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Waiting for Bigger Ships to Come In

December 20, 2016 | Download as PDF

The Promise and Reality of the Panama Canal Expansion for Commercial Activity at U.S. Ports

The shipping industry has long anticipated the ramifications of an expanded Panama Canal capable of accommodating higher volume and larger ships. Finally, after $5.4 billion in costs and more than two years in delays, the first “Neo Panamax” ship traveled through the Panama Canal’s third lock on June 26, 2016.

And the world didn’t change. At least not right away.

Not that anyone expected immediate, dramatic change. Realistically, the full impact of the Panama Canal’s new third lock is unlikely to be felt for years. But after nearly a decade of preparation and billions of dollars of investments in port facility upgrades, the momentous event had a somewhat anti-climactic feel.

Though the Canal expansion’s debut has come and gone, many questions remain. Will it ever deliver on its promise to the port cities that scrambled to accommodate the bigger ships that can now traverse the Canal and more easily access the East Coast and Gulf Coast ports from Asia? If so, which U.S. ports will benefit and which will suffer? Will some ports, notably those on the West Coast and on inland waterways, lose foreign trade volume? And finally, how will all of this affect the commercial/industrial sector in U.S. coastal cities and beyond?

Expansion Background

Discussions about expanding the Panama Canal date back decades. The United States actually began construction of a third set of locks in 1939, but discontinued the project when World War II intervened.

The idea didn’t die, however, and in 1985, the U.S., Japan and Panama agreed to jointly fund a study of options for widening or even replacing the Canal. “The current canal, completed in 1914, is too narrow and shallow to accommodate modern bulk-cargo carriers and supertankers,” reported The New York Times in a September 4, 1985, article. “Ships are limited to a maximum of 65,000 tons, and it usually takes them 20 hours or more to make the crossing.”

In April of 2006, with this and other studies as a guide, the Panama Canal Authority published “Proposal for the Expansion of the Panama Canal: Third Set of Locks Project.” Construction began in 2007 and the original plan was for the new locks to be available during the 100th Anniversary year. However, as reported by The Journal of Commerce (JOC), the project was “punctuated by controversy involving repeated delays, a messy dispute over construction overruns, and the 11th-hour discovery of concrete flaws that pushed back the opening.”

Several unrelated developments coinciding with the expansion’s completion may initially skew its ultimate impact on trade and ports as well. Most notably, the maritime shipping industry, which never completely recovered from the 2008-2009 recession, spiraled into a global downturn in 2015 and 2016. The industry is facing an estimated $10 billion in losses in 2016, and was shaken by the sudden bankruptcy filing of Hanjin Shipping, South Korea’s largest shipping company, in August 2016. As 2016 neared its close, other shipping companies showed similar signs of catastrophe on their doorsteps.

Another obstacle delaying the impact of the new locks are draft restrictions set just prior to opening that at least initially prevented Neo-Panamax vessels from using the full 50-foot depth. Dry weather from the El Niño phenomenon forced the Panama Canal Authority to impose the restrictions in response to lowered water levels at the reservoirs that feed canal locks. Though the new locks initially provided drafts of up to only 43 feet, Canal officials expect water levels to eventually be sufficient to meet long-term demand.

Finally, the election of Donald Trump as U.S. President, with his campaign promises of protectionism, trade restrictions and treaty renegotiations, has added a major dose of uncertainty to an already struggling industry.

In a November 9, 2016, article in the Wall Street Journal, titled “Shipping Industry Feels Shock Waves from Donald Trump Election: Ship operators fear antitrade rhetoric that took center stage during the campaign,” Basil Karatzas, a New York-based maritime ad adviser, talked of the industry’s fear of the Trump unknown. “There is little detail about Trump’s trade policy, but his overall protectionist, anti-globalization stance will likely hurt shipping—an industry that thrives on low trading barriers for goods,” he said. “In the short term, the shock effect to the markets will likely lead to lower trading volumes at a time when shipping companies report earnings in bright red numbers.”

Trump repeatedly criticized global trade deals such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP), which would lower or eliminate tariffs between the U.S. and 11 other countries, including Japan and Vietnam. This comes at a time when the World Trade Organization’s global trade forecast predicts only a 1.7 percent growth rate in 2016, the lowest since the 2008 financial crisis, the article noted.

