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"When the enlarged Panama Canal locks are opened in 2015, there will be a significant expansion of use of the canal by ships that currently have to go around the continent or transship through ports on one or the other oceans. There will be second and third-order effects that will be well beyond those obvious impacts."

General (Retired) David H. Petraeus


Great Expectations 

As post-Panamax vessels close in on the East Coast, localities must prepare their ports 

By Colonel Paul Olsen 
Norfolk District Commander


With the Panama Canal expansion project 60 percent complete and scheduled to open to commerce in 2015, the United States is in a unique position to profit as a national power while making only minor contributions to infrastructure.

Nowhere is this potential for profit more prevalent than along our Atlantic Coast, which according to Journal of Commerce, is poised to acquire U.S. imports traditionally held by West Coast ports.  

The United States is taking steps to seize that opportunity: in 2012, Congress requested a report from the U.S. Army Engineer Institute for Water Resources. The resulting report, titled The U.S. Port and Inland Waterways Modernization: Preparing for Post-Panamax Vessels, evaluated how our nation should address the critical need for additional port and inland waterway modernization to accommodate large “post-Panamax” vessels, which will be able to navigate the Panama Canal once the expansion is complete.

The 128-page IWR report is dense, but this article makes 12 digestible observations about the report while adding an Atlantic Coast focus.

Observation one:  The United States as a maritime nation

Maj. Gen. Mike Walsh, the deputy commanding general for civil works, provides an overall theme for the report in the foreword – the United States is a maritime nation, and its success has been dependent on our coastal ports and inland waterways to conduct trade since the 13 original colonies were established.

Trade is irrevocably tied to transportation, and Walsh asserts that “our nation had made a strong intergenerational commitment to develop its transportation networks. From the building of roads and canals in the early days of our nation, to later construction of the transcontinental railroad and to the creation and development of the Interstate Highway System, the nation has committed the time and resources to enable and facilitate the large scale movement of raw materials and finished goods from their origin to manufacturer or market, both within our borders and internationally.”

The outcome of commitment is the nation’s success in providing low-cost and “environmentally sustainable” means of transporting cargo, which has kept the United States globally competitive.

In the past 20 years, seaborne trade increased by nearly 40 percent, and intermodal cargo container shipments have become the most dynamic sector of the port-based trade. In the same time, the United States’ population has increased by 22 percent and is projected to grow by another 32 percent, or another 100 million people, in the next 30 years. The greatest population growth is expected in the South and West.

Walsh is certain that the population increases “will drive increased trade with imports expected to grow more than fourfold and exports expected to grow more than sevenfold over 30 years.”

To ensure future generations benefit from what Walsh calls a “competitive trade position,” we need effective and reliable transportation networks: “we have an opportunity as a nation to strategically position public and private investments to become … a world maritime leader.”

Observation two: Corps received clear congressional direction

Under Public Law 112-74, Congress directed the U.S. Army Corps of Engineers to develop the report in 180 days.

Indeed, Washington has its eye on yet-to-be-realized growth through international trade. The Office of the United States Trade Representative wrote, “The potential economic gains from trade for America are far from exhausted. Roughly three quarters of world purchasing power and almost 95 percent of world consumers are outside America's borders ... Trade remains an engine of growth for America.”

In a Sept. 6, 2013 letter to both the assistant secretary for civil works and the director of the office and management budget, Virginian senators Mark Warner and Tim Kaine underscored the importance of funding the Craney Island Eastward Expansion project in Portsmouth, Va.

The project would allow the Virginia Port Authority to nearly double its marine terminal capacity, enabling it to meet projected increases in international trade after the newly expanded Panama Canal is opened.  New, larger vessels all but demand the expansion: Hofstra University reported that each time the size of a ship is doubled, its capacity tripled.  In the private sector, more than 14,000 businesses from the contiguous 48 states move cargo through Virginia, all of which stand to benefit from the impending paradigm shift in shipping.

