Anchors Aweigh: The Panama Canal Expansion

A winner on the nation-state level might be Colombia. Several factors prime the second-most-populous nation in South America to be a huge potential beneficiary of the expanded canal. To begin with, it enjoys close economic and security ties with the U.S. Under the auspices of the so-called Plan Colombia, the U.S. has spent more on development and security efforts there than anywhere outside Iraq and the broader Middle East and Afghanistan since the end of the Cold War. Moreover, it has been a participant since 2012 in a bilateral free-trade agreement with the U.S. With an expanded Canal, its exports will find an easier path to American markets. As a world leader in the production of coffee and bananas, Colombia stands poised to make gains there. It might also be poised to become a player in the floating-liquefaction segment of the LNG space, where it is an early entrant in the region.

Cuba, too, is positioning itself ahead of the opening of the expanded Canal. This is being done via the special economic zone it has created around the Port of Mariel, and is aimed at making Cuba a regional trans-shipment hub. The increase in container traffic through the expanded Canal thus represents a major opportunity for Cuba, which has already partnered up with Brazilian and Singaporean firms to run the port and to expand it so that it keeps pace with the improvements being made to the Canal. It is expected to be able to handle so-called New Panamax vessels at roughly the same time as the expansion is completed. New Panamax ships will carry 120,000 DWT, as opposed to the current Panamax of 65-85,000 DWT in principle but in practice restricted to around 53,000. The biggest obstacle here is the 55-year-old trade embargo by the U.S. This hampers Cuba’s use as a port of call by mandating a six-month quarantine of sorts before any ship docking there can dock at a U.S. facility. That issue has suddenly become more alive than it has in decades. This is due to the Obama administration's official normalization of diplomatic relations with Cuba, its previous announcement of a plan to normalize economic relations with the Communist state, and current Cuban president Raul Castro’s pledge that in 2018 he will step down. It’s clear that at some point in the near- or medium-term the embargo might be scrapped. Whatever you might think of this as geopolitics, it will be the key for Cuba to really win big from the expanded Canal.

So whose livelihoods does the Canal expansion threaten? First and foremost: the Suez Canal, which is racing to complete its own expansion plans. This is evidence that the Egyptian authorities responsible for Suez take the Panama expansion very seriously. After a massive effort underway since last August, the project is closing in on completion. The sheer numbers involved are staggering, with Suez authorities claiming to have employed fully 75 percent of the world’s dredgers and to have moved half a trillion cubic feet of earth, the equivalent of 200 great pyramids. Sounds like a winner -- until you factor in jurisdictional risk. The northern Sinai peninsula, which abuts the Suez Canal, has long been a hotbed of militancy and a security problem for the Egyptian government. This is only getting worse and worse due to the rise of ISIS. Earlier this year, a new local affiliate of ISIS, the State of Sinai (formerly known as the militant group Ansar Bait al Maqdis, which pledged allegiance to ISIS in 2014) claimed responsibility for a series of attacks across Sinai. While a full-scale takeover of the Suez seems unlikely -- Egypt being much better prepared to resist ISIS than the fragmented Iraqi and Syrian governments -- it is nonetheless a looming factor. The seeming abandonment of the region by the United States exacerbates that factor. Another spate of coordinated attacks on military checkpoints in early July reportedly killed 100 Egyptians. Events like that only drive the point home harder. And we should expect to see them continue. A bigger, better Panama Canal might well come to be regarded as a more viable alternative as jurisdictional risk skyrockets in the Sinai and the region more generally.

And to circle back to LNG: as the Canal unlocks huge potential for LNG exporters in the U.S., it might well be helping speed the decline of a gorilla in the LNG export space, Australia, which has been flexing its muscles to up its capacity and outflow. The U.S. faces lower prices than Australia both on the supply end and in terms of project capex. This makes its entrance into the export market potentially ominous for Australia, which has placed a big bet on its effort to unseat Qatar as the world’s leading gas exporter by 2018.

Great infrastructure projects generally have long-term ramifications that ripple well beyond the obvious. One of the greatest ever is once again, this time quietly, setting the stage for major consequences for consumers, industries, and nations starting next year. At long last, the Panama Canal, which changed the world once, may be set to change it again -- nifty palindrome or no.