Business Beyond the Reef

I chatted with a friend in the shipping business about the Panama Canal expansion. More than $5 billion is being spent to expand the canal’s locks to handle the largest container ships on the drawing boards today. Some say the entire project will cost $10 billion once you count all the new facilities and other investments the expansion will attract. I have long told architects and engineers that they need to check out Panama. The new locks are expected to be in use by 2015, so not that long from now.

I hadn’t thought much about the implications of the new size of ships that the expanded canal will allow. Maximum ship sizes are governed not by the cargoes they will handle or the destinations their owners want them to go to, but by the depths of the harbors they will see and the size of the canals or waterways they will pass through. The present maximum size for transiting the Panama Canal is the gold standard for designing ships. Known as Panamax, this is the size vessel that most ports want to be able to handle. There are other standards out there. Suezmax is for vessels that must use the Suez Canal (considerably smaller than the Panama Canal). There is a Seawaymax for ships that go up the St. Lawrence Seaway. There is even a super huge Chinamax for ships restricting themselves to using China’s largest ports. Chinamax ships won’t be going anywhere near a canal. For the most of the world, Panamax is the key. And it is about to change.

The current Panamax, determined by the size of the locks in Panama, says that a vessel cannot be longer than 965 ft (294.13 m), wider than 106 ft (32.31 m), deeper than 39.5 ft (12.04 m), or taller than 190 ft (57.91 m). The height restriction is to pass under bridges along the canal. These dimensions mean that a current Panamax vessel can carry up to about 5,000 20-foot containers. After the new locks are operating, the new Panamax ships will be able to handle up to 12,000 20-foot containers! These ships are monsters! The new Panamax dimensions will be a length of 1,200 ft (366 m), a width of 160.7 ft (49 m), and a draft of 49.9 ft (15.2 m). The height (air draft) won’t change because the existing bridges aren’t being replaced.

The new Panamax has profound implications for ports – and for anyone who ships by sea. Many of the world’s ports will be unable to handle the new ships. Honolulu, for instance, can barely handle a current Panamax ship, and I just don’t see Hawaii spending mega-bucks to dredge the harbor and ship channel to more than 50 feet. (This puts paid to the old dream of using Honolulu as a transhipment port for ships bound across the Pacific.) Other smaller ports will also feel the pinch.

The new Panamax ships will dominate shipping between the few major ports that can handle them. That implies that smaller vessels will carry cargoes from the new Panamax-capable ports to smaller regional ports that can’t handle these monstrous ships. Kind of a hub and spoke model like the aviation industry uses. I spoke with a shipping expert from Miami who speculated that the new Panamax ships would require a super port somewhere in the Caribbean, Central America or the Bahamas to take cargo off the big ships and redistribute it to smaller ships that can still enter smaller U.S. East Coast or Gulf ports. We are likely to see the same in the Pacific, but it remains to be seen where the super ports will be developed.

You can expect to see shipping rates drop on the routes used by the new Panamax ships. But you will likely see rising rates on the routes served by the smaller, probably older vessels that can still fit into the smaller harbors. Across the Pacific, that means lower prices for crossing the big ocean, but higher costs to push the cargo further along the West Coast or between Asian ports. Those of us out here in the middle will simply be dependent on smaller vessels. But we already are.

I have long held that Chinese are more likely to live up to the spirit of a contract, than to the actual language in the agreement. Usually I prefer this, but there are times when they don’t live up to either the spirit or the word. The world has just had a big demonstration of that.

You may not have followed the saga of COSCO, a state-owned Chinese shipping company, and its refusal to pay its bills according to contract. The way the shipping business works is that the big shipping companies usually don’t own most of the vessels in their fleets. The ships are under long-term lease from financial companies that don’t know much about operating ships, but have the money to pay for their construction. It’s the same sort of arrangement that most airlines use to get their aircraft. The logo on the tail or the house flag at the masthead, don’t tell you anything about who actually owns the ship or the airplane.

COSCO, more accurately China COSCO Holdings, did a very bad deal – and wants out of it. COSCO is a power in dry-bulk shipping, the vessels that carry bulk commodities. The price of such shipping definitely impacts the prices you pay either in your company or your home. In 2008, COSCO decided it needed more ships. Unfortunately, 2008 was a period of very high prices in the shipping industry. Dry-bulk carriers were relatively scarce and the finance companies who owned the ships could drive an extremely hard bargain. COSCO, like the rest of us, did not know where prices would head and decided that the high prices (up to $80,000 per day) were worth paying to ensure their cargo lift capacity.

Fast forward three years. Dry-bulk vessel prices have plunged. Spot prices for new charters were as low as $16,716/day last month. COSCO lost its bet big time. (It wasn’t that good a bet in the first place, but decision-making by state-owned companies is a story for another day.)

Rather than simply swallowing hard and paying the prices it thought it could afford in 2008, COSCO decided to welsh on the deal. They simply stopped paying for their ships and effectively said to the leasing companies, sorry but it’s your problem now. Except that it wasn’t. The leasing companies – the legal owners of the ships – put the word out to the police in ports around the world, and – in at least three cases – COSCO vessels were seized in foreign ports. Arrested, as it were, for non-payment on a valid contract. True, it was an industry problem, because COSCO’s refusal to pay called into question the credit-worthiness of the leasing industry. But the industry called the Chinese bluff – and COSCO was the first to blink when the idea sank in that no one would ever lease ships to them again.

So, COSCO has reluctantly begun to pay on its 2008 contract again. Even at $80,000 a day.

Washington recently published its National Export Strategy for 2011. Largely an exercise in self-aggrandizement (Look what we are doing to implement the National Export Initiative!), there are still some gems that are worth ferreting out.

One big surprise, to me at any rate, was an emphasis on the need to improve domestic transportation infrastructure if the United States is to grow exports. The export supply chain to your foreign customers begins with the condition of the roads, airports, ports, rivers and more where the goods you are selling begin their outbound journey. Anything that increases transport costs hinders exports, yet another argument for improving our transportation infrastructure. Here are some of the facts:

• Freight rail moves goods in and out of 49 of the 50 states.
• 70 percent of all U.S. freight moves at some point by truck.
• 60 percent of all U.S. grain exports are shipped through the mouth of the Mississippi River.
• In 2009, U.S exports transported by U.S. passenger and cargo airlines equaled $334 billion or nearly 20 percent of all U.S. exports of goods and services.
• U.S. ports support, directly and indirectly, more than 13 million American jobs.
• The U.S. marine transportation system moves nearly 80 percent of the United States’ overseas trade by weight and approximately 50 percent by value.

No prizes for guessing which state has no rail access to the others. Hawaii is already in the grip of an oligopoly that strangles exports through the high prices they can charge under the Jones Act. Most of Hawaii’s exports are forced to first make a sea journey to California before they can begin their export journey. A friend in the business tells me that, if he can find a freighter going through the Panama Canal, he can ship product cheaper to landlocked Switzerland than he can to New Jersey. Jones Act.

Unrelated, but interesting data from the report: