Panama Canal Opens its Locks to a Lack of World Trade

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The opening of the expanded Panama Canal this past weekend was a moment of great pride for Panamanians, marking the end of almost a decade of construction, riddled with cost overruns and engineering muddles. The impacts of the new-and-improved canal resonate far beyond the country at the tip of the Central American isthmus, with the potential to create new markets and reallocate international shipping routes—but what people seem to be overlooking is that world trade may no longer be on the rise.

In the past few years the need for the canal’s expansion has been all too apparent. Amidst an industry downturn, shipping companies are using fewer but bigger ships, which are unable to traverse the unexpanded canal. The use of these more efficient ships in lieu of smaller ones that were tailor-made for the Panama Canal will more than likely render many ships obsolete in the near future. In fact, canal authorities say that 10% to 15% of its annual revenue has been lost to the Suez Canal in the past three years. Thus, while it still accounted for six percent of total world trade last fiscal year, the route would quickly have lost relevance if it were unable to handle today’s increasingly large vessels.

Coming at a cost of over $5 billion, the new canal locks, which are longer, wider, and deeper than the original 102-year-old locks, more than double the canal’s cargo capacity and are made up of enough steel to build 22 Eiffel Towers. They feature 3,200-ton doors that allow the canal to raise and lower water levels, built-in water-saving reserve bays, and a new dam that allows the storage of more water in wetter years.

A third lane that is 180 feet across has also been added and will finally be able to accommodate the so-called neo-Panamax ships that have become so prevalent in the shipping industry. These mega-vessels are capable of carrying 14,000 containers at once, which is close to three times the number of containers that fit on the ships allowed through the old canal. Now, roughly 90% of the current world fleet will be able to use the canal, meaning that companies with these larger vessels can send one big ship instead of two or three smaller ones.

The option for bigger ships to start using the Panama Canal makes it once again more competitive with the Suez Canal in Egypt. It eliminates the need for a cumbersome trip around the southern tip of Africa, shortening the typical roundtrip journey from ports in Asia’s Far East to those along the Eastern seaboard of the US roughly 11 days. It also saves on costs, altogether leading canal authorities to anticipate a 16% to 17% increase in revenue next year.

But this aside, the expansion of the canal has come at a time of great financial difficulty for commercial shipping, which is facing its worst slump ever. Supply exceeds demand by almost 30% in the industry, and freight rates barely cover fuel costs. To add to that, this year’s El Niño climate pattern forced Panama Canal authorities to restrict ship crossings in April due to a concerning lack of water following the unusually long dry season.

As economic trends show no signs of uplift in global trade, some economists are suggesting the recent plateau may not be temporary, which could indicate that the slowdown is structural and not cyclical. So, while the canal is now equipped to deal with more of the world’s ship population, this may not equate to a huge increase in traffic—even if it does, one cannot assume this necessarily means more cargo, as illustrated by the canal’s mere 1% increase in cargo volumes last year despite a 3.7% increase in ship transits, compared to a 7% increase in cargo but only a 1% increase in transits the year before.

Still, the American Association of Port Authorities says roughly $150 billion will be invested in the expansion and improvement of port infrastructure along the East Coast to reduce congestion and gear up for the inflow of bigger ships and extra cargo, and many Caribbean and South American terminals are following suit. There is no guarantee that there will be a payoff for these ports that are pouring billions of dollars into construction, but if the increased usage of the expanded canal is proportional to current usage (as is expected), then the US will be among the top beneficiaries.

The US liquid natural gas industry in particular is one that will probably see a boost. Oscar Bazán, the Panama Canal’s executive vice president of planning and business, says bigger ships are now in a position to capitalize on the surge in US natural-gas output and the interest it has generated in new export markets, since the expanded canal can handle tankers carrying liquid natural gas. He expects liquid natural gas to be one of the canal’s main items of transport by 2020.

Though the canal will still be too small for Very Large Crude Carriers, the titanic vessels that transport 2-million barrels of petroleum at a time, the canal anticipates that it will sow the seeds of opportunity for new oil routes from Mexico, Venezuela, and Columbia. With these promising prospects ahead, one can only hope that neither the shipping industry nor world trade will stay down in the doldrums for very much longer.

Written By: Reshma Rajagopalan

 

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Works Cited:  

Kahn, Carrie. “A Wider, Deeper Panama Canal Prepares To Open Its Locks.” NPR. NPR, 11 May 2016. Web. 30 June 2016.

Nussbaum, Alex, and Naureen Malik. “Panama Canal Fever Sweeps Globe Again as New Era in Trade Nears.” Bloomberg. Bloomberg, 24 May 2016. Web. 30 June 2016.

“Panama Canal Expansion-Key to Global Trade.” International Finance Corporation. World Bank Group, June 2016. Web. 30 June 2016.

Paris, Costas, Robbie Whelan, and Kejal Vyas. “The Panama Canal Expands.” The Wall Street Journal. Dow Jones & Company, 20 June 2016. Web. 30 June 2016.

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7 thoughts on “Panama Canal Opens its Locks to a Lack of World Trade”

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