A cargo ship passes under the Americas Bridge as it exits the Panama Canal waters on route to Pacific Ocean in Panama City, Wednesday, Jan. 8, 2014. Panama Canal Authority wants to end a standoff over the expansion of the canal by splitting construction costs with an international consortium that has threatened to halt work unless the authority comes up with $1.6 billion in extra funding. (AP Photo/Arnulfo Franco)
A cargo ship passes under the Americas Bridge as it exits the Panama Canal waters on route to Pacific Ocean in Panama City, Wednesday, Jan. 8, 2014. Panama Canal Authority wants to end a standoff over the expansion of the canal by splitting construction costs with an international consortium that has threatened to halt work unless the authority comes up with $1.6 billion in extra funding. (AP Photo/Arnulfo Franco)AP2014
The $5.25 billion expansion project for the Panama Canal is slated to finish in 2015, promising quicker transit times and more space for huge ships that don't fit in the canal's locks – the shipping term for these behemoth refering to their inability to fit ("Post-Panamax").
But as construction continues many shipping companies are looking to other routes to transit cargo across the globe. The world’s biggest container shipping company, Maersk Line, has already abandoned Panama in favor of Egypt’s Suez Canal, which has no locks, and other companies are finding cheaper and faster routes to the U.S. East Coast by shipping to ports in California and than transiting goods overland by train.
The reason for the global shipping shift is not so much the construction at the Panama Canal but the exorbitant costs of crossing it, the time spent waiting to enter the canal and the already limited number of eastern U.S. ports that can service Post-Panamax ships.
“The economics are much, much better via the Suez Canal simply because you have half the number of ships,” Soeren Skou, chief executive officer of Maersk Line told Bloomberg last year. “One of the reasons for why this is happening now is that the cost for passing through the Panama Canal has gone up. At the end of the day, it comes down to cost.”
The cost of moving a ship through the Panama Canal has tripled over the past five years to around $450,000 per passage for a vessel carrying 4,500 containers, and this figure is likely to go up upon completion of the expansion process. While the cost of crossing the Suez Canal is also expected to rise, it is generally considered an easier route given its ability to handle larger ships and the reduced traffic compared to Panama.
About 70 percent of the nearly 14,000 vessels that pass through the canal every year are headed to the U.S. The canal handles around 5 percent of the world’s total trade – in comparison about 7.5 percent moves through Suez – and bills itself as the quickest and most efficient way to ship goods around the globe. To some extent, that is still true.
Shipping goods from Shanghai to New York via Panama takes 25 to 26 days compared to 27 to 28 days through Suez, but only about 20 percent of China’s exports to the U.S. head through the Panama Canal. Typically, Chinese goods are shipped to West Coast ports and then moved overland by truck or train to the East Coast, a method that generally takes between 19 and 22 days.
Besides speed, there are other reasons businesses choose the ship-to-rail routes. One is that it's often cheaper. Recently a number of major Pacific ports in the U.S. – Los Angeles, Long Beach, Oakland, Portland, Seattle, and Tacoma – have paired with western railroads likely Burlington Northern Santa Fe and Union Pacific to form the U.S. West Coast Collaboration (USWCC) in an attempt to offer competitive cost and service options.
And unlike many West Coast ports that sit in deep-water harbors, the only port on the East Coast that can currently handle Post-Panamax ships is in Norfolk, Virginia.
That's likely to change as ports from Miami and Charleston, S.C., to Baltimore and New York are pumping billions of dollars into dredging and revamping their facilities to be able to take the larger cargo ships. Even so, some experts warn that because of construction in the Panama Canal, an overall leveling off of the global shipping industry and the cheaper cost of ground shipping, those ports may not be in for the economic boost they hope.
"The cities have unrealistic expectations when it comes to the Canal expansion," said Jean-Paul Rodriguez, professor of global studies and geography at Hofstra University. “There may be some shift in cargo going to the eastern U.S. ports because of the canal expansion and their improvements, but it's just not guaranteed."
Along with the speed, costs and logistics, the overland route is also more environmentally-friendly, Yossi Sheffi, director of the MIT Center for Transportation and Logistics argued in The Americas Quarterly.
On average, shipping from Asia to the West Coast on a Post-Panamax ship and transferring the cargo to an overland method to get it to the East Coast produces two-thirds the CO2 emissions than shipping the same amount of goods through the Panama Canal.
While it's expected that canal costs will increase because of the ongoing expansion, just how much is an open question. Negotiations over the massive cost overruns running to $1.5 billion in the project recently stalled because one of the companies involved demanded more than $1 billion to continue work on the project.
The Panama Canal Authority immediately rejected the idea. "There is no negotiation outside the contract," canal administrator Jorge Luis Quijano said.
On Tuesday, the Authority proposed that it would inject $183 million into the project to allow the consortium expanding the canal to continue work for several months while a permanent solution is sought to the dispute. The authority suggested that the consortium to put in $100 million.
Italy's Impregilo, one of the corporations in the project, countered with a demand for $1 billion from the Canal Authority.
Quijano said the Authority was sticking by its proposal for a joint injection of $283 million, moving the conflict closer to the Jan. 20 deadline that the consortium has established for resolving halting work.
"We hope they're reasonable and let the work finish," he said. "But we have no qualms about working with another contractor."
The Associated Press contributed to this report.