Made In The Americas (sm):  The New Panama Canal

The New Panama Canal, Made In The Americas (sm) For The Americas

When Theodore Roosevelt engineered another attempt at digging a 50-mile passage through the Isthmus of Panama, he learned from the previous failed French project.  By the time the canal was complete in 1914, the French failure had cost over 22,000 lives, and the Americans lost 5600.  While the French organizers were investors with few engineers among them, the Americans geared up for what became an engineering marvel.  Ships could now pass in 30 hours from one ocean to the other, and Roosevelt’s post-War of 1898 dream of military advantage facilitated by the canal was finally realized.

But one hundred years later global markets have heated up.  Cargo ships, cruise ships, tankers are all bigger and many can no longer squeeze through the locks.  During President Carter’s administration a treaty returned the Panama Canal Zone to Panama whose voters happily approved the construction of a wider more innovative canal equipped with a new lock system.  Click to watch the progress on a set of webcams.  Completion is scheduled for October, 2014, one hundred years after the original canal dedication. 

Among logistics, distribution and supply management pros the excitement is building.  Logistics costs for freight shipped from China to US West Coast ports, for instance, followed by transfer to trucks or trains, will change with the new canal.  The change is partly attributed to fuel costs; bigger ships and slow steaming.  When steamship lines want to drive costs down, they know that going super slow is most efficient.

 Transit times to East and Gulf coast ports, however, according to Tim Feemster, Sr. Vice President, Director of Global Logistics and Supply Chain Consultancy, Grubb and Ellis Company, are lengthened by 10 – 14 days in comparison to current West coast routes.  “Shanghai to Columbus, its $100-$400 cheaper to come via Norfolk vs. Los Angeles/Long Beach, depending on the spot market and fuel surcharge.” The cost differential depends on how many and what types of items are in the container.  For one thousand pairs of shoes, for instance, a four hundred dollar increase means little per pair, but the transit times could be 10 - 14 days longer.

The question will be whether to trade cost for speed and availability.  “If it’s July and we’re bringing Christmas trees from Asia, we can go cheap, but if we’re shipping fashion goods to solve an out-of-stock condition, speed counts.  Let say it’s June,” says Feemster, “and we’ve got a woman’s top in red, green, yellow, and purple in all sizes.  That style/color/size combination morphs into many skus.  If yellow is the hot color and the retailer is all out of stock, they can fly the yellow order.  Now that’s very expensive, but if they want to make the season and sell at full retail, which is good for margin, the shipment will go air express.  Two weeks additional travel time by boat can be huge - making all the difference for retailers.”

 So the correct answer to the question of what impact the new canal will have on commerce is…. It depends… on what the inventory is at the warehouse, the store, for the particular season.  This question is the kind of multivariate problem perfect for logistics optimization software.

“It’s a pretty big change… The jury’s out as to whether the new canal will push more traffic to east coast ports.  To ship cargo by train to Columbus from Norfolk, for example, and then distribute by truck from Columbus or Toledo will cost less, but it covers more miles.  All water is the cheapest method, of course – you never want to go backward by rail.”

Marcos Barbalho is an Atlanta, Georgia based consultant in charge of Latin American operations for an outsourcing company.  According to Barbalho, the new canal and shipping routes will have several impacts.  “I think there will be a number of changes happening.  The West Coast has sometimes been very congested with big transit time coming from the West to the East Coast.  As clients work through the numbers, now they have an option to use ports throughout the East Coast.  Panama is preparing to become of a trans-shipment spot, and we’ll be able to will unload both sides of canal and reload to smaller ships.  We can hit the Gulf ports or Latin American countries.  That opens up new avenues and over time the whole landscape changes.  People may be moving away from China over next few years because the cost of doing business in China continues to increase.  China is a low cost country only because of currency and other factors, and those advances over time will change, just as labor shifted work to Vietnam and Cambodia.  The new low wage area could be Africa or India.”

Oil costs are a factor in the outsourcing and transportation formula, and Barbalho believes that despite the hype, the oil market will continue to be cyclical.   “If oil goes down, which I doubt - it’s a cycle - we’ll see more drilling.  Brazil, for instance found huge reserves in pre-salt fields and they are moving from 1M to 4M barrels a day.  Although there are a number of issues there, there is a lot of money going after exploration, so oil prices will come down over time, although I don’t know by how much.”

The new canal is a windfall for some ports.  Now cities up and down the East Coast can bring traffic through the canal, although Barbalho believes that Southeastern ports have better chances unless the goods are intended for NYC or Boston.  “Charleston and Savannah, will vie for business if either or both get deep water.  Norfolk is ready to go now with 50’drafts.  They have great railroad facilities, low cost land to build additional DCs to store the product, and they can distribute to the North or Midwest easily.  NYC costs tend to be higher because shippers must get out of the city to Pennsylvania for storage, and these are all very costly areas for drayage. Atlanta will continue to be a logistics center,” he predicts, “and Miami will get a big chunk of business from Western South Americas.”  Further, as bigger ships land, East Coast delivery costs could drop.

Logistics costs aside, the technology of the new canal is exciting.  In October 2014 when the passage opens new lock systems will change the way water moves in and out of the locks.  Although the new apparatus is significantly longer and wider, it is designed to actually discharge less fresh water into the ocean.

Reshoring, inshoring, nearshoring - not a trivial event

“It’s not a trivial event to change the sourcing pattern,” advises Feemster. “Since we began massive outsourcing to China and brought them into world trade, raw material supply chains are focused in China, so we can't just pick it them up and bring them all back.  The supply network shift – unplugging and bringing supplies and finished products back here – is huge.  And we know that some of the manufacturers are coming back to North America.”

Most experts believe that Panama had to do the canal project to remain a competitive option.  Without a wider passage, they would lose the ability to transit product because container, tanker, and cruise ships are getting bigger and shippers are decommissioning smaller ships.  The goal is to move more volume through canal. 

UPDATE: "It appears that the project is running behind schedule.  There is a long time before the scheduled opening but it appears it will occur after the 100th anniversary date of the original opening.  Stay tuned."

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