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Sunday, June 16 2019 @ 10:31 AM UTC

Panama Canal: Overdue Expansion

Canal Expansion Shipping lines and several U.S. ports support plans to widen the strategic Panama Canal. Some say it may even be overdue thanks to the heavy increase in China-U.S. cargo traffic. Perhaps fitting, the Panama Canal may celebrate its 100th anniversary with a new look. If all goes according to plans, the 50-mile waterway will undergo a $5.2 billion construction that will add a new set of locks by 2014, 100 years after the canal opened up for traffic. Also fitting, some may argue, is that the new plans have been spearheaded by Panamanian president Martin Torrijos, whose father, Omar Torrijos, gained worldwide fame for negotiating the 1977 treaty that led the United States to hand over control of the canal in 1999. "We support an extension of the Panama Canal as it would mean a positive development for world trade," says Frederik Berling, a spokesman for Denmark-based AP Moller-Maersk Group, the world's top shipping firm and port operator and the largest user of the canal. Richard Wainio, a former top executive of the Panama Canal and current director of the Port of Tampa, agrees. "They need additional capacity," he says. "The present canal is approaching its limits in terms of what it can handle. The Asian-U.S. trade, especially driven by China, has grown much more rapidly and robustely than anyone anticipated." As planning director of the Panama Canal Commission, the U.S. agency that ran the canal from its inauguration in 1914 until it was handed over to the Panamanian government in 1999, Wainio was involved in the first serious plans to widen the waterway.

CHINA TRADE PRESSURE

Although some 14,000 ships transit the canal each year, the strong increase in U.S. trade with China has led to an increase in delays of ships waiting to pass the waterway, which links the Pacific and Atlantic oceans. The United States and China are the two top users of the canal. The pressure on the Panamanian waterway follows delays on the U.S. west coast. "Following congestion on the US West Coast towards the end of 2004, the pressure has been on carriers to launch additional services via the Panama Canal," Taiwan-based shipping line Evergreen Marine Corporation said in a statement in February, announcing a new service linking China with the southern states of the United States via the Panama Canal. "We believe that the West Coast may again suffer congestion in 2006 and so... we are taking action now," Evergreen president Arnold Wang said in the statement.

And Israel-based Zim, another major shipping line, announced last month plans to offer a new weekly service from Shanghai to the Port of Tampa via the Panama Canal and various other stopovers.

"Without expansion, the Panama Canal will decline in relative importance for the US East Coast market," says Berling. "This is because larger ships can be deployed via the Suez Canal and serve that market from the ever-growing Hong Kong/South China region with comparable transit times."

Increasingly, shipping lines have boosted the number of vessels that are too large to pass the Panama Canal, so called post-Panamax ships. "The container vessel order books comprise mostly larger ships, which will not be able to transit the Panama Canal at its current size," Berling says.

Although the first post-Panamex ships were built as far back as 1988, the increase in such vessels is larger than most people expected a few years ago, Wainio says.

LATIN COMPETITION

The canal has also been facing threats of competing projects in Mexico and Central America aimed at facilitating cargo from the Pacific to the Atlantic coasts.

"The old stories that no water or land bridge will ever be built to compete with the Panama Canal are children’s stories for those that do not observe the reality of today’s world," local shipping paper The Bulletin Panama said in an editorial last week, pointing to potential Latin American rivals. "Time has run out and if we do not proceed rapidly, the Panama Canal will only be useful for sporting events in enormous pools to entertain the Panamanians."

Although the U.S. ports on the West Coast may appear to be the losers and the East Coast ports the winners of a Panama Canal expansion, the pie is big enough for everyone, Wainio says. "Los Angeles, Long Beach and Tacoma won't see their business go down, but Panama will capture a larger share of a pie that is growing significantly," he says.

After the new canal is ready, ports like Miami and New York will likely have to make some changes as well to be able to handle the new supertankers going through Panama, Wainio predicts. "Obviously it will be key for East Coast ports that want to be dominant," he says. "They need to deepen channels and enhance to accomodate these larger vessels. Most of the East Cost ports are a long way from handling these big ships."

REFERENDUM

The final plan is subject to a referendum, which will likely be held later this year. So far, polls show that about 55 percent of Panamanians favor expansion, 19 percent oppose it and the rest are undecided, according to the Associated Press.

