JULY 2016 – THE CONDITIONS FOR SUCCESS OF THE NEW PANAMA CANAL

Introduction

On June 26, the Government of Panama announced, with great fanfare, the completion of the expansion of the Panama canal. It was a historic event for this small Central America country. The crowd was awaiting the traverse of the first container ship, a Cosco ship from Asia, measuring 300 meters long, 48.25 metres wide and capable of carrying 9 500 containers (TEUS): two times the maximum capacity of the old locks.

62 international delegations were invited to listen to the speech by President Juan Carlos Varela Rodríguez. The event reflected the project: the Panama canal plays a strategic role in international maritime transport. For the population of Panama, expectations are high, since this project will hopefully revive the country’s economy and restore the market share lost over time to the Suez canal.

Although the promotional campaign of the Panamanian Government is fully justified, studies on the impact of the project leave many elements imprecise and uncertain. The complexity of the world situation and the state of international trade which has evolved in recent years may explain it.

According to research conducted jointly by The Boston Consulting Group and C.H. Robinson, as much as 10 percent of container traffic between East Asia and the U.S. could shift from West Coast ports to East Coast ports by the year 2020. Other research also suggests that the expansion of the canal will impact the trade of bulk, especially between Asia and America.

However, several market conditions are necessary for the achievement of these forecasts. The following text presents an analysis of these conditions.

The role of Panama

A strategic location

The Panama canal plays a strategic and undeniable role in global transportation. It significantly reduces the distance required for the transport of goods. Transportation costs are substantially reduced, as are the price of delivered goods. Ships do not need to circumvent the southern tip at Cape Horn and the South America passage to go from the East or West coasts of America. For example, a ship travelling from New York to San Francisco via the Panama canal travels 9 500 km, less than half of the 22 500 km necessary for a trip through Cape Horn.
On average, in 2015, 38 ships crossed the Panama canal every day, that is to say 14 000 per year. It represents roughly a little more than 4% of the global world traffic. It is estimated that about a third of the traffic between Asia and the Pacific transits it.

The Project

Its construction will have lasted almost 5 years, mobilized 30,000 workers and cost more than 5.2 billion $US. The new Panama canal offers now a doubled capacity, or 600 million tons annually (PCUMS) compared to 280 million tons.

The infrastructure now has a new channel parallel to the two already in place prior to construction. This will serve a larger number of vessels and thus reduce congestion to the entry of the channel. Secondly, the enlargement of the existing lanes and their dredging can receive larger ships. For example, before the expansion, the capacity limit was 5,000 containers (TEUS) while it is now 13,000 EPV. The channel also allows an increased carrying capacity of bulk.

The conditions for success

1. first condition: a favourable evolution of the market

To justify enlargement of the canal, world demand for maritime transport must be sustained. It has, until now, been fueled by the growth of developing countries. But it will not necessarly continue.
In this regard, the graph that follows, prepared by the OECD, illustrates the expected convergence of growth rates between developed and developing economies, from which is derived the shipping trend.

gross domestic product projection

The growth of developing economies has been historically greater than that of the global economy. It tends to converge towards those of developed countries. One can also note that the rate of growth of the world economy will decrease and, consequently, demand for transport. This could have an effect on transport and port infrastructure usage.

The shipping industry is currently in a situation of oversupply. Ship owners are still expecting returns on hundred of million dollars invested in the construction of huge ships. Their financial situation limits the flexibility the Panama Canal authority to increase their fees. An excessive increase in pricing could jeopardize any efforts to stimulate demand.

Finally, the new Panama Canal is limited in its accommodation of larger ships. More 13 000 TEUS capacity ships cannot cross the new channel. The largest newly constructed ships now offer a capacity of 20,000 TEUs.

2-Second condition: a balance of the market to the benefit of Panama shares

The second condition relates to a new balance between market shares. The expansion of the canal will effectively redefine the market share between the different route options. However, this new equilibrium should be at Panama’s advantage.

This adjustment is a dynamic process which depends on the reaction of the competition to preserve its market share. Among these reactions could be price wars, discounts and other benefits to clients, as well as significant investments in new capacity of infrastructure.

The analysis of options route is as follow.

Analysis of the competition

The Suez canal

The Suez canal is Panama’s direct competitor. For the past three years, Panama has lost between 10% to 15 % of its profit to the Suez canal.

