The $5.25 billion question

This year marks the 100th anniversary of the opening of the Panama Canal. Even though it remains today a marvel of engineering and construction, not to mention perseverance, it is quickly becoming functionally obsolete. Not only is it inadequate for the traffic volumes now flowing through it, but it is also unable to accommodate today's largest containerships.

In 2006, Panamanian voters approved a $5.25 billion expansion of the canal, which is now about 70 percent complete and scheduled to be fully operational by June 15, 2015. A third "lane" is being added, with one set of locks constructed at the Pacific end and one at the Atlantic. Each set of locks will have three chambers, each of which will measure 1,400 by 180 feet and be 60 feet deep. When finished, they'll be able to accommodate ships measuring up to 1,200 feet long and 160 feet wide, with a draft of up to 50 feet. As it relates to cargo capacity, the expanded canal will be able to handle ships carrying up to 14,000 twenty-foot-equivalent units (TEUs). Currently, the canal cannot accommodate vessels larger than 5,000 TEUs.

As for what this means for shippers, the expansion will open up new routing options for so-called post-Panamax vessels, ships that have been unable to use the canal because of their size. Up until now, the larger U.S.-bound ships have been limited to West Coast ports or have used the Suez Canal to reach a few East Coast destinations. Once the work in Panama is complete, they'll be able to call on East and Gulf Coast ports—assuming these ports can deepen their harbors to accommodate the larger vessels' drafts.

A major question remains, however, as to just how much the newly enlarged canal will change international distribution. Some industry watchers predict a wholesale change in shipping patterns, with significantly more tonnage moving to East and Gulf Coast ports. Others foresee substantial growth at South American ports where larger ships will call and transload to smaller vessels for "last mile" movements to the U.S. A third, larger group is not sure what will happen. There are so many possible influencing factors, it is difficult to formulate a prediction with any degree of confidence. For example, there will still be very efficient landbridge options utilizing rail intermodal service. Some carriers have become comfortable with using the Suez and will no doubt continue to do so. And nearshoring from China to Mexico could eliminate some shippers' need for the canal altogether.

Further complicating the forecast is the emergence of the megaship. Last year, Maersk put the first Triple E containership into service (the carrier has ordered a total of 20 at a cost of $190 million apiece). With a capacity of 18,000 TEUs, these ships are the largest and most efficient in existence. According to Bloomberg Businessweek, a Triple E can carry 18 million flat-screen TVs, weighs 165,000 tons when fully loaded, and is three feet taller than the largest cruise ship.

But there's another thing about the Triple E: It will be too large to pass through the Panama Canal even after the expansion project is finished. The vessels measure 1,312 feet long by 194 feet wide, and the new Panama Canal lock chambers will only accommodate ships up to 1,200 feet long and 160 feet wide. These ships, in fact, are too big for any port in North America. On top of that, the Triple E is configured so that it can carry an extra row of containers, but currently, there is no crane in North America that has sufficient reach to handle them. For the time being, these vessels will be used primarily in the Asia-Europe market.

These complications notwithstanding, there is no question that the enlarged canal will alter the dynamics of international shipping and even affect domestic distribution patterns. The questions are how, and how long it will take.