The Panama Canal is a symbol of human ingenuity overcoming obstacles, a connection between the Atlantic and the Pacific purchased at the cost of some $8.6 billion in today’s dollars and countless hours of toil. It opened on August 15, 1914 — almost four centuries after Charles V, Holy Roman Emperor and King of Spain, first saw the advantages that could be gained by driving a shipway through the Isthmus of Panama. And it impenetrably entered the collective mind of the U.S. via an immortal palindrome describing Theodore Roosevelt — A man, a plan, a canal: Panama.
Now, slightly more than one century after the first ship passed through it — the SS Ancon — the Canal stands close to the completion of a massive structural change. New locks are being constructed on both the Atlantic and Pacific sides, along with new channels to access the locks and a new shipping lane. This will be rounded out by the widening and deepening of existing channels to allow for much larger ships to transit them with much faster transit times. The project is no less significant than the original Canal plan, if not as visionary in scope. The expansion was first formally proposed by the Panamanian government in 2006. It got endorsed by then-President Martin Torrijos as a tool to help transform Panama into a first-world country. The project has been underway since 2007. It was approved by an overwhelming margin of Panamanian voters in a referendum, with its initial target date for completion set in August 2014, to coincide with the centenary of the Canal’s opening. Labor difficulties and a long and bitter cost dispute flared up nine months before that deadline, in December 2013, when the Grupo Unido Por el Canal (“GUPC”) consortium including Spain’s Sacyr and Italy’s Impregilo doing the construction work demanded $1.6 billion from the agency running the Canal to cover cost overruns. The agency, crying blackmail, refused to comply. Work stopped in early January of 2014 as GUPC engaged in a very public round of infighting over the cost overruns, with each member blaming the others. By February, things were back underway with much shouting and grumbling. But consequently the completion date had been pushed into early 2016. The current Canal administration sees the project as being complete in April of next year. At the moment that prediction looks very much on target. The Atlantic locks have already been flooded and ports up and down the East and Gulf Coasts of the U.S. are already preparing themselves for an increase in business. When the expansion does come online, it will unlock an enormous amount of global shipping capacity at one fell swoop. For container ships alone, currently the leading source of traffic for the Canal, the difference will be huge and immediate. Another 45 percent of the worldwide container fleet will now be able to transit the Canal, bringing the total percentage of the fleet with Canal access to 87 percent.
While the future of the expansion looked to be in serious doubt in 2014, it is now time to reckon with the transformative effect the Canal will have on the shipping industry and on the world economy more generally. The expansion is arguably the single most consequential infrastructure project for world trade, around 95 percent of which (according to current estimates) is carried on ships. Per the shipping broker Clarksons, that is one tonne of cargo for every human on earth, every year.
Perhaps the most obvious locus of change will be the U.S. liquefied natural gas industry, which is currently salivating for the project to be finished. The Canal cannot currently handle the vast majority of ships of the size used to transport LNG; in fact, no LNG shippers use the Canal at all. When the project is completed, some 90 percent of ships used to carry LNG will be able to access it and the shipping distance from Gulf Coast ports to Asia will fall to approximately 9,000 miles from 16,000 now. The major choke-point for U.S. LNG exports will have disappeared. Already, on expectations that U.S. will be pumping LNG into the world economy, prices across the Asian market fell in May to US$7 per million BTU. This is down 185 percent from the high of US$20 seen in 2014. The leader in U.S. LNG exports is Cheniere Energy. Cheniere actually almost perished after a disastrous wrong-way bet on the gas import market in 2008. But it’s spent the past two-and-a-half years building a $12-billion-dollar liquefaction facility in Sabine Pass, Louisiana, and has a commensurate head-start in LNG export operations. China is allegedly eyeing long-term supply contracts with the company. Cheniere will almost certainly win big from the completion of the expansion project — though this may already be reflected in the company’s stock, which is up nearly 136% since work restarted on the Canal in 2014. Another possible beneficiary and investment opportunity might be Freeport LNG, which heads into production in early 2018 and whose CEO Michael Smith has hinted strongly that the company will go public before its production debut.
More generally, U.S. East Coast ports stand poised to benefit enormously from the expansion — if they can overcome some of the logistical problems that plague them. Estimates see them as poaching as much as 35 percent of West Coast freight. But in order for that to happen, they have to make sure that the congestion driving ships away from West Coast ports doesn’t snarl their own operations any more than it already has.
The Canal expansion, as noted, will affect the shipping industry more generally, even if U.S. LNG will likely be the sector with the most dramatically visible change. Both charters and liner operators in the container-shipping industry stand poised to benefit, if this summer’s activity is anything to go by. Currently, the Canal can handle ships up to only about 5,000 TEU. TEU are twenty-foot equivalent units, the measure of capacity for container ships based on the standard length of an intermodal container. The expanded Canal will be able to handle up to 13,000 TEU. March of 2015 saw legendary shipowner John Fredriksen getting into 9,000 TEU and higher-range container ships, all but the very largest of which will be able to transit the expanded Canal. And June 2015 saw unusually high levels of charter fixing for both Panamax and post-Panamax vessels around the globe, with a particularly high level of demand for vessels in the 6,000 to 7,000 TEU range. That was fueled by liner operators optimistic about new routes between East Coast U.S. ports and Asia. Project this activity forward 12 months and the sector can expect to see concomitant growth in activity at those TEU and above. This will be even more the case if the situation around the Suez Canal continues to heat up as ISIS gains strength in the northern Sinai (more on that in a bit). On the other hand, container lessors have been seeing a generally subdued market due to oversupply. The Canal expansion might modestly up the demand half of that equation but realistically will not provide any rocket fuel there.
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.