Thursday Morning Quarterback: Rethinking the Panama Canal Expansion
(Rapidly expanding) possibilities through Arctic waters for deep draft traffic may provide shippers with viable alternatives to canal in the not-too-distant future. What this and the (slowly improving) container sector situation will mean for Panama is not yet clear.
The well-publicized expansion of the Panama Canal to handle bigger, deeper draft and wider ship traffic is well underway. And, given the trends of still bigger, wider and deeper shipbuilding – especially in the container markets – the decision to proceed with the project was nominally a no-brainer. Or, at least, so we thought.
The Canal has long enjoyed the premier position as the routing of choice for traffic coming from Asia to the U.S. Gulf and East Coasts. Today, the maximum size of ship that can safely transit the canal is known as a Panamax carrier, but a growing number of newer vessels already exceed this limit and more are slated to come. Considering these realities and others, the Panama Canal Authority faithfully did its homework before proceeding with the plan. Looking at the competition, expected trends in newbuilds and other equally important factors, they plowed ahead aggressively.
More than two years ago, Panamanian voters turned out in low numbers but approved an ambitious plan to widen the Panama Canal. Almost 8 of 10 voters were in favor of the expansion. The estimated eight-year, $5.25 billion project, when completed, was touted as a way to help consumers by providing shippers with better economies of scale through larger vessels, reduced delays and increased capacity. The news was generally well received in the United States.
The widening of the Canal, already underway, is a huge undertaking, and entails adding a third set of locks on both the Atlantic and Pacific sides of the waterway. When completed, the 50-mile canal's capacity will effectively be doubled, while allowing the new generation of still larger container ships, cruise liners and tank vessels to pass through a bottleneck which is currently too small.
The Panama Canal Authority will finance the project using more than $2 billion in borrowed funds, but hopes to eventually pay the entire price tag by raising tolls. Upwards of 40,000 jobs could be created, all of which are badly needed in this Central American country where unemployment typically hovers at about 10% and a much large percentage of the nation’s residents live below the poverty line. Currently, 70% of canal traffic involves cargoes headed to or coming from the United States. That figure was expected to grow once the conversion is complete and container ships with capacities of 12,600 TEU’s will be able to transit the canal, up from ships of just 4,500 TEU’s today.
In the spring of 2007, industry executives at the annual Connecticut Maritime Association Shipping 2007 Conference in Stamford, CT were treated to an in-depth justification of the impending expansion of the Panama Canal. Speakers included economist Robert West, Managing Director of Global Insight, Inc., and Rodolfo Sabonge of the Panama Canal Authority (PCA). Leaving no doubt that Panama would proceed with the project, the presentation gave compelling reasons why it was heading down that road.
First to speak was Rodolfo Sabonge of PCA, who asserted that one of the prime movers of the decision to expand was Panama's mission to "produce maximum sustained benefit from our geographic resources." That mission, he said, was in direct contrast to and a major shift away from the American policy of operating a break-even enterprise. "We must now make money," added Sabonge. He went on to predict that Panama's throughput of about 3 million twenty-foot equivalent units (TEU's) in 2006 would translate into an expected volume of more than 7 million TEU's in 2015 – even without expansion.
Sabonge then went on to explain that already, more than 30% of the world's ships were too big to transit the Canal. By 2015, he insisted, as many as 40% of the world's container ships will be too big without canal expansion. According to Sabonge, dredging on both the Pacific and Atlantic sides, coupled with the additional lanes, will double capacity for the canal. In the meantime, with the Canal already reaching maximum capacity, shippers are beginning to look for other routes to move their cargoes in an efficient manner. And, therein lurks the problem with this carefully orchestrated plan.
Even then, economist Robert West told the gathered CMA executives that, "The Canal is doing the right thing." As the expansion was being planned and getting closer to execution, shippers were already looking for alternate routes. Among those under consideration included the Mexican option of port and rail companies working together to receive cargo into Mexico's West Coast and shipping the cargo via rail into the United States. The Northwest Passage option, although widely discussed and used by the Panamanians themselves in their decision process, was not thought to be a viable solution to overcapacity. They might still be right.
