Bigger Panama Canal Will Broaden Trade

Aerial overview of the new locks (courtesy of Canal de Panamá)

Having altered shipping routes by clearing a waterway through 50 miles of jungle, the Panama Canal is two years away from doing it again.

The outlines of a wider, deeper shipping lane can be seen running parallel to the canal’s original locks, which allow boats to crisscross the Pacific and Atlantic oceans.

For now, the site is a hole in the ground, dominated by backhoes and dump trucks shuttling out debris. But, once completed, the $5.25 billion expansion project is expected to bolster trade by allowing more than twice as much cargo to fit on ships the size of the Empire State Building.

The expansion also will accommodate larger vessels to transport commodities such as liquefied natural gas, coal and copper, opening new export routes as the costs for shipping drop.

Major cities up and down the U.S. coast, the largest customers for the canal, have been scrambling to prepare their ports for larger ships. So have countries throughout Central and South America, as well as the Caribbean.

With all eyes on Panama, Canal Authority CEO Albert Aleman spends much of his time traveling to events to detail the progress. In Washington, speaking at an Organization of American States meeting this March, Aleman said most of the dredging to deepen the canal is finished. After a nine-month delay caused by poor-quality concrete, workers have begun to pour the foundations for a third set of locks, the most challenging and costliest part of the expansion.

Work on the new locks, in constant progress (courtesy of Canal de Panamá)

Aleman remained confident that the project will be completed on time, and the only question seemed to be which giant ship is chosen as first to steam through on the centennial anniversary of the canal’s opening.

“We don’t know yet,” Aleman told delegates from 34 countries. “But we want it to be historic.”

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Robert McMillan, a former chairman of the Panama Canal Commission, said it’s inevitable for such an ambitious undertaking to face potential delays. Engineers working on the canal in the 1900s thought they could just dig a waterway straight through Panama, only to find out they would need to add a series of locks to offset the different levels between the Pacific and Atlantic oceans.

“Anything of this magnitude has bumps in the road,” McMillan said. Still, he thinks the Panama Canal will meet its 2014 target – or, at least, “shortly after.”

Much is riding on Panama to complete the expansion work quickly. Panamanian Finance Minister Frank De Lima has proposed that earnings from an expanded Panama Canal be set aside in a special fund, which the government could then tap to revive the economy during a slowdown.

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“The canal is on target to be completed in 2014 – and, more importantly, under budget,” De Lima said on a conference call with reporters in March.

Others might not be as lucky. A bigger Panama Canal should slash transportation costs to carry Asian goods directly to the southern and eastern U.S. states, raising alarms along the West Coast. China is the canal’s second-biggest customer, followed by Chile.

With the expansion, as much as 25 percent of shipping traffic could be diverted from Los Angeles and Long Beach, California, currently the busiest ports in the United States, once larger boats can go straight to New York and Miami, according to a report by Fitch Ratings.

The rerouting has to do with the higher costs of unloading cargo onto trucks and trains to journey across the United States. Cargo ships can carry a maximum of 5,000 20-foot boxes through the Panama Canal now, but the expansion will allow vessels to haul up to 12,600 boxes of freight. Shipping companies would then save up to a third from using an all-water route, according to Panama Canal Authority estimates.

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The potential for traffic has caused Eastern and Gulf Coast ports to unleash their own expansion projects, from dredging harbors and plans in New York to raise a bridge that is too low for bigger cargo ships. West Coast ports also are expanding to compete. All told, the 13 busiest U.S. ports are spending $8.6 billion over the next few years to deepen their waters and add new storage space, a report by Jones Lang LaSalle found.

Several of those ports are in danger of falling behind, though they can make up for the loss by relying on increased traffic from smaller boats, said Aaron Ellis, a spokesman for the American Association of Port Authorities.

“Not all ports need to be able to handle these ultra-large ships, since some specialize in handling specific types of cargo that don’t typically travel in such large ships,” Ellis said.

The Bahamas, Jamaica and even Panama are deepening ports to attract big container lines, with a plan to shuttle goods on smaller boats to overcome cramped U.S. waterways.

Although the Canal Authority has won widespread praise for the expansion – including nearly 80 percent of Panamanians who voted for it in a 2006 referendum – the choice of companies to build the new locks stoked rare controversy.

Panamanian Vice President Juan Carlos Varela called the $3.1 billion contract a “disaster” after a group led by Spain’s Sacyr Villahermosa bid almost $1 billion lower than Bechtel to construct the locks. A confidential U.S. diplomatic cable, released by the anti-secrecy group WikiLeaks last year, said Varela expressed concerns about Sacyr completing the work because the company is in “deep financial trouble”.

In January, striking workers paralyzed construction of the locks for almost a week, demanding higher pay.

Although the Panama Canal Authority received $2.3 billion in loans to expand, shipping companies could balk at higher fees needed to pay for the work and avoid the wider, deeper waterway after 2014.

The canal currently charges tolls based on shipping volume, which includes the amount of cargo and the ship’s size. Ships that require less help from so-called mules that pull them through the locks are charged less.

Faced with struggling world economy, the Canal Authority delayed raising shipping tolls in 2010. It has since upped the fees and has vowed to increase them further to help pay for the expansion.

Big ships might have little room to complain, however, as the only option is to sail around the tip of South America, resulting in longer trips and typically higher costs.

McMillan praises the Panama Canal as expertly run and says that will continue once its next administrator, Jorge Luis Quijano, takes over for Aleman in September. Quijano is an engineer who has been in charge of the expansion project since the beginning. Neither the United States nor “anyone else” could probably do a better job at managing the project than Panama, McMillan said.