Potential Winners and Losers

The prevailing theory is that ports on the East Coast and Gulf Coast will benefit from the expanded Panama Canal, likely at the expense of West Coast and inland ports. Per JOC, ports on the East and Gulf Coasts have spent a combined $150 billion in recent years to deepen harbors, expand terminals and improve rail and road connections from their docks. 

“As the world container fleet gets upgraded with larger ships, major ports are facing the challenge of accommodating deeper vessel drafts,” wrote Hofstra University researchers Dr. Jean-Paul Rodrigue and Dr. Joseph Schulman in their publication The Geography of Transport Systems. “While a typical Panamax containership could be accommodated by a 35-foot channel, post-Panamax I containerships handling above 5,000 TEUS require a berth depth above 42 feet and a depth of 50 feet is required to handle ships above 10,000 TEUs.”

As a result, without a deeper channel, many ports would not be accessible to the new post-Panamax container ships. “The expansion of the Panama Canal to a depth of 50 feet and a capacity of 12,000 TEU (with its associated New-Panamax ships class) has also placed additional pressures. This has triggered a ‘race to the bottom’ in the dredging of several East Coast ports such as Miami (50 feet achieved in 2014), New York (50 feet achieved in 2014) and Savannah (47 feet by 2017),” the report notes.

This new competitive advantage could accelerate the migration from Southern California to East Coast and Gulf Coast ports, which began even before the new Panamax ships first cruised through the Canal. While still North America’s two busiest ports when measured by imported and exported container volume (excluding domestic shipping and non-containerized cargo), the ports of Long Beach and Los Angeles have lost substantial ground to their rivals across the continent in recent years. 

In calendar 2015, the Port of Los Angeles handled just under 5.5 million TEUs (Twenty-Foot Equivalent Units) of imported and exported goods while the Port of Long Beach did about 4.9 million. These amounts are down by 7.4 percent and 1.1 percent from 2014, per JOC.

This isn’t a one-year anomaly. From 2010 to 2015, the four largest West Coast ports (Los Angeles, Long Beach, Oakland and Seattle-Tacoma) saw their combined container volume of foreign trade rise by just 1.7 percent, per JOC. At the same time, the largest East Coast Ports (including New York-New Jersey and nine others that dotted the JOC Top 25 North American Ports of 2010) grew by 22.7 percent and the two Gulf Coast ports on the list (Houston and New Orleans) reported a combined increase of 28.8 percent.

An 11-day work stoppage in 2002 at West Coast ports is credited with helping to first drive Asian shipping companies to seek the Panama Canal to East-Gulf Coast as an alternative route. More recently, prolonged union contract negotiations and congestion at Southern California ports moved Asian shippers to target the East and Gulf Coasts. 

While Southern California slipped, 20 of the Top 25 North American ports reported higher foreign trade volume in 2015. The only exceptions other than in Southern California were Oakland (-5.6 percent) – which has dropped from the 6th-largest to the 11th-largest on the JOC list since 2010 – and two ports in Florida (Jacksonville -0.4 percent and Everglades -3.2 percent).

Inland ports in the Midwest, Chicago in particular, may also experience some lost volume when the neo Panamax ships begin cruising directly to East Coast seaports. These Midwest distribution centers historically deliver goods to the Eastern and Central sections of the U.S. from ships that arrive to the West Coast from Asia.

Even with the billions of dollars they have spent on deeper channels and bigger, better terminals, the East and Gulf coasts still aren’t fully prepared, some experts say. Congestion is plaguing some ports and many still have functional limitations.

Port Cities Status - Northeast Atlantic

For the purposes of this paper, the Northeast Atlantic ports range from Maine to Maryland, with the largest being the Port of New York/New Jersey.

During the last decade, New York-New Jersey and Baltimore have deepened their channels to 50 feet, joining Virginia as East Coast ports with channels deep enough for fully loaded neo-Panamax vessels. 

Despite its deeper channel, the New York-New Jersey port is hamstrung by the Bayonne Bridge. Its 151-foot clearance disqualifies many larger ships from reaching four New York-New Jersey container terminals. A $1.3 billion project to raise the bridge to 215 feet has been delayed until at least the end of 2017.

