impact of panama canal expansion on asia -north …...impact of panama canal expansion on asia...

Impact of Panama Canal Expansion on Impact of Panama Canal Expansion on

AsiaAsia--North America Container TradesNorth America Container Trades

AndrewAndrew PenfoldPenfoldDirector, Ocean Shipping Consultants Ltd.Director, Ocean Shipping Consultants Ltd.

Panama, May 2007Panama, May 2007

Panama May 2007Panama May 2007

Overview Overview -- Tactical and Strategic PerspectivesTactical and Strategic Perspectives

•• The AsiaThe Asia--North America trades are highly dynamic North America trades are highly dynamic -- the share of the share of

different regions has changed rapidly over timedifferent regions has changed rapidly over time

•• In the US, attention is focused on providing capacity, dealing wIn the US, attention is focused on providing capacity, dealing with ith

environmental issues and intermodal problemsenvironmental issues and intermodal problems

•• Step back for the Strategic View Step back for the Strategic View -- there are major changes there are major changes

emerging, where will we be in 2015?emerging, where will we be in 2015?

•• The market will look quite different in 2015 than it does now.The market will look quite different in 2015 than it does now.

•• The basic position will be the revitalisation of the The basic position will be the revitalisation of the ‘‘all waterall water’’ optionoption

The outlook will be shaped by intrinsic (containerThe outlook will be shaped by intrinsic (container--specific) factors specific) factors

and macroand macro--issues: a volatile mix of uncertaintyissues: a volatile mix of uncertainty


Forecast Summary Forecast Summary -- what is the outlook?what is the outlook?

•• Strong underlying demand growth will continue but there are Strong underlying demand growth will continue but there are

increased risksincreased risks

•• The risks are macroThe risks are macro--economic economic -- how will the Chinese bubble be how will the Chinese bubble be

sustained and what are the implications for container trade and sustained and what are the implications for container trade and

ports?ports?

•• There are also significant technical changes that will revise thThere are also significant technical changes that will revise the e

structure of the trades:structure of the trades:

-- Panama Canal developmentPanama Canal development

-- East Coast port improvementEast Coast port improvement

-- Intermodal congestionIntermodal congestion

-- Environmental problems in California and PNWEnvironmental problems in California and PNW

•• Container distribution is set to change Container distribution is set to change -- the West Coast will see the West Coast will see

much greater competitive pressuresmuch greater competitive pressures


Demand ProjectionsDemand Projections

•• Latest OSC projections for North American demand indicate Latest OSC projections for North American demand indicate

continued strong potential continued strong potential -- but the forecast range has widenedbut the forecast range has widened

•• The short term outlook to 2010 seems quite robust with a furtherThe short term outlook to 2010 seems quite robust with a further

expansion of nearly 25 per cent forecastexpansion of nearly 25 per cent forecast

•• The core model relates container demand to GDP and the The core model relates container demand to GDP and the

indications are for continued growth through to 2020indications are for continued growth through to 2020

BUT:BUT:

•• Sustainability of the model is being questionedSustainability of the model is being questioned

•• How much longer can imports be funded and can the Chinese How much longer can imports be funded and can the Chinese

economic bubble continue to expand?economic bubble continue to expand?

Financiers increasingly insist on Financiers increasingly insist on ‘‘high riskhigh risk’’ scenarios scenarios -- the position is the position is

the same (less threethe same (less three--four years) in North Europefour years) in North Europe


North America North America -- Forecast Container Port Forecast Container Port

Demand to 2020Demand to 2020

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Million T

EUs

Increased Risk

Case 2

Case 1


Market Share by RegionMarket Share by Region

•• Longer term historic review confirms shifts in port region shareLonger term historic review confirms shifts in port region sharess

•• Not just the result of Asian acceleration but also transport Not just the result of Asian acceleration but also transport

economics. Note:economics. Note:

-- Intermodal and ship size revolution saw South Pacific take Intermodal and ship size revolution saw South Pacific take

share from Atlanticshare from Atlantic

-- This has now stabilisedThis has now stabilised

-- Atlantic Atlantic -- especially NY/NJ now lifting shareespecially NY/NJ now lifting share

-- This is due to congestion and port/intermodal constraints on This is due to congestion and port/intermodal constraints on

the West Coastthe West Coast

-- There are now economic alternatives and future container There are now economic alternatives and future container

trends will boost these optionstrends will boost these options

This fluidity will continue. Major changes will alter market shThis fluidity will continue. Major changes will alter market shares ares --

probably more significantly in the next ten yearsprobably more significantly in the next ten years


