P u b l i c P o l i c y D i v i s i o n

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1 William J. Diehl, CAPT USCG (Ret.) Chairman, Ports Task Force Greater Houston Partnership Testimony before the Texas House Transportation Committee Entitled The Panama Canal s Expansion Effect on Texas Mr. Chairman and Members of the Committee: May 24, 2012 My name is Bill Diehl and I m the Chairman of the Greater Houston Partnership s Ports Task Force. I am also the President of the Greater Houston Port Bureau, a maritime trade organization of over 150 companies doing business along the Texas coast. In my previous career, I had the pleasure of working at the Panama Canal from 2004 to 2006 as the U.S. Coast Guard s Liaison. In 2006, I assumed the Coast Guard s Captain of the Port duties for the Houston-Galveston area, and retired from the Coast Guard in 2009 to accept my current position at the Greater Houston Port Bureau. I am here today to discuss what the Greater Houston Partnership sees as the effect of the Panama Canal expansion on Texas. Before getting into the effect of the Panama Canal, I would like to highlight the value of our Texas ports. We know that as a nation roughly 1/3 of our GDP is tied to global trade and 98% of that tonnage is moving through our nation s ports. What most people don t realize is that 25% of that tonnage moves through Texas ports. Let me restate that, out of our 50 states, 25% of all inbound tonnage in the United States is coming into one state: Texas. It is probably time we start advertising ourselves as, Texas: America s Energy and Maritime Capital. Our success as a state is our connection to global markets via our ports. Those global markets are served by ships and those ships are getting larger. The average vessel transiting the Panama Canal has more than doubled in size in the last 15 years primarily because of the growth and expansion of container trade. The effect of the Panama Canal expansion is that it will allow us to continue to grow our trade with the global markets of Asia. The two sets of locks at the Canal reached full capacity in recent years and without the expansion, they would not be able to move additional cargo to meet global demands. In the maritime industry, if you re not growing, you re going to slowly go out of business, and the canal s expanded third set of locks will allow it to service larger ships. With the additional capacity of the larger locks, Texas has great opportunity and we see three reasons that cargo movement will continue to grow in our State: 1. Our region s population is growing 2. Container ships are growing larger 3. Texas exports are growing Page 1 of 5

2 My testimony will include a discussion of each of these three reasons and I will conclude with a warning about why we may not be able to take full advantage of the Canal s Expansion. First, let me talk about our regional population growth. Houston is the logical gateway into the middle of the country. We have 20 million people living within 500 miles of the Port, and our population in this area is growing at three times the national rate. Why is this important? It is basic supply and demand: as our population grows we will need more sneakers, clothes, and flat screen TVs, and right now, most of those goods come in containers from Asia. Furthermore, most of the containers that come through our ports are consumed within weeks by customers within one-day s truck ride. To visualize all of this, think about our oceans as super highways with our ports as on and off-ramps. The Canal is a key bridge connecting those super highways. Now let s take this analogy ashore: would it make a big difference to the economy if we build a massive bridge connecting two super highways in rural West Texas probably not, since the impact is limited with just a small population. This is why a small Caribbean Island is not looking to Canal expansion as a game changer for their economy; they just don t have the population demand to take advantage of the increased supply capacity the Canal will soon offer. However, our population within the Houston, San Antonio, and Dallas triangle is growing and will derive a lot of benefit from having adequate and efficient transportation infrastructure for our global supply chains. Having a port close to your customers is a good thing; having your customer base growing is even a better thing. We see that as our population grows we will be able to meet our global market demands of future generations efficiently by shipping through the Canal. We are also optimistic that with the Panama Canal expansion, we will be able to receive larger ships laden with goods. With larger container ships, we will see the Dallas market open up for us here in Houston as the supply chain route shifts from the port of Los Angeles to Houston. You have two slides from the Panama Canal to which I would like to call your attention. The first slide, with the three pie charts, shows how the global container fleet is growing. The left pie shows that in the year 2000 only 15% of the ships were too large to transit the current locks at the Canal (we call them Panamax Vessels). The right pie chart shows that by 2014, 48.1% of the global container fleet would not be able to transit the locks without expansion and that 12.5% will also test the expansion locks capacity The color coding uses a term TEU; it stands for Twenty-foot Equivalent Unit, and is based on smaller 20-foot-long intermodal container, a standard-sized metal box which can be easily transferred between different modes of transportation, such as ships, trains and trucks. The current Panama Canal locks can take a 5,000 TEU ship and with the new locks they will be able to handle a ship in the 12,000 TEU range. So why does this matter? Well, going back to my metaphor that the Canal is simply a bridge between two super highways, by 2014 nearly 50% of the container ships out there will be too big to get across our bridge the canal. Page 2 of 5

