Panama Canal expansion—is it worth it?

image credit: Lyn Gateley

A century after the U.S. steamship Ancon first sailed through the Panama Canal, a $5.3 billion expansion delayed by bickering contractors and angry workers is nearing completion. The problem is it might not be big enough.

With the expansion 16 months behind schedule, canal administrator Jorge Quijano said officials are studying whether to dig a fourth set of locks to handle a growing fleet of super- sized ships. Those include the 400-meter-long “Triple E” vessels capable of carrying more than 18,000 containers, four times more than current ships passing through the canal.

“We are always analyzing the market and as soon as we can economically justify it we will begin,” said Manuel Benitez, deputy administrator of the Panama Canal Authority, adding that he thinks the current expansion is sufficient for now. “If that changes and the demand exists we are ready to begin.”

Panamanian officials tomorrow will celebrate the anniversary of the French and U.S.-built canal, which cut thousands of miles off global trade routes and generated almost $10 billion in tax revenue for Panama since the U.S. handed over control at the end of 1999. A new expansion could help sustain economic growth that has averaged 9% per year since 2007, the fastest in Latin America.

Delays on the current expansion, approved by voters in a 2006 referendum, have cost the country about $200 million, pushed the completion date back to December 2015 and may force the government to trim spending.

“We are going to elaborate a plan to tighten public spending and we are going to review the budget,” Economy Minister Dulcidio De La Guardia told congress on Aug. 11, citing lower-than-expected canal revenue.
 

Campaign Promises
 

President Juan Carlos Varela, who took office in July, needs the boost that would come with increased ship traffic to fulfill campaign pledges to reduce poverty, expand public transportation and sustain growth as canal construction winds down. The country’s fiscal deficit reached 3.2% of gross domestic product in the first half of 2014, above the 2.7% allowed by Panamanian law, De La Guardia said.

“We have already felt the impact of not having the canal expansion done,” said Benitez.

A consortium led by Spain’s Sacyr SA halted work on the expansion at the start of the year in a dispute over $1.6 billion in cost overruns. Construction workers demanding higher salaries went on strike in the days leading up to the May presidential elections and Quijano, the canal administrator, said a regional drought may limit ship traffic later this year.
 

Ship Traffic
 

Economic activity in May, when the labor strike hit, eased to 1.7% from a year earlier, the slowest pace in almost five years. Growth will be 7.2% this year, the least since 2009, according to the International Monetary Fund. The country’s dollar bonds have returned 1.1% in the past three months, below the 1.9% average of emerging markets, according to JPMorgan Chase & Co.’s EMBIG index.

The global financial slowdown since 2008 has also hurt revenue in the 77-kilometer (50-mile) canal. Total ship transits declined to 13,660 in 2013 from 14,685 in 2011, according to the Canal Authority. Officials expect those numbers to rise when the new locks open.

With a surge in U.S. natural gas (NYMEX:RBQ14) production expected to boost trade with Asia and shipping companies including A.P. Moeller-Maersk A/S rerouting their largest vessels away from the canal, Panama is vowing to finish the expansion next year.

The project, which has spurred a series of port and infrastructure upgrades throughout the Caribbean and the U.S. eastern seaboard, will make room for vessels with the capacity to carry as many as 12,600 containers, almost three times what the existing locks permit.
 

48,000 Bananas
 

One 20-foot container can hold 329 19-inch televisions or 48,000 bananas, according to Maersk, which says it has a fleet able to transport 4.1 million containers.

“Vessels are getting larger because of the economies of scale,” said Robert Brodesky, director of transportation consulting for IHS. “There is a lot emphasis being put on ports particularly on the east coast of the United States in being able to deepen their channels.”

The expansion will coincide with the delivery in the coming years of about 165 ships capable of carrying as many as 10,000 containers, said Jonathan Roach, a shipping analyst at Braemar ACM Shipbroking in London. About 140 ships, including some under construction, will be too big to fit through the new canal, Roach said.

Benitez said the idea for an additional set of locks emerged as a way to attract increasing shipments of iron ore and coal from Brazil and Colombia and oil from Venezuela to the canal. Officials have blueprints of the land where contractors would build the locks, Benitez said.

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