With Panama expansion near complete, global impact is still debated

on July 23, 2015

westcoastportThe Panama Canal expansion project now has a completion date of April 2016. The project has been delayed by at least 1.5 years due to cost overruns and labor disputes.   The expansion project will cost nearly 5.3 billion dollars and double the existing capacity by widening and deepening existing canals and also trenching a third canal.

Currently ships going through the Canal are limited to 965 ft long x 106 ft wide and can carry a load of 5000 shipping containers.   With the new expansion ships can be much larger (1400 ft x 180 ft) and can carry a load of over 14000 containers.

According to the Panama Canal website the project is 91 % complete with many of the legs competed for testing.   There has been a lot of debate among economists about the impact of the expansion project.   Some believe that it will cause a major transformation of global shipping. Others are hesitant to go that far because global shipping is extremely complex and dynamic.   It will be difficult to predict what the reactions will be to mitigate potential lose or exploit gains.   So the best one can do today is speculating about the potential winners and losers:

Potential Winners

Port Construction: The Panama Canal project was budgeted at around 5.3 Billion dollars.   With the anticipation of much larger ships traveling to and from the US, many ports are undergoing major revamps to accommodate the bigger ships. According to an article in USA Today there is at least 46 billion dollars worth of renovation being done to US ports. Specifically:

  • Port of New York and New Jersey
  • Port of Miami
  • Port of Mobile Alabama
  • Port of Long Beach
  • Port of Seattle/Tacoma

Many of the projects are well underway or complete. The East Coast and South ports are due to be renovated in time for the Panama expansion completion. The west coast ports are due for completion in 3-4 years. This is not really speculation as the money has already been allocated to these projects.

East Coast: A study by C.H. Robinson Worldwide Inc has estimated the East coast could siphon off as much as 10% of the port traffic from the West Coast.   Some of the ports in the south east and south have much lower labor rates and may be more attractive places to port, but New York/New Jersey are access points to the Erie canal and ultimately the great lakes.

Ohio/Pennsylvania: The Panama Canal expansion should result in more traffic through the Erie Canal which in turn connects to Lake Erie and Lake Huron and bring more trade to Ohio and Pennsylvania.

Midwest: The expanded Panama Canal will give Midwest farmers and other businesses another viable (and less expensive) avenue to Asia. The Mississippi river literally touches 30 US states and is a convenient method to transport. Many Midwestern companies, who are anxious to avoid the congestion, hassle and cost of the west ports will be able to ship product via the Mississippi to a number of southern ports that can then ship on the much larger ships to Asia.

Midwestern and Eastern Transportation: It is not only the east coast ports that will benefit from more traffic, but trucking and railroads that move material to and from the east coast will see a pickup in business.

Panama: in 2012 Panama reported revenue of 2.6 Billion Dollars from canal operations: Source The expansion project should double that number.

Potential Losers

West Coast: Some say the West Coast ports could lose 10% of the traffic.   Many merchants and shippers are still stinging from the labor slow down in the winter of 2015.   The west coast has a history of labor problems and many may feel that avoiding the west coast is a safer longer term shipping option.

Continental shippers: One rule of thumb for shipping is to transport by water as far as possible as it is far cheaper than breaking product down to do inter-continent shipments by truck, rail or plane. The Panama Canal expansion allows shipments to stay in water longer and potentially reduce business for over land transport.

The Suez Canal: The Suez Canal is currently the best option for Asia to ship economically to Europe as it is logistically close and can accommodate the larger ships. However the Suez Canal is largely unsecured and routes on the way to the canal are subject to pirate attacks.   Panama will give Asia a much safer option.

What’s beyond 2016? There will likely be more canal rebuilding activity once this project is complete.   A China businessman is investigating a 50 billion canal project going through Nicaragua.   The Panama authority will be doing feasibility studies on adding yet a 4th channel through Panama system.   International shipping has been steadily increasing over the last 2 decades and many believe that this trend will continue.