Boom or Bust: The Panama Canal Expansion

Despite the myriad of budget overruns and problems encountered during the construction of the US$5.4 billion Panama Canal Expansion, many hope the expanded canal will increase annual Canal revenue from US$2.6 billion to as much as US$16 billion (Fortune). This is especially true since Cosco Shipping Panama paid US$575,545 for its inaugural trip and Hong Kong-flagged MOL Benefactor (10,000 tea) paid US$829,468 — a US$1 million fee seems likely given the canal can handle higher capacity vessels. However, not only did the Expansion open two years late, it was inaugurated (26 June 2016) during a time when global commodities and shipping have taken a hit. Crawling global trade combined with potential safety and construction issues with the canal put the Canal’s revenue rates at risk.

The Panama Canal Authority (ACP) reported the Canal Expansion transited 104 Neo-Panamax vessels and received 289 reservations within the first 50 days of its opening. The Panama Canal experienced a 7 percent increase in transits and 6 percent revenue increase in July 2016 compared to July 2015 (Huffington Post). The Expansion has outpaced the Suez Canal as the route with the largest container traffic between the U.S. and east Asia; Panama now has 57 percent of trade share, compared to 48 percent in 2015 (Splash247).

Although not every ship sailed smoothly through the new Expansion — three ships bumped the edges of the new canal, causing one to receive a serious gash. The Cosco Shipping Panama container ship came into contact with the fenders during the Canal's inaugural trip, then the first LPG tanker Lycaste Peace ripped a fender during a collision. Finally, the Xin Fei Zhou, owned by China Shipping Container Lines, hit a wall in the Agua Clara lock, gouging the hull and requiring repairs (The Guardian). The ACP denies the first two incidents caused damages, saying some bumping is normal, and it blamed the third incident on bad weather and incorrect vessel alignment. However, the three issues in a span of a month have raised concerns about the use of tug boats nearly the size of the snug locks. Only a 6m width and a 61m length are left after the 49m wide and 366m long Neo-Panamax vessels are guided by tug boats into the 55m wide and 427m long locks (Splash247). The International Transport Workers’ Federation released a joint study with Brazil’s Fundação Homem de Mar indicating the locks are too small, lacking space for the tugboats and increasing the risk of accidents (Splash247). The ACP dismissed the study entirely. If more vessels encounter problems in the narrow locks, it could cause damage to the ships and the canal, and delays. While ultimately seen as a boon, larger vessels will also take more time and resources (tugs) to maneuver through the tight locks and the Culebra Cut, and these inefficiencies could eat into Canal revenues (Splash247).

Inevitable repairs to the shoddily built Expansion will also eventually force the ACP to close portions of the Canal, hurting expected revenue. The Grupo Unidos Por El Canal (GUPC) consortium won the expansion bid with a US$3.1 billion proposal, however, this was severely under budget for the project. According to the New York Times, the GUPC budget was 71 percent smaller than the next bidder, and apportioned 25 percent less for steel to reinforce concrete. The impact of skimping became evident when water gushed through a concrete wall of the Pacific Cocoli locks in June 2015; instead of replacing the porous concrete wall, it was reinforced with steel. Financial resources will remain an issue as the GUPC and ACP sort out lawsuits regarding the extra costs of the project, which is more than US$2 billion over budget.

The real challenge affecting the Expansion and its ability to pass through Neo-Panamax vessels will be water. Due to El Nino or climate change, the Canal has been experiencing a water shortage, forcing the larger ships to carry loads not much bigger than the smaller vessels going through the old Canal —and diminishing the advantage of the expansion. As the New York Times pointed out, this situation will only happen again given climate change and increased public water consumption.  

While the costly and imperfect Expansion may be able to overcome construction issues and water shortages, it can only do so if trade via shipping takes off and the ACP can collect its handsome canal fees. This means the Canal needs an improved global economy and high volumes of Asian exports destined for the U.S. east coast. According the Houston Chronicle, a confluence of factors, such as increased U.S. manufacturing, decreased Chinese reliance on exports, and falling shipping fuel and shipping rates, have caused companies to use fewer big ships and select longer, canal-fee free routes. This hurts the Expansion’s prospects of meeting its projected revenue targets. While the Canal is ultimately good for global trade, it remains to be seen if it will be profitable.