LONDON: Crude oil and refined products such as gasoline and diesel have become the second-largest commodity shipped through the Panama Canal, overtaking grains and second only to container traffic, according to the Panama Canal Authority (PCA).
The waterway is a vital conduit for refiners on the US Gulf Coast to reach customers in Asia as well as fast-growing markets on the west coast of Central and South America.
Container trade is by far the most profitable for the canal operator.
But oil and products tankers also pay some of the highest tolls on the canal under a segmented tariff structure introduced in 2002 and regularly increased since then.
US refineries are set to be some of the main beneficiaries from an increase in the canal’s capacity set to be completed in 2014.
Many high-value items will continue to move across the US in containers by rail to and from the West Coast. But for bulk cargoes such as crude oil and grains, which are less time-sensitive, the canal’s expansion could have a bigger impact.
In the 12 months to Sept. 30, 2012, the canal carried almost 39 million long tons of petroleum and products, the rough equivalent of 288 million barrels of crude or 790,000 barrels per day.
For comparison, the canal carried 54 million tons of container cargo and 37 million tons of grain in fiscal 2012, as well as 15 million tons of metals, 13 million of coal, 12 million of chemicals and 6 million of fertilizer.
The canal primarily serves as a route for the US to export products rather than import crude.
For every barrel that passed across the isthmus of Panama from the Pacific to the Atlantic, six went in the opposite direction in fiscal 2012, according to canal authority statistics.
US refineries sent 5.2 million tons of refined products to Asia via the canal (mostly petroleum coke) as well as 7.9 million tons to South America (mostly diesel) and 3.5 million tons to Central America (mostly gasoline).
Since the canal was opened in 1914, capacity has been limited by two sets of locks, one at each end, used to raise ships 85 feet above sea-level so they can cross the Gatun Lake, a flooded valley created by damming the River Chagres.
Each chamber is 110 feet wide by 1,000 feet long.
There are also draft restrictions imposed by the water depth in Gatun Lake, which may be reduced in the dry season, as well as height restrictions to ensure vessels fit under the Bridge of the Americas at the Pacific entrance to the canal.
These restrictions limit the maximum size and carrying capacity of vessels using the canal. Panamax vessels, the largest which can use the canal, can be up to 965 feet long, 106 feet wide and draw no more than 39.5 feet below the waterline.
Panamaxes carry up to 75,000 deadweight tons, which is about 5,000 20-foot equivalent units (TEUs) of shipping containers or up to about 500,000 barrels of crude and refined products.
Because of these size restrictions, the canal is closed to supertankers, which carry from 1 million barrels (suezmax) to 2 million barrels (very large crude carriers) or even 4 million barrels (ultra-large crude carriers), as well as to the new generation of container ships carrying up to 15,000 TEUs.
In 2006, Panama approved the construction of an extra set of locks at each end of the canal, as well as dredging operations, that will increase maximum vessel length almost 25 percent (1,200 feet), width by over 50 percent (160.7 feet) and draft by over 25 percent (49.9 feet).
As a result, the canal will be able to handle container ships carrying up to 12,600 TEUs and oil tankers carrying over 1 million barrels.
Construction was more than half finished at the end of 2012. The project is on track to be finished by 2014, in time for the canal’s centenary.
The imminent expansion has prompted a popular parlor game as analysts try to predict how it will effect trade flows — especially on the crucial routes between the US East Coast and Asia, which account for two-thirds of the canal’s total tonnage.
There is serious money at stake too. Ports along the US East Coast have been busy upgrading their capacity by dredging and installing larger berths to grab a share of the higher trade volumes expected to flow through the canal.
In an unusual outbreak of bipartisan enthusiasm, senators and congressmen from both major US political parties have been pushing the federal government to spend more money dredging harbors on the East Coast to enable them to handle larger vessels.
Meanwhile, the canal will present increased competition to US West Coast (USWC) ports of Los Angeles and Long Beach and to the Union Pacific and Burlington Northern Santa Fe railroads. They currently handle transhipment of most containers from China bound for the Midwest and the East Coast as well as bulk grain and coal exports from the Midwest to Asia.
In practice, the impact on trade flows is impossible to predict.
On the container side, it is cheaper to move containers from Asia to centers such as Ohio on the East Coast by the all-water route and much more profitable for the shipping lines, since they tend to subsidise the cost of onward rail freight from the USWC to final destinations.
But it will still be quicker to send containers to the West Coast and then load them onto the railroad for transhipment to the East. For example, it takes an average of around 20 days to send a container from China to Columbus, Ohio, via the West Coast, but 28 days to send it via the canal and the East Coast, according to Theodore Prince in a fascinating article in “Supply Chain Quarterly” last year (“Panama Canal Expansion: Game Changer or More of the Same?” Quarter 1, 2012).
Time is money. Many shippers of high-value items minimize their inventory costs by transloading. Containers from Asia are shipped to the West Coast and then sent on to an transloading center in one of the four corners of the US before being dispatched to a final destination.
Four-corner facilities are usually established in the Pacific Southwest (California), Pacific Northwest (Washington), Northeast (New Jersey and Pennsylvania) and Southeast (Georgia).
Transloading enables shippers to minimize inventory and maximize flexibility by enabling them to leave the decision on the final destination for each container to the last possible moment. But sales forecasting errors increase with time, so inventory management strategies are sensitive to the length of time it takes to deliver products from the factory to the center.
“A great deal of all-water cargo consists of lower-valued or seasonal cargo shipped well in advance of when importers anticipate it will be needed. High-value, time-sensitive cargo generally moves over the USWC, either intact or transloaded,” according to Prince.
For high-value items, Prince predicted many shippers will still prefer USWC to an all-water route via the canal because of the substantial time savings.
“Cargo routing ultimately is a function of shippers’ supply chain optimization, not ocean carriers’ linehaul economics ... The canal expansion will not provide any benefits to shippers that are not already available today, so there will be no unfulfilled demand for East Coast ports ... Many ports that are relying on the canal expansion to generate astronomical post-2014 growth will be very disappointed,” Prince wrote.
As for bulk cargoes, however, grain and coal could move down the Mississippi and via the canal to Asia rather than overland to USWC. Colombian and Venezuelan oil could become much more attractive to buyers in China. Expansion also will ensure US East Coast refiners can continue to increase shipments to Latin America and Asia.
As the expanded canal bids to attract volumes, it is likely to put downward pressure on both all-water and intermodal transhipment rates. More important, the added capacity should ensure the canal can continue to handle its projected 3 percent growth in demand per year through 2025.
— John Kemp is a Reuters columnist. The opinions expressed are his own.
