Study from Boston Consulting Group and C.H. Robinson said the cargo most in play will be destined for the “battleground region” in the Midwest.
Up to 10 percent of container traffic to the U.S. from East Asia could shift from West Coast ports to East Coast ports by 2020 as a result of the expanded Panama Canal, according to a new report from the Boston Consulting Group (BCG) and C.H. Robinson.
“Rerouting that volume is equivalent to building a port roughly double the size of the ports in Savannah and Charleston,” BCG said.
BCG said research for the report, Wide Open: How the Panama Canal Is Redrawing the Logistics Map, “involved extensive scenario analyses based on differing levels of demand, capacity, and costs.”
With the size of container ships able to transit the canal increasing two to three times, East Coast ports will “become more cost competitive because it is cheaper to move cargo by water than over land. West Coast ports, however, will remain the destination of choice for shippers who need to use the fastest routes possible.”
The study said the cargo most in play will be destined for a “battleground region” in the Midwest encompassing Chicago, Detroit, Memphis, and Columbus where “shippers will make different choices based on the value of their cargo, transportation costs, transit time, and flexibility.” That region accounts for about 15 percent of U.S. GDP, BCG noted.
Part of the study compared four products — tires, couches, tee shirts and industrial pumps — that would be shipped from East Asia to Columbus.
“If cost were all that mattered, shippers would route all these products through an expanded Panama Canal to reach Columbus via rail from the New York–New Jersey port. At current market rates, that route would be about 4 percent cheaper than one going through Oakland. But it also would take 11 days longer,” the report notes. “For some shippers, the 4 percent savings is pivotal. But for others, the extra time matters more.”
The study notes longer transit time increases inventory in transit and requires companies to stock more inventory as a buffer to account for unpredictable demand during those 11 days.
For products such as tires and couches, transport savings are “large enough to more than make up for the extra inventory that shippers will need to carry.”
“Transportation makes up 44 percent of the cost of goods sold for tires and 23 percent for couches. Even though the cost of holding extra inventory is higher for these products than for pumps and tee shirts, the savings of routing through the East Coast to the battleground region more than makes up the difference. In fact, by transporting tires to Columbus by way of the East Coast, shippers can expect to save about 1.5 percent — a big number for a low-margin product.”
On the other hand, for both pumps and tee shirts, “transportation constitutes up to 3 percent of revenues at most, so shippers often do not believe that there will be significant savings or that the savings from alternative routes will outweigh the increases in transit time and managerial complexity. By routing a shipment of tee shirts through the East Coast to Columbus, Ohio, for example, a retailer’s savings would total just 0.13 percent, and it would be half that for pumps. Not surprisingly, the cost of the extra inventory that retailers or distributors would need to carry exceeds these savings.”
The report also notes, “Shippers of both products also do not want inventory in transit any longer than necessary — though for very different reasons. Since tee shirts often feature trendy colors or the logos of winning sports teams, retailers want shorter lead times and low inventory levels in order to keep up with changes in fashion and avoid obsolescence. Pump makers, on the other hand, accept higher inventory levels because having inventory in warehouses, not on ships, allows them to take advantage of every opportunity to make sales.”
In 2014, about 35 percent of container traffic from East Asia to the U.S. arrived at East Coast ports. According to the report, current growth trends would push that share to 40 percent by 2020 without the canal’s expansion. But with the canal expansion in place, the East Coast’s share could reach 50 percent, a 10 percent increase in market share.
On the East Coast, the ports of New York/New Jersey, Norfolk, Savannah, and Charleston are well positioned to gain traffic, the report said, as are Houston, New Orleans and Gulfport.