North America North America -- Market Share by Port RegionMarket Share by Port Region

0%

20%

40%

60%

80%

100%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 06

Gulf

South Atlantic/Gulf

North Altantic

South Pacific

Pacific Northwest


Future Container Demand by Port RegionFuture Container Demand by Port Region

•• Port shares determined by:Port shares determined by:

-- Total transport costsTotal transport costs

-- Capacity availabilityCapacity availability

-- Transit timesTransit times

-- Local versus intermodal marketLocal versus intermodal market

•• Some trends in regional distribution:Some trends in regional distribution:

-- A decline in market share for California A decline in market share for California -- increased All Water increased All Water

and Mexican competition, capacity and environmental limitsand Mexican competition, capacity and environmental limits

-- North Atlantic share lifted North Atlantic share lifted -- Panamax size increase boosts all Panamax size increase boosts all

water services (Suez share falls)water services (Suez share falls)

-- Pacific NW Pacific NW -- some increase in sharesome increase in share

Nothing is certain Nothing is certain -- market shares will changemarket shares will change


North America North America -- Case 1 Container Port Demand Case 1 Container Port Demand

by Port Range 2020by Port Range 2020

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Million T

EUs

US Gulf Coast

Atlantic South

Altantic North

Mexican Pacific

US Pacific South

Pacific North


Containers Ship Size EvolutionContainers Ship Size Evolution

FeederFeeder

ULCS & New PanamaxULCS & New PanamaxPostPost--panamaxpanamax

PanamaxPanamax


Lloyd’s Register

Changes in Through Shipping Costs Changes in Through Shipping Costs -- the main the main

driverdriver

•• Cost comparison between 2006 and 2015. Sum of:Cost comparison between 2006 and 2015. Sum of:

-- Underlying shipping costs (largest possible vessel)Underlying shipping costs (largest possible vessel)

-- Stevedoring chargesStevedoring charges

-- Canal chargesCanal charges

-- Intermodal delivery costsIntermodal delivery costs

•• Major changes by 2015:Major changes by 2015:

-- Panamax from 2015 means 11,000TEU (probably much more)Panamax from 2015 means 11,000TEU (probably much more)

-- Key Atlantic ports improve water depthKey Atlantic ports improve water depth

-- Ultra Large Container Ships (14,000TEU+) Ultra Large Container Ships (14,000TEU+) -- some transpacific some transpacific

trades and via Sueztrades and via Suez

-- New intermodal possibilities New intermodal possibilities -- Mexico, expanded BC optionMexico, expanded BC option

Two representative sources Shanghai (for NE Asia) and Two representative sources Shanghai (for NE Asia) and

Singapore (for SE Asia)Singapore (for SE Asia)


Cost Sectors and Outlook I Cost Sectors and Outlook I -- stevedoringstevedoring

•• Stevedoring charges LA/LB:Stevedoring charges LA/LB:

-- LA/LB costs are very high and risingLA/LB costs are very high and rising

-- Productivity is low in Californian portsProductivity is low in Californian ports

-- Capacity expansion is problematicCapacity expansion is problematic

•• East Coast stevedoring charges:East Coast stevedoring charges:

-- Currently costs average some 15 per cent less than in Currently costs average some 15 per cent less than in

CaliforniaCalifornia

-- Capacity is available and being developedCapacity is available and being developed

-- Southern ports are cheaper than NY/NJSouthern ports are cheaper than NY/NJ

-- Transshipment possibilities in CaribbeanTransshipment possibilities in Caribbean

•• Pacific NW stevedoring charges:Pacific NW stevedoring charges:

-- Slightly cheaper than LA/LBSlightly cheaper than LA/LB

-- Scope for higher volume but will remain a nicheScope for higher volume but will remain a niche


Cost Sectors and Outlook II Cost Sectors and Outlook II -- shipping costsshipping costs

•• Calculated on the basis of known and forecast trading costs:Calculated on the basis of known and forecast trading costs:

-- Original vessel newbuilding costs from current market and Original vessel newbuilding costs from current market and

adapted for new Panamax vesselsadapted for new Panamax vessels

-- Operating costs Operating costs -- from OSC databasefrom OSC database

-- Bunker prices Bunker prices -- analysed on the the basis of current prices analysed on the the basis of current prices

(increases will favour all(increases will favour all--water option)water option)

•• Voyage/service shipping cost calculation Voyage/service shipping cost calculation -- basis weekly service basis weekly service

and typical port rotationsand typical port rotations

•• It is assumed that the largest possible vessels will be deployedIt is assumed that the largest possible vessels will be deployed

•• Also, ULCS vessels will be deployed on some Transpacific and Also, ULCS vessels will be deployed on some Transpacific and

Suez routings.Suez routings.

