CSCMP's Supply Chain Quarterly
October 16, 2019

Panama Canal expansion: game changer, or more of the same?

Some ports and ocean carriers expect significant new business to come their way following the Panama Canal expansion. But do the "shipper math," says the author, and it's clear that U.S. distribution patterns are unlikely to change much.

The expansion of the Panama Canal, set for completion in 2014—the canal's centennial—could become a point of inflection for trans-Pacific goods movement. Many stakeholders believe the expansion offers a game-changing opportunity, and there has been a great deal of speculation, analysis, and publicity regarding its anticipated benefits.

There is no doubt that an expanded canal will allow larger vessels to ply the all-water route from Asia to the East and Gulf Coast regions of North America. It's also clear that the expansion will significantly increase the canal's capacity and will support continued volume growth in this trade. However, cargo routing ultimately is a function of shippers' supply chain optimization, not of ocean carriers' linehaul economics. In addition, 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 to fulfill. For that reason, many ports that are relying on the canal expansion to generate astronomical post-2014 growth will be very disappointed. A look at this issue from both the shipper's and the carrier's point of view explains why.

Article Figures
[Figure 1] Trans-Pacific deployment characteristics
[Figure 1] Trans-Pacific deployment characteristics Enlarge this image
[Figure 2] Intact movement of ISO 40-foot containers
[Figure 2] Intact movement of ISO 40-foot containers Enlarge this image
[Figure 3] Estimate of import cargo movement from U.S. West Coast
[Figure 3] Estimate of import cargo movement from U.S. West Coast Enlarge this image
[Figure 4] Intermodal marine containers from U.S. West Coast
[Figure 4] Intermodal marine containers from U.S. West Coast Enlarge this image
[Figure 5] Inland intermodal transit times: U.S. West Coast vs. U.S. East Coast
[Figure 5] Inland intermodal transit times: U.S. West Coast vs. U.S. East Coast Enlarge this image
[Figure 6] Shippers' routing decisions change over time
[Figure 6] Shippers' routing decisions change over time Enlarge this image
[Figure 7]
[Figure 7] "Shipper math" vs. "carrier math" Enlarge this image
[Figure 8] Order of weekly import vessel calls (West Coast)
[Figure 8] Order of weekly import vessel calls (West Coast) Enlarge this image
[Figure 9] Order of weekly import vessel calls (East Coast)
[Figure 9] Order of weekly import vessel calls (East Coast) Enlarge this image

Why expansion is vital
To comprehend post-2014 economics, it is necessary to understand the basis for the canal expansion. The Panama Canal was begun by the French in 1880 as a sea-level canal (the method used to build Suez) and completed by the United States in 1914 with two sets of three locks, one at the Atlantic and one at the Pacific end of the canal. Since then, many ships have been built to accommodate "Panamax" dimensions—sometimes fitting within the canal with just inches to spare.

While 2014 is viewed as a watershed date, 1999 is equally important. Based on the Torrijos-Carter Treaties of 1977,1 the Hay-Bunau Varilla Treaty of 1903 was abrogated and Panama was granted control of the canal after 1999. Alberto Alemán Zubieta was appointed Administrator of the new Panama Canal Authority (ACP); he and the entire professional staff had been with the Panama Canal Commission, the United States government agency responsible for operating the canal, for years prior to the handover.

The canal now had a new raison d'être. Under U.S. control, it had been administered like a utility. Prices had been regulated to break-even after all expenses and a slight return had been recouped. Under the ACP, by contrast, the Canal was viewed as an economic engine, and a number of innovative ideas were forthcoming. These initiatives were traditional (for example, expand canal capacity and become a logistics hub); enlightened (use the canal to increase electrical power generation and fresh water services); and creative (become an eco-tourism center). The political and economic goal often cited by ACP executives was for Panama to become "the Singapore of the Western Hemisphere."

