In our earlier post on the Panama Canal expansion (Part 1 – by Thomas Sobeck and Frank Monte) we introduced the scope of infrastructure change currently underway as a result of this expansion. While the canal is open for business, investment in downstream infrastructure must be completed in order for the promised efficiencies to be realized. East coast ports are investing heavily in not only the ability to offload the containers, but the additional secondary investments required to handle the cargo to the end customer. This includes warehousing, inland ports, and railway investments to support the increased traffic. Manufacturers and distributors are obtaining a foothold in locations convenient to the ports in order to support their business needs and take advantage of the favorable cost impact that the canal enables.

Here in Part 2, we will discuss what this level of investment means for the general flow of trade throughout the United States. It is clear that the expectation is for increased container volume through east coast ports due to the associated cost and geographic advantages. Xeneta reports that there is the potential for 10-14% of container traffic that will shift from west-to-east coast ports. This sizeable shift can change how market participants price and manage capacity. First, the west coast competition isn’t resting on their heels – they are proactively managing this new threat and aggressively promoting the value of continuing to ship through this traditional route. Second, other east-coast and transshipment ports are now potential options as the new trade flow will need optionality once through the canal. Last, the land bridge may prove to be a viable option as rates react and manufacturers see new capacity open up throughout the system.

Outcomes: Shifting Trade Flows

The expected macro result of the canal opening is to see trade flows from Asia shift from the west coast US to east coast ports. The estimated 10-14% shift is believed to move to the ports of Houston, Savannah, New Jersey, and several others. This has the potential to provide an increase in available capacity among western rail operators and a significant increase in competitive pressure from the rail and port operators. Rates may be adjusted to give shippers pause and consider whether the savings opportunity is as large as originally believed.

Additionally, shippers that are taking advantage of the new east coast ports will have to consider enhancing their relationship with new carriers. The east-coast port operators NS, CN, and CSX can expect an increase in demand along with new relationships with distributors that typically shipped with Union-Pacific, BNSF, or other west coast rail companies. In the end we may find that this speculation is the only result of this shift in trade flow. New market participants may find exports to be a viable option now that there is an increase in capacity through the canal. Oil, natural gas, and grain from the heartland now has a more economical way to export product, which can increase demand through gulf ports and open up new markets due to beneficial cost impacts. Last, the necessity for ensuring a timely shipment of goods may cause manufacturers to maintain shipments through the west-coast ports. Having a shipment arrive a week early may trump any need for cost efficiencies when customer demand is high.

Outside of the rail considerations to be made, another shift in trade flows may exist in the form of new destination and transshipment port options. There are ports that aren’t making major headlines with infrastructure changes. Multimillion dollar changes underway at Gulfport, Port Everglades, and Jacksonville. These ports aren’t able to handle the Panamax vessels but may see a secondary impact in the form of smaller vessels that are carrying cargo offloaded at another major transshipment hub. Ports on the eastern side of the canal are under construction to support cargo exchanges and distribution to smaller ports. It is possible that we are able to see the cost advantages of the canal at ports which are unable to handle the Panamax ships because the distribution network has been set up to offload the containers onto smaller ships.

Levers Available

Given the changes that are occurring, what do market participants need to start thinking about? What kind of technology tools are available to our clients and how can one take advantage of these conditions?

As companies seek to determine what logistics opportunities can add the best benefits, they will also soon figure out it may not be as simple as first thought.  Some simple logistic networks may be able to use the “tried and true” use of spreadsheets to determine alternatives to save money, time, or whatever is the optimal goal.  Other, more complex company logistic networks, may need to utilize technology to determine the best path forward, or at minimum, to provide them options to consider.  Logistics technology, including transportation Management systems (TMS), network optimization, customs/compliance tools, and visibility systems, have become necessary to compete in the marketplace and to drive costs our of logistics networks. Those not utilizing these type systems, appear to be falling behind their competition, and will soon be acquired, or even worst, out of business.

Another important aspect that seems too often left out is logistics talent.  Companies pushing forward understand that talent is what will set them apart now and especially in the future.  The ability to attract, retain, and develop talent will play a key component in the company’s success.  This has been a sticky issue for quite some time as baby boomers retire, taking their expertise with them and creating a shortfall of talent in the space.  Being in logistics is not considered a sexy position or career, but those in the know, understand its importance and need to for further development.  Supply Chain programs are being developed at top universities and are continuing to evolve upward at those universities that currently have programs.  This will somewhat help ease new entry professionals into the space, but companies also need to take care of their mid-managers with continued development and appreciation so that they don’t become part of the exodus in the field.

Over all, it can be determined that many factors are up for consideration as the Panama Canal expansion comes to fruition.  Its initial impact may not be recognized for a certain period of time, but knowing what the logistics industry is involved in as they prepare for the potential impacts and getting your professional resources knowledgeable, will ultimately determine what opportunities you can take advantage of and at the right time.  Utilizing technology and partnering with the right service providers, will also help you decide how your approach to these changes and allow decisions to be made on factual inputs instead of a gut reaction.  As you can imagine, once these avenues are addressed, it will help set the current direction and future strategy of your company, and ultimately its success in the marketplace.