March 1, 2014

The Second Coming of the Panama Canal

As the expanding canal delivers a big bang for metals and infrastructure, its competitors are stepping up their game.

Mobs of bulldozers, excavators and strategically planted explosives have been blasting away at the Isthmus of Panama since 2007, carving the new Panama Canal between the Atlantic and the Pacific.

By the end of 2015, big “post-Panamax” container ships, carrying almost three times the load of the ships that currently ply the canal, will finally have a clear, all-water shot from Shanghai or other Asian ports across the Pacific, through the isthmus, to the North American East Coast.

It’s a game-changing development that stands to shake up trading around the globe, canal officials contend. It has already kicked up a furious competitive battle between ports on the Pacific and Atlantic sides of North America, with dredgers deepening channels, builders constructing huge new freight terminals and waterfront managers touting the virtues of their own ports.

The new canal, currently among the largest civil engineering projects in the world, has also given the global steel market a shot in the arm. For starters, it is using 279,000 tons of reinforcing steel and more than 67,000 tons for the locks’ gates and valves, according to canal authority figures. There will also be new ships, dock equipment, construction equipment, terminals and other steel-intensive products.

The American Association of Port Authorities has reported that the United States will spend about $46 billion in port upgrades by 2017, mostly in preparation for the anticipated arrival of a lot of big freighters from China via the expanded Panama Canal.

“This is an arms race,” says Robert Puentes, a transportation expert at the Brookings Institution.

While East Coast ports prepare for visits from the big new freighters from Asia, each about the length of the Empire State Building, West Coast ports and cross-country rail lines have embarked on a “Beat the Canal” program.

Will the new canal transfer big slices of shipping and freight market share to the East and Gulf coasts? Or will shippers stick to the West Coast ports, which have dominated the $559-billion-a-year trade flow between China and the United States in recent years, with shorter cross-Pacific routes? Or will big-box retailers like Walmart and Target and other large shipping customers employ a “four corners” distribution strategy, with outposts scattered around the map, spreading the freight business around?

More for Everybody?

Nobody knows for sure what the new trade and shipping patterns will look like, though one rosy scenario predicts the shipping boom will deliver its benefits to all corners. “It may or may not be the case that there’s going to be more for everybody,” says Puentes. “But you can say that some American ports are moving toward more specialization.”

Some ports are going after particular markets, based on their proximity to producers of goods and the kinds of storage facilities available, he says. For example, Savannah and Baltimore are building facilities that would appeal to car exporters, while New York is vying for chemical business. Baltimore, the closest port to the Midwest, is counting on rail giant CSX Corporation’s decision to locate a new intermodal rail terminal near the port, with quick connections to Detroit and Chicago, to give it a leg up with automobile shipping.

But the shape of things to come is more likely dependent on a lot of comparative calculations, weighing shipping scenarios and totaling the costs of fuel, insurance and all of the other factors that establish a shipping rate.

“Nobody really cares how cargo is routed, as long as it’s at the lowest possible cost and it’s not damaged when it gets there,” says Paul Bingham, an economic consultant who works with the Southern California ports.

In fact, there is heated debate among freight and shipping experts as to whether the expanded canal will have any effect at all on global shipping and trading patterns.

Or Another Y2K?           

“There’s a significant number who believe it will be Y2K again,” says John Vickerman, president of the port-planning firm Vickerman & Associates. He’s referring, of course, to the widely feared turn-of-the-millennium global computer crash, which never materialized.

No one knows, for example, what the tolls will be for big ships navigating the canal between the Pacific and Atlantic oceans, though it is certain they will go up. The Panama Canal Authority, which runs the canal, is not offering concrete estimates.

According to the Journal of Commerce, the shipping industry’s trade newspaper, current charges to go through the canal for a fully loaded 20th-century-style container ship are about $450,000. (A fully loaded ship carries 4,800 20-foot containers or “container equivalents,” referred to as TEUs.)

But the canal authority, which borrowed much of the $5.25 billion for the expansion, is committed to raising existing tolls—according to one report, by at least 3.5% a year over the first 20 years of the new canal’s operation. That would double the toll by 2035. And American shipping experts like Vickerman say the tiny nation, which relies on tolls to balance its budget, has even heftier revenue-raising plans. Thus, one possible outcome is that the Panama Canal might price itself out of the competition, leaving the status quo in place.

The history of the creation of the Panama Canal is a legend of American ingenuity and industriousness. In 1904, American engineers took over the abandoned site of a French canal project, in which thousands of workers had died from yellow fever and malaria. After spraying breeding sites for disease-carrying mosquitoes, the new canal builders set about solving their biggest problem. Unlike the Suez Canal, which is little more than a 120-mile ditch, the Panama Canal had to cross the Continental Divide, an unyielding spine of volcanic rock, reaching 85 feet above sea level.

