ports have been proposed for Cape Breton Island — at Sydney and on the Strait of Canso. The aims of the Sydney Port Group and of Melford International Terminal are to handle container ships of up to 20,000 TEUs, vessels too large for other North American ports, the Journal of Commerce noted in a report this August.)
A 2013 paper from Michigan State University’s Center for Economic and Community Development also envisions Halifax as gateway for bringing goods from Asia to Michigan, which would become a North American logistics hub. The report notes Halifax’s deep water — 55 feet at low tide — and that it is 1,500 nautical miles closer, via the Suez, than any other North American port to emerging markets in India. “Halifax is the preferred North American connection with Europe, the Mediterranean, the Middle East, and South East Asia via the Suez Canal with a two-day discharge advantage over other East Coast North American ports,” the report said.
However, Dr. Taylor said he doesn’t believe “for a second” that Halifax will be able to leverage enough advantage of the Suez Canal’s increased capacities to become a major North American port of call for traffic from Asia. “One of the huge issues in intermodal, as you know, is local market. You want to be able to truck a good deal of the goods to local markets instead of putting them on rail, and Halifax just doesn’t have that at all,” Dr. Taylor said. That Halifax is also a single railway town is also a strike against it, Dr. Taylor said. But then so is Prince Rupert, which has been growing its container business rapidly, Mr. Bohan pointed out. (For the first five months of 2015, foreign container volumes at Prince Rupert’s Fairview terminal were up 42.8 per cent over the same period in 2014, according to stats on the Prince Rupert Port Authority website.)
The Suez expansion, which is already completed, is expected to have a more immediate impact on Halifax than the Panama expansion. However, Mr. Bohan said Halifax also expects to gain a share of the trade that is expected to shift to the east coast as larger vessels begin plying the Panama Canal. “I can’t emphasize enough that this is reality,” Mr. Bohan said, noting that both Halifax container terminals are already handling large ships effectively.
Montreal better positioned to benefit
Both Mr. Davies and Dr. Taylor say that Montreal is better positioned than Halifax is to benefit from increased Suez traffic. The main factors are the size of its local market as well as it having two competing railways. On the other hand, Dr. Taylor noted, it’s a longer haul to Montreal with less frequent sailings than for East Coast ports. And he didn’t even mention Montreal’s much shallower depth.
Carriers such as Mediterranean Shipping Company, are getting around Montreal’s draught limitations by transloading larger vessels onto smaller ones at ports in the Caribbean. One advantage of that is it increases the frequency of vessel calls, Dr. Taylor said, although he did wonder about the additional handling charges.
“The big beneficiaries of these canal expansions are the large mega-vessels which we cannot see in Montreal,” said Tony Boemi, Vice-President of growth and development with Montreal Port Authority. “On the other hand, the biggest advantage we have more than any other port is our geographic location.” Montreal is within eight hours by truck of 40 million consumers, he said. And the city is within 48 hours by rail of Chicago, at the epicentre of a market of another 70 million people.
At present, the biggest vessel Montreal can handle carries about 4,500 TEUs. However, Mr. Boemi said the port is working on a project to maximize the water column of the St. Lawrence River that would eventually enable Montreal to accommodate vessels of 6,000 TEUs. “That may be a project that the government might ultimately contribute (to) as well,” Mr. Boemi said.
The province of Quebec announced in June a five-year $1.5 billion maritime strategy for the entire St. Lawrence River that would include $20 million in improvements to Montreal’s Old Port for a cruise ship terminal, the National Post reported. In fact, over 15 years, the government plans $9 billion in industrial and commercial investments on the St. Lawrence, with $4 billion of that to come from the private sector.
Mr. Boemi wasn’t prepared to suggest that the Suez Canal expansion was an impetus for that spending. However, he did say, “There’s an acknowledgement that the maritime industry is a good economic driver and so therefore they feel there’s a need to invest.”
Montreal is poised for cargo growth, and is projecting it at a rate of four to 4.5 per cent annually. Mr. Boemi declined to estimate how much the Suez project is influencing that projection. But he did call Montreal “a natural entry port for the U.S. midwest” and estimated that about 30 per cent of cargo that arrives in the port from Europe ends up in the U.S. “All the auto makers – Ford Motor Company, Chrysler, General Motors — all use the port of Montreal,” Mr. Boemi said.
Transshipment ports to play bigger roles
The use of transshipment facilities, including at Mediterranean ports like Valencia in Spain and Gioia Tauro in Italy, has already increased Montreal’s imports from Asia. A decade ago, those imports were practically nil, Mr. Boemi said. Today they make up 20 per cent of the container volumes. And containers account for 48 per cent of the 30 million tonnes the port now handles each year. “Our cargo is much more diverse now,” Mr. Boemi said. Montreal also differs from Halifax in that when a ship arrives from Asia, it discharges all its cargo. “And that’s really the name of the game for the carriers,” Mr. Boemi said. “They want those ships full in and full out.”