Observation three: Logical organization

The IWR’s report drew on existing data, reports and studies and reflects information available at the time the Corps produced it. It addresses the elements Congress identified and opens with Discussion of Demand for Future Capacity, complimenting it with a subsequent chapter on Current Capacity.  The obvious message in these chapters is that uninhibited growth that could be unleashed on the East Coast could be, depending on the viewpoint, either tempered or choked by the current capacity on the East Coast.

The chapter on Evaluating Capacity Maintenance and Expansion builds on the influence of the previous chapters, merging impact scenarios with ports’ channel depths, ultimately exploring the question, “How much depth is needed?” 

The Corps values its ability to balance economic need with environmental concerns and the Environmental Impacts of Capacity Expansion chapter addressed impacts on high-priority items, ranging from endangered species to collisions and increased truck traffic.

The report highlighted additional issues, options and opinions in successive chapters, provides a historical review and vision for the future, then follows this vision with financing options that may be considered.  The report then leaves us with the future federal role in navigation, considerations in a modernization strategy.

Observation four: Post-Panamax vessels will dominate the east coast fleet

The report outlines demand for future capacity, which is critical: post-Panamax vessels make up 16 percent of the world’s container fleet, but account for 45 percent of the fleet’s capacity.  Cargo Business News wrote that most ships navigating the Panama Canal today carry 3,200-4,500 TEUs of cargo (a TEU is a "twenty-foot equvalent unit," or a standard-sized container)  but after 2015, experts predict most ships passing through the canal will carry 4,500-8,000 TEU of cargo, with post-Panamax vessels moving an estimated 12,600 TEUs.

According to the report, as a region, Atlantic ports in the southeast are seeing the most growth and by 2030, 62 percent of container ship capacity will be post-Panamax. Additionally, “movements of TEUs through East Coast ports are expected to triple from current 15 million to about 45 million in 2035, population and trade growth, coupled with port capacity, have shown the nation’s most critical capacity needs are along the southeast and gulf coasts.”

The post-Panamx vessels will be calling on ports that accommodate them.

A deep-draft dredging cost-benefit analysis centered on U.S. coal exports, published in 1984, pinned the United States’ shipping potential on its ability to accommodate large vessels to take advantage of cost savings. At that time, the Port of Virginia was just 45 feet deep.

Nearly 30 years later, that analysis still rings true as the port continues to be the world’s leader in coal exports: Hampton Roads is the largest coal-exporting port in the U.S. averaging more than 40 million tons annually from its three terminals, exceeding 50 million tons of coal shipped during 2012.

Additionally, the United Nations Conference on Trade and Development analysis indicated that world trade is increasing while freight costs are decreasing, and that “total freight costs in world trade still represent, on average, less than 6 percent of the import value (or shelf price) of consumer goods.”  

The proliferation of post-Panamax vessels, with the ability to lower shipping costs, makes their East Coast domination inevitable: exporters are likely to save an average of 25 percent by shipping on post-Panamax vessels rather than the smaller Panamax ships.  

Observation five: what it means to be post-Panamax ready

According to the National Institute of Environmental Health Sciences, when the expanded Panama Canal is complete, the largest container vessel serving the United States-Asia trade, MSC Fabiola (a post-Panamax vessel), will be able to access the Gulf Coast with unprecedented speed – but most ports east of the canal will not be able to accept it. 

Post-Panamax vessels require 50 –foot channel depths, and when the canal is complete in 2015, only four East Coast ports, which include the Port of Virginia, will be ready to handle post-Panamax ships, while 15 others won’t finish the “race to the bottom.”

Photo of General Mike Walsh Major General Michael Walsh, U.S. Army Corps of Engineers

Moreover, turning basins, navigation jetties, dredge material placement facilities, berthing facilities and aids to navigation must all be made ready for the larger fleet of vessels. Other factors include storage area, stacking height rules, and operating hours, cranes capable of loading and unloading the larger ships, and docks engineered to handle the new, bigger cranes.

But, in terms of post-Panamax ready, did the report go far enough?

