Hobbled Panama Canal pinched further as eastern Asia factory growth favors Suez

The likelihood of months-long draft and transit limitations at the Panama Canal becoming a regular feature of routings to the US East Coast from Asia comes as rapid growth and greater potential for trade through the Suez Canal appears more evident.

Extended restrictions on the Panama waterway, limiting the number of container ship transits and stowage weights, will remain in effect at least through June after the canal authority announced tighter rules in late August. The canal draft limitations, caused by increasingly drier weather and underdeveloped reservoirs, have already spurred carriers to make more regular and ad hoc calls to Western Mexico's Port of Lázaro Cárdenas. The restrictions may ease, but scientists say climate change is now impacting the formation of El Niño.

The Panama Canal limitations, first implemented in June, initially had a limited impact on container shipping operations as carriers had yet to get aggressive in blanking capacity to match weak demand. But now lighter loadings mean empty holds where cargo could be, pinching the bottom line of carriers as their operating costs rise. The sector is still less impacted than its tanker and bulk counterparts.

The Suez Canal has no such limitations and no locks or wildly changing water levels to concern the Egyptian government operators. The waterway can handle the largest ships in the world, with Mediterranean Shipping Co.'s Irina holding the top rank with its 24,346-TEU capacity.

It has had other issues, however, namely when the Ever Given container ship became grounded in March 2021. Amid renewed violence in the Middle East and the prospect it could widen, it shouldn't be forgotten that a militant group in 2015 claimed credit for a viral video showing a rocket-propelled grenade attack on a Cosco container ship.

Carriers taking notice

But shifts in trade sourcing are putting new focus on the Suez, thanks to growing production out of Southeast Asia and the Indian Subcontinent. Moving away from China isn't easy, as many shippers are finding, but it's happening, as geopolitical pressures mount for importers to diversify their sourcing.

As a result, shippers are asking CMA CGM and other container lines for more capacity.

"Our customers came up with an ambitious shopping list of additional capacity they will need from Southeast Asia to the US," CMA CGM Group Chairman Rodolphe Saadé said while in New York recently. "To be honest, I was not expecting to hear this because they usually talk about China. Now it's different." 

The carrier has just the ships for the fast-growing container trade — 14 ships of 24,000-TEU capacity. But those ships, to be delivered from shipyards between 2026 and 2028, won't get deployed to the East Coast unless ports do more dredging and invest in larger cranes to handle the bigger vessels, Saadé said while in New York to highlight the company's $600 million investment in terminals at its new facilities in Staten Island, New York, and Bayonne, New Jersey.

The opportunity for Southeast Asia trade growth for US East Coast ports is significant. The ports get approximately 60% of their laden Asia imports from North Asia, with China accounting for about half of inbound containerized trade from the entire continent. But the growth of imports from Southeast Asia and the Indian Subcontinent has been rising faster, according to an analysis of data from PIERS, a sister company of the Journal of Commerce within S&P Global.

On a compound annual growth rate for the five years ending in 2022, container trade from the two regions to the East Coast surged nearly 13% to 3.1 million TEUs, according to PIERS. For comparison, North Asia exports to the US East Coast in the same period rose just 5%, albeit from a larger base. With the deepest harbor on the eastern seaboard, Halifax, Nova Scotia is also gaining from the eastward shift of manufacturing momentum in Asia.

"Just as the West Coast was the beneficiary of the shift to Chinese production, the East Coast will be the beneficiary of the shift to Southeast Asia," said Stephen Edwards, executive director at the Virginia Port Authority.

Edwards, in a recent podcast sponsored by Cargomatic, said the Port of Virginia is capitalizing on the opportunity by ordering large cranes, deepening its channel to 55 feet by the end of 2024, and expanding Norfolk International Terminals, which is slated for completion in 2025. The port is already showing it can efficiently handle 13,000- to 14,00-TEU vessels, according to Edwards.

"All that is designed to say, 'We can handle your ultra-large container ship to give you the economies of scale to come through the Suez Canal,'" he said.

*Originally published in the Journal of Commerce on October 26, 2023

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.