|Aggregate demand||Potential shift in demand growth patterns|
|Maritime shipping costs||Higher shipping costs and slow steaming;|
Tolls taking a large share of the benefits of economies of scale
|Economies of scale||Less ship calls and traffic concentration|
|Transshipment hubs||Changes in the transshipment dynamics (hub concentration);|
“Funnel effect” towards Panama
|West Coast ports||Improved competitiveness of West Coast ports through better hinterland access|
|Railways||Improved competitiveness of North American rail corridors;|
Emerging dichotomy between East Coast and West Coast railways
|Gateways||New points of entry to service markets (e.g. Lazaro Cardenas, Prince Rupert)|
|Suez Canal||Increasing competitiveness of the Suez Route;|
Potential of the Cape Route
|Global sourcing||Changes in sourcing strategies (e.g. near sourcing)|
Source: Adapted from Rodrigue, J-P (2010) Factors Impacting North American Freight Distribution in View of the Panama Canal Expansion, The Van Horne Institute, University of Calgary.
In the early 2010s, the expansion of the Panama Canal brought forward expectations about traffic growth and trade opportunities within Latin America as well as the US East Coast. Yet, these expectations were mitigated by the following commercial challenges:
- Lower aggregate demand. A common misconception is the belief that the expansion of the Panama Canal generated additional trade. Global container throughput will eventually level off in mature markets such as Europe and North America, implying less demand for maritime transportation or at least less growth opportunities. This trend is much less salient in Latin America where the potential for substantial growth remains. The rebalancing of this growth will impact the shipping routes using the Panama Canal.
- Maritime shipping costs. Since the choice of routing options is dependent on comparative costs, two factors influence the selection of the Panama Canal route as an option. The first is fuel (bunker) prices and slow steaming. Higher prices incite maritime shipping companies to reconsider routing options, network configuration and the type of ships used. The second cost variable concerns tolls levied on cargo (containers) transiting through the Panama Canal. The expansion of the Panama Canal came with substantial capital investments that need to be recovered through tolls. This creates a conundrum since higher tolls undermine the attractiveness of the Panama Canal as a routing option.
- Economies of scale. The new locks of the Panama Canal were designed to accommodate a new ship class (New Panamax) of around 12,500 TEUs, expanding economies of scale on routes that were previously limited to 4,200 TEUs (Panamax ships). There are also operational limits to economies of scale as larger ships put additional pressures on port and inland infrastructure. For instance, many East Coast ports have undertaken infrastructure expansion and dredging projects with the expectation that the expansion would involve calls by much larger ships. Although economies of scale convey benefits to maritime shipping, they are less advantageous from a supply chain perspective. Larger ships usually involves less frequent services, which can be disruptive for supply chain management with more cargo needing to be handled during port calls.
- Transshipment hubs. The expansion is impacting the transshipment dynamics in the region. Bigger ships have a lower tolerance to deviation from main shipping routes, which have incited a greater role for ports in the Caribbean side of Panama and in the vicinity (e.g. Cartagena) to capture additional transshipment traffic (the “funnel effect”).
- Competition from West Coast ports. The Panama Canal route (all-water route) is competing with ports along the American West Coast to access some North American markets, including the East Coast (landbridge versus all-water routes) and the Midwest. West Coast ports are implementing various strategies to improve their competitiveness with a revision of their fares, rules and connectivity with their hinterlands. A particular emphasis is placed on hinterland access regimes as a strategy to improve the cost, quality and reliability of the West Coast as well as to secure traffic outside their fundamental hinterlands.
- North American rail competition. In light of the previous point, railways, particularly those servicing the West Coast (BNSF and UP), are also implementing strategies to improve their competitiveness for the landbridge market. For instance, in recent years many railways committed substantial capital investments to improve long distance corridors. The outcome has been a more efficient maritime / land interface along the West Coast. On East Coast (NS and CSX) as a growth of the all-water route traffic may is benefiting inland services calling from the East and Gulf coast ports. For instance, NS completed in 2010 the double-tracking and double-stacking of a rail corridor between Hampton Roads, Virginia and Columbus, Ohio; labeled the Heartland Corridor.
- New gateways. Gateways are major freight platforms that coordinate freight distribution over vast markets. The development of the Savannah gateway has been a notable driver of traffic growth through the all-water route. Two new port gateways are also emerging, both with the support of major rail operators. In Canada, Prince Rupert capitalizes on shorter transpacific distances and a dedicated and uncongested CN rail corridor to Chicago. In Mexico, Lazaro Cardenas with a rail corridor operated by KCS up to Kansas City (and through the major market of Mexico City), offers a new corridor to access the United States. In 2019, CN announced in collaboration with HPH the development of a new container terminal in Quebec City, offering an additional option to access the North American market. Thus, the role of gateways in coordinating freight distribution influence the routes selected to access markets.
- Suez Canal option. The usage of the Suez Canal as a routing option to service East Coast ports has increased in the last decade, particularly with the growth of transshipment activities around the Mediterranean basin as well as shift in sourcing towards South and Southeast Asia. Mediterranean transshipment hubs offer additional opportunities to consolidate Asian and European cargo and employ larger ships. The Cape Route option is also an alternative to connect to Asian markets, particularly for Brazil and Argentina.
- Global sourcing. A substantial share of the growth in global trade over the last decades was based upon global comparative advantages, particularly labor in Asia, through outsourcing and offshoring. This has favored the growth of Transpacific trade as well as the use of the Panama Canal to access the American East Coast. The rise in labor costs and automation is mitigating this process and incite supply chain managers to consider closer sourcing alternatives, such as in Latin America, or even sourcing back to the United States. The outcome would be a more regionalized production system (near sourcing) that relies less on long distance shipping.