3 So larger ships are coming through the canal. How does this help Texas? If you look at the second slide, with maps of the United States, I will explain that the Panama Canal expansion is really a fight for changing the distribution routes to Middle America. In 1999, 86% of East-bound containers coming from Asia went into a west coast port and were shipped by train across the country to the East Coast. Only 11% went by an all-water route through the Panama Canal. By 2004 (when I arrived in Panama), the canal s market share had jumped to 38% - that s the sheer volume of goods moving from Asia to the East Coast by skipping a West Coast Port. As the ships grew it became obvious that it was cheaper to leave them on board and sail them through the Panama Canal then to take them into Los Angeles, and intermodally ship them across the country by train. The green section on the map shows you where it currently makes more sense to ship through the canal to your final destination. With the expansion, the ships will quickly go from 4,000 TEUs to 8,000 TEUs meaning the price per container will drop. The Panama Canal numbers show the cost of shipping on 8,000 TEU ship is 16% less than a 4,000 TEU ship. This means that here in Texas, we will see the green line move west and now it will be more cost effective for our State to get its containers from ships going through the Panama Canal. Currently Dallas gets the majority of its freight via the Port of Los Angeles, because the cost of leaving it on a 4,000 TEU ship and shipping through the Canal are similar, but through LA you get the container probably a week sooner. However, with 16% freight cost drop that comes from bumping up to an 8,000 TEU ship, the total value equation for a Dallas company moving 50,000 containers means that it makes economic sense for them to factor the week s delay into their schedule to take advantage of the cost savings offered by an ocean carrier coming through the canal. This is what is happening with global economy: we are moving more cargo further, so we are seeking out less expensive and logistically sustainable ways to move that cargo. When it comes to moving material in volume over great distances, no truck, train or plane can come anywhere close to the efficiencies of ocean shipping. So now we have the conditions for growth: a rising population, and larger ships to service them. What else does Texas offer that makes it an extremely attractive place to offload cargo? Exports. Exports can cover the backhaul the return trip for a ship, allowing them to maximize usage of the vessel, driving costs down and making the trip financially attractive to carriers. Emilia Istrate from the Metropolitan Policy Program in Washington D.C. wrote a report about the US Bureau of Economic Analysis economic numbers from 2011 noting that companies are orienting themselves where demand is and that exports have been and will continue to be a major driver in the nation s economic recovery. According to the Bureau, the US economy has become more export intensive over the last couple of years and that growth will continue as companies take advantage of growing demand in developing countries. Page 3 of 5

4 So how do we stack up? From , Houston exports grew by 14.5 percent, and another 12 percent from Our region exported more than $47 billion of goods in % of our metropolitan GDP, and we re ranked by the Brookings Institute as the fourth largest exporting region of the nation. Dallas is ranked as number five and between us; we have over 580,000 jobs supported by exports with steady double-digit growth rates. As oil and gas exploration bring in steel pipe, tubular goods, and construction materials - our chemical facilities are producing nearly $10 billion of export goods every year and are investing in ways to make themselves more efficient. Taking advantage of the low price of natural gas, many regional refineries and chemical facilities have switched to using a natural gas feedstock. By making the switch, the plants are able to produce resins, plastics and chemicals at a fraction of the variable costs as before. Chemicals represent 20% of our total exports and nearly $10 billion/year, and it s this type of engineering and infrastructure investment that is fueling our growth. What does the Panama Canal Expansion mean to the state of Texas? It means as we grow we will see more cargo coming into Houston on bigger container ships to supply the needs of our population. Containers bound for Dallas via train may see significant advantages of shipping through Houston instead of Los Angeles. And when the volume of inbound shipping picks up, our manufactures will have an advantage in shipping out exports. All of this is good, but we do have an Achilles heel: with additional cargo comes a strain on our infrastructure to be able to carry that capacity. Having a workable strategy to meet this increased cargo infrastructure is key. On the land side, our local ports are gearing up for increased traffic. For example, the Port of Houston Authority (PHA) is building new facilities to accommodate the increased cargo. The PHA is tripling the design capacity of their container yards with the build out of their Bayport Container Facility as well as improving access to road and rail hubs in the region. Our Achilles heel is the maintenance of our Texas ship channels. Most people don t think of a ship channel as infrastructure because it is not visible nor is it made of concrete or steel, but our channels are our ramps on and off the maritime highway. Our local industry is putting $130 million into the Federal Harbor Maintenance Trust Fund (HMTF) every year to fund maintenance dredging, but we still have to beg to get $20 million of it returned as dredging allocations when we really need $50 million a year. In recent years, funding disbursed from the HMTF has not reflected revenue collected with only 52% of the revenue generated actually being spent to keep our channels deep and wide. As we see larger ships, the lack of dredging will have a growing impact on our ability to bring them into our harbors safely and efficiently; put simply: if we silt in, the ramp will be closed. Our regional ports rely on funding from the HMTF to maintain adequate dredging and capacity levels. For this reason The Greater Houston Partnership s Board of Directors strongly Page 4 of 5

5 supported the immediate passage of the Realize America s Maritime Promise (RAMP) act (H.R. 104), which legislatively ties HMTF appropriations to HMTF revenues. This same solution Congress used for the Airports and Airways Trust Fund in AIR-21. Here is a short anecdotal story we heard six months ago. A Wall Street reporter called to inquire about business trends, and while talking, he mentioned that when he spoke to a Vice President at the Port of LA. The reporter was told that: The best thing that could happen to Los Angeles is that Houston never gets dredged. In closing, the US Department of Transportation estimates that world trade, the vast majority of which is transported by ship, will double in the next 20 years. Ships are becoming larger, requiring more sustained dredging. The Panama Canal s expansion will allow these large ships to reach us by bridging the maritime highways of the Pacific with the Gulf of Mexico. However, to capitalize on this bright future, we need to continue to invest by dredging and building out our infrastructure; otherwise, the inefficiencies will starve the golden economic goose our ports. Mr. Chairman, members of the committee, on behalf of the Greater Houston Partnership and our affiliated Port Companies we appreciate the opportunity you have provided us today to highlight what we see as the Panama Canal Expansion s effect on Texas. Thank you. Page 5 of 5