The Egyptian Government has already reacted to the proposed expansion by reducing fees of certain routes, notably that of Asia to coast of United States.

The Suez canal is competitive because it can serve bigger ships, which allows ships owners to use less vessels in service and obtain savings. These savings, as well as reducing the time of congestion at the Panama, compensate for the additional costs related to the distance to reach the America via the Suez canal.

For their part, proponents of the new Panama canal rely on the fact that the new infrastructure will allow a decrease in 5 sea days to browse a route between Asia and America. It remains to be seen what the balance of the new market share will be.

The Nicaragua canal project

The Nicaragua canal project is another potentially competing project to that of Panama. The cost of this project is estimated at more than 50 billion $US. Its length of 280 kilometers would be more than three times that of the Panama canal. It has been approved by the Nicaragua Government but has been contested by the population. Several experts have serious doubts on its profitability as well as on its eventual realization. Its promoter, the Chinese billionaire Wang Jing, lost 90% of his fortune on the stock market in the summer of 2015.

However, if the project has to be realised, either by the current sponsor or someone else, the competition between Panama and Nicaragua would make both infrastructures unviable from a commercial point of view.

Northwest passage

A seasonal sea route could emerge between Asia and the East coast of United States throughout the Canadian Arctic by 2030. This route, as shown in the table below, would be definitely shorter than those of Panama and Suez and would allow substantial savings. In addition, unlike the Panama canal, there is no limit to the size of ship. Thus larger vessels could sail freely.

Distance between the ports according to the
sea route

Route

London/Yokohama

New York City/Yokohama

Hamburg/Vancouver

Panama

23 300

18560

17310

Suez and Matacca

21200

25120

29880

Cape Horn

32289

31639

27200

Passage of
Northwest

15930

15220

14970

Source: Frédéric Lasserre, 2004, “melting of Arctic ice in the Northwest passage: what future for”
Canadian sovereignty?, policy options,
Nov. P.57

This project is serious and realistic but will not materialize for several years. Of all routes, it is the one that would provide the best opportunities for Canadian ports. It would be more competitive than Panama and Suez because it brings together in a single route the advantages of the latter two.

Competition from the rail routes

The cost of the unit volume of transport by train is generally higher than that of the maritime sector. However, the railway lines have become more competitive compared to maritime transport. The rail sector has gained significant productivity and has become highly competitive in terms of costs and time for the delivery of the goods. For example, with the stacked containers technology, about 40% fuel savings can be made. Land bridges are valid alternatives to shipping alternatives.

Also, transportation costs are not the only factor which determines the choice of a route. The rail allows the distribution of goods across a wide territory. Shippers may prefer a route with complementary transportation mode. Using port sites in combination with rail system, makes it more efficient to deliver merchandise to destination point.

Huge amounts of goods originating from Asia are landed at the ports of Los Angeles and Vancouver and are redirected by train to the respective markets. In fact, the competitiveness of the U.S. West coast ports depends much more on rail links than on distance between Asia and America.

Also, according to a study by the U.S. Government, non-American ports on the West Coast of America are cheaper, faster and more reliable than other American alternatives. The authors cite as an example Prince Rupert, which would be the first true intermodal port in North America. It is served by the Canadian National (CN) which can reach the markets of the American Midwest, the coast of the Gulf of Mexico as well as all Canadian regions.

Prince Rupert is designed for quick connections to CN’s network and is the shortest link between North America and the West coast of Asia. An expansion project is planned for a second terminal which could receive 5 million containers per year by 2020 (cf see article new World Maritime, PPPs to the rescue of the financing of port infrastructure). Prince Rupert is also a terminal for coal exports and grain.

The expansion of the canal of Panama should not have an impact on the traffic directed to the ports of Vancouver because of their ability to receive large vessels. Vancouver container traffic is expected to grow until it reaches seven million TEUs by 2020.

3. Third condition: a favourable positioning to the evolution of trade

Globalization allows exchanges of trade throughout the world. In this regard, there are more transportation alternatives. For example, the Suez canal has become a competitor to Panama due to the economic development of Asia.

In addition to globalization, mapping of trade has significantly evolved. The biggest users of the canal of Panama are not the same today as those fifty years ago at the beginning of the 20th century. Routes are not the same either. For the canal expansion project to be profitable in the long term, the evolution of world trade has to be in favor of Panama.

