Since 1914 the Panama Canal has been a key conduit for international trade. Connecting 144 routes and reaching 1700 ports in 160 countries, the man-made waterway has positioned the country as a transportation and logistics hub in the Americas.
In 2014 the canal marked its 100th anniversary since completion, and the 15th since Panama assumed control of the waterway. As its eight-year expansion programme reaches its final stages, the canal is now approaching another milestone. The expansion will double the waterway’s capacity and boost its competitiveness, while developments in the international commodity trade will ensure Panama’s economy is in a prime position to benefit from the increased connectivity. Ultimately, the expansion should enable the country to continue its influence on international maritime trade patterns for another century.
Though construction of the canal was begun in 1881 by France, it was the US which, having acquired the rights to construct and operate the canal in 1904, led it to completion.
The canal was officially inaugurated in 1914 and remained under US control for most of the 20th century, despite calls for its nationalisation. Mounting pressure on the US to relinquish control of the canal led to the signing of the Torrijos-Carter treaties in 1977, which abrogated the Hay-Banau-Varilla Treaty of 1903 that had given control to the US. The treaties established the timeframe for the nationalisation of the canal in 1999, and its operation thereafter based on the principle of neutrality. Control was officially handed over to the Panama Canal Authority (Autoridad del Canal de Panamá, ACP) – the autonomous government agency that remains in charge of its administration and operation – on December 31, 1999.
That date also marks the beginning of the greatest period of economic growth Panama has seen. A pillar of the economy, the canal has contributed more than $9.6bn to the national treasury since Panama assumed control of the waterway. According to the ACP, the canal’s contributions to the national treasury have more than quintupled since 2000 – when it contributed $201m – surpassing $1bn in the 2014 fiscal year, up 5% from the previous year. Its contribution to GDP reached $2.7bn (6%) in the 2014 fiscal year. The canal is also a hub for Panama’s extensive services sector, which accounts for nearly 75% of Panama’s economic activity and exports. The canal’s direct and indirect contribution, including the maritime cluster, free trade zones, ports, transport and logistics activities, is estimated at 29% of GDP by the ACP. On an annual basis, the canal employs some 10,000 people, and more than 30,000 additional jobs have been created since the expansion began.
Initially used to pay down government debt, canal revenues have more recently been used to help fund national infrastructure projects. Public sector spending – including the $5.25bn expansion of the canal, which began in 2007 – fueled growth during the financial crisis, which Panama came out of relatively unscathed, with growth averaging 7.7% from 2009 to 2014. In 2012 the government established the Panama Savings Fund, a sovereign wealth fund which draws on all contributions from the ACP to the national treasury in excess of 3.5% of the nominal national GDP; essentially a national rainy day insurance fund.
Global Service Provider
While the 80 km-long canal has historically been an important player in international trade, providing significant distance savings to its users, the increase in trade between the US and China witnessed in the past decade has been key to elevating the canal’s importance.
The canal remains the most economically viable route for most east-west trade. The majority of cargo transiting it travels from the US to Asia or vice versa, in particular between the east coast of the US and China. According to the ACP, this route accounted for 35.8% of cargo passing through the canal in the 2014 fiscal year, or 116,797 Panama Canal Universal Measurement System (PC/UMS) tonnes – the tonnage measurement system for cargo vessels transiting the canal – of the total 325,882 PC/UMS tonnes for the year. US east coast-South America is the second-most important route, accounting for 10.3% – or 33,485 PC/UMS tonnes – that year. The routes Europe-west coast of South America and US east coast-west coast of Central America ranked third and fourth, with 23,252 and 17,670 PC/UMS tonnes, respectively.
According to the ACP, 2.3% of the global maritime trade volume transits through the Panama Canal. The waterway is an important path for commodities, particularly grains and chemicals. In 2013, 13.9% of world grain trade transited through the canal, as well as 6% of chemicals and 3.7% of containerised cargo.
Since opening in 1914, more than 1m vessels have transited the waterway, totalling over 9bn long tonnes. After a record 14,685 transits in 2011, the number of transits decreased by 1.3% in 2014 to 13,481, from 13,660 in 2013. However, toll revenues increased by 3.3% year-on-year (y-o-y) to $1.9bn, following recent toll increases. Total canal revenues, which include tolls and other maritime services, hit a record $2.65bn in fiscal year 2014, representing a y-o-y increase of 4.5%.
As for cargo, the canal recorded 325.8m PC/UMS tonnes in the 2014 fiscal year, an increase of 2% on the 320.6m PC/UMS tonnes in 2013 but lower than the record set in 2012 of 333.7m PC/UMS tonnes. The rise was driven primarily by the dry bulk segment, which grew by 20% y-o-y, reaching 112m long tonnes, with a total of 3339 transits. Toll revenues for the segment rose by 27%, due to record grain and salt movement. Grains, the main dry bulk commodity group, registered a record 47.7m long tonnes in fiscal year 2014, up 50% y-o-y, due primarily to increased movement of soybeans, sorghum and corn from the east coast of the US to China, Japan, and destinations on the west coast of Central and South America.
