Over the last century, the dramatic increase in global trade has transformed the world into a thriving, bustling marketplace. With rapidly soaring demand throughout the world, trade routes have become busier and the strains on global logistics much greater. When the Panama Canal opened in 1914, it transformed the landscape for global shipping and allowed speedier access to destinations for traders. It has served the US particularly well, allowing far greater access to the East Coast than before, while transforming large parts of Central America too.
A sea route through this part of the world had been seen as an extremely attractive way of cutting the time it took to pass between the Pacific Coast and the Atlantic, but it wasn’t until the end of the 19th century that work properly began to cut through the region. France attempted to construct a sea-level canal, excavating huge amounts of land to make way, but ultimately abandoned the project. The US would go on to complete the project in 1913. In 2013, more than 12,000 ships carrying well over 200 million tonnes of cargo travelled through the canal.
Trade routes pass through the canal
The canal’s predicted annual revenue by 2025
The Panama Canal in 2013:
Ships passed through
Tonnes of cargo carried
Though it has operated effectively for over a century, the need for expansion has been apparent for a number of years. The existing two-lock canal has restricted the size and volume of ships that can pass through, ultimately hindering the flow of trade.
As globalisation has gathered pace over the last century and new markets have sprung up, the pressure being placed on international trade routes has intensified. While it once served the world to great effect, routes have emerged during the last few decades that have challenged the Panama Canal’s status as the primary passageway for the world’s cargo ships. Coupled with the increasing size of these ships, it became clear at the turn of the millennium that a massive expansion of the Panama Canal was necessary if it was to keep up with global demand.
By 2006, the issue of expansion had become top of the agenda for Panama’s leaders, with then-president Martín Torrijos saying: “Just like the petroleum that has not been extracted is worthless and that, in order to extract it, you have to invest in infrastructure, the canal requires to expand its capacity to absorb the growing demand of cargo and generate more wealth for Panamanians.”
A massive expansion scheme was therefore announced that year and work began in 2007. With costs initially estimated at around $5.25bn, it represented a huge investment into a transformative new infrastructure project that would double the capacity of the Panama Canal. The project would include the construction of two new locks either side of the canal, the excavation of new channels that access the locks, a widening and deepening of the existing channels, and a raising of the maximum operating level of the Gatun Lake.
The project has proven popular with a number of international investors, with the Panama Canal Authority (ACP) securing loans from the likes of the Inter-American Development Bank, the Japan Bank for International Cooperation, the European Investment Bank, and the International Finance Corporation.
Originally intended for completion in the latter half of last year, the project has been beset by delays and cost overruns. In 2012, it was announced the project would be delayed by six months to early 2015, but that projection has since been shifted to some time at the beginning of next year.
The costs of the project have also been huge, with the initial estimated price being $5.25bn for the design, construction, testing, environmental mitigation, and other potential unforeseen costs. However, much of this money is going towards building the two new lock complexes, with each costing around $1bn. While these costs seem high for a developing nation, it is thought that the canal’s annual revenues could reach more than $6.2bn by 2025. However, these figures have been contested by a number of prominent Panamanians concerned about the impact on the rest of the economy.
Other opponents of the expansion have cited the impact on the environment that such a massive engineering project will have. While the ACP has claimed the environment – including forests, national parks, archaeological sites and local agriculture – will not be permanently damaged, campaigners worry it will irreparably harm the landscape. Others have claimed the quality of water in the region will be seriously worsened, with fears water supply may also be affected.
Impact on global trade
Such an expansion of a key trading route will inevitably have a big impact on global trade. A report published in October by Scotiabank said: “The expansion will have positive effects in many countries, but the primary beneficiary will likely be the United States. China, Chile, Colombia, Mexico and Ecuador also stand to gain as transport economics for oil, coal, copper and LNG improve, while Brazil and Argentina are unlikely to see any material benefits during the first years of operation. Improved shipping infrastructure will better lubricate international commerce and allow for a realignment of trade flows — what that looks like exactly, however, has yet to be determined.”
For US ports, in particular, such an influx of new trade routes and larger ships will mean a need to improve port infrastructure. At the same time, some industries that previously shipped to certain ports might change their routes. A study published last year by the Pacific Maritime Association, the shipping industry body that serves the West Coast ports of the US, suggested a considerable amount of work was needed if ports were going to harness the benefits of the newly expanded Panama Canal: “The impact of canal widening can best be understood in terms of risk versus uncertainty. The risk concerns balance sheet investments that will affect volumes and shipping rates (except for certain commodities such as fast fashion and electronics). Containerisation has by and large produced a steady decline in shipping rates for more than two decades. These major new investments may well continue the logic of rate decline. The uncertainty lies in the timing and economic geography of ‘winners’ who serve the Midwest market battleground. West Coast ports will need to respond with aggressive and innovative measures to avoid losing significant market share once the widened canal is fully operational.”
