This is the second in a series related to Forisk’s 2013 mid-year forecast of softwood stumpage prices in the United States.
What is the status of the Panama Canal expansion and its implications for the U.S. forest industry?
The expansion of the Panama Canal remains behind schedule. This fact and the expansion itself have no material, measurable implications to timberland investors, forest industry firms and timber prices.
Discussion for Diehards
In a previous post about expanding the Panama Canal, I summarized Forisk’s 2012 research and my visit to the Canal. To recap the situation, the largest ships began outgrowing the Canal in the 1980s. In 2007, Panama officially started a $5.2 billion expansion project that adds a third deeper, wider lane which will allow significantly larger container ships to short-cut the trip from Asia to the East Coast in the U.S. and elsewhere.
What is the status of the project? As reported by Andres Schipani and Robert Wright in the Financial Times (Panama Canal: Out of the Narrows, August 25, 2013), the project is 60% complete, six months behind schedule and expected to wrap-up in 2015. The expansion will permit ships with three times the capacity of the largest vessels currently using the Panama Canal. However, ships have already outgrown the new canal. For example, the world’s largest container fleet operator, Maersk Line, has 20 new ships ordered that won’t fit through the expanded third lane.
Forisk’s research focused on the economics of utilizing an expanded Panama Canal. For exporters, the specific issue to consider is the total time and cost associated with transporting goods from China to the U.S. East Coast with and without the expansion. According to Tom Heagle, Vice President of Operations at ASF Logistics, it takes 12 days to ship goods from China to the West Coast of the U.S. plus six additional days to rail those goods from the West Coast to the East Coast. That’s 18 days total. Using the Panama Canal, it takes 21 total days by ship. While the Panama Canal route takes longer, the economies of scale are attractive, as a 10,000 container post-Panamax ship can carry the same volume of cargo as 16 to 18 trains or, according to Schipani and Wright, “570 Boeing 747 jumbo jets.”
In addition, a critical limiting issue remains. Today, most U.S. ports cannot accommodate these ships. Most East Coast ports currently lack the necessary depth (50’+) and/or maneuvering space and/or suitable cranes and/or docks to handle the enormous ships. Technically, only the ports in Baltimore, Maryland and Norfolk, Virginia can handle these ships at this time. And, unfortunately, efforts to dredge and expand the port in Savannah, Georgia remain stalled, keeping the port on the sidelines.
Currently, the Panama Canal has no direct impact on price estimates in the Forisk Forecast. While we project log export growth of 107% in 2013 over 2012 from the U.S. South, the volumes still total below 500,000 tons (about the annual use for one 100 MMBF sawmill). As housing returns and domestic saw log prices strengthen, we expect export activity to prioritize lumber over logs.