August 17, 2015
Preparing for Panama
If you’re anything like me, you are probably vaguely aware of the existence of the Panama Canal, but haven’t paid much attention to its ongoing operations. Let’s face it, after over a century of operation the initial excitement has faded and the novelty has worn off. In the eyes of today’s generation, the canal is a celebrated engineering feat of days gone by that you read about in U.S. history books, but don’t truly appreciate.
My attitude regarding the canal recently changed when I read a book about the construction of the Panama Canal, which I highly recommend for fellow history nerds. Not only did this book provide some perspective that made me appreciate the magnitude and historical significance of the canal, but it also inspired me to investigate the canal as it exists today, 101 years after its official opening on August 15, 1914.
Initially, I was curious whether the original locks were still in use and continuing to function properly, and whether the Culebra Cut, which caused so much delay and frustration with its frequent landslides during the original construction, had created any maintenance challenges over the years. What I found instead was that the Panama Canal is nearing the completion of a 10 year, $5.2 billion renovation project. The massive expansion began in 2006 and is scheduled to wrap up in the second quarter of 2016. As someone who works in the supply chain industry, this immediately caught my attention and if you’re reading this you’ve been officially put on notice: the Panama Canal expansion project is going to have a major impact on supply chain trends in the coming years.
According to a recent study by the Boston Consulting Group in partnership with C.H. Robinson, as much as 10% of container traffic from East Asia to the U.S. is expected to shift from West Coast ports to East Coast ports by 2020. Although a figure like 10% may not excite you, the study goes on to say that container traffic from East Asia represents 40% of all shipping containers entering the U.S. which means they are predicting a very large shift in container traffic.
Why are they predicting such an enormous change in traffic patterns? Let’s start with what the renovation project is actually trying to accomplish. The primary objectives that will be achieved upon the completion of the renovation are the ability to accommodate larger vessels and increased overall throughput capacity. Without getting too technical, the increased capacity will reduce traffic jams and allow for faster passage through the canal, while the addition of the new and much larger set of locks will allow vessels up to nearly 3 times larger than the current maximum vessel size, often referred to as Post-Panamax container ships, to now be able to pass through the canal as well.
The reduced travel time to get from one side of the canal to the other will certainly provide noticeable reductions in travel costs and travel times, but the biggest reason that this renovation project is noteworthy is because of the ability for larger vessels to utilize the canal. In today’s world, a post-Panamax vessel, any vessel carrying more than 5,000 TEUs is too large to pass through the canal. Subsequently, these vessels typically harbor in a West Coast port, even if the final destination is in the middle of the country or on the East Coast. According to the previously cited BCG study, Post-Panamax vessels make up 16% of the global container fleet but account for a whopping 45% of container cargo. This trend is expected to continue and the study estimates that these vessels will account for two thirds of all container cargo within the next 15 years. Upon the completion of the renovation, the canal will be able to accommodate any vessel carrying up to 13,000 TEUs.
Now is the time when you ask yourself how you can take advantage of this development? Well, as you can imagine, these massive Post-Panamax vessels provide significant savings compared to their smaller counterparts due to economies of scale. In less than a year, these goliath vessels will be able to pass through the canal and harbor at East Coast ports. The overall travel time will still be slower compared to harboring at a West Coast port and transporting the goods over land, but for goods that are destined to the eastern half of the country, although passing through the canal and docking on the East Coast will be a relatively slower option, the new path is expected to offer significant reductions in transportation costs. The study estimates that although it would take 11 more days to reach New York City, the transportation cost could be reduced by up to 4%. East Coast ports such as Port of New York & New Jersey, Port Miami, and Port of Mobile have already begun significant renovation projects of their own, in anticipation of these new larger ships and increased volumes.
With the expansion project expected to wrap up in April of 2016, now is the time that you should begin reviewing the feasibility of utilizing this new transportation method and looking for ways to integrate these potential cost savings into your supply chain. Not all supply chains are created equal, some companies will value time to market and flexibility over cost savings, but for other industries a 4% reduction in transportation costs could provide a significant competitive advantage over competitors. In a world where consumers can compare prices in mere seconds and every organization is constantly searching for efficiencies, you can’t afford to be late to the Panama party.