To get ships across the hump, the Americans devised a clever system of locks to raise ships on stepped pools. The water for the locks was drawn from an artificial lake, created by damming a river.

Just Like the Old One, Only Larger

The new project, about a half-mile from the old one (which is actually twin channels with twin sets of locks), covers the same ground, only on a larger scale. On both the Pacific and Atlantic sides, excavators have carved out mile-long trenches and paved them with tons of salt-resistant concrete. Dredgers are deepening Gatun Lake, the artificial lake that’s replenished by Panama’s voluminous rain (aside from feeding the canal’s locks, the lake is also part of the cross-isthmus waterway), and deepening an eight-mile channel, the Culebra Cut, connecting the lake with the Pacific-side locks. The job is about two-thirds completed, authority officials say.

The reason for all of this frantic construction is a matter of size. The old locks can fit ships no larger than 965 feet long and 106 feet wide and with a draft no greater than 39 feet. Those dimensions describe the so-called Panamax ships, which in terms of container cargo are limited to a maximum of about 4,800 TEUs.

The post-Panamax ships that will navigate the new channel are about 1,200 feet long, 160 feet wide and with a draft of 50 feet, and they’ll carry as many as 12,500 TEUs.

Driven by the bigger ships’ economies-of-scale savings, the world’s shippers are eagerly switching to post-Panamax vessels. Such ships currently comprise fewer than 20% of the world’s container ships, but they’re expected to multiply quickly, according to the Army Corps of Engineers. Even with a relatively small share of the global fleet, the big ships represent about half of the world’s container-carrying capacity.

A brand-new canal may not be the answer to all the prayers of what consultant Bingham calls the “wannabe ports”—those Eastern ports that are furiously reconfiguring channels and building new facilities—but it has certainly been a bonanza for industry sectors such as construction, ship-building and steel.

Jobs 1st Alliance, the coalition of West Coast ports, railroads, unions and government officials that launched the Beat the Canal campaign, has tallied all the proposals under discussion on the East Coast, adding up to $18 billion in port improvements, they say. There is, in addition, about $6.6 billion in proposed railroad upgrades to accommodate all the freight trains carrying double-high container loads, the coalition says.

Obviously, a lot of money is already being spent on port design and improvement. Some of the ports have moved quickly to establish friendly havens for the new ships. The Obama administration last year chipped in $104 million in TIGER Grants (Transportation Investment Generating Economic Recovery), bringing the total of federal port investments to more than $440 million in American Reinvestment and Recovery Act funds in the past five years. The feds have also moved quickly to approve port-deepening proposals.

The Canadian Impact

In Canada, the federal government is more proactive in terms of freight policy and port development. The government has, for example, poured funds into developing Prince Rupert, a former logging community in northern British Columbia, as a busy international trading station. The port broke ground last year on a CAD$90 million utility corridor to supply an expected construction boom for new terminals.

The government hopes Prince Rupert will become a major transit point for cargo. The port promotes itself as offering “the shortest trade route with Asia” and being “only 100 hours to Chicago.”

Canada has already invested $3 billion in 93 projects under the Asia-Pacific Gateway and Corridor Initiative, says Maryse Durette, a spokeswoman for Transport Canada, that country’s equivalent of the Department of Transportation.

The U.S. East Coast ports are making significant expansion strides on their own, floating bonds and partnering with private enterprises to finance development.

For example, Miami has already spent $2 billion on improvements, including adding four mega-cranes to handle the expected increase in container traffic, and it’s doling out another $1 billion to build a tunnel for trucks to zoom between the harbor and U.S. I-95. Savannah and Charleston are, between them, spending almost $1 billion in dredging projects to deepen their ports. The Port Authority of New York and New Jersey is spending $1.2 billion to raise the Bayonne Bridge, between Staten Island and New Jersey, by 60 feet, so that the big ships can enter the Ports of Newark and Elizabeth unobstructed.

Baltimore, though, appears to be ahead of all the East Coast ports, except Norfolk, Va. Aided by an alliance with the port management firm Ports America Chesapeake, the Port of Baltimore has established deep-water berths at its Seagirt Marine Terminal and installed new shipping cranes there, specially equipped for the big ships. The private company has already invested $105 million in port upgrades, officials say.

“Baltimore and Norfolk are the only two [East Coast] ports that are ready for the post-Panamax ships today,” says Richard Scher, spokesman for the Maryland Port Administration.

The cranes arrived, with much fanfare from Shanghai in 2012, on the deck of a Chinese freighter.

