Eager to defend its status as one of the world’s great trade conduits, Panamanians decided to expand the canal in a national referendum almost seven years ago. That $5.25bn project is running about six months behind schedule but, when the work is finished in mid-2015, the expanded waterway will transform some of the most critical trade routes between the Atlantic and the Pacific.
Last week, celebrating the arrival of the canal’s titanic new lock gates, Ricardo Martinelli, Panama’s president, predicted that the expansion work “is going to change the global maritime industry”.
The deeper, wider channel will allow the passage of enormous vessels with up to three times the capacity of the biggest ships currently using the route. Panamanian officials predict that the canal, which celebrates its centenary next year, will increase the annual tonnage it carries to more than 600m tons in 2025 from 333.7m tons last year.
In Panama, the expansion is 60 per cent complete. Dredging of the navigational channels along the narrowest section, the Culebra Cut, is finished.
Somewhat cruelly for Panama, ship sizes keep growing. Maersk Line, operator of the world’s biggest container fleet, has 20 new ships on order that are so big that they cannot pass through even the enlarged waterway.
“In the future, we foresee trade growing between Asia and Latin America,” says Jorge Luis Quijano, the Panama Canal administrator, “with east Asia sourcing more and more raw materials out of Latin America.”
However, Panama will not be able to profit from these trade flows unchallenged. Nicaragua has backed a $40bn proposal for a little-known Chinese company HKND to dig a rival to the Panama Canal. Many already doubt the economic feasibility of a project three-times longer than Panama’s 80km waterway.
Not to be left behind, Guatemala and Honduras have announced “land bridge” projects between the Atlantic and Pacific. There is also speculation in Mexico about Chinese investment in a connection across the Tehuantepec isthmus.
Container shipping lines such as Maersk, which has about 15 per cent market share in Latin America, are open-minded about such projects. “Any infrastructure investment that will facilitate trade between customers is welcomed,” says Robbert van Trooijen, Maersk Line chief executive for Latin America and the Caribbean. “I see myself as a user of those projects.”
Since Panama took control of the Canal in 1999, about 5 per cent of world trade has been passing through its locks. It earned $1.6bn in pre-tax profits last year on revenues of $2.4bn, and accounts for up to 10 per cent of the country’s economic output.
Panamanians are confident that regional rivals will not eat too deeply into their profits. “We don’t consider there will be any competition,” Fernando Núñez Fábrega, Panama’s foreign minister, told the Financial Times last month when asked about the Nicaraguan rival. For him, if everyone who wanted to build a canal did so, “Central America would end up like a Swiss cheese”.
Alberto Alemán, who stepped down as Panama’s canal administrator in December 2012 after 16 years at the helm, hopes that much of the new business will come to Panama’s own ports, on both coasts. Panama offers logistical advantages. It is a regional airport hub and also has a large free trade zone, like Singapore and Hong Kong. The country is also Latin America’s fastest growing economy, with annual growth rates of about 10 per cent.
The high quality of Panama’s ports sets it apart from many in Latin America. “We have to adapt ourselves, and fast, to address the big infrastructure gap we have in the region,” says Esteban Diez-Roux, principal transportation specialist at the Inter-American Development Bank, or IDB. “Logistical costs in Latin America are about 50 per cent higher than in the rest of the world.”
According to an IDB study, the region must speed up the modernization of ports, roads and other basic infrastructure “otherwise, it will not be able to take advantage of the lower costs that will be generated by increased transoceanic traffic of large ships”. After all, delivering all the cargo from one 10,000-container vessel requires 18 trains, or 5,800 trucks or 570 Boeing 747 jumbo jets.
Behind the concrete towers under construction, a vessel from Wallenius Wilhelmsen, the Scandinavian joint venture that operates the world’s largest car-carrier fleet, is lining up to cross the locks from the Pacific into the Atlantic. “There still is no other place in the world where you can be in another ocean in just a matter of hours,” Mr Alemán, the former administrator of the canal, said.
