Panama Canal Expansion: Factors Influencing the Potential Economic Impacts on the U.S. Economy

1. Panama Canal Expansion: Factors Influencing the Potential Economic Impacts on the U.S. Economy Stephen Fitzroy Economic Development Research Group, Inc.www.edrgroup.com

2. Panama Canal Expansion: Key Economic Factors Vessel Economics and Operations Suez Canal and US West Coast Competition Caribbean Transshipments Competition from Canadian and Mexican Ports Measures of US Port Capacity Changes in Landside Logistics US Energy and Export Policy What We Should Expect

3. So, Where is the Panama Canal? Google Maps, April 2014

4. Panama Canal Volumes - 2012

5. Potential Impacts on US Infrastructure and Markets • Lower Relative Costs for Containerized Cargo Between Northeast Asia and US East Coast • Major shifts of container volumes to US East Coast • Greater Export Opportunities for US Bulk Commodities • Larger bulk vessels lower US costs • Increased US Container Port Capacity • More surge capacity, more calls • More Demand for Landside Road, Rail and Distribution Center Capacity • Move containers to inland markets

6. Container Vessel Operations • Move to larger vessels (13,000 to 18,000TEUs) driven by operating costs and thin profit margins • Savings can range from 40% to 60% per “slot” compared to 5000 TEUs and under. • Cascading has already begin – moving larger vessels into current rotations • New Alliances (P3, G6, CKYH(E) and Chinese lines) forming quickly • Members will consolidate loads on larger vessels • Fewer calls, but larger volume discharges

7. Container Vessel Economics • Vessel Operating Costs: • Capital costs • Manning (labor) • Fuel use for main (HFO) and auxiliary (MDO) engines • Stores and lubes • Maintenance • Port costs, insurance, etc. • Maximum Economic Vessel Calls • Three to four after passing through canal • Discharge Rates – Number of TEUs Loaded/Unloaded • Larger vessels (13k to 18k) discharge 8k to 10k per call

8. Effects of Bunker Fuel Costs Source: Mercator International, Panama Canal Expansion Study, June 2012

9. Suez Canal and US West Coast Competition • Larger vessels (up to 18,000 TEUs) will begin calling of US West Coast ports this year. • 13,000 TEU vessels will begin calling on NY and VA Ports in 2014Q3 • US East Coast will be served by Suez from Asia • Railroad pricing margins for mini-land bridge operations • Pooling of cargoes by alliances will accelerate this trend • Operating cost will decline well before Panama Canal expansion is complete

10. Canadian and Mexican Ports Competition • Canadian ports, especially on West Coast, have drawn a large share to US-bound Cargo • Productivity and connections to US Midwest are keys • Mexican ports are emerging as low-cost alternatives • Less congestion and strengthening rail links to Central US markets • Emergence of manufacturing and “near-shoring in Mexico may combine with lower labor costs to stimulate shipment of intermediate goods through Mexico

11. Caribbean Transshipments • Marine transshipment hubs function in several ways: • Like the air hub and spoke system – allows for more efficient operation of larger vessels based on smaller feeders • Vessel loads can be reconfigured while cargo is in transit – very important for logistics management • Costs for transfers are low relative to US ports • Locations are directly on routes to/from Panama Canal and US East Coast or Europe

12. Location of Caribbean Transshipment Ports Mariel

13. Measures of US Port Capacity Source: Container Port Capacity Database, U.S. Army Corps of Engineers, 2010 • Navigational Channel Depth/Vessel Capacity • Only New York, Jacksonville and Houston exceeded 50% • Berth Capacity • Charleston (47%) and Savannah (74%) exceeded 50% • Crane/Lift Capacity • Savannah exceeded 50% • Container Yard Capacity • New York, Virginia Ports, Miami and Houston exceeded 50% • Gate Capacity and Chassis Availability

14. Factors Affecting Cost Savings Panama Canal Tolls Transshipment Costs Port Charges Terminal Operator Costs Rail Transportation Costs Drayage and Chassis Management “Net” Cost Savings Accruing to Shippers

15. Changes in Landside Logistics • More On-Dock Rail, Intermodal and Inland Port Operations Supporting Major Container Ports • Accommodate surge loads and expand market access • Greater emphasis on value-added logistics services • Intensifying Use of Transload Facilities At or Near Ports • Convert cargo from 40-foot international to 53-foot domestic loads • Accelerating Trend Towards both Larger and Smaller Distribution Centers • Larger DCs near ports to redirect imports • Smaller regional DCs to handle same-day fulfillment

16. US Energy and Export Policy • Trade Agreements Affect Volumes and Prices • TPP (Trans-Pacific) • TTIP (Trans-Atlantic) • Bi-Lateral (Columbia, South Korea, Panama) • Commodities Most Likely Affected: • Agriculture • Corn • Soybeans • Energy • LNG • Natural Gas Liquids • Coal

17. What’s Should We Expect? • Likely • Cascading to larger container vessels • More rapidly than expected, but not due to the Panama Canal • More competitive US Exports • Driven by reduced costs for deep draft bulk vessels and emerging LNG/Energy • More emphasis on logistics and supply chain innovations • To handle container surges in larger ports) • Unlikely • Big savings for shippers • Most captured by TSPs • Major Shifts of Containerized Cargoes to US East Coast • Re-shoring of “traditional” manufacturing • Near-shoring may shorten supply chains for US • Major highway investments • Alternatives – Rail/Barge should be considered

18. More Information Contact: Stephen FitzroySfitzroy@edrgroup.com For a copy of this presentation and other EDR Group Presentations: http://www.edrgroup.com/ited2014 To access the library of past EDR Group Papers, Projects and Presentations:http://www.edrgroup.com/library