Global impact: Analysing the far-reaching effects of the expansion

The completion of the Panama Canal’s new locks will have broad effects on global commerce as new economies of scale will impact both the bulk commodity and container shipping industries. Latin American producers of coal, copper, liquefied natural gas, soybeans and other commodities, Asian manufacturers, US farmers, and many more all stand to benefit from the completion of the canal’s expansion.

In terms of infrastructure development, though the Panamanian government continues to invest heavily in reinforcing its logistics and transportation network in preparation for the expansion, it is certainly not alone as cities across the Americas scramble to prepare for the arrival of the post-Panamax ships that will be transiting the canal in just a few years.

Globalisation

As trade barriers continue to fall in an increasingly globalised world, the role of the canal in facilitating global commerce has likewise increased. Commercial accords between nations continue to be ratified, which, combined with the expansion and formation of new and existing trading blocs, represent a bright future for the waterway. It is particularly important to east-west trade routes between North America and Asia, particularly from the east coast of the US to China. As a facilitator of trade between the world’s two largest economies, the Panama Canal has arguably never been as important to the world economy as it is today, remaining the most economically viable route for most east-west trade.

Despite its population of 3.6m, Panama is the number one country in the world in terms of ship ownership, with the most flags of registration and deadweight tonnage due to the fact that many Japanese, Korean and Chinese ship owners register tonnage in Panama, according to the UNCTAD “2012 Review of Maritime Transport”. The same report also found that Panama’s 342 container ships with a combined capacity of 1.28m twenty-foot equivalent units (TEUs) make it the “best-connected” maritime country in Latin America, surpassing Brazil’s figure of 937,000 TEUs.

Go Big Or Go Home

The rationale behind the construction of the third set of locks stems from the need to handle the increasingly larger ships employed by the world’s major shipping companies. The arrival of post-Panamax ships in 1996 began the race for bigger and better ships, and in 2011 they accounted for an estimated 37% of the world’s shipping fleet. It does not appear the trend is slowing either, with the arrival of super-post-Panamax vessels. Maersk’s first Triple E class 18,000-TEU vessel went into service in June 2013, and the company is planning on putting a total of 20 into service in the coming years.

Also referred to as ultra-large container ships (ULCs) or Malaccamax, these ships are well above the 13, 000-TEU capacity of the canal’s new locks and representative of the shipping industry’s “go big or go home” attitude. The increased economies of scale offered by such enormous vessels provide numerous advantages, including drastic reductions in carbon emissions and fuel consumption, and they have also been the driving force behind infrastructure investments in port and maritime infrastructure, including Panama’s.

Ports Of Harbour

While the Panama Canal may be able to handle post-Panamax vessels by the end of 2015, the same cannot be said for many final ports of destination in the Americas due to depth and capacity constraints. As a result, the canal’s expansion has prompted significant investments across the region as coastal cities race to upgrade infrastructure in order to maintain competitiveness.

With 65% of the canal’s tonnage either departing from or arriving to ports inside the US it comes as little surprise the canal’s expansion has sparked harbour investments around the country. Currently only five ports in the US are capable of handling postPanamax ships – four of which are found on the west coast (Oakland, Long Beach, Los Angeles and Seattle) due to the heavy use of the country’s terrestrial intermodal logistics network to transit goods from Asia across the country. Thus much of the investment is currently being funnelled east, though the western Port of Long Beach could end up investing $4bn over the course of the next decade upgrading facilities, including $1.2bn to upgrade current infrastructure, $650m for a new container terminal and $950m to replace a bridge, according to UNCTAD. However, the balance of power within the US is expected to shift from west to east with the completion of the locks, reducing the competitiveness of Asian goods docking at western ports and traversing the country’s road and rail networks to eastern destinations.

Meanwhile on the other side of the country in Baltimore, $250m was invested to upgrade the Seagirt Terminal, which was completed at the end of 2013. Just north in Bayonne, New Jersey, the Port of New York is planning to develop a new post-Panamax terminal with a 1.7m-TEU capacity to the tune of $300m. In the south-east Port of Miami, $150m is being spent on a deep dredging project as well as $42m for four additional super-post-Panamax cranes. With these three additions by the end of 2015, four cities along the east coast of the US will be post-Panamax ready, with more coming on-line in cities such as Charleston and Savannah (currently only the Port of Norfolk maintains post-Panamax capacity along the east coast).

Latin American ports are also eager to increase capacity in anticipation of increased traffic flows through the canal. Colombia’s Port of Cartagena is investing $400m over the course of the next three years to double its capacity and allow for post-Panamax ships, while Mexico’s Caribbean Port of Manzanillo is also undergoing a $250m renovation. Just 10 hours’ sailing distance north of the canal lies the Costa Rican city of Limon along its Caribbean coast, the site of a $1.1bn investment to develop a new port terminal capable of handling post-Panamax container ships in Moin. APM Terminals won the 33-year concession from the Costa Rican government in 2011, with initial plans calling for the completion of the first phase of the port’s construction by 2016. In addition to APM’s new terminal at the Port of Moin, another $900m container trans-shipment terminal, AMEGA, is being developed adjacent to handle post-Panamax ships coming through the canal and disbursing goods to the region via smaller ships. Ports in Cuba, Brazil, Ecuador, Peru, Jamaica and the Bahamas are also planning or in the midst of expansion and renovations in preparation for Panama’s expansion.

Commodities Trade

Latin America’s role as a supplier of raw materials and commodities for growing Asian economies will also be affected, according to Oscar Bazan, ACP’s vice-president of planning and business development. “The commodities trade will be affected significantly by the increased economies of scale introduced with the new set of locks. The canal is already an important point of transit for energy and mineral commodities from South American countries like Peru, Chile and Colombia, as well as handling roughly 40% of US grains.” Though container shipments accounted for 37% of traffic by weight in 2012, it was slightly overshadowed by the combined 39% in dry (23%) and liquid (16%) bulk shipping, most of which is raw materials and other commodities. Indeed, according to figures from the ACP and Standard Chartered Research, items transported from the Atlantic to the Pacific via the canal in 2012 were predominantly commodity-based, with grains responsible for more than 30%, petroleum products just over 20% and container shipments coming in third at just under 20%. Cargo moving from the Pacific to the Atlantic, however, is dominated by container cargo, which accounts for just over 35%, largely due to the movement of manufactured goods shipped from Asia to the US.

Even still, a significant amount of petroleum products, steel, grain and coal also moved west to east. With emerging market giants India and China still experiencing significant economic growth, their hunger for commodities is expected to last well into the future, meaning the expanded canal should in particular benefit producers of energy-related commodities. Coal originating in the eastern US and Colombia and shipped west, for example, is expected to see a boost thanks to the canal. Meanwhile, agricultural products from Brazil such as soybeans, already a major food source for Asia, are also forecast to increase.

Impact

Quantifying the impact of the canal’s expansion on a given industry, country or product is a vastly complex undertaking that could be easily rendered useless by a wide variety of issues ranging from changes in tariff agreements between countries to swings in global commodity prices. Even so, broad assumptions can be made. 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. Countries shipping commodities in the opposite direction from the Americas to Asia also stand to benefit. Indeed, the expansion of the canal is often referred to as a game-changer for global trade, and though many countries stand to gain from its increased capacity, Panama should be the ultimate beneficiary.