A dynamic approach is taken to contrast the most likely situatioA dynamic approach is taken to contrast the most likely situation n

from 2015from 2015


Cost Sectors and Outlook III Cost Sectors and Outlook III -- canal costscanal costs

•• A controversial sector:A controversial sector:

-- Costs have increased significantly and will continue to do so Costs have increased significantly and will continue to do so

to pay for the expansionto pay for the expansion

-- In reality, an increase of more than 100 per cent (in real termsIn reality, an increase of more than 100 per cent (in real terms) )

can be anticipated and will be necessarycan be anticipated and will be necessary

•• Are these costs sustainable and will they damage the market Are these costs sustainable and will they damage the market

position of the Canal for the container market?position of the Canal for the container market?

-- Analysis indicates that the total role of these costs in the Analysis indicates that the total role of these costs in the

throughthrough--transport chain is not a major constrainttransport chain is not a major constraint

-- There could be scope for further increases (on a selective There could be scope for further increases (on a selective

basis) beyond anticipated levelsbasis) beyond anticipated levels

Within anticipated range, volumes will not be price sensitive foWithin anticipated range, volumes will not be price sensitive for r

arterial trades, but there may be implications for lower volume arterial trades, but there may be implications for lower volume

servicesservices


Cost Sectors and Outlook IV Cost Sectors and Outlook IV -- intermodal costsintermodal costs

•• Inland costs are critical for the West Coast v. All Water calculInland costs are critical for the West Coast v. All Water calculationation

-- Charges have increased rapidly and remain under pressureCharges have increased rapidly and remain under pressure

-- In reality, a real cost increase of 20 per cent can be anticipatIn reality, a real cost increase of 20 per cent can be anticipated ed

by 2015 by 2015 -- it could be much moreit could be much more

•• Historically, transport times have been shorter, but Historically, transport times have been shorter, but intermodalintermodal

capacity constraints are damaging efficiencycapacity constraints are damaging efficiency

•• Scale of investment to fix the problem (lines and yards) is Scale of investment to fix the problem (lines and yards) is

enormous enormous -- little sign that this will be forthcominglittle sign that this will be forthcoming

•• Environmental opposition is mounting, especially in CaliforniaEnvironmental opposition is mounting, especially in California

•• The PNW option is less congested and will be competitive for The PNW option is less congested and will be competitive for

some tradessome trades

Much higher intermodal charges and a lack of capacity will favouMuch higher intermodal charges and a lack of capacity will favour the r the

all water option.all water option.


Shanghai to Chicago Shanghai to Chicago -- current situationcurrent situation

•• There is very little to choose in cost terms between the costs oThere is very little to choose in cost terms between the costs of f

containers reaching Chicago via Los Angeles or via the Atlantic.containers reaching Chicago via Los Angeles or via the Atlantic.

Norfolk is somewhat cheaper and New York records a higher Norfolk is somewhat cheaper and New York records a higher

chargecharge

•• The level of local demand in California and the East Coast makesThe level of local demand in California and the East Coast makes

each routing effective and there is a balance between the differeach routing effective and there is a balance between the different ent

options options

•• The Pacific NW option (Vancouver) is highly competitive and willThe Pacific NW option (Vancouver) is highly competitive and will

increase share, but this will remain a fairly minor secondary increase share, but this will remain a fairly minor secondary

alternativealternative

•• The Suez option is not competitive for Shanghai containers, but The Suez option is not competitive for Shanghai containers, but

does play an economic role for shipments from Southeast Asiadoes play an economic role for shipments from Southeast Asia


Shanghai to Chicago Transport Costs Using Current Shanghai to Chicago Transport Costs Using Current

Largest Vessels Largest Vessels -- US$ per 40US$ per 40’’ containercontainer

0

500

1000

1500

2000

2500

Vancouver Los Angeles New York (Panama) New York (Suez)