Coincidentally with the handover, the canal's container traffic began to significantly increase. This was due to three factors. First, the primacy of the U.S. West Coast (USWC) route was being challenged. For 25 years, the preferred routing for trans-Pacific containers had been intermodal shipment over the USWC. However, by the mid-1990s, that system was beginning to show strains.

Railroad capacity—which had appeared inexhaustible during the 1980s—was becoming problematic because the railroads had reached network equilibrium after reducing trackage and increasing traffic volumes. The 1993 floods and railroad network meltdowns from 1995 through 1999 highlighted this weakness.

Second, the primary gateway of Los Angeles/Long Beach in California's San Pedro Bay (hereafter referred to as "San Pedro") was becoming congested at the same time the political environment was becoming less welcoming to port expansion.2 And finally, waterfront labor on the West Coast had become troublesome. The 2002 lockout, which shut down West Coast ports for 10 days, was extremely costly for shippers.

Shippers wanted to diversify routes in order to mitigate their exposure to problems associated with the USWC. Many turned to all-water service via the U.S. East Coast (USEC). There were a number of reasons why the USEC was attractive. Foremost was the passage of the Ocean Shipping Reform Act (OSRA) in 1998, which introduced confidentiality into the dealings between shipping lines and customers. As contract carriage replaced common carriage, carrier conferences3 disappeared and all-water rates became distinct from those for intermodal service over the USWC.

With the introduction of larger vessels in the Asia-Europe and trans-Pacific services a number of Panamax-size vessels shifted to the all-water route. Meanwhile, western U.S. railroads were steadily increasing their rates, leading many ocean carriers to encourage cargo to shift to all-water routes by discounting those rates compared to rates for transcontinental intermodal service. At that time, the labor disputes, problems with truckers, congestion concerns, and the fear of railroad failures that troubled the West Coast were largely absent on the USEC.

All of those developments led to an increase in the volume of cargo and the number of daily transits through the canal.4 The ACP recognized that the canal was becoming capacity-constrained and that without an expansion, the waterway would eventually become obsolete.

Accordingly, a US $5.2 billion expansion of the Panama Canal was approved in a national referendum in 2006. It includes a third, larger set of locks that will be wide enough and deep enough to accommodate larger vessels. This will significantly increase the number of canal transits while allowing larger ships to transit the canal. After extensive study, the ACP decided upon a lock size that would accommodate ships of 12,600 TEUs (20-foot equivalent units).5

Clearly, a canal expansion is of critical importance to global commerce. The big question now for shippers, carriers, seaports, and even the ACP itself is this: what impact will the larger, deeper Panama Canal have on international trade patterns, particularly on imports from Asia to North America?

It's not an easy question to answer. There are a great many unknowns about the post-2014 world. What we do know, however, is that a number of operational and economic factors affect ocean carriers' and shippers' routing decisions now, and they will continue to do so after the expansion.

Factors affecting vessel deployment
Even today, routing cargo moving between Asia and the USEC is not simply a matter of choosing between USWC intermodal and the Panama Canal. Ship lines have other options, each with its benefits and drawbacks.

One of those options is to use the Suez Canal. Suez has no physical constraints on ship size, thus it is possible for carriers to deploy larger vessels on this route than is currently possible through the Panama Canal—and, of course, enjoy the resulting linehaul savings.6 A major consideration in the future will be whether industrial production will migrate from North Asia to Southeast Asia and the Indian subcontinent. If production is located "west of Singapore," then the Suez Canal to the USEC will be the preferred route. However, if the source market is "east of Singapore"—especially China—there will be no transit-time advantage to using Suez.

Because the canals charge tolls, there has been some interest in routing vessels to avoid them. Sailing around Cape Horn to avoid the Panama Canal is possible; however, it has not been considered viable for many years. A few vessel strings sail around Africa's Cape of Good Hope to avoid the Suez Canal, but this route usually is limited to carrying exports and empties on the return leg back to Asia.

Once carriers establish their rotations (the order in which they call at various ports) vessel-deployment decisions are largely based on transit times. The decision process, however, is a "Rubik's Cube" of possibilities and tradeoffs.