Many, including Capt. J. William “Bill” Cofer, president of the Virginian Pilot Association, content the 50-foot channel depth is insufficient for the post-Panamax vessels.

“Today, inland channels require 55-foot depths and offshore entry fairways require 60-foot depths,” he said. “International shipping companies are now routinely building ships that, when deeply loaded, draw 48 feet to 52 feet.”

Cofer said around the world, ports require at least 3 feet of under-keel clearance in their inner harbors, and 8 feet of under-keel clearance to safely transit off-shore waters surrounding the U.S. coastal shelf.

“This isn’t complicated … it is simple math,” he said. “Today, the new global shipping fleets currently transiting the world require inland channels dredged to 55 feet and offshore fairways with depths of at least 60 feet to move cargo in all weathers.”

The Port of Virginia is the sole eastern seaboard port that is authorized to dredge to 55 feet.

But, under Cofer’s criteria, no East coast ports are prepared.

Observation six: Who is ready?

The Port of Virginia in Hampton Roads is the second largest east coast port in terms of total freight tonnage. At more than 60 million tons annually, the port ranked second only to the Port of New York/New Jersey among East Coast ports in 2011.

Virginia’s port is ready: the 50-foot deepening was completed in 2006. Baltimore is ready as well, having recently constructed 400-foot cranes to load and unload the post-Panamax vessels.

The next ports expected to be ready for the larger vessels crossing the Isthmus of Panama are New York and Miami. New York is raising the deck of the Bayonne Bridge by 64 feet in order to accept the vessels, and Miami plans to begin dredging its harbor in November 2013.

The Port of Charleston recently announced that the completion date for dredging to 50 feet would be in 2019, five years ahead of the previous date. Other ports, from Houston to Philadelphia are also jockeying for a position in the post-Panamax world, investing heavily in infrastructure improvements and dredging projects. 

Observation seven: Cascade ready

IWR’s report defines “cascade ready” as a channel depth of 45 feet. This is one of the most under-recognized but most profitable observations in the study: “For U.S. ports to be ready to take advantage of post-Panamax vessel opportunities, major ports not only need to be ‘post-Panamax ready,’ but second-tier ports need to be ‘cascade ready’ as they in turn have the opportunity to take advantage of larger vessels that begin to service their trade.”

This determination is a result of the “cascade effect,” which the IWR explains is a general increase in average vessel size on a trade route caused by the deployment of new, larger vessels.  The larger vessels, in turn, displace smaller vessels, which then must reroute to the next most efficient trade route. The cascade effect, as Hostra University observed, is inescapable: uniform channel deepening throughout the East Cost just isn’t feasible and results in its varying levels of connectivity to global shipping networks.

But strategic upper-hand that “ready” ports have doesn’t signal the end for smaller ports. The IWR determined that even ports that are neither post-Panamax-ready nor cascade-ready will benefit: the report suggests that smaller ships will be able to take some of the cargo from a larger port and ferry the cargo to a shallower port.  

Observation eight: Striking a balance

According to the IWR’s report, the U.S. Army Corps of Engineers has 17 active studies investigating possible port improvements, most associated with the desire to be post-Panamax ready.

However, in this time of seemingly perpetual fiscal crises, we must realize that capital improvements cannot be realized at the cost of maintaining current levels of service. Channels require maintenance dredging, cranes require repair and servicing, aids to navigation continually require replacing, etc.

Mike Darrow, Norfolk District’s chief of Water Resources Division, understand the importance of striking the right balance.

“We must continually weigh the needs of new capital improvements with an operations and maintenance budget that has remained flat for years and actually has lost critical buying power for required channel dredging maintenance due to inflation,” Darrow said.  “Unless the current budget paradigm changes, nationally we cannot afford to add new and improve existing infrastructure without also increasing the dollars available to maintain the improvements to the navigation system.”

Darrow added that Congress is currently exploring registration in a 2013 Water Resources Development Act, which will provide a large amount of maintenance funding from tolls collected through the Harbor Maintenance Trust Fund, or HMTF. the Water Resources Development Act imposed a fee on shippers that generated $8.1 billion during 2012.