The report added certain industries may well shift to other ports, but those that need to access the market quickly will likely remain: “Ocean carriers will trade off lower prices for increased revenues on all-water routes for those products where speed is secondary (e.g. household goods, appliances and furniture), but ‘fast fashion retailers’ will remain in the domain of [West Coast ports] as speed to market is still key.”
The report concludes: “Uncertainty, as many economists recognise, is thus a reason for action, not inaction, and for thinking through in advance the impact of plausible alternative futures on current practices.”
While global trade in general will greatly benefit from the expansion, there are also specific industries that will get a boost from the scheme. One is the energy market, with the US shale gas industry one of the main beneficiaries. Scotiabank suggests the US liquefied natural gas (LNG) industry that has emerged in recent years could get a significant boost from the increased capacity of the canal: “While more than 100 countries export or import merchandise through the canal, just 10 — the United States, China, Chile, Japan, Colombia, South Korea, Peru, Mexico, Ecuador and Panama — account for more than 75 percent of canal traffic by weight, and just the first three account for over 50 percent.
“It is likely that utilisation of the expanded canal will increase proportionally to current usage and more so for countries that export or import the commodities that will be the biggest beneficiaries of the expansion. The most obvious example of this is the large volume of US LNG export capacity that is expected to come on stream in the next few years and the Asian countries that will be the likely importers of that gas.”
Energy providers tend to require increasingly large ships to transport their oil or gas efficiently, and this has meant they have been unable to pass through the existing Panama Canal. “The canal has a relatively limited impact on the global energy system at present as its pre-expansion constraints limit traffic to only smaller classes of crude tankers and virtually none of the existing LNG tanker fleet”, Scotiabank said. “The expansion will open the canal up to a far larger swath of the global energy trade: over 80 percent of the current LNG fleet will be able to pass through the expanded canal and the maximum crude tanker capacity will increase by upwards of 25 percent, with larger tankers able to transit the canal through the use of the trans-canal pipeline (although doing so increases per-barrel costs). Increasing allowable tanker sizes decreases the unit transport cost, making seaborne transit more competitive with existing pipelines, especially for natural gas.
“The expansion will further bolster the ongoing energy revolution in the US. For oil, increased tanker capacity will allow for better economies of scale, facilitating improved logistics for US crude oil (if Washington drops its crude export ban) and refined petroleum exports, which have doubled over the past few years. For natural gas, the current LNG export capacity in the region stands at roughly 2.6 billion cubic feet per day, but that is expected to increase almost eight-fold by 2019 as the US completes its liquefaction facilities and rationalises its regulatory frameworks.”
This will in turn impact on the economic performance of North American economies, says Scotiabank: “Even if the lion’s share of the region’s natural gas does not end up in Asia, linking the Atlantic and Pacific basins, and easing access to Asian markets (where LNG is considerably more expensive) will allow exporters to demand a higher price in other markets, shrinking the wide disparities in global landed LNG prices. Higher prices will incentivise further North American natural gas development, which will have positive knock-on effects for Canadian, US and Mexican GDP growth and trade balances.”
Alongside the obvious benefits to global trade, local Panamanians are also likely to see an influx of money and jobs from the scheme. According to the ACP, as many as 40,000 jobs will have been created during the construction of the new locks and surrounding infrastructure, while further jobs will come once it is completed. The scheme has attracted a number of international partners to operate there, including Hong Kong’s Hutchison Whampoa, and international infrastructure and logistics engineering firm CH2M HILL. Selected as the programme manager of the scheme, CH2M HILL has helped with the excavation of an access channel to the new locks on the Pacific side of the canal, as well as the widening of existing channels and elevation of the Gatun Lake.
Writing for Port Technology International, a leading industry journal for the shipping industry, the Panama Canal Authority’s Marianela Dengo explained how important the scheme will be for both Panama and global trade: “The Republic of Panama is rapidly positioning itself as the transportation and logistics hub of the Americas. The country, located at the narrowest point of the Americas, provides unparalleled connectivity to world markets. The Panama Canal connects 144 routes and the country’s modern port system.
With terminals operated by SSA Marine, Hutchison Whampoa, Evergreen and PSA, it ranks among the most productive port systems in the Americas, handling 6.5 million TEU (twenty-foot equivalent unit) in 2011 and with projections for 8.4 million TEU by 2015.
“Only 80km separate the Atlantic and Pacific oceans in Panama, and connectivity is available by water, land and air. Panama’s dollarised economy, the Colón Free Zone, its strong banking system, the availability of warehousing space and third-party logistics, and the special tax and migratory incentives available to multinational companies doing business abroad, all compose a cluster of value-added activities that are making of Panama the best place to consolidate cargo in the Americas.”
Despite the problems the scheme has faced, the Panama Canal expansion project is undoubtedly one that will transform global trade and lead to quicker and easier access for a number of industries. Whether ports around the world are ready to benefit from this is unclear. It will undoubtedly mean an increase in the number of large ships sailing the seas, and many countries will need to ensure their ports and transport infrastructures are modernised to keep up with this grand new route.