Since 1980, container ships have become larger (up to 15,000+ TEUs) and faster (upwards of 25 knots). However, the faster the steaming speed, the more fuel is consumed. At the same time, faster speed means fewer vessels are needed to maintain a fixed-day-of-the-week service.

The established order of larger ships and ever-faster transit times was disrupted by the market conditions of 2008-2009, when freight rates plunged and fuel prices spiked. Bunker fuel pricing has ranged from US $250 to $750 per ton in the last five years. To reduce fuel costs, ship lines implemented "slow steaming" (15-18 knots) and "super-slow steaming" (10-15 knots). While this strategy required them to add vessels, there were plenty available at a reasonable price7 and the fuel savings were great enough to cover the cost of the additional ships.

Nevertheless, container ships continue to increase in size because they offer economies of scale; the handling and operating cost savings of up to US $75 per TEU are too great to ignore. Regardless of whether cargo volumes increase, it is expected that today's 4,000-TEU ships will be replaced by larger ones.

The question is, how large? While 15,000-TEU vessels are frequently talked about, they have not yet come to North America. They have, however, become the standard in the Asia-Europe trade lane, which features long distances and relatively few port calls—a reminder that large vessels can only generate savings when they are moving.

Carriers are not expected to introduce vessels exceeding 8,000 TEUs into the all-water services to North America for some time. When they do, they initially may combine services that currently use 4,000-TEU vessels, thus carrying the same amount of cargo on fewer, larger ships.

Most all-water services today make three to five import port calls on the USEC. If larger vessels are deployed, then the number of port calls can be expected to drop to two or three. There are many examples of increases in vessel size resulting in "load centering" (the practice of consolidating ships' calls at fewer ports). In the Asia-Europe trade, for instance, port calls have consolidated around a handful of ports in both regions. Moreover, as the trade lane's subsegments (Indian subcontinent, Mediterranean, and Persian Gulf) have grown, ship lines have introduced dedicated deployments of smaller ships to serve those markets.

We have seen the same thing happen in the Western Hemisphere. In the Asia-USWC trade, Oakland is no longer an "automatic" port call after San Pedro. Many 8,000-TEU vessels now call only at Los Angeles and Long Beach. In the South American trades, load centering has occurred as port infrastructure has improved. In short, with the exception of North America, most minor ports worldwide are primarily served by transshipment at the larger ports to smaller ships.

Figure 1 illustrates import port calls and vessel sizes for USEC and USWC services as of January 2011. It clearly demonstrates the dichotomy between the U.S. East Coast (smaller vessels/more port calls) and U.S. West Coast (larger vessels/fewer port calls). As USEC vessel size increases, then, the number of port calls can be expected to decrease.

"Shipper math" versus "carrier math"
All enterprises seek to optimize their results, generally by maximizing or minimizing a specified objective, subject to inputs. Depending on what calculus they use to define success, different types of organizations will have different objectives. While this may seem blindingly obvious, participants in the debate over the impact of the expanded Panama Canal generally fail to consider the significant differences between shippers' and carriers' objectives, and how they shape each party's decisions. Consider the shippers' objectives:

  • Maximize revenue. For retailers, this can translate into never losing a sale. This objective manifests itself as holding large safety stocks and always choosing the fastest transit times.
  • Minimize transportation expense. Many shippers still make minimizing transportation expenses a standalone goal. This may be appropriate for low-value, traded commodities, where transportation is a major component of the delivered cost, but it may be less important for high-value imports.
  • Optimize the supply chain. In this textbook case, all factors are integrated into a strategy that aims to achieve what is best for the overall enterprise.

