In International Shipping News 04/07/2016
Source: Zacks
For the past century, the Panama Canal has served as a bridge between the Atlantic and Pacific Oceans, but changes needed to be made to adapt for the next century. On June 26 th , a newly-expanded canal opened up, boasting a now doubled capacity for freight traffic and size.
With larger freight ships, the issue became that the canal was both too narrow and too shallow, issues that the expansion is meant to tackle. It will operate 24 hours a day, seven days a week, with a current expectation of 35 to 40 ships passing through every day, as per the Guardian .
The canal allows for expedited transport of commercial goods, ranging from automobiles to grain. Before, if a company on the West Coast in the U.S. wanted to ship to the East Coast, the ship would have circumnavigated the entirety of South America and sailed back up North to its destination.
Although boosted capacity certainly has positive implications for Panama, a dampened reputation due to the Mossak Fonseca Panama Papers leak along with a need for more water in the channel are a few of many potential difficulties. Let’s take a look at why the expansion matters, and how we can expect it to impact the rail/shipping industry.
How Was the Canal Improved?
Canals use locks, a system meant to raise or lower watercraft between areas of water that may not necessarily be even. This is integral to canals, as their sole purpose is to allow for the quick and safe transit of watercraft.
The Panama Canal previously had a capacity of up to 5,000 TEUs, with the TEU (Twenty Foot Equivalent Unit) serving as the unit of capacity on a container ship. According to the official website for the Panama Canal, the post-expansion capacity is up to between 13,000 and 14,000 TEUs.
Each lock complex has three levels, and creates a new lane with a lock on each side. The website states that this “provides a capacity to handle vessels up to 49 meters (160 feet) wide, 366 meters (1,200 feet) long and 15 meters (50 feet) deep.”
The expansion is also meant to make the Panama Canal more competitive with Egypt’s Suez Canal, which has the capacity to handle mega-ships with a capacity of 14,501 TEU and higher. The Suez Canal is longer, has no locks and costs less than the Panama Canal, however both handle similar levels of traffic.
Benefits to Trade and Industry
As our team points out , the Panama Canal expansion is significant for investors interested in the railroad industry. Normally, Asian exports are transported by ship to the West Coast, after which they are transported by train to the East Coast by such firms as BNSF, a subsection of Berkshire Hathaway Inc.
Because the Panama Canal now has an expanded capacity, many of these larger ships will simply make use of the canal instead of railways to transport their goods, which stands to negatively impact the aforementioned firms that have heavy presence in the West Coast.
Although the canal negatively impacts some companies, this doesn’t mean that the entire industry will be hurt by it. Companies such as Norfolk Southern Corp. that move cargo to the Gulf Coast are in position to benefit from increased volume in the Panama Canal.
Expansion of the Panama Canal reduces the cost of imported goods while also creating increased access to Asian markets for U.S. exporters. Because freight ships have significantly more capacity than trains, increased use of the canal will decrease shipping costs for many companies, being that ships are a slightly slower but cost effective method for transport.
Outlook Isn’t Picture Perfect
As the New York Times points out, there are many concerns about the Panama Canal. One such concern involves the concrete that lines the walls of the locks. There have been past situations in which water broke through the concrete. The budget for concrete in the expansion was comparatively small, 71% smaller than the next lowest bidder for the contract.
Another concern comes from tugboat captains, who say that the canal locks have too small a margin of error and could make navigation more challenging. This coupled with concerns about the depth of the waterway creates doubt about the reliability of the canal. Officials are hopeful that three-water saving basins, which will reuse 60 percent of water in each transit, will help to reduce this strain.
Panama itself could potentially serve as somewhat of a liability, concerning it is a nation still shaking off the aftereffects of the Panama Papers scandal, which has decreased traffic in the region. Furthermore, its large earthquake risk could pose a threat down the road. The canal waterway also serves as tap water for the people of Panama, who will have to be aware of their usage so as not to overly diminish reserves.
Macroeconomic headwinds will also play a direct role in the utilization of the canal. A slower Chinese economy coupled with aftershocks of Brexit could potentially reduce export volumes. Competition with the Suez Canal, for which further expansion is also planned, also serves as a potential threat.
Bottom Line
The Panama Canal has served as a vital trade route for over a century now, but as the case with any longstanding structure, it has to keep up with the times. Its recent expansion is a direct response to increasing demand, and does have a lot of potential. However, as is the case with anything, it is not without its dangers and difficulties.
The challenges are only beginning, and whether or not the expansion will pay off is something that investors will have to watch as time goes on. The Panama Canal has a lot of economic firepower, but there’s no way of knowing yet if it will have to surrender that in the near future.
Source: Zacks