West concluded by telling his listeners that the exploding Latin American markets, supported by what he calls "the Caribbean Transshipment Triangle," is further good news for the Panama Canal. He also reminded everyone, "The search for alternatives (to the Canal) is ongoing and will continue until 2015, when the Canal is completed." It turns out that he was right about a couple of things.
Not included in the Canal Authority’s risk model was the colossal global financial collapse that eventually resulted in as much as 12 percent of the world’s container capacity being laid up or idled. That sector – and others – still has not rebounded to the extent that most would have hoped and frankly, we might be years away from that total recovery. This, added to the accelerated predications of the melting of the polar ice cap, has potentially changed the game for Panama.
In December of last year, we published an article in our online e-newsletter entitled, North to Alaska: Warming Up to New Realities, wherein we outlined the growing attention being given to the changing landscape on the North Slope of Alaska which could potentially impact domestic energy markets, marine transportation and a host of other related industries. And, if you believe the climate change people, the route could be routinely ice-free in the summer time, as early as 2014 – or, as it turns out, roughly coinciding with the original estimated completion date for the Canal expansion.
A lot of water has passed under the bridge (and melted from the Polar Cap) since March 2007. Much further down south, the heavy tolls imposed by the Panama Canal and a miserable global economy are causing shippers to look at going around the horn to save money. It is only a matter of time before they start looking north, as well. When they do, the commercial, environmental and national implications of such a reality will finally become fully transparent. In response, the United States has also at last awoken to that possibility, as well.
On January 9, 2009 – almost exactly one year ago – the outgoing President signed the Nation’s new Arctic Region Policy, less than two weeks before departing the White House. Almost eight years after President Bush took office, 15 years after its last overhaul and fully one year after U.S. Coast Commandant Thad Allen literally begged the executive branch to do something about it, we now have an Arctic Policy. According to Allen himself, “This document, which replaces the Arctic section of PDD-26, establishes comprehensive national policies that recognize the changing environmental, economic, and geo-political conditions in the Arctic and re-affirms the United States’ broad and fundamental interests in the region.” What it doesn’t do is provide the means to get the job done.
Commerce and trade in the Arctic regions isn’t just a concept. It’s here. Last year, two German cargo ships successfully navigated across Russia's Arctic water, transiting from South Korea to Siberia without the assistance of icebreakers. As reported last September, the two ships made the cost-saving voyage – trimming almost 4,000 nautical miles off traditional routes – because of the reduction in the polar ice cap due to global warming. And, if Al Gore and his friends are right, this sort of voyage, widely hailed as a mere curiosity at the time, could become routine in a very short period of time. A similar passage from Asia to Europe would save 9,300 km (5,800 miles) compared with the Panama Canal, possibly leading to a diversion of some traffic.
Today, the typical Aframax or Suezmax vessel can expect to save hundreds of thousands of dollars and more than 30 days by utilizing the canal. Down the road a little, those metrics might change a bit. Following the expansion, transit tolls are expected to rise at a 3.5% annual rate over the next 20 years (source: McQuilling Report number 15 – Panama Canal, June 2009). Nevertheless, with U.S. east coast ports already gearing up with efforts to prepare for ship drafts of 50+ feet, Panama may have their day in the sun, after all. Click HERE to see the PANAMA CANAL AUTHORITY FISCAL YEAR 2010 FIRST QUARTER METRICS.
At the moment, and while significant diversions of traffic through Arctic waters are no longer a pipe dream, they are perhaps not as close as one might think. On the other hand, the net effect of the sagging global economy on shipping, however, is very real. And both variables will have a palpable effect on how much traffic goes through the canal for the not-too-distant future, and beyond. Once completed, the expanded Panama Canal is expected to make a profit for its operators. At least, that’s what the studies and models projected a mere five years ago. That was then; this is now. – MarEx
Joseph Keefe is the Editor in Chief of THE MARITIME EXECUTIVE. He can be reached with comments on this editorial at [email protected] and/or join the Maritime Executive ‘Linked In’ group at by clicking http://www.linkedin.com/e/gis/47685>