The shipping lines that serve shippers have their own objectives:

  • Maximize revenue. Achieving this goal requires pursuing all business regardless of whether or not it is profitable. Because ocean shipping has so many fixed costs, this strategy frequently seeks to maximize cash flow. It may be driven by national currency requirements or simply a need to keep making loan payments.
  • Minimize expense. This strategy seeks to avoid expenses, especially cash payments to outside vendors. For many ship lines, this involves controlling payments to North American railroads and trucking companies.8
  • Maximize load factor. This is a combination of the first two. It seeks to handle as much business as possible (that is, maximize revenue), but to do so with existing vessels so as to avoid paying for commercial feeders (minimize expense). Some have referred to this strategy as "going broke with full ships."
  • Maximize profitability. Although this could be a goal for ocean carriers, in recent years the industry has focused on the other three objectives.

Some of these objectives appear to be similar, but shippers and carriers seek to achieve them through different transportation outcomes. In other words, what is beneficial to shippers may be costly to carriers, and vice versa.

One of the complexities confronting ship lines is that in the inbound trans-Pacific trade to North America, services are not just port-to-port. A great deal of cargo is handled by the line beyond the port of discharge, with the ocean carriers contracting and paying for the inland transportation.

The problem is that marginal inland revenue is less than marginal inland expense. In other words, over time, the lines pay more in inland expense than the additional revenue they collect for movement beyond the discharge port. The result is a steadily decreasing financial contribution the further inland a container moves. For this reason, ocean carriers are looking to reduce their inland expenses—and using the post-2014 canal would appear to offer that opportunity. But what is optimal costwise for the ship line is not necessarily optimal for its customer.

Since ocean carriers subsidize inland movement, the lowest transportation expense for intermodal cargo can be achieved by loading containers at the factory and moving them intact to the warehouse or distribution center (DC) in North America. But this approach frequently raises the landed cost for the shipper because it requires higher levels of inventory. This is quite significant because for many importers, inventory-related costs often exceed the total cost of transporting their goods from Asia.

As an alternative, many importers utilize a transloading strategy characterized by inventory deferral. Rather than determine the final U.S. destination when issuing purchase orders or consolidating cargo in Asia, importers defer the inventory-deployment decision—at the stock-keeping unit (SKU) level, facilitated by real-time sales reporting that identifies demand fluctuations—until arrival in the United States. Then the cargo is transloaded from marine containers to domestic equipment for either local markets or further movement inland. The shipper's savings from inventory deferral depends on the mix of inland destinations and the value of the cargo.

The main benefit of this transloading strategy is the ability to reduce safety stock without losing sales. This is a complex, nonlinear decision based on the variability in lead times and transit times of the routes selected, the volume assigned to each route, and the statistical error in sales forecasts. Because sales forecast errors increase exponentially with time, the time component of shipment routing will necessarily impact the safety stock calculation.9

The number of destinations also affects safety stock. The more destinations a shipper can consolidate and then apply inventory deferral, the greater the opportunity to reduce safety stocks. The potential savings for an importer with one or two DCs, therefore, would be less than for an importer with 30 or 40 facilities.

While this transloading strategy started in southern California, many importers have implemented a "four corners" version. In addition to transloading in the Pacific Southwest, inventory deployment operations have been established in the U.S. Northwest (Washington state); Northeast (New Jersey and Pennsylvania); and Southeast (Georgia). Transloading also benefits ship lines, because it eliminates the cost and effort of inland movement and allows their containers to return to Asia much faster.

It is my opinion that transloading is much more prevalent than previously understood. In 1980, the prevailing freight flow in the United States was westbound: from Chicago to Los Angeles. Today, it is completely reversed. The only way to explain this transformation is that eastbound movement is driven by import transloading.

There is plenty of evidence of an increase in transloading. Figure 2 examines USWC 40-foot container imports and subsequent intermodal movement. The 11 states west of the Rocky Mountains comprise 20 percent of the U.S. population, so one would expect about 20 percent of imports to remain on the West Coast. Therefore, the gap between 80 percent (the expected percentage of containers moving intact) and 38 percent (the actual percentage moving intact) represents transloaded volume in 2010. This demonstrates that transloaded containers (measured in TEUs) now outnumber intact boxes.

