Panama Digs Deep: The troubled progress of the canal expansion

It’s been a tumultuous year for the Panama Canal. This year not only marked the canal’s centennial but it was also supposed to be the year that the canal’s expansion project was completed.

However, the canal’s new locks – a set of locks that will enable ships with 160 percent more cargo capacity to cross the mountainous isthmus while doubling the canal’s current capacity – did not open this year, as originally planned.

Instead, there were complications that pushed the completion date to the summer of 2015. And that was prior to the work stoppages, prior to the allegations of corruption due to massive cost-overruns, and the need to renegotiate contracts.

The lengthy delays caused the canal to push back its opening date for the expansion. Ultimately, the centennial passed in subdued fashion, as the canal turned 100 years with nearly the same capacity that it had at its infancy.

Most recently, Panama’s president, Juan Carlos Varela, said the canal’s expansion will be completed by December 2015, and open to marine traffic by early in 2016.

But beyond that, and perhaps more significantly, Panama Canal Authority Administrator Jorge Quijano has been quoted as saying that the canal will need another expansion in 25 years to handle even larger ships, as shipping companies look to maximize profits by maximizing capacity.

And then, recently, as if all of that wasn’t enough, Egypt announced that one of the canal’s main competitors, the Suez Canal, would undergo its own expansion that preliminarily has been slated for completion in August 2015 – months before its Panamanian counterpart is ready for increased traffic.

The project in Panama seems to be humming along again, but the upcoming year and ultimately the completion of both the Panama Canal and Suez Canal projects will tell a lot about the future of commercial shipping.

A canal for the future?

The 48-mile Panama Canal turned 100 years old in August of this year. It consists of a series of locks on either side of the isthmus which raise ships up 85 ft in elevation to Gatun Lake. Its locks are 33.5m (110 ft) wide, 320m (1,050 ft) long, with a depth of 12.5m (41.2 ft). These dimensions have limited the size of so-called Panamax ships. These largest ships would have been impressive to anyone when the canal was completed in 1914, but they are tiny compared to today’s behemoths.

For instance, Panamax ships can be a maximum of 57.91m in air draft, 32.31m in beam, 294.13m in length and 12.04m in draft. Meanwhile, Suezmax ships (the largest possible to pass through the Suez Canal) can be 68m in air draft, 50m in beam, unlimited in length and 20.1m in draft. To say nothing of Chinamax ships, which have unlimited air draft, 65m in beam, 360m in length and 24m in draft.

The new Panamax (or post-Panamax), for when the expansion is completed, will offer a maximum of 57.91m in air draft, 49m in beam, 366m in length and 15.2m in draft. This will increase carrying capacity, which is measured using standard cargo containers – the twenty-foot equivalent unit (TEU) – from 5,000 TEUs to 13,000 TEUs.

This was supposed to place it on even ground with Suexmax and, to a lesser extent, Chinamax ships. However, Suezmax ships can carry up to 15,500 TEUs, and will be able to carry even more after its own expansion is completed and ship-builders begin to build post-Suezmax ships.

All this leads one to wonder whether the Panama Canal’s strategic advantage is all that significant. In fact, Quijano has all but admitted this, in discussing the short-term relevance of the current $5.3 billion expansion.

“In 25 years,” he is quoted as saying to Asian news media, “I’m sure the fourth set of locks will be built.”

Strikes and cost-overruns

The expansion has been riddled with complications. Firstly, Panama has always proven to be a much more complex feat of engineering than the Suez. Whereas the land in Panama rises 85 ft, and thus the canal required a series of locks to lift vessels up and over the isthmus, the Suez simply needed to be dug. The land around it is relatively flat and the canal connects directly to the Red and Mediterranean Seas at either end.

This time around, however, there were other issues to grapple with. In February, work stopped for two weeks over a dispute between the Panama Canal Authority and the construction group, Grupo Unido por el Canal (GUPC), which is led by Spain’s Sacyr S.A. GUPC claimed it was owed $1.6 billion, while the authority demanded explanations for heavy cost-overruns, and contracts had to be renegotiated.

Another two-week delay occurred in May, when 5,000 workers walked off the job over wage disputes.

It was reported in the Journal of Commerce that these delays cost the Panama Canal Authority around $300 million in lost toll revenue.

The work on the canal appears to be back on track. Reports claim that at least 12 of the 16 gates have been transported from Italy, and much of the concrete for the walls has been poured.

In all, the project required the construction of two new sets of locks – each with three chambers, and each chamber containing three water-saving basins, lateral filling and emptying, and rolling gates. In addition, nearly 50 million cubic meters of earth will have been moved along 6.1 miles in order to widen and deepen the existing navigational channels.

“We are full speed ahead right now – finally,” Ilya Espino de Marotta, the executive vice president for engineering and programs management at the Panama Canal Authority told the Miami Herald.

According to the Panama Canal Authority, the project is 80 percent complete. So far, the entrance dredging on both the Atlantic and Pacific sides is entirely complete. Raising Gatun Lake’s maximum operating level is 93 percent complete. Gatun Lake and Culebra Cut dredging is 88 percent complete, while the Pacific access channel is 80 percent complete, and the design and construction of the third set of locks is 77 percent complete.

Competition and commerce

When completed, the new locks will run parallel to the old ones. Essentially, the rule will be that anything carrying 5,000 TEUs or lower will use the old locks; anything carrying more than that will use the new locks.

Currently, the Panama Canal accommodates about 5 percent of the world’s total cargo volume, according to a report published by the U.S. Department of Transportation’s Maritime Administration.

The expansion will allow an additional 12-to-14 large vessels through the canal per day, and will increase the canal’s throughput capacity twofold – thereby allowing the canal to accommodate nearly 10 percent of the total cargo volume.

This increase in vessel capacity is expected to lead to fewer and more concentrated ship calls at the larger ports on the Atlantic side of the United States.

However, as Quijano’s comments make perfectly clear, the demand for capacity will not slow down anytime in the near future, and the world’s major transit canals understand this clearly.

While cost-savings on maritime shipments depends on a number of factors, in general, one rule holds true, according to the Maritime Administration report: “Per unit cargo costs for shipping generally decrease as the size of the vessel increases.”

“Given the pronounced transition to larger container ships that is already underway, it is expected that most of the global carriers now serving the Northeast Asia-U.S. East Coast route with 4,000-5,000 TEU ships will rapidly replace them with 8,000-10,000 TEU ships (or larger) after 2015,” says the Maritime Administration’s report.

In addition, the report notes that container ships have been the largest and fastest-growing market segment for the Panama Canal over the past decade. All this played a role in Panama’s decision to expand the canal.

At the moment, the canal appears to be doing the right thing. Many of the ships which have been ordered by shipping lines will fit within the confines of the post-Panamax locks. But these ships are increasing in size very quickly and will soon outgrow even the new locks. Already Maersk Line has ordered twenty 18,000 TEU ships, according to the Maritime Administration’s report.

And as the Suez Canal grows in size and capacity, it may become imperative for the Panama Canal to make another expansion of its own in order to remain a key player in the game. Otherwise, shipping companies may start to look at maximizing profits through different routes altogether.