Inland to Chicago Shipping Cost Stevedoring per FEU


Shanghai to Chicago Shanghai to Chicago -- position from 2015position from 2015

•• The role of LA/LB as intermodal gateways will have been severelyThe role of LA/LB as intermodal gateways will have been severely

undermined by cost increases and theundermined by cost increases and the revitalisationrevitalisation of the allof the all--

water optionwater option

•• The Panama routing with its NPX vessels will be highly attractivThe Panama routing with its NPX vessels will be highly attractive e

for the Atlantic coast and Midwest markets and will record very for the Atlantic coast and Midwest markets and will record very

competitive cost structurescompetitive cost structures

•• This will have been achieved despite increased competition from This will have been achieved despite increased competition from

ULCS vessels on the Suez and Transpacific routesULCS vessels on the Suez and Transpacific routes

•• The position of the Panama alternative will also be competitive The position of the Panama alternative will also be competitive

versus the Pacific Northwestversus the Pacific Northwest

From an underlying cost perspective, the Panama option will be From an underlying cost perspective, the Panama option will be

highly attractive and increase market share except for highly tihighly attractive and increase market share except for highly timeme--

sensitive cargoessensitive cargoes


Shanghai to Chicago Transport Costs for 2015 With Shanghai to Chicago Transport Costs for 2015 With

Largest Vessels Largest Vessels -- US$ per 40US$ per 40’’ containercontainer


0

500

1000

1500

2000

2500

Vancouver Los Angeles New York (Panama) New York (Suez)

Inland to Chicago Shipping Cost Stevedoring per FEU

Shanghai to Chicago Forecast Transport Cost Shanghai to Chicago Forecast Transport Cost

Evolution to 2015 Evolution to 2015 -- US$ per 40US$ per 40’’ containercontainer


1752

19481949

2119

1919

1844

1974

1830

1965 1943

2036

1902

0

500

1000

1500

2000

2500

2007 2014

via Vancouver via Los Angeles

via Norfolk and Panama via Norfolk and Suez

via New York and Panama via New York and Suez

Sensitivities and Issues Sensitivities and Issues -- potential downsidespotential downsides

•• The relative position of the Panama All Water option will be theThe relative position of the Panama All Water option will be the

cheapest alternative for shipments from China to the East Coast cheapest alternative for shipments from China to the East Coast

and Midwest. There are some uncertainties, however:and Midwest. There are some uncertainties, however:

-- Any major delay in improving East Coast ports will postpone Any major delay in improving East Coast ports will postpone

the the maximisation maximisation of the Panamaof the Panama’’s market role. However, s market role. However,

Halifax, NY/NJ and Norfolk will be available and other ports Halifax, NY/NJ and Norfolk will be available and other ports

have deepening plans. Also, use of Caribbean hubs will boost have deepening plans. Also, use of Caribbean hubs will boost

the positionthe position

-- There could be a competitive response from California. Given There could be a competitive response from California. Given

the labour structure and mounting environmental opposition the labour structure and mounting environmental opposition

this will be difficultthis will be difficult

-- Intermodal investment could be steppedIntermodal investment could be stepped--up. Once again, this up. Once again, this

is seen as unlikely is seen as unlikely -- capacity will be constrained and capacity will be constrained and

schedules sufferschedules suffer

It is unlikely that the core identified cost advantage will be It is unlikely that the core identified cost advantage will be

undermined. Even with 8500TEU vessels the advantage is clearundermined. Even with 8500TEU vessels the advantage is clear


Sensitivities and Issues Sensitivities and Issues -- potential upsidespotential upsides

•• There are market developments that would further favour the new There are market developments that would further favour the new

All Water option:All Water option:

-- There might be scope to increase the capacity of the New There might be scope to increase the capacity of the New

Panamax vessel Panamax vessel -- this would further boost competitive edgethis would further boost competitive edge

-- If fuel prices rise much higher, then the costs of the all waterIf fuel prices rise much higher, then the costs of the all water

service become even more advantageousservice become even more advantageous

-- There will be scope to combine AsiaThere will be scope to combine Asia--Atlantic services with Atlantic services with

RoundRound--thethe--World operations World operations -- further boosting load factorsfurther boosting load factors

OSC have been cautious in modeling future costs OSC have been cautious in modeling future costs -- the true All Water the true All Water

advantage could be considerably higheradvantage could be considerably higher


West Coast Implications I West Coast Implications I -- Pacific Northwest Pacific Northwest

•• Advantages:Advantages:

-- Shortest haul to East Asia Shortest haul to East Asia -- likely strongest growth sectorlikely strongest growth sector