Container vessels, the main segment transiting the canal, did not perform so well. The segment registered 2891 transits and 110m PC/UMS tonnes in the 2014 fiscal year, representing a y-o-y fall of 6.8% and 5.6%, respectively. Tolls amounted to $911.4m, or 48% of overall canal revenues. Silvia de Marucci, executive manager of economic analysis and market research at the ACP, told OBG, “In recent years we have seen a reduction in container traffic, as the international fleet is increasingly relying on bigger container carriers which cannot transit through the old locks. Additionally, with economies of scale the time and fuel savings offered by the canal may not always make it competitive compared to alternative routes.”
In 2014, according to ACP estimates, 22.5% of the world’s container ships could not fit through the existing lanes, highlighting the importance of the expansion. Increased fog in the first quarter of 2014 also led to an increase in canal transit times to just over 12 hours, compared to 10.8 hours in 2013.
In the context of a progressively larger international fleet and a subsequent loss in competitiveness, the expansion of the canal was approved by national referendum in 2006 and began in September 2007. The main component of the scheme is the addition of two lock complexes on the Pacific and Atlantic terminals, creating a third lane of traffic that will allow the passage of longer and wider vessels, and double the canal’s annual capacity to 600m PC/UMS tonnes.
The new lane is an addition to the existing two sets of locks that make up the current two-lane system. The existing locks (305 metres long, 33.5 metres wide and 12.8 metres deep) serve Panamax vessels, with dimensions of 294.1 metres long, 32.3 metres wide and 12.04 metres deep, and carrying up to 5000 twenty-foot equivalent units (TEUs). The New Panamax locks will enable the transit of vessels up to 366 metres in length, 49 metres in width, and 15.24 metres of draft, and will have the capacity to handle full container vessels of up to 13,200 TEUs or up to 170,000 dead-weight tonnes (DWT), according to the ACP.
At $5.25bn, the canal expansion is the largest single investment in Panama’s history. Financing of $2.3bn was provided from a number of sources, including the Japan Bank for International Cooperation ($800m), the European Investment Bank ($500m), the Inter-American Development Bank ($400m), the International Finance Corporation ($300m) and the Andean Development Corporation ($300m). The project was awarded to Grupo Unidos por el Canal, a consortium made up of Sacyr Vallehermoso of Spain, Salini-Impregilo of Italy, Jan de Nul of Belgium and Constructora Urbana of Panama, in 2009, and completion was originally scheduled for 2014, in time for the canal’s 100th anniversary. However, the expansion has been hit by cost overruns, labour disputes and delays. Even so, the programme reached 90% completion at the end of June 2015, with the opening of the new lane scheduled for the first quarter of 2016 (see analysis).
The opening of the new lane will be accompanied by a change in canal tolls. The new toll structure was approved on April 14, 2015 by Panama’s Cabinet Council, after more than a year of informal consultations with industry stakeholders, an open call for comments and a public hearing. Rate adjustments, which apply to both the existing canal and the new lane, will go into effect on April 1, 2016 (see analysis). Tolls have increased 14 times in total, and six times during Panama’s 15-year administration, reflecting the more business-like approach to the canal’s administration adopted by the ACP, in contrast to the break-even approach of the US administration.
The expansion has triggered investments in a series of infrastructure projects, as the country strives to boost capacity in anticipation of increased traffic and cargo from the new lane. Panama Ports Company – which has operated the Port of Balboa (by the canal’s Pacific entrance) and the Port of Cristobal (on the Atlantic entrance) since 1997 – has invested $1bn to increase the combined annual capacity of both ports to 6.5m TEUs. Other large-scale projects under way include the Port of Corozal, Panama Colon Container Port (PCCP), Bahia de las Minas, Bahia Manzanillo, and a new Cruise Ship Terminal.
With a price tag of $650m, construction of the Port of Corozal was approved in early 2015 by the ACP’s board of directors. The 120-ha trans-shipment port is slated for Panama’s Corozal region, near the canal’s Pacific entrance, and will have an estimated annual capacity of 6m TEUs. On the Atlantic side, the $600m PCCP in Isla Margarita, spans 37 ha and will have an estimated capacity of 2m TEUs.
The expansion has had a similar effect internationally, driving investment across the Americas, particularly the US, as cities race to upgrade infrastructure in a bid to remain competitive. According to the American Association of Port Authorities, across the US public and private ports are investing more than $46bn in improvements through 2016.
The Port of New York and New Jersey is investing $6bn to deepen port channels to 50 feet, raise the Bayonne Bridge by 64 feet, modernise container terminals and install dock rails. The Port of Miami is spending $1bn on new cranes, rail service linking the port to mainland, and deepening the main harbour by 10 feet. The Port of Long Beach is also spending $4.5bn on a mega-terminal, a bridge connecting the port to mainland, road and rail improvements, while the Port of Seattle/Tacoma is upgrading its terminal and rebuilding its pier to the tune of $400m.
