Rail gains ground in Panama
Panama Canal Railway gains container activity because of drought; Asia-Europe traffic seeks alternatives to avoid conflict along route via Red Sea, Suez Canal
UNIQUE CIRCUMSTANCES
at major canals are seeing rail lines draw container traffic away from ships.
The Panama Canal Railway, partially owned by Canadian Pacific Kansas City, is seeing increased container traffic because of drought conditions affecting canal water levels, while global conflict is diverting some traffic that normally would travel by ship through the Red Sea and the Suez Canal.
The 37-mile Panama Canal Railway normally handles about 300,000 containers per year, mostly for regional transshipment for Central, South American, and Caribbean markets. But the railway saw a 20% increase in container traffic last summer as drought altered shipping patterns, and in January, its largest container shipper, Maersk, announced shipments bound to and from Australia and New Zealand would be diverted to the railway.
“Based on current and projected water levels in Gatun Lake, the Panama Canal Authority has needed to make reductions to the amount and weight of vessels that can pass through the canal,” Maersk said in an advisory, adding that it had “made changes to services to ensure that our customers are impacted as minimally as possible,” and that the rail line would become a “land bridge” replacing ship traffic through the canal.
“This creates two separate loops, one Atlantic and one Pacific,” the advisory explains. “Pacific vessels will turn at Balboa, Panama, dropping off cargo heading for Latin America and North America and picking up cargo heading for Australia and New Zealand. Atlantic vessels will turn at Manzanillo, Panama, dropping off cargo heading for Australia and New Zealand and picking up cargo heading for Latin and North America.”
Most of the new volume last year came from shipping lines that did not regularly use the railroad. More such traffic could be coming, CPKC CEO Keith Creel said at the Midwest Association of Rail Shippers Winter Meeting.
“We never had this opportunity set before — not only to continue to do business with our primary customer there, which is Maersk …” Creel said, “but also for the other steamship lines that we have a very material commercial relationship with to enter into negotiations and discussions about bringing more traffic to that railway to grow.”
It’s why, Creel said, the Panama Canal Railway has proven to be one of the pleasant surprises of the CPKC merger. Kansas City Southern and Mi-Jack, a builder of gantry cranes, were awarded a 50-year concession to operate the rail line in 1998.
“We’ve got one customer, it’s making money, it’s doing well. It was a great investment. But in my head, I said, how do you
grow it? But little did I know. You don’t know what life has in store for you.”
RED SEA DISRUPTION
Meanwhile, the conflict in the Middle East and attacks by Houthi rebels in Yemen on shipping in the Red Sea have led some companies to seek rail alternatives for routes between Europe and Asia. About 20% of all global trade — and 30% of global container traffic — normally transits the Red Sea and the Suez Canal, including goods from Asia for Europe and North America’s eastern seaboard. In an average week, nearly 400,000 TEUs (20-foot container equivalents) travel between Asia and these locations. Ships traveling this route between Chinese ports and northern Europe can do so in about 26 days; longer routes around Africa add 10 days or more. The shipping attacks have seen the cost of sending a 40-foot container rise, reportedly to more than $7,100 from less than $3,000 in December, with insurance costs also rising substantially. The disruption to supply chains has led to some temporary factory closures as parts from Asia have been delayed.
Rail freight between China and European countries had grown over the last decade, with much of it routed via Russia’s Trans-Siberian railway. But the Russian invasion of Ukraine led to creation or promotion of alternatives. Despite less use of the Trans-Siberian route, nearly 20,000 trains were dispatched from Chinese cities to Europe by all routes in 2023, carrying around 2 million containers; this includes those destined for Russia, but also those using new routes avoiding Russia. By rail, a container can reach Poland or Germany from China in as few as 12 days via Russia or around double or triple that via the newer, more complex routes.
Rail freight rates between China and Europe were averaging around $4,200 per container in late 2023, but that has risen to about $6,000 — if space is available, as many trains are fully reserved far in advance. However, unlike the largest container ships, which can carry over 23,000 TEU (or around half that number of 40-foot containers) the average international freight train on a China-Europe route is capable of handling 80 to 100 TEU (40 to 50 40-foot containers). Even if there were unlimited numbers of suitable freight cars, locomotives, and crews, it would take thousands of trains to replace one large container ship.
As of late January, neither the drought in the Panama Canal nor the troubles in the Suez Canal had resulted in steamship lines diverting traffic to U.S. West Coast ports, Class I railroad executives said on their fourth-quarter earnings calls. — Bill Stephens and Keith Fender.