It took nine years and $5.4 billion to build, but the Panama Canal officially opened its third lane on Sunday, June 26. The expansion allows the 102-year-old canal to accommodate massive cargo ships that carry as many as 14,000 containers. The first ship to pass through the canal’s two newly-constructed locks on June 26 held 9,400 containers, nearly twice the capacity of the 5,000-container ships that the canal previously handled.
The expansion of the Panama Canal is expected to have an impact on the movement of freight in the United States. More than 60% of the canal’s container traffic either comes from or goes to ports on the East Coast. Now that bigger ships can pass through Panama, the amount of freight moving through the Eastern half of the U.S. could increase significantly. More than 170 of the gigantic “neo-Panamax” ships have reservations to move through the canal’s expanded locks. In a recent speech, U.S. Secretary of Transportation Anthony Foxx described the enlarged canal as “a dynamic that’s changing freight.”
Bigger ships could be good news for U.S. trucking fleets mired in a slow freight market. However, most transportation experts agree that it could take years for a larger Panama Canal to have a big impact on freight tonnage and load rates. Here are four reasons why:
East Coast Ports are Not Ready
Currently, only three ports on the East Coast—Miami, Baltimore and Norfolk, Va.—can accommodate the bigger ships that will now move through the Panama Canal. Dredging projects are underway in Savannah, Ga., and Charleston, S.C. that will allow those ports to serve the largest container vessels in about two years. The Bayonne Bridge near the port of New York and New Jersey is too low for ships carrying up to 14,000 containers to enter the port. The port authority is spending $1.3 billion to raise the bridge 60 feet, a project that will not be complete until late 2017.
The lack of infrastructure on the East Coast to handle the larger ships is a big reason transportation experts like FTR’s Larry Gross think the Panama Canal will have a minor effect on shipping in the near term. “There was discussion at some time that this was going to be a game-changer,” Gross told Fleet Owner magazine. “I don’t view it as a game-changer.”
The Freight Market Remains Sluggish
Greater capacity in the canal means that more cargo can pass through, but it does not mean that consumers will start buying more products. Freight volumes in 2015 and 2016 have stagnated in the face of slow economic growth and high inventory levels for retailers. Freight tonnage moved by truck and rail in May was down 5.8% from a year ago, according to the Cass Freight Index. Publicly-traded trucking fleets like Werner Enterprises and Swift Transportation have recently slashed their earnings expectations.
Until consumers start spending more, the Panama Canal’s expansion will not have a major effect on the freight industry.
Shippers Might Not Divert More Freight to the East Coast
Panamanian officials expanded the canal with the expectation that it would divert more freight from Asia to the East Coast. Right now, the most direct route for moving freight from China to the U.S. is through the West Coast, but congestion and recent labor disputes have made West Coast ports less attractive to shippers. A recent report by C.H. Robinson Worldwide Inc. and Boston Consulting Group estimated about 10% of Asian container traffic to the U.S. would shift from the West Coast to East Coast ports by 2020.
For that to happen, however, shippers will have to accept a longer route from Asia through Panama, as well as the tolls the canal charges. Sending one neo-Panamax ship through the 50-mile Panama Canal will cost an estimated $800,000. It remains to be seen how many shippers will prefer that cost to shorter intermodal transits through the West Coast.
There May Be Problems with the Canal’s Expansion
Time will tell, but questions remain as to how well the two massive, new locks will serve the Panama Canal. In 2009, officials for the canal awarded the project to the lowest bidder, and the expansion took two years longer than expected to complete.
In a recent investigative piece, The New York Times interviewed dozens of contractors, canal workers and maritime experts about the canal expansion. Many of those interviewed expressed doubts that the new locks had enough water, were made of durable concrete and were large enough to safely accommodate big cargo ships. One consultant interviewed by the Times also claimed that the canal was at risk for an earthquake measuring 8.0 on the Richter Scale.
If the improvements to the Panama Canal do not live up to their billing, there could be disappointing consequences for both shippers and transportation companies in the United States.
Sources: Fleet Owner, The Wall Street Journal, The New York Times, Commercial Carrier Journal, Transport Topics