Congestion woes and a decline in export volume have also caused the NYNJ port to lose business to East Coast rivals. JOC reported on December 20, 2016, that the port’s share of the East Coast’s loaded import and export containers fell from 33.5 percent in 2010 to 30.1 percent in 2015. 

Through the first nine months of 2016, the NYNJ port’s share stood at 27.0 percent, which is actually an uptick from the same period in 2015 with the peak season in October and November yet to be measured. Even with the slippage, the port still handles 60 percent more import-export container volume than its nearest East Coast rival, Savannah, JOC reported.

Joe Nitti, a senior vice president in Cresa’s Princeton, New Jersey, office says the port has invested substantially to improve its distribution and efficiency. “They’re tying in all multimodal shipping routes – planes, trains, trucks and ships. The Port Authority, on the pier side, has an active rail line coming on to the pier so they can process containers quickly.”
The other ports in the Northeast are significantly smaller, with only three cracking the Top 25 in foreign trade container volume. The Delaware River (essentially Philadelphia) and Baltimore ports rank 18th and 19th, respectively, while Boston comes in 25th. All three showed year-over-year increases in 2015, with Baltimore recording a 9.3 percent gain, followed by Boston (5.3 percent) and Delaware River (2.8 percent).

Boston has an approved $310 million dredging plan that will first restore the harbor depth to 40 feet on its way to an eventual 51-foot depth. Delaware River began a $364 million project in 2010 to achieve a depth of 45 feet, expected to be complete in 2017. Baltimore recently approved a $25.6 million dredging project for depths varying from 49 to 51 feet.

Many of these and other dredging projects are being financed with the assistance of the Harbor Maintenance Trust Fund (HMTF), a dedicated funding source supported by port fees with money that in the past was too often diverted to other uses.

Port Cities Status - Southeast Atlantic

For the purposes of this paper, the Southeast Atlantic ports range from  Virginia to Miami, Florida

Savannah handled record-setting volumes of cargo in 2015, though it expects its double-digit growth to level off in 2016. The Georgia Port Authority (GPA), whose port is the nation’s fourth-largest in foreign trade container volume, in January 2016 approved $47 million to purchase four new Post-Panamax Cranes and another $8.2 million for the third phase of a new empty-container depot. As part of a $706 million harbor expansion project, the GPA will deepen the 18.5-mile outer harbor to 49 feet at mean low water and the Savannah River channel to 47 feet

The Port of Virginia – North America’s seventh-largest – is upgrading capacity at its centerpiece terminal in Norfolk with a $350-million state-backed bond deal. It also agreed to share with the U.S. Army Corps of Engineers the cost of a feasibility study for deepening the Hampton Roads port channels to as much as 55 feet. Virginia received congressional authorization in 1986 for dredging to 55 feet, the only port on the East Coast with authorization to that depth.

The South Carolina Port Authority is investing a whopping $1.6 billion to expand Charleston’s port, including dredging to 52 feet by 2020. It is the continent’s 10th-largest port by foreign trade container volume.  

Other Southeast U.S. ports dot the Top 25, including Miami (13th), Jacksonville (14th), Port Everglades (15th) and North Carolina (24th).

Port Cities Status - Gulf Coast 

For the purposes of this paper, the Gulf Coast ports range from Key West, Florida, to Texas Houston (8th) and New Orleans (22nd) are the only two U.S. Gulf Coast ports among the North America Top 25 in container volume of foreign trade, though  Mobile, Alabama, and Gulfport, Mississippi, are also major ports in the region.

When measuring by weight of all foreign cargo handled (including domestic shipping and non-container cargo such as oil and grain), the American Association of Port Authorities (AAPA) considers Houston the largest U.S. port based on 2014 statistics, followed by the Port of South Louisiana. Also among the Top 10 in that category are Beaumont and Corpus Christi in Texas, New Orleans and Mobile (7th through 10th respectively).

Houston recently completed a dredging project to reach 45-foot depths and continues to upgrade its capabilities.

Louisiana has 33 ports, including many that run up the Mississippi River. While the Mississippi River ports can typically accommodate ships to 45-foot depths, the state is authorized to go another 10 feet deeper. Without this improvement, the benefits of the expanded Panama Canal to Louisiana’s ports may be limited. The Port of South Louisiana is investing $66 million in upgrades.