Colombia’s port of Cartagena is also investing $400m to double its capacity, while Mexico’s Caribbean Port of Manzanillo is undergoing a $250m renovation. In Limon, Costa Rica, $1.1bn is being spent to develop a terminal for post-Panamax ships – those so large that they will be unable to pass through the Panama Canal even after its expansion – with completion of the first phase set for 2016. Additional ports in Peru, Jamaica and Ecuador, among others, are undergoing expansion or renovations in preparation for the influx of New Panamax ships following the expansion.
For Panama, the expansion will be a game changer. “Once the new lane is operational and economies of scale are generated, we will be able to recover the competitiveness we had lost,” Marucci said. The expansion has the potential to open new market segments for the canal and increase revenues significantly. Most importantly, it will allow Panama to continue to compete successfully in the increasingly competitive maritime trade industry.
The expansion represents another paradigm shift for world maritime trade. It stands to generate economies of scale in sea transport and, to a lesser extent, redefine trade routes. There is little doubt that the break-even line for Asian manufacturers shipping to the Americas will shift, reducing the competitiveness of Pacific ports along the coast of North and South America. Meanwhile, ports on the east coast of the US stand to benefit from increased competitiveness. On a regional basis, the expansion is likely to open further trade opportunities between the west coast of the US and the east coast of South America, particularly Brazil, an important emerging market.
The expansion will also facilitate the flow of grains – the second-most important commodity transiting through the canal – from the US mid-west to Asian markets, as they can be transported in vessels of approximately 100,000 DWT through the new locks, reducing shipping costs. The canal already handles roughly 40% of US grains, and is also an important point of transit for energy and mineral commodities from South America, particularly Peru, Chile and Colombia.
The expansion will enable the transition of larger volumes of energy and mineral commodities, including coal from Colombia and iron ore from Venezuela and northern Brazil. Coal exports from Colombia, which are expected to follow an upward trend in the next decade, will be able to transit the expanded locks in capsize vessels of 175,000 DWT, providing significant savings. The canal could also become a new and more competitive route for cargo from Peru destined for Europe and for shipments from Trinidad to Chile.
A much-anticipated development is the deployment of liquefied natural gas (LNG) carriers through the expanded locks, a new market for the canal, as the existing locks cannot accommodate this type of vessel. Marucci told OBG, “We follow shale and natural gas developments in the US. As the natural gas plants for export become operational on the Gulf of Mexico and elsewhere, there will be potential for transit to Asia through the canal, of not just LNG but also of related products such as gas, diesel, propane, butane and petrochemicals.” Beyond this, Panama could become a centre for hydrocarbons storage and trading, as it already is for other commodities.
Bigger & Bigger
As the international community awaits the opening of the third lane, engineers are already studying the feasibility of building a new set of locks that will enable the transit of even bigger ships, according to the ACP. Marucci told OBG, “We face increasing competition from many angles. It’s a very competitive sector, in which even improvements to vessels can affect our competitiveness.”
The Suez Canal, the world’s other strategic waterway connecting Europe and South Asia, is undergoing expansion to the tune of $8.5bn, which will expand it to two-way traffic, shortening transit times. The biggest competition to Panama, however, is the possibility of a canal through Nicaragua. Though critics have raised questions about the feasibility of the project, work on the 278-km interoceanic waterway began symbolically in December 2014. Once completed, the planned canal is set to be 90 feet deep and 1706 feet across at its widest, and be able to accommodate the latest cargo supertankers with a capacity to carry up to 18,000 containers, surpassing the expanded Panama Canal. Feasibility studies are still being carried out. At a cost of roughly $50bn, the project could be finished within five years and operational by 2020.
Marucci told OBG, “While we cannot be certain that the Nicaragua Canal will materialise, this would be direct competition. Nonetheless, we have questions about how profitable a 200-km waterway would be, given the maintenance costs involved”. For now, the ACP is focused on 2016, when the expanded lane will become operational. “We must focus on how to make our offer more competitive, not only in terms of making the transit efficient but also by making improvements in the offer of auxiliary services,” Marucci said.
The performance of the canal is susceptible to external factors, in particular fluctuations in trade volume between the US and China. Further shifts in global trade patterns, such as the possible rise in near-shore activities in countries such as Mexico, or the emergence of the Latin American market, could also have an impact on the canal’s importance to global trade. However, with emerging market giants China and India still experiencing significant economic growth, Asian demand for commodities is expected to continue in the medium term, making the canal’s outlook a positive one. The expansion will have a wide impact on the Panamanian economy. Beyond an increase in toll revenues, it is likely to have an impact on areas as varied as supply chain, trans-shipment activity and even industrial real estate space. Ultimately, it will help Panama retain the importance in global shipping the country has enjoyed for the past century, while solidifying its status as a regional hub.
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