November 14th 2014
A just-released study commissioned by the Pacific Maritime Association argues that West Coast ports stand to lose significant volumes of cargo in the years following the Panama Canal expansion due to lower freight rates that will be offered on all-water Asia to East and Gulf coast services.
The study estimated that price levels on the Panama Canal route for Asia cargo bound for Chicago will drop 12-14 percent from $3,200 to $2,800 per 40-foot container in the three to seven years following the expansion of the canal, which is now scheduled to be open in early 2016. The current spot rate from Shanghai to the U.S. East Coast is $4,190 per 40-foot container, according to the Shanghai Containerized Freight Index.
The lower rates will attract less transit time-sensitive cargo now moving over the West Coast, it said. “In interviews with fifteen key executives in the transpacific supply chain, twelve projected that rates will go lower and produce a significant shift of volumes from West Coast ports to East and Gulf Coast ports,” the study said. “The overwhelming view of those interviewed is that the system will exploit the new capacity provided by the widened Canal three to seven years after it is in operation.”
It added: “West Coast Ports will need to respond with aggressive and innovative measures to avoid losing significant market share once the widened Canal is fully operational.”
The study was published in May but released only this week, just as congestion has brought the Los Angeles-Long Beach ports to a standstill and as negotiations between the PMA and International Longshore and Warehouse Union have broken down, spreading congestion throughout the West Coast port range.
The study points to the inevitability that container lines will deploy much larger ships on the expanded Panama Canal route and will accept lower revenue per container to keep those ships filled. Container ships of over 13,000 TEUs will be able to transit the new set of locks, up from a maximum of roughly 5,000 TEUs today.
“Ocean carriers will trade off lower prices for increased revenues on all-water routes for those products where speed is secondary (e.g., household goods, appliances and furniture), but ‘fast fashion retailers’ will remain in the domain of (West Coast ports) as speed to market is still key,” the report concluded. It added this point: “Shipping lines in the anticipated overcapacity situation will prefer to use their own assets, for which they have already paid, to avoid out of pocket inland costs on long-haul rail” eastward from West Coast ports.
The report was written by Michael Nacht, a professor of public policy at University of California at Berkeley and a former assistant secretary of defense for global affairs (and a two-time TPM speaker in Long Beach), and Larry Henry, founder of ContainerTrac.
Though it doesn’t put a percentage estimate on the market share the West Coast could potentially lose, it cites a 2008 Drewry estimate that up to 25% of the U.S. West Coast ports’ cargo base, primarily hinterland cargo, could be lost to the East Coast and Gulf coast ports following the canal expansion. But it also notes that others don’t see a big potential for loss, reflecting the long-running and still-inclusive debate over the topic.
West Coast market share has already been slipping. Since 2007, the East and Gulf coasts have seen their market share for loaded international containers grow from 50.5 percent to 52.1 percent in 2013, according to PIERS, the data division of JOC Group.
Since it was published in May, the more recent congestion at Los Angeles-Long Beach is not mentioned, but no forecast of the Panama Canal expansion impact can now avoid considering the impact of the catastrophic gridlock now affecting the largest container gateway in the Americas. Shippers who are increasingly focused on mitigating risk in their supply chains, and who began diverting cargo away from the West Coast following the ten-day port shutdown in 2002, are no doubt looking anew at all available alternatives. The PMA report notes that shippers are likely already assessing their options post-Panama Canal expansion.
A JOC Survey of shippers conducted between Oct. 30 and Nov. 3 revealed that just shy of 70 percent plan to divert cargo next year to avoid Los Angeles‑Long Beach.
The PMA report said, “Shippers can be expected to formulate their plans in the fall of 2015 on how they initially expect to take advantage of the Canal’s greater capacity.”