Mobile has announced plans to dredge to 50 feet from its current 45, but has no timeline in place for completion as of late 2016.

Experts say the Canal expansion could benefit the Gulf Coast ports with increased non-containerized cargo such as grain from the U.S. Midwest, as well as exports such as coal, oil and liquefied natural gas (LNG).

Port Cities Status - West Coast

For the purposes of this paper, the West Coast ports include all those in Washington, Oregon and California. 

While ports in other parts of the country have aggressively invested to improve their post-expansion position, the West Coast ports are largely playing defense to preserve their approximately 70% market share of U.S. imports from Asia. 

The Journal of Commerce writes: “Unlike many of the ports on the East and Gulf coasts that are deepening their harbors and enlarging their marine terminals to prepare for the mega-ships that will begin transiting the canal…the major West Coast gateways already have 50-foot harbors and terminals of 100 to more than 400 acres in size.

“To prevent an erosion of market share to East Coast ports, the Seattle-Tacoma, Oakland and Los Angeles-Long Beach gateways must improve their efficiency in unloading vessels, moving containers through the yards and expediting the departure of containers by truck and intermodal rail.”

Labor issues, size limitations, congestion and a shortage of truck drivers to move cargo away from the docks have conspired to threaten the U.S. dominance of West Coast ports, particularly Southern California. The Hanjin bankruptcy is likely to further damage this advantage.

The Seattle-Tacoma seaport is the sixth-largest by volume in North America, based on 2015 statistics, and it has historically benefited from troubles at ports to its south. However, in the wake of the Hanjin collapse and general downturn in shipping, the port is defending its $260 million plan to upgrade Seattle’s Terminal 5 to make it “big ship ready.” Port Commissioner John Creighton told a September gathering of the West Seattle Chamber of Commerce that he remains “bullish” on the Terminal expansion and the overall outlook for the port. 

West Coast ports, while anticipating some drop off, still expect to retain their position at or near the top of the U.S. port pecking order, at least in the short term. “It’s something that is going to be felt gradually over time,” Jock O’Connell, a trade adviser at Beacon Economics, told the Orange County Register. “There is a general sense that the market share will be lost to East Coast ports, but that has been happening for a while. Whether that leads to a (long-term) decline, that’s another question.”

Port Cities Status - Inland

For the purposes of this paper, Inland ports are all those located on an inland waterway such as a river, lake or canal. “Dry ports” are typically extensions of seaports accessible primarily by truck or train.

The major U.S. waterways hosting inland ports include the Great Lakes (Ports of Chicago, Detroit, Duluth, etc.), Mississippi River (Ports of St. Louis, St. Paul, Memphis, etc.), Missouri River (Ports of Sioux City and Kansas City) and Ohio River (Ports of Pittsburgh, Cincinnati, Louisville, etc.). 

Chicago was described in 1914 by poet Carl Sandberg as the “nation’s freight handler.” Over 100 years later, this essentially remains true. With its generally central location, web of rail lines, access to inland waterways and nation’s busiest airport, Chicago is the top U.S. logistics city per Supply Chain magazine.

As it relates to a distribution center for goods arriving on the West Coast bound for the East and South, its status may be threatened somewhat by the Panama Canal expansion and subsequent competitive improvements made by East Coast and Gulf Coast ports.

“The West Coast is already being impacted, which in turn, impacts Chicago,” says Jay Cook, a senior vice president in Cresa’s Chicago office. 
“On top of superior truck routes and interstate access, Chicago offers a unique bonus in terms of rail; we have access to all of the major rail lines. This year, we will roll in over 50,000 cars, or roughly a thousand a week. We will hit that number in 2016, but I wonder if that will be reduced in 2017 and future years due in large part to the Canal.”

Rail and trucking lines, recognizing the potential of a shift in where goods will originate, are taking steps to adapt. Many seaports are investing in new or expanded dry ports to accommodate growing volumes, while railroad lines are revamping routes and seeking greater efficiencies through methods such as double-stacked container improvements.

Impact on the Commercial/Industrial Sector

With billions collectively invested in landside facility and waterside transportation upgrades, many U.S. ports are relying on faith that the anticipated influx of bigger ships and higher volume will materialize once the expanded Panama Canal hits peak performance.   

