SAILING CLEAR: Cargo ships sail near the area where a new set of locks were installed, during a November 2015 press tour of the Panama Canal expansion project, in Cocoli, near Panama City. (AP Photo/Arnulfo Franco, File)
Editor’s note: This story has been updated to show that the Port of South Louisiana is planning $66 million in infrastructure investment over the next five years, not $6 million as reported in the original story. 10/12 Industry Report regrets the error.
Later this spring, an expanded Panama Canal is expected to open for business, doubling the 102-year-old waterway’s capacity and sending ripple effects around the world, including the Gulf Coast. The canal currently accommodates an estimated 5% of the world’s total cargo volume, according to the U.S. Department of Transportation, with trade between Asia and Western economies dominating demand for the canal’s capacity. Although it takes eight to 10 hours for a ship to traverse the canal, the alternative is an 8,000-mile journey around Cape Horn.
As global trade has skyrocketed, the canal’s ability to increase its capacity was hampered by a limit on the size of vessels and the amount of traffic it can accommodate. At its narrowest point, the canal spans about 110 feet, which is inadequate for the increasingly large container ships used to transport goods. The expansion project was needed to increase capacity to meet growing demand as well as to modernize the 50-mile-long canal.
Construction on the $5.25 billion project began in 2007 and includes widening and deepening the waterway, building new locks—one each on the Atlantic and Pacific sides—and excavating new channels to the new locks. As a result of the expansion, larger post-Panamax ships holding 15,000 standard shipping containers (known as 20-foot equivalent units, or TEUs) will be able to access the canal, compared to ships holding a maximum of about 5,000 TEUs today. Panama Canal volume will grow from 12.3 million TEUs to 25.4 million TEUs by 2028. The expansion will also reduce bottlenecks and lower average transit times.
The expanded canal is currently projected to open in May—about a year and a half behind the original schedule.
The project is one of the largest global trade infrastructure changes in more than a century. By providing shippers easier access to North America, the canal’s expansion will have ramifications for global trade, including an impact on shipping routes, port development and cargo distribution. It will likely reduce the cost of trans-ocean shipping, particularly for those trade routes between Asia and ports on the U.S. East and Gulf coasts, and could affect global supply chains and demand for industrial real estate space. Port and inland infrastructure upgrades from Canada to the Caribbean are already underway in anticipation of the larger cargo ships. This includes Louisiana’s ports.
EAST TO WEST
Much of the attention about the Panama Canal’s expansion has focused on competition between West Coast and East Coast ports in the United States, with a Boston Consulting Group study estimating that container traffic from East Asia to the United States could shift from West Coast ports to East Coast ports by up to 10%. Yet the canal’s expansion will have an impact on Louisiana and Gulf Coast ports and trade, as well. While the extent of that impact is unknown, industry professionals agree that the expansion will be beneficial for local, state and regional economic development.
“Just being where the cargo is heading, we’re going to see a gain,” says Paul Aucoin, executive director at the Port of South Louisiana. “Even if we don’t change a thing, we’ll see a 15% increase in cargo because of the larger vessels.”
Robert Landry, chief commercial officer for the Port of New Orleans, says that East Coast ports likely will benefit because the large number of distribution centers and the large population base located in the eastern United States will mean ships can more directly service consumers, as most of the container trade coming through U.S. ports is consumer goods from China, Thailand, Vietnam and other parts of East Asia. That doesn’t mean that Gulf Coast ports won’t benefit, however.
“It won’t be as prevalent as what will happen on the East Coast, but we will see a boom,” Landry says.
Louisiana is home to 33 ports. These include shallow-draft inland ports, which serve cargo, or shallow-draft coastal ports, which serve offshore industries, such as oil and gas and commercial fishing. Louisiana also has six deep-draft ports, which generally transfer large volumes of cargo. Additionally, other ports are in development. The ports differ in types of cargo and in the regions they serve.
A 2012 study conducted by James Richardson, alumni professor of economics at LSU, found that the state’s ports account for $4 billion in personal earnings, $290 million in state taxes and $227 million in local taxes, as well as 73,000 direct jobs and almost 400,000 jobs overall. The Lower Mississippi River handles more than 500 million tons of domestic and foreign cargo annually and accounts for 20% of U.S. waterborne commerce, including 60% of its grain and 20% of its coal and petroleum products.
MORE CARGO COMING
As a result of an expanded Panama Canal, Gulf Coast ports will experience an increase in the size of the ships and the volume of cargo those ships hold. The state could also experience additional service from Asia, as well as an increase in feeder services from transshipment hubs in the Caribbean.
“What we’ll see as a result of the deepening of the Panama Canal is larger ships being handled at lower Mississippi ports,” says Joe Accardo, executive director at the Ports Association of Louisiana. “Ships with deeper drafts will be able to get into Gulf Coast ports that have that draft capability more efficiently.”
These larger ships carry more cargo, which translates to higher volumes of goods being processed through Louisiana’s ports. Forecasts indicate Gulf Coast volume will grow from 1.5 million TEUs to 3 million TEUs by 2028, with 12% of cargo traffic flows occurring between the Panama Canal and the Gulf Coast.
“We expect to see container volume rise 8% to 10% in the first year, then 3% to 5% average growth rate per year, and that reflects that we could benefit from the canal’s expansion,” Landry says, though he adds that forecast “was done a few years ago, when the economic outlook was rosier.”
