Executive Briefings

JLL Managing Director Comments on Panama Canal Expansion

Will the amount of cargo transiting the Panama Canal do so on fewer vessels?

Ocean carriers began ordering larger vessels in advance of the anticipated 2014 opening of the third set of locks, but the opening was delayed until 2016, says Walter Kemmsies, managing director, economist and chief strategist for the U.S. Ports, Airports and Global Infrastructure Group at JLL. To put the new larger vessels to work, liners started to re-route their all-water (Panama Canal) Eastern Asia-to-U.S. services through the Suez Canal. As the liners begin to deploy larger vessels on the all-water route they are likely to shift some Suez Canal routes back to the Panama Canal. This is important because the consensus view is that with larger vessels transiting the Panama Canal, there will be the same amount of cargo but fewer vessels. However, there could be enough cargo shifted back from the Suez to the Panama Canal so that transits through the Panama Canal do not decline as expected.

Will the all-water route from Asia to the U.S. East Coast become sufficiently more cost-effective to attract cargo from the West Coast?

Larger vessels have greater economies of scale, Kemmsies says. For one thing, doubling the size and therefore the payload of the vessel does not double fuel consumption, and fuel is the biggest expense of operating a vessel. The Panama Canal tariffs for the expanded locks included a “frequent flyer” type volume discount. Therefore the cost of shipping cargo from Asia to the U.S. East Coast via the Panama Canal will be lower because of lower operating costs and competitive transit rates. Does this mean volumes will shift from the West Coast? That depends on an X-factor: will West Coast port authorities, terminal operators and railroads lower their rates? If so, cargo might not shift. The Panama Canal also points out that modifications to ship build means they may be able to transit vessels with 14K TEU capacity as opposed to the current max of 12.5K vessels. There could be a long competitive battle ahead.

As for whether East Coast-based importers and exporters will benefit, Kemmsies says yes, generally speaking. There will be more shipping options as ocean carriers shift routes back to the Panama Canal. However, the volumes will come on larger ships and it does take longer to unload a larger ship than a smaller ship. Some cargo owners may wish to pay a premium for their container to be placed on top of a hatch as opposed to being stored deep in the hull of the vessel.

Source: JLL

Ocean carriers began ordering larger vessels in advance of the anticipated 2014 opening of the third set of locks, but the opening was delayed until 2016, says Walter Kemmsies, managing director, economist and chief strategist for the U.S. Ports, Airports and Global Infrastructure Group at JLL. To put the new larger vessels to work, liners started to re-route their all-water (Panama Canal) Eastern Asia-to-U.S. services through the Suez Canal. As the liners begin to deploy larger vessels on the all-water route they are likely to shift some Suez Canal routes back to the Panama Canal. This is important because the consensus view is that with larger vessels transiting the Panama Canal, there will be the same amount of cargo but fewer vessels. However, there could be enough cargo shifted back from the Suez to the Panama Canal so that transits through the Panama Canal do not decline as expected.

Will the all-water route from Asia to the U.S. East Coast become sufficiently more cost-effective to attract cargo from the West Coast?

Larger vessels have greater economies of scale, Kemmsies says. For one thing, doubling the size and therefore the payload of the vessel does not double fuel consumption, and fuel is the biggest expense of operating a vessel. The Panama Canal tariffs for the expanded locks included a “frequent flyer” type volume discount. Therefore the cost of shipping cargo from Asia to the U.S. East Coast via the Panama Canal will be lower because of lower operating costs and competitive transit rates. Does this mean volumes will shift from the West Coast? That depends on an X-factor: will West Coast port authorities, terminal operators and railroads lower their rates? If so, cargo might not shift. The Panama Canal also points out that modifications to ship build means they may be able to transit vessels with 14K TEU capacity as opposed to the current max of 12.5K vessels. There could be a long competitive battle ahead.

As for whether East Coast-based importers and exporters will benefit, Kemmsies says yes, generally speaking. There will be more shipping options as ocean carriers shift routes back to the Panama Canal. However, the volumes will come on larger ships and it does take longer to unload a larger ship than a smaller ship. Some cargo owners may wish to pay a premium for their container to be placed on top of a hatch as opposed to being stored deep in the hull of the vessel.

Source: JLL