And the HMTF is in good standing: the report states allocations made from the HMTF during the past five years have been less than the revenues earned; there is a balance in the HMTF account.

Observation nine: Financing the future

In a break from the norm, the Corps’ report offers financing options for illustrative purposes.The report begins by exploring the option of “business as usual” which outlines maintaining a funding stream consistent with the previous five years.  Other options range from increasing revenue for harbor improvements,  modifying authorities or appropriations, changing cost-share requirements, and implementing user fees or public-private partnerships.

Three of the options seek to increase initial funding for improvements.

According to economic-planning studies for ports, federal funding became even scarcer after 9/11 because money was shifted from infrastructure and maintenance projects to beefing up port security.

Our economic future, however, hinges on funding the growing gap between supersized-vessels and the ports that can welcome them.

Observation ten: Post-panamax environmental impacts

As a federal engineer, I am keen to remind stakeholders that we, as a nation, must balance our passion to build with our responsibility to sustain.

The Corps arguably leads the nation in establishing metrics to monitor environmental impacts.  Using these metrics, the report found that while no region was consistently more or less vulnerable across all indicators, less vulnerability was seen in the Northeast. It is also important to note that regardless of financing option, USACE will continue to have a regulatory oversight responsibility. 

IWR’s due diligence illustrated that with increased port and ship size, the diesel-fueled truck traffic will increase as goods are moved farther inland. According to the Environmental Protection Agency, diesel is a “likely human carcinogen.”

Within the Corps’ lane of expertise, USACE, as the report points out, would be responsible for the final determination of whether the proposed action is environmentally acceptable.

District Commander Col. Paul Olsen points out the importance of modern port infrastructure to the Honorable Jo-Ellen Darcy, assistant secretary of the Army (civil works).

The chapter also points out that potential environmental benefits from modernization exist.  

The EPA’s brownfields sites provide opportunities to help modernize ports: abandoned and contaminated areas near ports can be rehabilitated to support shipping activity.  Because the government would restore these sites, it would be cheaper to reinvest in the areas – it would ultimately take the pressure off to impact “greenspace.”

Observation eleven: game-changing impacts

Leaders and socio-political strategists must be keenly aware of game changing impacts from post-Panamax Expansion: the very moment the larger canal opens, there will be economic impacts to the intermodal land-bridge, transshipment, U.S. bulk and agricultural exports, all of which will create socio-political pivots that must be considered. 

While I am not an expert in this magnitude of socio-economic impacts, my experience at the U.S. Army War College suggests that even minor impacts to the canal in terms of usage fees, security issues, and specific port requirements will cause massive adjustments to our domestic economics. 

The inherent economic complexities demand that we draw upon existing approaches and integrate new methods to explore, model and prepare for the inevitable impact because, as David Petraeus says, the ramifications of the canal expansion are “enormous.” 

“When the enlarged locks are opened in 2015, there will be a significant expansion of use of the canal by ships that currently have to go around the continent or transship through ports on one or the other oceans,” he said. “There will be second and third-order effects that will be well beyond those obvious impacts." 

In fact, a University of Rhode Island research paper that modeled container-port transportation demand and related economic impact for U.S. coastal container ports concluded that competition among container ports is not limited to the vicinity of the port. The policy of a post-Panamax – receiving port has distant impact on ports and port demand. A domino effect ensures: combinations of economic policies unfurl onto trucking, rail, shipping and energy costs.

Observation twelve: a call to action   

General Walsh crystallizes a call to action when he writes in the report, “This nation must address the need and the challenges of a modern transportation system and evaluate potential investment opportunities.  This report advances that objective. It contributes to an ongoing public discussion, which is already underway, and will help inform current and future decisions on the maintenance and future development of our ports and waterways and their related infrastructure.” 

 

- Kerry Solan contributed to this report. For more information, email kerry.l.solan@usace.army.mil.

 

 

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