Halifax can handle ships twice the size of Montreal’s capabilities. However Mr. Bohan said they usually discharge about 20 per cent of their cargo at Halifax before heading to other U.S. ports on the string. Mr. Boemi said the fact that more large vessels are going to be able to traverse the canals will only benefit Montreal. “The bigger the canal, the larger the vessels, and the larger the vessels, the more need for transshipment,” Mr. Boemi said.
Panama expansion will alter West Coast traffic
The Suez Canal expansion isn’t expected, however, to have much of an impact on West Coast trade. The 2013 U.S. Department of Transportation’s Maritime Administration report noted, for example, “it is much shorter to transport goods between the Pacific Northwest and California and the Mediterranean through the Panama Canal and across the Atlantic Ocean than across the Pacific and Indian Oceans and through the Suez Canal.”
The Panama expansion, however, is expected to shift at least some in-bound Asian traffic from East Coast ports to West Coast ports. It’s a shift that is already well underway, according to the calculations of Mr. Davies. For example, the share of Asian imports into the U.S. that were destined for Los Angeles/Long Beach declined more or less steadily from about 57 per cent in 2003 to 49 per cent in 2012. That shift coincided with a narrowing of the gap in the West Coast’s advantage over the East Coast in relative shipping costs. And that gap is expected to narrow further because of the lower cost per TEU of the larger ships that will soon pass through the bigger locks on the Panama Canal.
While he conducted that analysis nearly two years ago, Mr. Davies said that the major finding still holds: larger vessels do have an economic impact that would divert more traffic from West Coast ports to East Coast ports. And he didn’t expect that incorporating two more years of data would much alter his conclusion that each $100 reduction in shipping costs would shift 534,000 TEUs to the East and Gulf coasts.
Several ports on the U.S. East Coast are already preparing to receive those bigger vessels that the Panama Canal will make possible. “For example, the port of Savannah is investing more than $1.4 billion, and the port of Miami is investing $2 billion, in infrastructure improvements,” noted the June 2015 report from Boston Consulting Group and C.H. Robinson. The report concluded that the Panama Canal expansion could shift up to 10 per cent of Asian container traffic to the U.S. to the east coast by 2020. “West Coast ports will still handle more traffic than they do today, but their market share will likely fall,” the report said.
“Two-thirds of container traffic from East Asia currently arrives at West Coast ports, one-fifth travels through the Panama Canal for eastern destinations, and 14 percent reaches the East through the Suez Canal. The East Coast has steadily been gaining ground in container traffic from East Asia; in fact, its share rose from 32 percent in 2010 to 35 percent in 2014,” the report said.
East Coast ports expected to make big gains
Mr. Davies said ports like Savannah, New York, New Jersey, Norfolk and even Baltimore are the most likely to benefit from the Panama Canal expansion. “There’s a tremendous amount of investment going in there,” Mr. Davies said. “And they do have the advantage in general of large local population, similar to southern California, which is certainly an advantage that Seattle or Vancouver doesn’t have.”
While his 2014 presentation tracked a 12 per cent decline in the Los Angeles/ Long Beach share of Asian imports into the U.S. from 2003 to 2012, increases of Asian imports to any other individual East Coast U.S. port during that period were almost imperceptible. Only New York-New Jersey registered an increase of over two percent in that decade.
The Panama expansion might also benefit Houston, although its containerized traffic has historically focused less on consumer goods and more on machinery and materials such as steel for the oil industry, Mr. Davies said. Houston also doesn’t have the rail connectivity that Los Angeles and Long Beach do. “That doesn’t mean you can’t get a container from Houston to Chicago. It’s just that you don’t have multiple double stacked trains leaving every day,” Mr Davies said.
Dr. Taylor doubts, however, that much Asia traffic will shift to the East Coast via Panama simply because of the West Coast’s price advantage, which he said has historically been about $1,000. That’s close to the US$742 differential that Mr. Davies calculated for 2007 in comparing between Los Angeles/Long Beach to Chicago and New York/New Jersey to Chicago. The former added up to US$3,593 per FEU (40-foot equivalent unit) to US$4,335 for the latter. By 2012, according to Mr. Davies, that difference had shrunk to US$526 (US$4,000 versus US$3,475). “The Western railroads have a lot of flexibility and a lot of maneuvering room,” Mr. Taylor said. “They’ve made a tremendous amount of money on those routes, have a very good profit margin on those routes in the West Coast, and they have the ability to lower prices coming out of the West Coast.”
A few more points are worth mentioning, Dr. Taylor said. One, “there’s a still a huge advantage to getting stuff to the first port of call quickly.” Second, frequent sailings are an advantage. “Slow sailing to the East Coast is not necessarily what shippers want even if potentially it is a little bit cheaper in terms of on-the-water cost,” Dr. Taylor said.
