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Impacts of the Panama Canal Expansion on Global Supply Chains

  • Richard E. Crandall
January/February 2017

The Panama Canal opened in 1914 after decades of deadly struggle between humans and nature. The French first attempted to build it but gave up after eight years of torrential rains, mudslides, engineering mistakes, and mosquitoes carrying yellow fever. Americans then took over the project—first getting rid of the mosquitoes and next using state-of-the-art engineering and earth-moving equipment to finish the job. The fact that the canal operated for a century without major modification is a testament to the skill and foresight of its creators (McCullough 1978).

People first thought about building a canal when gold was discovered in the middle of the 19th century. The goal was to reduce the travel time required for prospectors traveling from the US East Coast to California (McCullough 1978). By the time the canal came to fruition, however, the main objective involved more streamlined and safer movement of goods between the Atlantic and Pacific Oceans. Until then, it was necessary for ships to navigate completely around South America, including the notorious sailors graveyard at Cape Horn, which is fraught with strong winds and currents, large waves, and icebergs.

The expansion

Although the Panama Canal has operated successfully and accommodated the increasing number of ships that move through it, recent developments have put numerous pressures on Panama, which has owned the canal since 1999. Challenges include the following:

  • US manufacturers have been purchasing more goods from China and Southern Asian countries. This has increased the flow of goods from Asia to the United States and focused attention on minimizing transportation costs.
  • Even as China was becoming a major supplier of components to US manufacturers, other Asian countries—primarily Japan and Korea—were learning how to produce automobiles and electronic products that supplement or replace those previously made in the United States for the US market. This has resulted in more and larger items being shipped to the US market.
  • As part of the effort to reduce transportation costs, ocean carriers have designed larger ships, which have a lower cost per container moved. They carry upwards of 19,000 twenty-foot equivalent units (TEUs), with future vessel designs able to carry 21,000 TEUs. These mega-ships are the length of four football fields, make up 16 percent of the global container fleet, and carry 45 percent of the container cargo (Laxmana et al. 2016).
  • Competition from the Suez Canal is another key issue. In recent years, more ships have been using this route to the US East Coast because of its ability to handle larger ships and the shift of manufacturing from East to South Asia.

Over the course of 17 years following the transfer of ownership to Panama, the canal was upgraded—at a cost of $3.3 billion— to boost capacity from 228.5 million tons in 1999 to a record total of 341.8 million tons in 2015. Workers also expanded the depth of the lake channels by 2.1 meters and added new lighting, tugs, launches, mooring stations, and vessel traffic systems. Reliability, safety, and transit times all improved (Dupin 2016b).

However, there was still work to be done, and, in September 2007, yet another major expansion began. This was the largest investment and infrastructure project in Panama’s history, with the original estimate at $5.25 billion. In the end, the price tag came to about $5.4 billion, and disputes persist about cost overruns. Chris Dupin (2016b) reports the expansion project included

  • deepening and widening the entrance channels to the canal on both the Atlantic and Pacific sides of the waterway
  •  construction of three massive locks on each side of the canal, creating a third lane
  •  three water-saving basins that accompany each lock chamber resulting in a 7 percent water savings compared with the 1914 locks
  • deepening, widening, and raising the elevation of Gatun Lake, which supplies the water for the canal but offers sparse resources at the end of Panama’s dry season
  • deepening of the Culebra Cut, the 8-mile artificial gorge that was dug through the Continental Divide in Panama during the canal's original construction
  • a new 3.8-mile Pacific access channel that joins the new Cocoli Locks with the Culebra Cut, a project that involved construction of a dam that was nearly 1.5-miles long.

The locks, which opened June 26, are 1,400 feet long and 180 feet wide and can accommodate ships as large as 1,200 feet long and 160 feet wide (Dupin 2016b). The water depth is 60 feet, compared with 42 feet in the original locks. Plus, each lock has an inner and outer gate, which makes maintenance easier and offers the potential to accommodate even larger ships.

The lock chambers are designed to include three water-saving basins that will reuse 60 percent of the water in each transit (Dupin 2016a). There are nine basins for each of the two lock complexes, bringing the count to 18 basins for the entire project. With the water-saving provisions, the Panama Canal Authority hopes to be able to handle ships drawing 55 feet of water most of the year (Dupin 2016b). The organization is confident that the canal can accommodate ships drawing 46 feet of water continually.

Effects and prospects

What are the implications of the expansion for supply chains using the canal to move goods? The most anticipated result is that the expanded canal will make it economically attractive to move some of the traffic from East Asia to the United States from West Coast ports to East Coast ports. At present, about two-thirds of the tonnage is received at the West Coast ports of Los Angeles-Long Beach, Oakland, and Seattle-Tacoma and moved by rail or truck to areas in the middle and eastern sections of the United States. About one-fifth of the goods move through the Panama Canal to the East Coast ports of New York-New Jersey, Baltimore, Norfolk, Savannah, Charleston, and Miami. These ports serve the Northeast and Southeast parts of the United States.

