We haven’t talked about logistics since April, so it seems worth discussing a recent Wall Street Journal article on expanding the Panama Canal (Ripples Likely From Wider Canal, Nov 11). In a nutshell, they are expanding the canal across the isthmus (I’m writing this post only because I love the word “isthmus”) in order to accommodate bigger ships. How much bigger? If you have really good eyes, you can make it out from the graphic at right. Currently, the largest ships that fit through the canal can carry the equivalent of 4,400 twenty-foot containers. After the expansion, that number jumps by almost a factor of three to 12,600.
So how does that affect supply chain choices? The author discusses that question with an annoying British guy in the following video.
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Ocean shipping is all about economies of scale and a boat that is three times bigger has a non-trivial impact on cost, particularly when the alternative is unload on the West Coast out goods on a train to the East Coast.
It takes about 18 days total to make the ship and train journey from Asia to the West Coast, and then across the country. The all-water route through the Panama Canal takes about 22 days, roughly the same as via the Suez Canal–a competing route from Asia to the East Coast. The sea voyages also can take substantially longer, depending on ship speed and route congestion.
The ship-to-rail route can cost 10% to 25% more, depending on how specifically the cargo is routed to meet just-in-time delivery requirements, says the Port of Long Beach. The economies of an expanded canal might widen that gap.
Curtis Foltz, executive director of Georgia Ports Authority, says retailers such as Wal-Mart, Target and Kmart are signaling that they plan to ship more product via the expanded canal.
That doesn’t necessarily mean that the West Coast ports are toast. They have better rail connections and other infrastructure advantages than East Coast ports. Further, even bigger ships are coming. The Economist has an article (Economies of scale made steel, Nov 12) describing sailing on a Maersk Lines vessel that can hold 15,000 twenty-foot-equivalent units and reports that ships capable of carrying 18,000 container units are coming. (This is also shown in that tiny graphic above.) These behemoths will not fit through even the expanded canal and as long as Long Beach and LA can take them, they will shrink or eliminate the price advantage of the Panama route.
There is final point. Just as recent events in Japan and Thailand have shown, having all your production in one place can be risky. The same can be said for having on logistic route.
[S]hippers like alternatives. Labor strife in the past decade closed West Coast ports and sent a chunk of business to the Panama Canal that never returned.
“What is without debate is the whole logistics system has become more diversified,” says Mr. Foltz. “You’ll never see a wholesale shift in any one direction.”
We have written before about shippers following a four corners strategy to maintain flexibility in how their goods come into the country. It would seem that lowering costs on cutting across the isthmus may only lower the costs of this diversification without necessarily shifting the flow of goods dramatically.