The resulting cargo flow, however, is a little more complicated. Figure 3 examines how import cargo discharged on the USWC is moving. In 2000, 60 percent of all cargo discharged on the USWC moved intact to inland destinations. However, a wide variance by destination developed over the past 10 years. From 2000 to 2010, the amount of cargo moving intact to the Midwest and South Central regions decreased by 5 percent, and intact cargo moving to the Northeast and Southeast declined by 37 percent. There was also a significant drop in total intact cargo movement from 2008 to 2009. This indicates an increase in transloading in response to reduced sales.10 Shippers adopted this strategy because the only way to reduce inventory without increasing stockouts is to reduce safety stock by transloading. Moreover, although absolute volume picked up in 2010, the percentage of transloaded cargo remained basically unchanged.

Meanwhile, the volume of all-water cargo to the USEC was growing. Figure 4 tracks the movement of intact marine containers (the traditional alternative to all-water movement) by rail from the USWC. Over 11 years, total rail volume increased by 25 percent. However, there is a wide variance by destination. Volume to the Midwest and South Central United States increased by 64 percent, yet volume to the Northeast and Southeast decreased/i> by 49 percent. Clearly, a significant percentage of USEC container movement was diverted from intermodal to all-water.

Transit time is another factor that influences the choice of intermodal over the West Coast or all-water service to the USEC. It is not unreasonable to assume, for instance, that 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. Slow steaming has increased transit time for all shippers, however. It may also have contributed to the increase in transloading.

Figure 5 compares transit times from Asia to Columbus, Ohio, over the USWC and USEC. On traffic moving over the USWC, transloading may offer better inland transit times because domestic intermodal's off-dock departures can provide simultaneous service to many destinations, whereas international intermodal can be delayed for days waiting for sequential processing of on-dock departures for various destinations. Additionally, domestic intermodal, which has a service speed of 55 miles per hour, is viewed as having a more predictable transit time than international intermodal, which has an average speed of 40 miles per hour and is frequently delayed due to switching and train consolidation in the port area after on-dock loading.

It should also be noted that shippers' routing decisions change over time based on various economic and operational factors. Consider Figure 6, which illustrates the changing itineraries of goods manufactured in China's Pearl River Delta through delivery to a Chicago distribution center. The point here is that what makes economic sense to shippers today may not be the case in the future.

Shipper and carrier math applied
Figure 7 is a pro forma examination of import cargo moving from Shenzhen to Columbus, Ohio. Columbus was selected because it is frequently cited as a destination that can be "converted" to intermodal service via the USEC. The numbers shown are representative of market conditions in May 2011; however, the results should remain unchanged as rates rise and fall.

The analysis, which utilizes the transit times shown in Figure 5, is as follows (all costs in U.S. dollars):

A. There is a large incentive for ship lines to move over the USEC because the intermodal rail savings of $800 ($1,300–$500) are much greater than the cost of operating the ship over the additional distance plus the Panama Canal tolls ($250).

B. However, the savings for shippers are trivial because the USWC and USEC rates are almost the same ($3,300 versus $3,200) and the transit time to the USEC is longer. For most cargo, the additional eight days will cost the shipper much more than $100.

C. Post-2014, lines could attract Columbus-bound cargo via the USEC by cutting the rate (for example, a $500 reduction, from $3,200 to $2,700).

D. If 8,000-TEU vessels start serving the USEC, then it is possible that 12,000-TEU vessels could start serving the USWC. This would probably eliminate any vessel cost savings the lines would obtain on the all-water route from deploying 8,000-TEU vessels.

E. The rate reduction (envisioned in C) will reduce the line's all-water contribution to less than it would achieve by moving the cargo over the USWC ($1,950 versus $2,000).

F. The rate reduction (envisioned in C) will also degrade the profitability of the entire vessel by replacing a load with a higher contribution for one that produces less ($3,100 versus $1,950).

This would indicate that at present levels, there are some major benefits to the carriers from rerouting cargo to the USEC via the Panama Canal, as opposed to intermodal service over the USWC. However, routing decisions are made by **italic{shippers,} not the ocean carriers. This is important because most railroads and ports view the lines—not the shippers—as their "customer."11 A line-focused port marketing strategy, therefore, is doomed to fail in this regard.

