Develop a Caribbean Strategy

A Panama Canal strategy may include transshipment opportunities. Using Caribbean ports might quicken supply chain flows.

December 1, 2013
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Sometime in approximately the next 18 months, the Panama Canal expansion project will be complete and a deeper, wider third lane and new system of locks will allow passage of the largest ships in the world.

The Panama Canal expansion means more opportunities and new trade routes with Asian markets that, until now, depended heavily upon West Coast ports as the gateway into the United States.

As a result of the canal expansion, ports along the U.S. Gulf and East Coast have spent much of the last decade ramping up their on-dock and landside infrastructure in anticipation of more business.

Not to be outdone, West Coast ports, especially Los Angeles and Long Beach, have carried out similar upgrades, and the rail lines that carry the cargo once it is offloaded at these locations have enhanced their infrastructure to the Midwest.

Another region that is anticipating increased business from the expansion is the Caribbean. Ports in the region are trying to position themselves as transshipment hubs once the expanded Canal is operational. The ports want to have cargo unloaded into smaller feeder vessels and sent to U.S. and other regional ports. The larger ships are then free to continue to other destinations, reducing the number of port calls required to serve North and South American markets.

When the opportunities on three U.S. coasts and the Caribbean are combined, shippers will see a new competitive landscape in which to transport their cargo from Asia. How that equation will sort out remains an open question.

“The only points that people seem to agree on are that bigger ships will go through the Panama Canal and volume will increase,” says Bob West, principal strategist for WorleyParsons Group. “How it is divided up, and who wins and who doesn’t win is anybody’s guess.”

Kurt Nagle, president and CEO of American Association of Port Authorities, agrees.

“The honest answer is uncertainty,” he emphasizes. “We’ve had a variety of discussions around this issue. There is a significant range of perspectives.”

An Express Service

There is a general agreement, however, that there will be increased opportunities for Caribbean ports to grow their business.

“It’s a matter of how much and to what degree,” Nagle says.

Transshipment opportunities lie in getting product to market faster and vessels back to Asia quicker than if they went directly to a Gulf or East Coast port.

“Instead of a single vessel going all the way through its port rotation, feeders would reach several of the main final destination ports much faster,” maintains Lauro Vieira, senior director of ocean freight, LATAM, for CEVA Logistics.

Nagle describes this as an express service.

“Offload as much cargo as possible at a transshipment point and move the vessel back to Asia, versus the economics of unloading the vessel at multiple U.S. ports,” he points out.

Bill Johnson, director of PortMiami, adds, “It’s all about time to market.”

West has been bullish in his outlook for Caribbean ports since the announcement of the Panama Canal expansion project in 2006.

“In discussions with shipping lines, what their actual strategies are and how they view the expansion, it is clear that they have a deep interest in using the biggest ships possible in order to realize economies of scale,” he believes. “It boils down to economics.”

There are arguments about how many big ships will go through the expanded Panama Canal in the first year of operation or whether the number will ramp up incrementally in the coming years. The unanswered question — even more important than the number of ships, according to West — is how fully laden those ships will be.

“It doesn’t make sense for carriers to run their ships empty,” West points out. “They are big and expensive. Shippers and carriers will want to utilize these ships as much as possible.”

In doing their due diligence, shippers that move cargo between Asia and the U.S. East Coast must question whether it makes sense to go all the way to a coastal port or transship at a Caribbean port.

West believes the answer will eventually be growth of transshipments in the Caribbean.

A shipping line, for example, loads a 12,000 TEU ship in Shanghai, utilizing as much as 90 percent of the slots with cargo. It is an open question, West emphasizes, as to whether there is enough cargo to consistently fill those slots on a regular weekly service with the end market being the eastern and Midwest U.S. only.

Rather, West envisions a scenario where cargo is loaded for markets that not only include the U.S., but also the Caribbean, Central America, South America and Mexico. He maintains it would be easier to get to the 90 percent level if companies employ this market strategy.

And it is a strategy that would depend on transshipment hubs at a Caribbean port.

“That’s the fundamental reason why I think some Caribbean ports will see an increase in transshipment volumes once the Panama Canal is expanded,” West says.

Ports in the Region

As completion on the Panama Canal expansion nears, ports in the Caribbean are upgrading their infrastructure in an effort to attract new business.

Freeport Container Port (the Bahamas): Currently the deepest container terminal in the region, the port already serves as a container transshipment point for the eastern U.S. Freeport Container Port has a 52-foot depth, meaning it can accommodate post-PANAMAX vessels. The port forecasts growing its berths from three to 20 during the next 10 years.

Kingston Harbor (Jamaica): A project of between $8 billion and $10 billion includes dredging, upgrading port facilities and building a dry dock in order to attract post-PANAMAX vessels.

Caucedo (Dominican Republic): The port is building a logistics center as part of an expansion that will make it post-PANAMAX-ship ready. In 2012, Caucedo became the base for four marine transport operations on North American-South American transshipment routes.

Panama: There is interest in Panama as a transshipment hub because of its proximity to the Canal. At this point, most of terminals are at capacity. New capacity might come from the private sector or the Panama Canal itself, which is contemplating a transshipment strategy.

PortMiami: The port has designs on becoming a gateway for two-way Asia-U.S. cargo for the eastern U.S. The port has begun dredging to a depth of 50 to 52 feet, a project that is timed to be completed just as the expanded Canal opens. A partnership with Florida East Coast Railway will allow shippers to reach more than 70 percent of the U.S. population from PortMiami in one to four days. In addition, there is significant investment in on-dock rail and a tunnel, which will allow trucks to avoid off-highway congestion when it opens in 2014.

“For those of us who do business in this part of the world, we believe there will be new opportunities with new connections to Asian markets via the expanded Canal,” Johnson says.

Wild Card Ports

At least two ports have the promise to become transshipment hubs, but much has to happen in both cases to make it a reality.

APM Terminals is investing nearly $1 billion in the construction of a container port in Costa Rica. When completed, the facility will act as the exclusive container port on Costa Rica’s Atlantic Coast.

Presently, the contract between APM and the Costa Rican government mandates the port can only operate for cargo in and out of Costa Rica; transshipment activity is prohibited. APM could eventually convince the government to allow transshipment activity, along with domestic activity, because it will have a fully operational port and established customer base.

Cuba is a long-shot possibility to be a competitive transshipment hub. Brazil-based Grupo Odebrecht is building a new port in Mariel, including a container terminal. Initial volume is expected to be 800,000 TEUs — more than the island’s economic activity warrants, West says. The key to Cuba’s success is an end to or easing of the U.S trade embargo.

Managing the Supply Chain

Companies may be able to use a transshipment port in the Caribbean to improve their supply chain efficiencies.

U.S.-based Caterpillar manufactures most of its heavy equipment in Brazil, primarily for the U.S. market. But Caterpillar doesn’t move the equipment to the U.S. until an order is placed.

Instead, equipment is offloaded at Manzanillo International Terminal (MIT) Panama and stored and maintained by a third-party logistics (3PL) provider. When an order is placed, the 3PL loads a vessel and transports the equipment to the U.S. Caterpillar realizes cost advantages in managing its supply chain inventory by using a transshipment hub to store inventory rather than storing it at U.S.-based distribution center.

 Numerous companies have similar arrangements, says Juan Carlos Croston, vice president of marketing for MIT Panama.  

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