In June 2016, the Panama Canal will double its capacity, and this capacity expansion will undoubtedly reshape the freight flows around the globe, including those transiting through the Port of Los Angeles (click here for a past blog related to this subject).
Considered jointly, the Port of Los Angeles and the Port of Long Beach are the 9th largest port in the world, handling most goods transiting between China and the United States. Given the various limitations of the Panama Canal (tolls, congestion, ship tonnage limitation), most goods that need to be delivered from East Asia to the United States are currently unloaded in the Port of Los Angeles and shipped by train to their final destination. Overall, the port activities in Los Angeles is a major activity node in Southern California, employing about 900,000 people throughout the LA County Region and 3.6 million worldwide.
However, the capacity expansion of the Panama Canal may change this shipment pattern. The Panama Canal currently handles about 340 million tons per year, which corresponds to about 14,000 transits per year. This is quite remarkable given that it was originally designed to accommodate 80 million tons per year! The increase of capacity relative to the original design has been achieved through a succession of minor tweaks, such as improvement in the scheduling algorithm, widening of some key bottlenecks, and deepening of some critical channels. Yet, there are only so many ways one can stretch capacity without major investment, and a few years ago, the Panama Canal has undertaken a $5.25 billion capacity expansion effort, which will conclude in June 2016, increasing the total capacity to 510 million tons, i.e., a 50% increase in total capacity, allowing for both larger ships to transit through the canal and increasing total traffic.
This increase in bottleneck capacity will undoubtedly reshape the freight flows between Asia and North America. In particular, it is very much conceivable that, if some ports on the East Coast (such as Miami) develop their logistical infrastructure, it may become more efficient in the long run to ship goods from Asia to the East Coast through the Panama Canal, creating a threat to both the Port of Los Angeles and the railway that currently ship these goods.
How can the Port of Los Angeles respond to this threat? I recommend they follow a three-pronged approach, aimed at improving:
- Flexibility, by invest in capability to accommodate both small and large vessels (such as the enormous Ben Franklin ships, which can carry up to 18,000 containers);
- Responsiveness, by investing in capacity to alleviate congestion and by streamlining the intermodal transition between ship and trucks or trains;
- Reliability, by working with the unions to reduce the likelihood of major strikes (such as the strike that occurred in 2015) that could disrupt just-in-time supply chains.
The good news is that the reshaping of freight flows will not happen overnight: Most ports on the East Coast (with the exception of Norfolk) do not seem yet to be able to accommodate large ships or to have the same level of logistical infrastructure as the port of LA and firms may take some time to reconfigure their supply chains. This should give some time to the Port of LA to get prepared for this increased competition and enhance its service offering. Nevertheless, a major disruption, such as a strike, in the Port of LA leading could easily precipitate this course of action, so adopting a complacent attitude could have severe consequences.
Acknowledgments: I thank Manuel Herrerra for a very good discussion that led to the writing of this blog.