Suez expansion opens new supply chain opportunities

These are historic times for the shipping industry and the companies that rely on its services. The governments of both Panama and Egypt are poised to inaugurate canals that are wider and deeper, and will operate more efficiently. These expansion efforts promise to reduce freight costs, increase transit speed, and potentially change the competitive balance between the two canals.

The Suez and Panama canals redefined global trade when they were completed in 1869 and 1914, respectively. However, as ships have increased in size, the canals have come to be viewed as a hindrance to the expansion of trade. Now, their expansion is shaking up the status quo.

While attention has focused on Panama--where the expanded canal is expected to be open for business in April 2016-Egyptian President Abdel Fattah al-Sisi has executed a vision of transformational growth for his country. He accelerated a proposed five-year development plan for a second Suez channel and insisted that work be completed in one calendar year. The new channel will reduce both transit time and unit cost of cargo.

Work to construct an entirely new 72-km section of the canal and deepen existing sections has involved all major dredging companies and more than half the world's largest dredging vessels. Remarkably, after many months of frantic activity, the canal is nearing completion, with the first transits expected in August of this year.

This will have an immediate impact on trade. The shipping lane from Asia-Pacific to Europe has been a driver of China's economic growth for the past 20 years. However, the development of larger ships-carrying containers, dry bulk, crude oil, liquefied gas, cars and trucks, refined products, chemicals, and cruise passengers-has placed increasing strain on canals, ports, and associated infrastructure. President Sisi's new canal will allow larger ships to transit and ease the flow of trade on this vital east-west route.

It will also inspire new strategic thinking for shippers. While the largest container ships-currently with a capacity to carry 20,000 TEU (twenty-foot-equivalent units)-can transit Suez, the dimensions of the expanded Panama Canal will only allow ships of about 12,200 TEU to transit, with some Panama-specific designs pushing the limit to 13,000 TEU. So, it is possible that mega-ships running from China via Singapore and Suez to the Mediterranean could continue across the Atlantic and serve US East Coast ports, taking cargo from the Panama Canal.

US ports are not yet ready for mega-ships, so Suez will not be a threat to Panama for several years, which gives Panama time to figure out how to respond.

Richard Clayton is chief maritime analyst, IHS Maritime & Trade