"We expect the noise level from those opposing the canal expansion to increase in the coming months, but we see very little risk that the referendum will not be approved by the population later this year," U.S. investment bank Bear Sterns said on Friday.

Among the opponents are Fernando Manfredo, a widely-respected former administrator of the canal. He favors building a megaport that would enable post-Panamex ships to offload cargo to smaller ships that could transit the canal. The price difference is substantial, costing only around $600 million.

The cost of the canal expansion has been a major hurdle for many years. Some original plans estimated the cost could run as high as $10 billion. The old plans called for building additional dams and reservoirs and relocating people living in the affected areas. That can be avoided by building water-saving basins alongside the new locks, which will reuse 60 percent of the water in each transit.

"The big questionmark is finance," says Wainio. "The new design, which does not require additional reservoire capability ... has reduced the cost considerably."

The new plans call for the construction of two lock facilities (one on the Atlantic side and another on the Pacific side), the excavation of new access channels to the new locks, the widening and deepening of existing navigational channels and the elevation of Gatun Lake’s maximum operating level.

The ACP itself emphasizes that the new cost estimates have been reached after careful and detailed analysis. "The construction cost for the third set of locks has been estimated through the most rigorous analysis methods with participation of renowned international specialists," the ACP says in the canal expansion proposal. "ACP personnel developed the cost estimation and schedule, under the guidance of consultants from Parson Brinkerhoff International, specialist in cost estimations, as well as construction experts from Montgomery Watson Harza and Clair Murdock Consultants."

The results were then reviewed by a special technical committee which included experts from Arizona State University, the University of California and the University of Colorado, according to the ACP.

TOLL INCREASE

The actual cost will not be paid by Panamanian taxpayers. More than half - $2.9 billion - will come from a gradual increase in tolls, while the remaining $2.3 billion will come from what the ACP calls "temporary" external financing.

"Tolls will be set at the appropriate levels in a manner that will double them within the 20 years considered in the proposal," the ACP says. "In this way, the competitiveness of the Panama maritime route will be maintained at all times, the profitability achieved will be consistent with the amount invested, the loans required for financing the construction peaks will be paid rapidly and both the benefits to Panama and payments to the Treasury will be sustainably increased."

The external financing will be needed to cover construction planned for the 2009-11 period. Economy Minister Ricaurte Vasquez has said that the financing will be undertaken by the ACP and therefore it will not affect the debt capacity of the government.

"We think that this will depend on how well the government’s finances come into line in the next few years (on this, we are relatively optimistic.)," Bear Stearns says.

The canal recently raised the rates on tug and linehandling services by 7 and 4 percent, respectively. The increase, implemented on April 1, is due to higher fuel prices, the ACP announced.

The ACP has to make sure that future rates are in line with the marketplace to avoid deterring traffic, experts warn. "As tolls rise significantly, alternate shipping routes become more appealing," US-based consultancy Global Insight said in a report on the Panama Canal last year. "Railroads and even extended ocean waterways will become viable alternatives."

EFFICIENT MANAGEMENT

Despite some initial concern among shippers, the ACP has managed to maintain and even improve operations of the canal after assuming control in 1999. Under ACP management, there has been a significant reduction in the time it takes to transit the Canal, an increase in tonnage transiting the waterway and a spike in transits of Panamax-size vessels, the ACP says. Net income for the fiscal year 2005 (ending September 20, 2005) reached $483.9 million, an increase of 27.2 percent from the previous fiscal year.

In March, the canal set two new records. On March 12, the canal set a new record in the transit of “super” vessels (defined as ships with 91 feet or more in beam). That day, 27 such ships passed the canal, beating the previous record from May 2005. The typical average is 19. And on March 13, a record 1,070,023 PC/UMS tons transited the waterway, breaking the previous record from 2004. (PC/UMS is the abbreviation for Panama Canal Universal Measurement System).

The canal expansion will take place in different stages. Dry excavation and dredging works will start in 2007 and last seven to eight years. Building the actual locks will start in 2008 and last five to six years. In 2011, the Gatun Lake’s maximum operational level will begin to be raised - a process that requires adjusting both the existing locks as well as Canal facilities located on Gatun Lake’s banks and likely will take four years, the ACP predicts. If all goes well, the new canal will be ready by 2014 or 2015.

"I think a lot people would feel better if they got online several years before then," says Wainio.


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