Not Just Another Lock: Panama Canal Expansion Changes Global Shipping Industry

The Panama Canal expansion set off a chain reaction of events including the building of mega-ships and changes to shipping routes. For procurement, the challenge is adapting to the changes in a way that minimizes the impact of potential disruptions. -By Betty Armstrong

The global shipping industry is now constantly disrupted for many reasons, but the Panama Canal expansion is one of the early reasons, forcing a cascade of changes in the shipping industry. The expanded canal opened in June 2016 with a third set of locks, and the Panama Canal Authority announced at the time that a new era of global trade was beginning. The expansion doubled the canal’s capacity, enabling it to accommodate mega ships that have grown larger than previously ever thought possible. The expansion also impacted shipping routes and led to the need for upgraded ports to handle a mega ship’s massive capacity. Procurement professionals must now overcome new challenges including understanding how the shipping routes are changing, the implications of giant cargo ships on costs and inventories, and how to incorporate the knowledge into procurement systems to keep trade going.

A Little Background First

The shipping industry is complex, with an interrelated set of factors determining routes. The factors include port clearance and configuration, and vessel size and capacity. Capacity is measured in twenty-foot equivalent units (TEUs) and deadweight tons (dwt). The oldest standard is Panamax, which was set in 1914 at 65,000 dwt to match the Panama Canal configuration and clearance. The volume standard was 4,500 TEU. As the global shipping industry grew, so did the size of the ships. The Panama Canal expansion led to a new Panamax (Neopanamax) standard of 12,500 TEU in 2016, which was an enormous increase, triggering port infrastructure upgrades in the U.S. to handle the larger container ships.

The other major ports are the Suez Canal, accommodating 22,000 TEUs and the Strait of Malacca, which can handle 25,000 TEUs. Transshipment hubs connect the major shipping lines, and feeder shipping lines service the hubs. This shipping configuration has vulnerabilities, including potential bottlenecks and a “high level of dependence on transshipment services. Approximately 80% of direct trade depends on third-party ports.

The size of container ships has steadily grown. In 1994, the Panamax standard increased to 4,500 TEUs, creating the first shipping issue since the ports were not built to handle this ship size. Only ten years later, Very Large Container Ships (VLCS) were built with a capacity of 10,000 TEU, further stressing shipping systems, since most port structures could not handle the VLCS. The problem grew with the introduction of Ultra Large Container Ships (ULCS) with a capacity of 18,000 TEU. By 2017, the ULCS had a 24,000 TEU.

Challenges for Procurement

Container ships carry 90% of global trade, making shipping a significant cost factor for global corporations. The largest ships can hold 200,000 tons of cargo with containers stacked 21 high. The Panama Canal was expected to handle 13,000 TEU container ships, but experience with operating the locks has led to the ability to accommodate much more capacity. In August 2022 the Zephyr passed through the canal en route to China, being the largest ship in terms of capacity at 16,285 TEU. These increasing ship capacities mean fewer ports can handle the ships, leading to periodic bottlenecks or choke points, and changes in shipping routes. Accompanying these changes, and combined with the pandemic disruption, shipping rates have significantly risen. Procurement must reassess its supply chain strategies to address the changes in shipping routes, increased container capacities, and higher costs. Increased risks include the risk of inventory being tied up in a bottleneck, higher cargo losses due to extreme weather conditions and the resultant supply chain disruptions, and the potential of significant environmental pollution if the ship’s cargo includes inventory like petroleum or chemicals. Since the Panama Canal expansion means more ships per day are handled, there is the risk of any disruption having an accumulating and costly effect.

There are also cost implications related to the large TEU ships. One is the increased cost of insuring cargo due to higher capacity. Shipping rates are also impacted by the need to upgrade ports feeding the ships, including installing larger ship-to-shore cranes, doing more dredging, expanding shipyards, and increasing the number of trucks for cargo movement. Larger cargo capacity means a lower cost per unit, but only if the ship is fully loaded.

According to Lars Jensen, CEO of Sea-Intelligence Consulting, another issue is that the larger capacity ships are dependent on manufacturing being consolidated in a few concentrated areas and the main demand being located in a few places. The reality is that demand is more dispersed now. In addition, shipping lines have formed alliances to fill the giant ships, restricting the supply chain's ability to meet demand trends. He believes there will be a return to smaller ships to increase route flexibility, better space utilization, lower maintenance costs, more port flexibility, and reduced reliance on transshipment. All of these issues make sourcing materials and managing costs more complicated for procurement.

No Longer Business as Usual

For procurement and supply chains, one of the most significant issues triggered by the Panama Canal expansion and related subsequent increase in ship size is that only a few ports can accommodate the giant ships, which means there are trade lane restrictions. This issue is coupled with increasing shipping costs, regularly shifting customer demand, geopolitical-driven disruptions, and the potential for labor union strikes. The result has been the shifting of a significant amount of trade. The Panama Canal Authority estimated that the larger cargo ships would dramatically reduce the per-unit container costs shipped to the East Coast from Asia, increasing the competitiveness of the East Coast route, and the data proves the prediction was correct. The implication is that procurement is utilizing fewer West Coast intermodal, rail, and long haul services, which can lead to lower shipping rates since population centers in the East are some of the fastest growing.

There is no simple answer, but there are some facts that procurement professionals are taking into consideration. One is that bigger ships can lead to more significant supply chain risks, simply because they hold more inventory. Should a ship be detained for any reason, the impact of inaccessibility to its cargo is magnified. Another fact is that trade is now dynamic, so companies are implementing policies and procedures to minimize supply chain disruptions. This has created a trend toward using more dispersed suppliers, which impacts logistics. A third fact is that many ports cannot handle larger cargo ships. Fourth, many of the biggest seaports are located in areas with a high risk of experiencing extreme weather and natural disasters.

All of this adds up to higher shipping costs and frequent disruptions to shipping. Procurement will need to factor in these risks when figuring costs, determining optimal inventory levels, and identifying shipping routes. The Panama Canal expansion triggered many current issues, but many other risks have developed since then.