While the focus of all this economic activity has largely been the accommodation of Neo-Panamax activity, the investment may already be paying off as it pertains to increased commercial activity in U.S. port cities.

Consider the Port Authority of New York & New Jersey (PANYNJ), which handled a record amount of cargo volume in 2015 despite losing some foreign import-export container market share to other fast-growing East Coast ports. The Port “exceeded its previous record for annual cargo volumes in 2015 by more than 10 percent, building on the jobs and economic activity the port generates for the bi-state region,” the Authority announced in February 2016.

PANYNJ cited its $600 million investment in ExpressRail, the ship-to-rail system serving its marine ports, as pivotal to the port’s continued growth. Upgrades to ExpressRail, which set its own cargo hauling records in 2015, “(have) been critical to addressing the need for on-dock rail to improve port efficiency, competitiveness and reduce emissions,” the Authority said.

Cresa’s Joe Nitti says the improvements to the port were a boon to the area, regardless of the effects of the expanded Panama Canal. “They improved the whole operating platform and retooled everything they do pertaining to shipping. They had a port that was successful a generation ago, lined with warehousing and distribution space, and they removed all the tenants and demolished a lot of the buildings. It makes for a more efficient operation; the warehouse space isn’t getting in the way of trucks traveling in and out of the port.”

Nitti says rents have increased and that vacancies are at historic lows. And the closer you are to the port, the more desirable the space.

“Space at the port is priced highest in the state because of the ease and efficiency to the port, he says. “In some cases, the redevelopment consisted of repurposing properties. It’s very expensive to put these properties online, but the market has been able to absorb the high rents due to increased efficiencies and the volume going through the port.”

E-commerce has changed distribution systems and logistics, Nitti notes, but adds that “they have to deliver the product from somewhere. We don’t do a lot of domestic manufacturing in the U.S. anymore, so warehousing at the port can be a preferred way of getting it to the customer.”

Despite the impressive growth at the New York-New Jersey ports, the height problem at the Bayonne Bridge could mute much of the benefit that the East Coast sees from the expanded Panama Canal. “With the Panama Canal opening, I think you’ll see some…slightly larger vessels coming through, but not the biggest ones,” Marc Bourdon, who heads the U.S. operations of France’s CMA CGM Group, told the New York Times. “You need New York to take them. It’s the major port. None of the other ports along the coast would be able to sustain a vessel of that size.”

While the rewards may be delayed, Nitti says he believes that PANYNJ’s investment in preparation for New Panamax ships was “a good bet.” He adds, “We’re going to see another game, once the Panama Canal is fully online and working smoothly. We’ve already seen a great benefit from its anticipation, and the economy is ready for it. If they were going to spend that money and resources on this level of improvement and there was no need or capacity for increased ship volume, it could have been a terrible gamble. But I think everything will fall in line and the gamble will pay off accordingly.”

All regions are experiencing similar impacts, with East Coast and Gulf Coast ports reporting record-setting cargo volumes and the economic benefit it can bring. Hampton Roads, Virginia, for example, had a 91% occupancy rate at its warehouse and distribution center in 2015, a boom that its leadership attributed largely to increased port activity because of congestion and labor troubles at West Coast ports.

Higher cargo volumes at ports, both existing and anticipated, is also driving new construction of warehouse and industrial space in many areas. The Georgia Port Authority announced in April 2016 that investors recently completed more than 1.7 million square feet of warehousing space, with more than 1.9 million square feet under construction and a 2,700-acre development announced. 

“The implications for cargo interests, be they traditional retailers or e-commerce companies, are steadily increasing rental rates, higher transportation costs as developers push inland and, when location closer to the seaports is crucial, a willingness to accept what in the past would have been considered inferior properties,” wrote the Journal of Commerce in an October 20, 2016, article.

Even with the reduced volume at West Coast ports, many Pacific seaside hubs report industrial vacancy rates at an all-time low. Case in point: distribution properties in Los Angeles County have a remarkable 0.9 percent vacancy rate.

As vacancy falls at ports around the country, rent for warehouse and distribution spaces has returned to pre-recession rates in most regions of the country and Class A properties are becoming scarce. Meanwhile, imports and cargo volumes at U.S. ports are predicted to increase at modest rates.

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