Panama Canal opens $5B locks, bullish despite shipping woes
Authorities are hosting a big bash Sunday to inaugurate newly expanded locks that will double the Panama Canal’s capacity in a multibillion-dollar bet on a bright economic future despite tough times for international shipping.business Updated: Jun 26, 2016 12:35 IST
Authorities are hosting a big bash Sunday to inaugurate newly expanded locks that will double the Panama Canal’s capacity in a multibillion-dollar bet on a bright economic future despite tough times for international shipping.
Nearly two years late due to construction delays and labor strife, the $5.25 billion project formally launches with the transit of a 158-foot-wide (48.2 meters), 984-foot-long (300 meters), Chinese-owned container ship, one of the modern class of mega-vessels that will now be able to use the canal.
With 30,000 people and eight foreign heads of state expected to attend the festivities, officials are bullish.
“There is evidence that the Panama Canal, with this expansion, is an important player not only for regional maritime commerce but worldwide,” said Oscar Bazan, the Panama Canal Authority’s executive vice president for planning and commercial development. “The canal is a winning bet. (Clients) will benefit from saving not only time but also money, because the canal is a route that shortens distance.”
However, the party comes amid a lull in global shipping due to the drop in oil prices, an economic slowdown in China, which is the canal’s second-largest customer, and other factors that have hit the waterway’s traffic and income.
While authorities anticipate increasing commerce between Asia and ports on the U.S. East Coast, doubts remain that not all those ports are ready to handle the huge New Panamex-class cargo ships. Net cargo volume through the canal from the U.S. East Coast toward Asia fell 10.2 percent in 2015, according to official statistics. Meanwhile the Suez Canal in Egypt recently lowered tariffs by up to 65 percent on large container carriers in an attempt to keep its traffic.
“It’s important to remember that the canal does not create demand. The canal opens the route. Supply and demand on a world level is what will decide whether the Panama Canal will really bring more volume or not,” said Antonio Dominguez, a general manager for global shipping leader Maersk Line, which moves about 14.2 percent of world commerce. “What is certain is that the current canal has maxed out.”
Maersk was among shipping companies that have reduced passages through the Panama Canal, although Dominguez said the company is considering a return.
Since the canal was handed over from U.S. control at the end of 1999, the waterway has generated about $10 billion in direct income for the Central American nation and is responsible for about 40 percent of its GDP, factoring in related economic activity. Some 35 to 40 vessels transit the waterway each day, and the canal is estimated to handle about 6 percent of world maritime commerce.
Panama began the expansion nearly a decade ago. Originally planned to open in late 2014 around the waterway’s centennial, the new locks can accommodate ships that carry up to three times the cargo of those previously able to use the canal.
Grupo Unidos por el Canal, the Italian- and Spanish-led consortium that spearheaded construction, handed the project over Friday, although a series of claims are still pending for presumed cost overruns of more than $3 billion.
Paul Bingham, a shipping economist at Boston-based EDR Group, predicted the canal expansion’s global impact will be small.
“The proportion of world trade that could plausibly use the Panama Canal is constrained by the geography of the world’s population, resource endowments and production regions,” Bingham said. “There is very little a larger canal can influence at the margin to induce shifts in the geography of world trade, even through potential reductions in costs of shipping a variety of commodities to, from and within the Americas.”