-- Spare capacity in Canadian intermodal links to east can be Spare capacity in Canadian intermodal links to east can be

tapped by selective upgrades and additions to rolling stocktapped by selective upgrades and additions to rolling stock

-- Relatively deep waterRelatively deep water

-- Capacity expansions underway and plannedCapacity expansions underway and planned

•• Shortfalls:Shortfalls:

-- Environmental opposition at very high levelsEnvironmental opposition at very high levels

-- Vancouver especially faces delaysVancouver especially faces delays

-- Fragmented demandFragmented demand

-- Much smaller local market than CaliforniaMuch smaller local market than California

Has the PNW missed its chance for a dominant position as All Has the PNW missed its chance for a dominant position as All

Water fights back?Water fights back?


West Coast Implications 2 West Coast Implications 2 -- CaliforniaCalifornia


-- Huge and growing local market Huge and growing local market

-- FirstFirst--choice port range for most transpacific trade, providing choice port range for most transpacific trade, providing

capacity is available capacity is available

-- Relatively deep water, and further deepening in progressRelatively deep water, and further deepening in progress

-- Significant scope to increase capacity by lifting productivity Significant scope to increase capacity by lifting productivity

and land reclamationand land reclamation

•• Shortfalls:Shortfalls:

-- Intermodal capacity constraintsIntermodal capacity constraints

-- Environmental opposition to further terminal developmentEnvironmental opposition to further terminal development

-- Costs of port transit very highCosts of port transit very high

These forces are likely to conspire to undermine CaliforniaThese forces are likely to conspire to undermine California’’s s

market share versus a revived Panama optionmarket share versus a revived Panama option


East Coast Implications East Coast Implications -- an advantageous an advantageous

position position


-- massive local demand, but growing more slowly than US massive local demand, but growing more slowly than US

averageaverage

-- NY/NJ dredging programme to handle larger vessels finally NY/NJ dredging programme to handle larger vessels finally

underway,underway,

-- improving intermodal links with Midwestimproving intermodal links with Midwest

-- Panama Canal expansion will boost demandPanama Canal expansion will boost demand

-- stevedoring charges cheaperstevedoring charges cheaper

•• Disadvantages:Disadvantages:

-- Could loose market share in the near termCould loose market share in the near term

-- further intermodal investment required further intermodal investment required -- especially for especially for

southern portssouthern ports


New Panamax Volume Deployments from 2015New Panamax Volume Deployments from 2015


• Asia-USEC

• Round-the-World

• Europe extension

• High volume feeders

Conclusions Conclusions -- scope for market share increasescope for market share increase

•• The new Panamax dimensions will radically alter container marketThe new Panamax dimensions will radically alter container market

structuresstructures

•• The share of Atlantic ports in the North American market will The share of Atlantic ports in the North American market will

increase from around 43 per cent in 2006 to at least an estimateincrease from around 43 per cent in 2006 to at least an estimated d

53 per cent in 202053 per cent in 2020

•• Essentially, this represents a reassertion of the relative situaEssentially, this represents a reassertion of the relative situation tion

in the late 1980s/early 1990sin the late 1980s/early 1990s

•• There will be further possibilities to leverage market share by There will be further possibilities to leverage market share by the the

development of RTW and complex service extensions to the core development of RTW and complex service extensions to the core

AsiaAsia--USEC tradesUSEC trades

The cost differentials between NPX and ULCS tonnage will be quitThe cost differentials between NPX and ULCS tonnage will be quite e

limited. There will be a key issue between the flexibility of limited. There will be a key issue between the flexibility of

ordering an NPX vessel and the somewhat cheaper slot costs for ordering an NPX vessel and the somewhat cheaper slot costs for

the larger units. Also, the current large vessel sector (postthe larger units. Also, the current large vessel sector (post--

Panamax) is likely to be undermined by the shift to larger vessePanamax) is likely to be undermined by the shift to larger vesselsls


Impact of Panama Canal Expansion on Impact of Panama Canal Expansion on

AsiaAsia--North America Container TradesNorth America Container Trades

AndrewAndrew PenfoldPenfoldDirector, Ocean Shipping Consultants Ltd.Director, Ocean Shipping Consultants Ltd.

Panama, May 2007Panama, May 2007


www.www.osclimitedosclimited.com.com

impact of panama canal expansion on asia -north …...impact of panama canal expansion on asia...

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