On a recent afternoon, the 140-foot white behemoths were loading a Swedish ship, whisking containers from the bulkhead to the ship’s deck and lining them up in neat stacks. Each crane can load 50 containers an hour, Scher says, and each can stretch across a ship’s deck to lift 187,000 pounds of cargo 22 container-rows away from the dock. The seven older cranes on the Seagirt dock can reach across only 18 container rows.

Baltimore’s White Glove Service

Like other ports, Baltimore is moving to claim certain markets as its own. The port is already a leader in handling farm and construction machinery, cars, trucks, forest products, sugar, gypsum and iron ore. To plant its flag more decisively in the auto shipping field, it’s building a new automobile storage facility. It has also organized a trained team of car handlers, who dress in spotless white uniforms and wear special gloves, giving the vehicles that pass through a luxury experience, Scher says.

Meanwhile, the Californians, particularly those at the Ports of Los Angeles and Long Beach, which share the San Pedro Basin, are responding competitively. Their edge rests on the speed with which they can transfer loads from their ports to the trains that will carry them eastward, and it’s a significant edge.

The Jobs 1st Alliance has come up with its own list of improvement projects to eliminate bottlenecks, speed up handling operations or increase loading capacities. The 50 projects, with a price tag of $5.5 billion, range from simple highway grade separations to the replacement of a heavily trafficked bridge in Long Beach, all to get cargo moving faster.

The California Advantage

Such improvements will help to give the California shipping routes an insurmountable advantage, officials say. For example, in a journey to the East Coast, the Burlington Northern Santa Fe Railway (BNSF) claims it can beat any all-water shipment going through the Panama Canal by nine days.

“The shortest route and the fastest route will always be via the West Coast, despite what happens with the canal,” BNSF vice president Steve Branscum asserted in a California State University, Long Beach video about the canal expansion. “That’s an indisputable fact. The vast majority of freight has always moved through the West Coast, and it will always move through the West Coast.”

Nevertheless, the West Coast is already leaking market share, according to the Journal of Commerce. Ten years ago, the Los Angeles-Long Beach duo handled more than 56% of Pacific Rim containerized imports, the Journal says; last year, their share slipped to below 50%. The Journal attributes the shift to a number of factors, including the recognition by giant retailers that two-thirds of their customers were in the East, with companies like Walmart and Lowe’s planting new distribution centers accordingly.

Another important factor is the Suez Canal, which offers some stiff challenges not only to West Coast port managers but also to the new Panama Canal.

The Suez route to the East Coast is a little bit longer—11,589 miles from Hong Kong to New York, compared to 11,205 miles via the Panama Canal—but tolls will probably be lower. Right now, the Suez tolls are slightly higher—$489,000 for the fully loaded container ship that the Panama Canal charges $450,000. But prospects are that the low-maintenance, no-locks Suez will be able to keep the costs down, while Panama’s rates will soar after the new channel opens next year.

Shippers, in a constant quest for lower costs, are watching closely to see whether the expense of taking a longer route through Panama, with expectedly hefty tolls, can compensate for what could be the higher expense of switching from container ship to trains in Los Angeles.

There are other proposals to cut shipping costs by bypassing both canals. “Dry canals,” short railroads to transfer freight from ocean to ocean across Honduras or Colombia, as well as a new wet canal across Nicaragua, have been floated as possible problem-solvers.

“It’s all about, ‘Can I save $100 by diverting to your route?’” Bingham says. “You add it all up and swing your cargo volume back and forth based on reliability and that cost.”

“The Prius of the Seas”

Meanwhile, there’s another headache for the Panama Canal (and some East Coast ports): the new super-post-Panamax ships, also referred to as Triple E ships, which can carry 18,000 containers at a time. Because of their anticipated fuel savings, major shipping companies are snapping them up big-time.

“These vessels will be the Prius of the seas,” a South Korean analyst told Bloomberg. “They’re fuel efficient and environmentally friendly.” Maersk Line, the world’s largest shipping line, is expecting 20 of them from South Korea’s Daewoo Shipbuilding & Marine Engineering. Some are already operating between the Far East and Europe.

At more than 1,300 feet long and 194 feet wide, however, they’re too big for the new, wider Panama Canal.

It’s a measure of the rapidity of change in global trade, Bingham says. “There are ships coming into operation now that are already too big to fit into the locks that are not even built yet.” 

Edmund Newton is a Washington, D.C.-based writer, formerly of the L.A. Times, Newsday and the New York Post, as well as the former managing editor of New Times-Broward Palm Beach. He has written for, among others, The New York Times, Time, People, Daily News Sunday Magazine, Black Enterprise, Ladies’ Home Journal, Essence and Audubon.