Labour worries pose wild card
One big threat to the West Coast ports’ advantage is that labour strife will again lead to congestion at those ports and make shippers wary. In February, the International Longshore and Warehouse Union and the Pacific Maritime Association (PMA), which represents 29 U.S. West Coast ports, signed a five-year contract that ended a nine-month dispute. However, no sooner was that dispute settled than hundreds of truck drivers went on strike at the ports of Los Angeles and Long Beach. And as recently as this July, PMA and the union were battling over the use of casual workers at Port of Oakland, the Journal of Commerce reported.
“If West Coast ports and their unions want to lose the business, they should keep up these recent practices,” Dr. Taylor said, adding that if they do, “there will be some companies that decide that they need to diversify their risk and move some product through the east coast even if it’s more expensive.”
A March 2015 report from American Shipper Magazine supports Dr. Taylor’s contention. In a survey of 403 shippers and 191 third-party logistics providers earlier this year, the magazine found that about 40 per cent of shippers that currently use only West Coast ports are considering a shift to East Coast ports. About half of shippers who use ports on both coasts are considering shifting from west to east. The reason for such strategic shifts are growing impatience with congestion at west Coast ports that have been exacerbated by recent labour strife.
“It should be noted that the extent of the migration might well be impacted by recency bias, with shippers feeling the pain of congestion planning on larger volume allocations to the East Coast than they might up end enacting,” said the executive summary of the American Shipper report. “But the message is clear: congestion in West Coast ports during the last nine months has left shippers scarred.”
Vancouver also poised for growth
Longshore workers in Vancouver still have nearly three years to go in an eight-year contract with B.C. Maritime Employers Association that expires March 31, 2018. Peter Xotta, Vice-President of Planning and Operations for Port Metro Vancouver, said that kind of labour stability helps Vancouver compete for business because shippers take it into consideration. “They’re not going to put all their chips in that market (Los Angeles) unless they have a high sense of confidence that they won’t be stung again,” Mr. Xotta said.
Vancouver, though, hasn’t been free of labour strife. A strike by container truckers in 2014 prompted some shippers to consider alternate methods such as switching to breakbulk. Other fallout from the dispute included allegations from Canadian Freight Forwarders Association that terminals charged excessive storage fees for cargo that had been immobilized during the strike. A “joint action plan” agreement settled the dispute. However, a crack in that deal appeared this August when Unifor, the giant national trade union representing many of the truckers, filed a lawsuit alleging they are owed back pay.
Mr. Xotta acknowledged that such a disruption at any port “can impact your reputation and your relationship with customers.” However, he said Vancouver has been “pushing really hard” to make substantive and lasting changes. In any case, Vancouver is projecting growth of four to five per cent annually over the next five years in its intermodal business. Baked into that is an expected impact from the Panama Canal expansion. However, Mr. Xotta didn’t quantify what the impact might be other than to say it’s modest or minimal. “In fact there are some positive impacts because of increased access to some emerging north-south trade in South America,” Mr. Xotta said. That would include trade, including in bulk commodities, with Brazil and Argentina, which Mr. Xotta said has been a priority of the Canadian government.
Mr. Davies, however, observed that Vancouver’s trade imports destined for Eastern and Central Canada have not been growing as rapidly as the total imports. “And certainly Port of Montreal has seen a big surge in its imports from Asia,” Mr. Davies said. “So there appears to be something of a shift from west to east in the Canadian market as well.”
Ms. Zatylny said that while the expansion of the canals raise short-term questions, the bigger long-term question is how Canadian ports are going to handle expanding global trade in the coming decade. Citing a presentation the association made recently to the Canadian Transportation Act review, Ms. Zatylny noted that the world’s seaborne trade is projected to more than double in the next 15 years – from 10 billion tonnes in 2014 to as much as 24 billion tonnes by 2030. In that same period, the association projects Asian imports to Canada to increase by 11 million TEUs, with Canada’s own population growth expected to increase throughput at its ports by 700 million tonnes a year.
To meet that demand, Ms. Zatylny said, would require building five more port authorities the size of Port Metro Vancouver, which is already Canada’s busiest port.
Canals at a glance
• Suez canal shortens the trade route between Asia and Europe by 6,000 km
• Panama Canal shortens the trade route between the west and east coasts of North America by 13,000 km
• Total Suez Canal length: 193.3 km
• Total Panama Canal length: 77 km
• New Suez Canal project: includes digging of a parallel 35-km waterway with a depth of 24 metres and width of 317 metres.
• Panama Canal expansion project: includes six new locks, called the third set of locks, that are each 427 metres long, 55 metres wide, and 18.3 metres deep, capable of handling vessels of 170,000 dead-weight tonnes or 13,000 TEUs.
• Cost of Suez expansion project: US$8.2 billion
• Cost of Panama expansion project: US$5.25 billion
• Opening of New Suez Canal: August 2015
• Opening of Panama Canal expansion: April 2016
• Panama Canal Expansion Project FAQ: www.micanaldepanama.com/expansion/faq/
• New Suez Canal website: www.suezcanal.gov.eg/sc.aspx?show=69