Other obstacles to rerouting are looming. The rate reductions that would be needed to induce shippers to change could more than offset any savings the ocean carrier might achieve. And if diversion doesn't work to and from Columbus, then it won't work for cities like Chicago, Illinois, and Dallas, Texas, which are even further inland from the USEC. Finally, Western railroads cannot be expected to sit idly by and watch their business erode without some sort of competitive response.

Which ports will be competitive?
Volume to the USEC will continue to grow; however, most of that growth will be organic and will not be diverted from the USWC. Nevertheless, there will be significant competition among ports seeking a larger share of all-water traffic.

One of the problems in the liner shipping industry is that carriers order additional ship capacity expecting that only they, and not their competitors, will capture additional traffic growth. The result is overcapacity and financial pandemonium.

The same situation is happening with many USEC ports. There are five to seven ports that expect to be major gateways post-2014. Yet it is unlikely that more than two or three will achieve that status.12

In the Northeast, the New York/New Jersey port complex will remain pre-eminent. It has the necessary population, history, and rail access, and it is already handling 8,000-TEU vessels. Philadelphia, Pennsylvania, and Boston, Massachusetts, will remain minor all-water players.

In the Southeast, the ports of Charleston, South Carolina, and Savannah, Georgia, will probably both remain dominant. Both have competitive advantages and disadvantages relative to the other. (Charleston is closer to the ocean and has deeper water, while Savannah has plenty of land and established arrangements with big retail importers.) Wilmington, North Carolina, and Jacksonville, Florida, will remain minor all-water players and will continue to rely on other business segments to prosper.

In the Mid-Atlantic, the Hampton Roads area of Virginia can be described as the second-largest Southeastern port, the second-largest Northeastern port, or the largest Mid-Atlantic port. None of those qualifies it to become a major trans-Pacific hub. However, the number of distribution centers located in Virginia ensures that it will remain relevant as a major regional gateway. The same probably applies for Baltimore, Maryland. Both Hampton Roads and Baltimore also have major presences in other shipping segments.

Hope for ports in the Gulf of Mexico probably is overblown. Tampa, Florida; Mobile, Alabama; and New Orleans, Louisiana, simply don't have critical mass and geography to be a trans-Pacific hub. The Port of Miami, Florida, has a local population base, but not much else. Houston, Texas, has enough local cargo to support only one vessel a week. Cost and transit time preclude any hinterland connectivity.

The most interesting opportunities may open up for well established Caribbean ports such as Kingston, Jamaica; Freeport, Bahamas; and Colón, Panama. (While the Panama Canal and that country's ports are governed separately, the ACP closely coordinates with Panamanian port management.) These ports could emerge as transload centers—much like Singapore; Tanjung Pelepas, Malaysia; and Algeciras, Spain. Should this occur, carriers might deploy ships larger than 8,000 TEUs to a single Caribbean port. Containers destined for anything other than the major East Coast gateway ports would transit these network nodes by feeder vessels. (Seaports in the United States are precluded from serving in this role because the cabotage provisions contained in the Jones Act require any vessels carrying containers between U.S. ports to be U.S.-built, owned, and crewed.)

Figures 8 and 9 analyze the port call distributions on the U.S. West and East coasts. Figure 8 (which also includes the Canadian ports of Vancouver and Prince Rupert) shows the clear dominance of the San Pedro ports of Los Angeles and Long Beach as the USWC load center. Not only does San Pedro have the most vessel calls, it also has the lowest average import order. This is the average of the import order for all vessel calls. A value of 1.00 is the lowest possible score, and would indicate that every vessel call was a first call.

Since ports compete for discretionary intermodal cargo—which traditionally is discharged at the first import port call—the lower the average import order, the more intermodal cargo is probably being handled. Figure 9 shows a little more varied situation on the USEC. Savannah is the most frequently called import port; however, New York has the lowest average import order.

