Just when supply chain experts thought they had it all figured out, the revamped and expanded Panama Canal opening in 2014 will raise a lot of questions and potentially change current shipping patterns for many large-scale distributors.
Strong supply-chain logistics and distribution strategies have become essential for companies in a consumer-driven economy. Always looking to get an edge, smart firms vet the various methods and routes available to them in order to mitigate costs and retain more for their bottom line.
According to some experts, the $5.25 billion expansion of the Panama Canal will open an entirely new set of possibilities that will weigh on many firms, especially those shipping product from Asia.
There are numerous ways to transport goods and they all come with a different price point. It all comes down to economies of scale: The longer you can ship in bulk, the less costly the process is. The most expensive method is shipping by air, followed by truck, rail, and boat, in descending order of cost. Air cargo accounts for the smallest portion of product distribution, simply because the cost is so high when compared to the other modes of transport. There will always be a market for air freight, smaller loads that are extremely time-sensitive best fit this model, but as fuel costs continue to rise, growth in this market is seriously constrained.
The majority of product finds its way to a truck at some point in its travel, but, with fuel once again a problem and new issues rising such as driver shortages and revamped federal regulations on driving hours, many firms are finding ways to keep cargo off of a truck bed as long as possible. Thus, the winner to emerge in this cost controlling trend has been rail.
The new strategy is to put international cargo from ocean going vessels directly on railways at an intermodal center and then ship it across county to other intermodal points, where it can then be placed on a truck to complete the end portion of the delivery run. Intermodal centers act as a meeting point for a confluence of shipping methods, where shuffling cargo to different modes of transport can be handled most efficiently.
Right now, this is the smartest way to ship product nationally and the real estate market has responded. Intermodal centers have popped up all across the country, from California’s Inland Empire and Houston, Texas, to Kansas City and Chicago, where CenterPoint Properties has developed the nation’s largest inland port in Will County.
While intermodal centers and rail will still play a major role in the foreseeable future, a change in traffic flow may in store by 2014 when the Panama Canal expansion project will be completed. Much larger ships will be able to pass through the Central American port, making distributors reassess their current methods.
“The expansion essentially doubles the amount of freight that can go through the canal,” says Richard Thompson, executive vice president with Jones Lang LaSalle Americas, Inc. “This will be a game changer.”
This will undoubtedly be a boon to the distribution industry, but as far as real estate is concerned, there may be winners and losers. Theoretically, the canal widening will allow more ships from the Pacific to continue directly to the East Coast. The longer something stays on water, the less costly it is.
According to a research paper from Jones Lang LaSalle, ships passing through the Panama Canal today can carry a maximum of 4,400 TEUs (twenty foot equivalent units, a standard unit of measurement). When the expansion is complete in 2014, ships will be able to carry 12,600 TEUs. The canal experienced traffic of 5.6 million TEUs in 2010 and by 2015 that number is expected to be 8.6 million TEUs.
With two-thirds of the U.S. population on the East Coast, many of the products that had previously been transported across the country after delivery from Asian markets may now remain on vessels all the way to eastern ports, saving money while sacrificing time.
Thompson and many of his JLL colleagues visited Panama earlier this year to get a better idea of the impact that the restructuring could have and to view the construction first hand. He does not believe that the expansion will usher in dramatic change right away, but it definitely will expand the influence of eastern ports.
One of the biggest reasons that there will be little change at first is that only one eastern port is designed to handle the capacity of the new ships that will be passing through the Panama Canal. Currently, the canal allows for 39.5-foot draft depth for its vessels. After the expansion in complete, the canal will support much larger “Post-Panamax” ships that require a 50 foot draft depth. On the East Coast, only the port in Norfolk, Virginia will be able to support “Post-Panamax” ships. Ports in New York, New Jersey and Miami have projects underway to increase the depths and raise bridges, but it is unclear as to whether they will be ready by 2014.
When they are complete, then supply-chain managers will have to determine what would be the best method for shipping product to the East Coast. The drawback of using the canal from the Pacific would be timing. Keeping product on open water can be much more time consuming than shipping it across the country via rail.
The JLL white paper suggests that cargo could be divided up as “discretionary” and “high-value.” High-value items will still likely come across the country via rail from Pacific ports, but “discretionary” items, such as furniture or household products, could reach the East Coast via all-water routes.
This will actually have a large impact on the Midwest. The current volume and type of cargo that ships directly to the East Coast from the Panama Canal does not justify much shipping to the Midwest. The majority of product to the Midwest comes on rail directly from western ports. However, after the expansion of the canal, the East Coast’s sphere of influence could likely expand as well. With a higher volume of consumer product passing through the Panama eastward, Midwesterners may find that many of their goods will be coming from East Coast ports.
Of course the East Coast ports may not be the only options for Midwest-targeted goods.
“There are going to be many more options to service customers,” says Thompson. “I think we could see more goods come through Houston up to Chicago.”
The Houston to Chicago route is about 1,000 miles less than a Los Angeles to Chicago route. If the name of the game is to find the less costly path, cutting out 1,000 miles of land travel could be a more realistic option for firms in the future.