Ports from the US to Cuba are investing huge sums of money to compete for the mega-ships that began to cross the expanded Panama Canal on June 26.
The original set of locks has provided service to the world in a very efficient manner for over 100 years.
The question now is how long will the new locks last and how successful will they be?
They were inaugurated on June 26 at a cost that will probably far exceed the initial estimate of $5,250 million, so a life of another 100 years would be ideal.
However, the slowdown in world trade, coupled with growing competition from the lucrative routes between North Asia (China, Japan, South Korea and Taiwan) and the United States with vessels increasingly larger, filled with containers, has generated uncertainty in the industry, according to experts in global transportation.
The newly expanded Canal has sparked competition between ports along the US East Coast and the Gulf of Mexico, that all want to receive shipments from Asia, much of which currently goes to California and then across the country by train.
US ports have invested tens of billions in dredging to increase their drafts to receive larger Neopanamax ships, as well as the construction of new port facilities. But analysts question whether the current pace of trade growth justifies such investments.
“There is mounting concern among many analysts that growth of world trade and the movement of trade to routes using the Panama Canal will not be as large as originally planned,” said Richard Wainio, former director of the Tampa Port Authority, who was previously head of planning of the Panama Canal.
“Virtually all ports from Brownsville to Boston have justified the investment of billions of dollars in port projects facing the expected boom in shipments of maritime cargo that will happen after the Canal expansion, but really not everyone will be benefited”.
The current trade between Asia and the United States is divided into three routes: Suez, Panama and through West Coast ports and rail connections known as the intermodal transport system.
“The Panama Canal is not going to make a big difference overnight,” said Jim Kruse, director of the Center for Ports and Waterways of Texas A & M University. This is due, in part, to ports on the US East Coast and Gulf of Mexico not yet being fully prepared to serve the mega-ships that can use the new locks on the isthmus.
In addition, these giant freighters make longer routes economically viable as an option, experts say, and point out that the route of the Suez Canal in Egypt has seized a part of Asian trade in recent years from the Panama Canal.
In 2013, Maersk, the largest container carrier in the world, moved from Panama much of its business between Asia and the US East Coast, and decided to use larger ships that can carry loads more profitably through the Suez canal.
Maersk may decide to return to Panama now that it has completed the expansion, but despite new locks that can receive cargo ships with a capacity nearly three times that of the current ships, the Panama Canal still is surpassed by Suez, a much wider waterway without locks, and at sea-level.
Shipping companies have invested heavily in recent years in a new generation of Neopanamax ships, the largest, and which already exceed the capacity of the new locks of the canal. Moreover, as a large volume of trade is shifting from China to Southeast Asia and Central India and Vietnam, the Suez route is geographically attractive, Kruse said.
Despite the availability of larger locks, lots of cargo will continue to be transported in smaller vessels, as is currently done. For example, the canal has historically been an important route for corn and soybeans that are sent by barge down the Mississippi River and embarked to Asia. These shipments usually use smaller vessels and, therefore, are not affected by the expansion of the canal.
These shipments are usually in smaller vessels able to transit through the old locks and, because of the limitations on the Mississippi River and reception ports around the world, the expanded locks will have little impact on these cargoes.
Other bulk cargoes, such as iron ore, coal or supertankers carrying oil are too big even for the new canal locks and must still use other means such as Suez or the Strait of Magellan in South America.
A future business that could benefit Panama is the rise of liquefied natural gas (LNG) produced in the United States. LNG is transported on ships worldwide and so far could not transit the Panama Canal. However, with the opening of the new locks, most ships carrying LNG may transit through Panama to Asia and thus significantly reduce the distance to Asian markets.
Can the container trade, LNG and perhaps some future, yet unknown, business be profitable enough to pay for Panama Canal expansion? A dispute with the European consortium that built the new locks is still in arbitration. The final price could end up being up to $2,000 million more than the original contract of $5,250 million.
“That’s a lot of money that had not been included in the budget,” Wainio said. “If they fail to grow, they could have problems.”
Canal officials say the revenue – more than $2,600 million last year – are more than enough to cover the costs under the conditions of financing the enlargement. In 2015, the Canal reached a record high in relation to the tonnage of containers and bulk liquids, as a result of exports of diesel, gasoline and propane from the US Gulf to South America and Asia.
The economic fate of the newly expanded Panama Canal partially depends on the competitiveness of ports along the US East and Gulf coasts for shipments from Asia, much of which is currently received in California, Washington and Canada and then shipped by rail. A big question for both the Panama Canal and US ports is how much of that trade will shift to the only sea route through Panama.