A dose of realism
The Panama Canal expansion is without question an important event in global transportation. It will remove a major chokepoint and ensure sufficient capacity well into the future.

Thanks to aggressive engineering, process improvements, and commercial innovations, the ACP has already been successful in facilitating cargo diversions from the USWC. The canal expansion will ensure that this market share is protected and maintained. The canal may also become a driver of transportation and logistics growth in the Caribbean.

In all likelihood, whatever cost advantages the canal expansion facilitates for the lines will be passed through to shippers. However, as this analysis demonstrates, there is a dichotomy in how shippers route cargo. And unless routing cargo through an expanded canal helps shippers substantially improve their overall supply chain costs, they will not greatly increase their usage of all-water service from Asia to the USEC. If such savings were present, shippers would abandon the USWC today—something that is not happening.

It is also likely that as the size of container ships in the U.S.-Asia trade increases, carriers will increasingly concentrate vessel calls at fewer USEC ports. It seems clear that the Panama Canal Authority and only a handful of USEC ports will benefit after 2014. The other USEC ports would do well to remember the words of former Montreal Mayor Jean Drapeau, who said, "The Olympics can no more lose money than a man can have a baby." Following the 1976 Olympics, the city was left with a debt that took 30 years to repay. Some ports that are betting on a post-2014 cargo boom could suffer a similar fate.

1. There were two treaties, although they are frequently referred to in the singular. The first assures the canal's neutrality and grants the United States a permanent right to defend the canal from any threat to its continued neutral service "to ships of all nations." The second treaty provided that Panama would assume full control of canal operations from 12 a.m. on December 31, 1999. This was later changed to December 15 due to concerns about potential "Y2K" technology problems.
2. The National Resources Defense Council led a string of legal victories over the ports that effectively halted expansion for almost a decade.
3. These rate-setting organizations established rates that would be used by all conference member lines and a specific customer. To maintain rate discipline, prices could vary only minimally. Thus, a shipment moving over the U.S. West Coast from Asia with a 16-day transit time frequently paid the same rate as one moving between the same origin and destination with a 30-day transit. Any rate reductions for all-water service that did exist were not significant because lines insisted that the cost of the additional vessels required to provide all-water service offset the rail intermodal expense. There was also a desire by the carriers APL and SeaLand to protect West Coast rates at all cost because they did not provide all-water service to the East Coast.
4. A transit is a vessel that has paid a toll. Smaller vessels often are combined into a single lockage (passage through a set of locks), which is the scarce resource. Larger vessels must transit by themselves.
5. The "New Panamax" ship dimensions will be: draft, 15.2 meters (up from 12.04 meters); beam, 49 meters (up from 32.31); and length, 366 meters (up from 294.13).
6. This advantage will exist even after 2014. However, at some point the question becomes not what physical size can be accommodated, but what size will the market profitably support?
7. Over the past five years, daily charter rates have varied wildly, especially with the current glut of vessel capacity. As of December 2011, a 3,500-TEU Panamax vessel might cost US $3,500 a day, a dramatic drop from the $35,000 a day the same ship might have cost to charter in 2007.
8. While intermodal transportation exists elsewhere in the world, it is only in North America that the ocean carrier, rather than the shipper (or freight forwarder), pays for it.
9. See "Port and Modal Elasticity Study" and "Port and Modal Elasticity Study, Phase II," Leachman & Associates LLC (2008).
10. This strategy is also indicated by the Inventory to Sales Ratio (ISRATIO) monitored by the Federal Reserve Bank of St. Louis, Missouri, USA.
11. A major exception to this strategy is Savannah, Georgia, which has marketed directly to major retailers. Those shippers routed the cargo and effectively forced lines to call at Savannah rather than at the historical load center in Charleston, South Carolina.
12. This analysis is from the perspective of USEC all-water container services to and from Asia. Many of these ports have a significant presence in other lines of business and/or container geographies.

Theodore Prince is a co-founder and chief operating officer of Tiger Cool Express LLC.

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