Larger volumes of cargo passing through Gulf Coast ports leads to an increase in goods transported through the state using other modes, such as rail, road and inland waterways, which results in economic benefit far beyond the ports themselves.
“A study showed that the Panama Canal expansion will lead to additional containers being sent through the Port of New Orleans container facility further into the Midwest—up to Indiana and Minnesota,” Accardo says. Yet, he adds, “the study looked at what is possible—that doesn’t mean it will happen.”
Indeed, the extent to which the state can capitalize on the Panama Canal expansion depends on a number of things. Some, like the strength of the global economy, are beyond the state’s control. Similarly, shippers’ routing decisions—based on fuel prices, delivery times, intermodal transport connectivity, distribution centers and other details—will determine which ports benefit most. “It’s the cargo shippers who will decide where they want to go and those decisions are based on cost and capacity,” Aucoin says.
Yet the state can improve its chances of benefiting from the increased volume resulting from the expanded canal in part, Aucoin says, “by making ourselves available and letting them know we can handle their cargo needs.”
One way to improve the attractiveness of the state’s ports is by deepening the Mississippi River, Accardo says. When the Panama Canal expansion is complete, the canal will be able to handle ships that have drafts 50 feet below the water’s surface. The Mississippi, meanwhile, is 45 feet deep. That five-foot difference means the river cannot accommodate the deeper-draft ships that will soon be sailing through the Panama Canal, which could cause Louisiana ports to lose out on potential economic benefit. A 2013 study by economist Tim Ryan, commissioned by the Big River Coalition and the Louisiana Department of Transportation and Development, concluded that deepening the Mississippi River five feet, to 50 feet, would add $11.5 billion to the U.S. economy. For example, according to the U.S. National Ocean Service, an extra inch of draft would allow a ship to transport an additional 358,000 pounds of wheat, 36 more John Deere tractors or 9,600 more laptops.
The Water Resources Development Act of 1986 authorized the U.S. Army Corps of Engineers to deepen the Lower Mississippi River channel to 55 feet, but this never happened, in part because the legislation required the state of Louisiana to pay for any maintenance beyond 45 feet. However, the latest iteration of the act changed that, instead putting responsibility for the cost of maintenance of up to 50-foot drafts on the federal government, not the state. Yet, the act provided no funding.
“If we’re going to take advantage of the deepening of the Panama Canal, we have to work diligently with our congressional delegation, the governor and the State Legislature to find the money to deepen the river channel to 50 feet,” Accardo says.
Investing in port and inland waterway infrastructure is also critical, Landry says. East Coast ports from New York to Miami are pumping billions of dollars into improvements. Ports in Savannah and Charleston, for example, are deepening their river channels, while the Port Authority of New York and New Jersey’s planned upgrades include increasing bridge height to accommodate the larger ships.
Louisiana ports have planned upgrades, as well. For example, the Port of New Orleans is expanding port capacity from 800,000 TEUs per year to 1.5 million TEUs annually. Landry says the port also has plans to transform its existing freight railyard into an intermodal rail facility and a 4-acre cargo marshalling yard, increasing the port’s container yard capacity to 840,000 TEUs.
The Port of South Louisiana is investing $66 million in infrastructure over the next five years. This includes building a new bridgeway from dock to land, adding two new mobile cranes capable of lifting more tonnage to the center of a post-Panamax vessel, and potentially constructing a new container port that could handle 15,000 TEU to 18,000 TEU ships. And, while “we always have upgrades going on,” Aucoin says, the impending increase in cargo and traffic from the Panama Canal’s expansion factors into these plans.
Landside capability also needs to be upgraded. This could include providing more land to accommodate the increased cargo or becoming more efficient in how cargo is processed—or a combination of both—says Landry. Intermodal capabilities and connections—such as roads and rails—that connect with the ports also must be upgraded to handle increased volumes. This includes enhanced capacity for barges, a highly efficient way to transport cargo such as petrochemicals and grain. Increasing use of rail and barge transport also takes some traffic off the state’s roads, which can improve air quality and reduce congestion, Landry says.
The increase in port activity will spill over to other industries, such as warehousing and real estate. “With an increase in cargo, if it plays out like they say, we’ll see an increase in demand for trucking, driving and warehousing jobs,” Aucoin says.
Yet the forecasted growth of Louisiana ports is not based solely on the Panama Canal expansion.
“The increase in container volume [at the Port of New Orleans] reflects benefits from the expansion of the Panama Canal, but also the growth of the South American economy, namely Brazil, Argentina and west coast countries of Chile, Ecuador and Peru,” says Landry. “We’re seeing a lot of activity in those areas.”
Maintaining a competitive, modernized port system capable of handling the increasing size of vessels and volume of cargo from the expanded Panama Canal and from expanding trade is critical for the growth of Louisiana’s existing industries—such as the petrochemical industry—as well as for the state’s overall economy. “We’re a huge economic generator for the state,” Landry says. “We have customers in all parts of the state that use our ports. And, when you have an asset like the Mississippi River and a well-developed inland waterway system, companies want to be here.”
Aucoin simply adds: “It’s going to be good for all of the Gulf Coast.”
Originally published in the first quarter 2016 edition of 10/12 Industry Report. Read more from this issue at 1012industryreport.com.