Trends in Global Shipping Trade Demand A New Canal
The first decade of the 21st century saw an unprecedented transformation in global maritime trade. The years preceding the global financial crisis witnessed an explosion in global trade driven in part by the growth of China’s economy and its emergence as a key trading partner for the world’s developed economies, including the United States. At the same time the maritime industry took a dramatic leap forward as the world’s largest container ships nearly tripled in size between 1996 and the present. These trends combined provided the rationale for Panama in 2006 to undertake the construction of a third set of canal locks that could accommodate the larger class of ships coming onto the market at that time. Since 2007, the Panama Canal Authority has invested $5.3B to build a third set of locks to allow longer and wider ships to transit. In response to the Panama Canal expansion, US and Asian ports have been making their own investments to handle the larger ships that will transit the expanded canal, due to be completed in 2015.
In the years since the Panama Canal expansion was announced, however, maritime trade has continued to grow, only temporarily abated by the recent economic slowdown. Both trade volumes and ship sizes have continued to grow and signs suggest that the Panama Canal by itself may be insufficient to meet the requirements of 21st century global trade. In particular, we believe there are three fundamental trends that will create demand for a new, significantly larger canal in the coming years.
Global maritime trade is expected to continue to grow, especially between Asia and the Americas
Globalization, technological advances and the emergence of new, strong commercial players, have resulted in rapid growth in global trade. Between 2000 and 2008 global trade grew at an average rate of ~12% per year. While growth slowed significantly after the financial crisis, trade levels have since picked up again and in 2011 the dollar value of global trade reached a record US$18.3 trillion. In 2013, this number is currently expected to reach US$19.9 trillion and is projected to continue to grow at a rate of 9% p.a. to 2020.
Global maritime trade is expected to continue to grow, especially between Asia and the Americas
Globalization, technological advances and the emergence of new, strong commercial players, have resulted in rapid growth in global trade. Between 2000 and 2008 global trade grew at an average rate of ~12% per year. While growth slowed significantly after the financial crisis, trade levels have since picked up again and in 2011 the dollar value of global trade reached a record US$18.3 trillion. In 2013, this number is currently expected to reach US$19.9 trillion and is projected to continue to grow at a rate of 9% p.a. to 2020.
Maritime shipping is the cornerstone of global trade and the preferred means of transport. Seaborne trade has historically represented 75% – 90% of global trade volume. The growth of maritime trade, which reached 9 billion tons of shipments in 2011, has been most recently spurred by the growth of iron ore shipments and container traffic carrying manufactured goods.
This growth of maritime trade is currently expected to continue at a steady pace of 3-4% p.a. through 2020. In particular, the rapid emergence of China as a manufacturing center has stimulated significant expansion in container traffic between the United States and Asia, with a majority of that traffic destined for US East Coast ports. While a large portion of that traffic has transited the Panama Canal, an increasing share of the trade between Asia and the US East Coast has shifted to larger ships travelling west from Asia, passing through the Malacca Strait and the Suez Canal, a longer voyage through at times dangerous regions, or has been landed in US West Coast ports and completed the journey by rail. The importance of these alternate routes is projected to increase in the coming years suggesting that Panama may not fully meet the needs of shipping companies plying the Asia to US East Coast trade route.
In addition to the flow of manufactured goods from Asia to the US, US exports to Asia are also expected to grow, including the export of coal from the US East Coast, and increasingly the exports of LNG and, soon of crude oil, from the US Gulf Coast. All these flows would benefit from an alternative transport route to the Panama Canal.
Trade between Latin America and Asia is also poised to grow in the coming years, consisting primarily of commodity exports such as iron ore, coal and other mined minerals, as well as lumber, grains, salt and increasingly crude oil. Today iron ore, the most important of these exports, departing from northern Brazil to China represents an important component of global seaborne iron ore trade. However, Asia-bound Brazilian iron ore sails a longer route around the Cape of Good Hope due to ship size limitations in the Panama Canal. Brazilian miners need to keep costs low in order to be able to compete with other seaborne iron ore suppliers to China, such as Australian producers who benefit from much shorter transport distances. The Nicaragua Canal will give them – and other exporters of goods and commodities – added cost competitiveness and further opportunities for growth.
Finally, given this tremendous growth in global shipping volumes, periods of congestion at the Panama Canal are possible in the next 10-15 years, despite its recent expansion. A second canal to serve excess demand could be invaluable to shippers, especially since expanding the Panama Canal further could be challenging due to hydrological constraints.
Drive for efficiencies will continue to spur investment in ever larger containerships that exceed the dimensions of the Panama Canal
Shipping companies and shippers are constantly focused on reducing transport costs, shortening travel distances, and enhancing transportation efficiency and safety. Transoceanic shipments between Asia’s major markets and their trading partners in Europe and the Americas accounted for 27% of the global container traffic in 2011.
The high volumes transiting these very long routes create a constant drive for cost efficiencies and higher margins through increased ship sizes and improved fuel efficiency. As they do, ships are rapidly outgrowing the capacity of the existing transoceanic canals, both Panama and Suez. Indeed, some shipping lines are already opting to employ much larger freighters and utilize shipping routes that bypass the Panama Canal, enabling higher margin realization despite the longer distance traveled.
Between 1996 and 2013 the largest container ships have more than tripled in size, from 6,000 TEUs to the recently-constructed Maersk EEE ships at 18,000 TEUs, and the average ship size has grown at a steady 4% over that period.
The Nicaragua Canal will help meet the changing needs of 21st century global trade and complement the expanded Panama Canal
The rapid growth in east-west trade and ship sizes provide a compelling argument for the construction of a second, substantially larger canal across Central America. Trends in ship size alone indicate significant potential market that can only be served by the Nicaragua Canal.
We believe that by 2030 – just over 16 years from now – the volume of addressable trade will have grown by 240% from today. The total value of goods transiting the combined Nicaragua and Panama Canals would exceed $1.4 trillion, making this one of the most important trade routes in the world. In addition, the fuel savings provided by the deployment of larger ships on the trade routes served by the Nicaragua Canal would be substantial. For example, going from Shanghai to Baltimore, the Nicaragua Canal route is 4,000 kilometers shorter than the Suez Canal, and 7,500 kilometers shorter than around Cape of Good Hope. At current fuel prices, for an average size containership, this represents a roundtrip savings of $500,000 and $1.0MM respectively 1 . For the largest ships the savings would $110/TEU and $327/TEU for the two alternative routes, mostly from lower fuel consumption.
1 Assumes a 3,000 TEU all-in cost of $140K per day (78% utilization of 3,000 TEU ship), at 23 knots sailing speed.
