The Potential Impact Of The Panama Canal Expansion On Union Pacific

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The shipment of intermodal freight is an important business segment for Union Pacific (NYSE:UNP), accounting for around 20% of the company’s freight revenues. [1] Union Pacific’s intermodal shipments consist of import and export container traffic and domestic container and trailer traffic. Containers are generally transported between ports and the ultimate destination or source of the shipment by either rail or truck. As Union Pacific’s rail network is concentrated west of the Mississippi river, the company’s international container traffic mostly pertains to west coast ports. Therefore, the growth in Union Pacific’s intermodal shipments is strongly correlated with the growth in container traffic at west coast ports. Though container traffic is expected to grow on the west coast, the ongoing expansion of the Panama Canal could hamper this growth by shifting some traffic to the east coast. In this article, we will take a look at the potential impact of the completion of the expansion of the Panama Canal on Union Pacific’s intermodal shipments.

Potential Impact of Panama Canal Expansion on Union Pacific

The Panama Canal links the Pacific and Atlantic Oceans, and also provides a shipping route linking the west and east coasts of the U.S. The Panama Canal at its narrowest point is roughly 110 feet wide, which is too narrow to allow for the passage of large container ships. [2] As a consequence of the bottlenecks presented by the Panama Canal, some cargo meant for the eastern half of the U.S. is delivered to West Coast ports and transported by either rail or truck to markets on the east coast.

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A project to expand the Panama Canal commenced in 2007. This expansion aims to widen and deepen the waterway to allow large oil tankers and container ships to pass through. The project has been beset by cost and time overruns. As of now, the project is tentatively scheduled for completion in 2016, though the specification of an exact date is difficult. [2] The completion of this expansion project should enable the movement of large container ships from Asia to east coast ports.

Sea transport is generally much cheaper compared to rail transport, though it takes more time than rail transport. With the expansion of the Panama Canal, a direct route for the transport of container traffic by sea from Asia to the east coast would reduce transportation costs and result in the diversion of some container traffic from the west coast to the east coast. The Boston Consulting Group and logistics company C.H. Robinson Worldwide estimate that around 10% of the cargo moving from Asia to the U.S. could shift to the east coast. [3] Such a diversion of container traffic would negatively impact the growth in Union Pacific’s intermodal shipments.

See our forecasts for Union Pacific’s U.S. Intermodal Freight Market Share

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Notes:
  1. Union Pacific 2014 10-K, SEC []
  2. Panama Canal, Consortium Reach Deal to Complete Work, Wall Street Journal [] []
  3. East Coast Ports Could See a Substantial Traffic Boost From Panama Canal Expansion -Report, Wall Street Journal []