According to the OECD, in the long term, developing economies will grow 1.5 times faster than developed economies. In 2050, the North Pacific will become the busiest region of the globe for the transport of goods. There will be a significant growth in the Indian Ocean, as well in the corridors of the Mediterranean and Caspian Seas. The OECD indicates that improvements at the current capabilities should be sufficient to meet the increase in demand for traffic until 2030. According to projections made by modelling, only the region of South Asia would be in need of a capacity increase beyond this period.

However, trade between the United States and Asia will intensified, due to Asian industrialization and an increase of its purchasing power. Exports of Asian countries could increase from 17% to 28% in 2030, while there would be a weakening of 28% to 20% for the euro area.

The table below indicates the structure of trade according to different routes using the Panama canal. One can see the dominance of trade between Asia and the United States with regard to the tonnage transported via the Panama canal.

Origin and destination of the movements of
goods across the Panama canal – from the Pacific to the Atlantic,
million tonnes, (2015)

Origin

Destination

Side
East of the United States

Europe

Side
East of South America

Side
Central America

Side
the Canada East

Total
including other

Asia

26.3

146

2.3

2.97

42

34.9

Side
Western South America

15.1

8.3

2.2

649

752

28.0

Side
West Central America

3.8

1.3

1.2

1.0

404

9.0

Side
West of the Canada

50

3.9

47

29

6.2

Side
West of the United States

1.1

2.2

37

13

29

4.6

Total
including other

47.7

16.3

6.7

5.3

1.9

91.9

Source: Panama canal authority, https://www.pancanal.com/eng/op/transit-stats/index.html

 Origin and destination of the movements of
goods across the Panama canal – from the Atlantic to the Pacific,
million tonnes, (2015)

Origin

Destination

Asia

Side
West of South America

Side
Western Central America

Side
West of the United States

Side
West of the Canada

Total
including other

Side
East of the United States

55.2

21.2

9.4

62

19

94.8

Europe

30

5.2

1.6

4.7

32

12.8

Side
East of South America

1.2

5.7

2.0

89

32

10.7

India
West

1.5

2.3

1.6

87

029

7.0

Is
of the Canada

97

32

097

53

 

1.97

Africa

007

19

13

7

7

1.95

Total
including other

59.9

35.5

15.3

8.4

1.5

137.4

Source: Panama canal authority, https://www.pancanal.com/eng/op/transit-stats/index.html

In 2015, Asia exported 26.3 million tons of merchandise to East coast of the United States, using the Panama canal (of a total of 34.8 million or 38 per cent). At the opposite, goods shipped from the East coast of United States to Asia amounted for 55.2 million tons out of a total of 95 million tons.

With regard to goods transported to the East of the Canada from Asia, they are marginal, or 422,000 tons compared to a total of 35 million tons, or barely 1.2 per cent.

Proximity effect

One will also note the proximity effect. In fact, a large proportion of the goods coming from Asia are transported to ports in the vicinity such as the Gulf of the Mexico, American East cost and the Caribbean area.

The movement of larger vessels through the Panama canal could bring greater market concentration, that is to say, usage of fewer but bigger ports, as well as the development of transshipment ports in the Caribbean. The larger ships require more space, more specialized equipment and more skilled workforce. For that reason, all port authorities are not necessarily willing to receive such vessels. This limits the choice of possible destinations for the users of the canal.

The Caribbean is indeed at the crossroads of the routes North-South, between the two States, and East-West, between America and Asia, on the one hand, and between America and Europe, on the other hand. In contrast, it is estimated that the expansion of the canal of Panama will have very little impact on the activities of the ports of the Great Lakes and the St. Lawrence. The nature of the products transported in and out the Great Lakes, as energy, grain and iron, make it sure the impact would be minor.

regions-panama

The map above shows the regions that will be most affected by the widening of the Panama canal. The orange and blue zone areas could benefit directly and indirectly imports from Asia. But, the regions of the white area indicate that there might be an advantage to export of certain products, such as agricultural products and energy from port sites of the golf of Mexico.

1 comment on JULY 2016 – THE CONDITIONS FOR SUCCESS OF THE NEW PANAMA CANAL

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