The remaining goods, about 14 percent, use the Suez Canal to access the United States. A report by C. H. Robinson and The Boston Consulting Group projects that as much as 10 percent of the traffic could be shifted from West Coast to East Coast ports, which would move the battleground area of the United States farther west to include some of the major cities previously served by West Coast ports (Laxmana et al. 2016). The report notes that the West Coast ports probably won’t experience a decline in shipments because of the expected rise in the movement of goods between Asia and the United States.

Yet, the expansion of the Panama Canal will not be of value to the US ports unless they upgrade their ability to handle additional tonnage, much of which will be carried by larger ships. They will need deeper channels and advanced container-handling equipment to be able to minimize the time ships spend at port. The American Association of Port Authorities says close to $155 billion will be invested by 2020 to help US ports handle bigger ships. Meanwhile, other ports are in the midst of dredging projects, and some lack essential infrastructure such as cranes and docking space (Uranga 2016).

As global supply chains have become increasingly complex, the Panama Canal expansion introduces a need for improved container handling, truck scheduling, and container sequencing to minimize wait times and cost. As a result, logistics managers must choose very carefully among the numerous available routes when moving their particular products. For instance, a study of four different product types by The Boston Consulting Group evaluated the relative advantages of shifting movement of goods from West Coast to East Coast ports through the Panama Canal if the destination is Columbus, Ohio (Laxmana et al. 2016). The investigation found that products with low transportation costs but high need for faster delivery gained little by using the Panama Canal. On the other hand, products with high transportation costs and less concern for delivery speed benefited.

The authors say three developments will affect volume through the Panama Canal:

  1. A proposed canal through Nicaragua eventually could be built, providing an additional route for shippers to reach the East Coast.
  2. Carriers could increase their use of transshipment and make a stop in the Caribbean to off-load containers to smaller ships, a change that could favor smaller US and South American ports.
  3. The use of liquefied natural gas as bunker fuel for ocean vessels could substantially reduce transportation costs.

The impact of some other potential developments, however, is less clear:

  • Ocean and rail carriers could alter their schedules, creating deviations in both transit times and the costs of using specific shipping lanes.
  • The cost and reliability of water routes terminating at ports on either coast could be affected by labor relations and trucking routes.
  • Foreign exchange movements and macroeconomic policy could alter the costs of carrying inventory and manufacturing location selection.
  • The evolution of e-commerce—such as the rise in demand for same-day delivery—could influence the strategies of a wide variety of logistics providers. One final factor to consider is the balance between the outsourcing and reshoring movements within the US manufacturing community. If outsourcing declines and reshoring increases, it could lessen the expected benefits of the canal expansion.

Onward

Logistics professionals have some interesting and challenging analyses ahead of them with regard to optimizing networks, mitigating risk, and enhancing infrastructure. Importantly, many of the needed improvements will require collaboration among customers, suppliers, carriers, and governments. It will be fascinating to watch their progress throughout the next few years.

References

  1. Dupin, Chris. 2016a. “Allianz Global: Expanded Panama Canal Presents New Risks, Benefits.” American Shipper, June 16. http://www. americanshipper.com/Main/News/Allianz_Global_Expanded_Panama_ Canal_presents_new_64362.aspx#hide.
  2. Dupin, Chris. 2016b. “Special Coverage: Panama Canal’s Transit to the Future.” American Shipper, July 21. http://digital. americanshipper.com/i/706695-aug-2016/37.
  3. Laxmana, Sri, Steve Raetz, Jennifer Bratton, Dustin Burke, and Peter Ulrich. 2015. “Wide Open: How the Panama Canal Expasion is Redrawing the Logistics Map.” C.H. Robinson and The Boston Consulting Group.
  4. McCullough, David. 1978. The Path Between the Seas: The Creation of the Panama Canal, 1870-1914. New York: Simon & Schuster.
  5. Uranga, Rachel. 2016. “Will the Expanded Panama Canal Hurt Los Angeles, Long Beach Ports?” Los Angeles Daily News, June 23. http:// www.dailynews.com/business/20160623/willthe-expanded-panama-canal-hurt-los-angeleslong-beach-ports.

Richard E. Crandall, PhD, CFPIM, CIRM, CSCP, is a professor emeritus at Appalachian State University in Boone, North Carolina. He is the lead author of Principles of Supply Chain Management, Second Edition. Crandall may be contacted at crandllre@appstate.edu.

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Comments

  1. EDUARDO GOMEZ November 20, 2017, 05:54 PM
    Thank you

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