Panama Canal Expansion: The Dangers of Long-Term Delays

5 MINS READJan 27, 2014 | 11:18 GMT
The Panama Canal locks in Colon, 110 kilometers (68 miles) northwest of Panama City, Jan. 17, 2014.
The Panama Canal locks in Colon, 110 kilometers (68 miles) northwest of Panama City, Jan. 17. Expansion of the canal could cease at the end of January if Panama does not agree to pay $1.6 billion in unforeseen costs.

Significant delays to the Panama Canal expansion project are increasingly likely as negotiations between the multinational construction consortium, Spanish financiers and Panamanian authorities drag out. The Grupo Unidos Por el Canal consortium is threatening to stop work at the end of January after already extending the previous deadline past Jan. 20. According to the Panamanian Dispute Adjudication Board, which is arbitrating the negotiations over who will cover cost overruns, a work stoppage could mean that the canal will not be completed until as late as 2020.

Because the project has been delayed once already, from an estimated completion date of 2014 to mid-2015, a postponement of a year or so would be well within the bounds of previous setbacks. How long it is delayed now will be determined by several factors, including whether the project will need a new consortium of builders and financial backers; such decisions will be shaped by ongoing negotiations between the principal stakeholders. The duration of any holdup itself will be critical in determining whether the ongoing dispute is geopolitically significant. A delay of a year or less is unlikely to have major consequences. On the other hand, a five-year delay could strain regional ports and transportation infrastructure, particularly as the United States continues to emerge from its economic downturn.

The expansion project will enable significantly larger bulk and container ships to pass through the canal. In essence, it will improve connectivity between Asia and the eastern coasts of North America and South America by making an all-water route accessible to a wider range of ships. The U.S. Gulf Coast and trade ports in the Caribbean stand to benefit the most from the increased shipping volumes of larger ships. East coast ports that have the capacity to handle new, larger Panamax ships will be in direct competition with west coast ports and interior transportation lines for trade traffic.

These effects will be seen regardless of the timeline of the project's completion, but depending on the length of the delay, different elements of infrastructure — particularly port and railway industries — and their associated companies will be affected in different ways.

Necessary Modifications

Ports in the Western Hemisphere are watching the ongoing negotiations with much anticipation. Ship designs are always changing to maximize efficiency, but at this point it appears that the canal improvements will permit ships that can carry up to three times as much containerized cargo as the current Panamax ships. The maximum bulk cargo weight of standard vessels is expected to increase by roughly 50 percent, to around 120,000 metric tons. This increased capacity will give ports the opportunity to handle greater cargo volumes and generate additional revenue.

Panamax and Post-Panamax Vessel Size Comparison

Panamax and Post-Panamax Vessel Size Comparison

But to be ready to do that, ports will have to be modified to receive the larger post-Panamax ships, requiring hundreds of millions of dollars worth of upgrades. New Panamax ships — with significantly larger hulls and displacement — draw much more water than current Panamax ships. This means that ports will need to have channels and berths at least 15 meters deep. For many locations, this will require significant dredging. This is particularly true of Gulf coast ports such as Houston, which tend to be relatively shallow, but even east coast ports will have to deepen their channels and berths. For example, the Port of New York and New Jersey began dredging key channels to depths of 15 meters in 2005. The New York and New Jersey Port Authority is also raising the Bayonne Bridge by 19.5 meters to allow enough air clearance for larger tankers entering the port. The project is taking place without disrupting traffic and is expected to cost $1.29 billion.

Container Port Readiness for New Panamax Vessels

Container Port Readiness for New Panamax Vessels

Other ports in the Western Hemisphere have already invested or are preparing to invest in the improvements necessary to receive increasingly large ships. These include Norfolk, Va., and Savannah, Ga.; Kingston, Jamaica; Cartagena and Buenaventura in Colombia; and Suape and Santos in Brazil. These are long-term investments designed to keep the ports relevant and competitive in a global climate in which ships are becoming larger each year, regardless of the status of the Panama Canal.

For the ports that are set to complete their expansions by the mid-2015 Panama Canal benchmark, the delay could mean a longer timeframe for recouping upgrade costs. But these are large infrastructure projects requiring enormous efforts and financing. As such, they are subject to their own delays, and a hold in the completion of the canal expansion may give some of these ports more breathing room and time to complete their own improvements before the canal upgrade affects regional trade dynamics. Longer delays to increased trade volume would likely create serious financial implications for a great number of ports.

A shorter delay, however, will provide a reprieve for west coast ports in North America that are likely to become slightly less competitive once high-volume all-water routes to the east coast become viable. This is a potential boon for inland railways that transport goods from west coast ports to east coast consumers, which could see higher-than-expected demand if the expansion is delayed. The prospect of the eventual completion of the canal would reduce incentives for substantial additional infrastructure investment, meaning that a long delay of five or more years would leave North America reliant upon existing infrastructure. As the U.S. continues to recover economically, additional imports could begin to seriously strain existing infrastructure at west coast ports and railways if the Panama route does not open. South American ports, for the most part, serve localized markets and are unlikely to see these kinds of distributed risks. 

A longer delay to the canal becoming fully operational would also substantially impact liquefied natural gas exports from the Gulf Coast to Asian consumer markets. Whereas the current canal is too small for most liquefied natural gas tankers, the new canal dimensions are big enough to fit the majority of the tankers currently in operation. As a result of the boom in natural gas production in the United States, the first liquefied natural gas export facility at Sabine Pass, La., is expect to come online in 2016. The majority of the export contracts being signed by prospective liquefied natural gas exporters are with Asian countries. Therefore, being able to go through the Panama Canal would be substantially more efficient than having to go around the capes of South America or Africa. Expanded capacity at the Panama Canal will also be a boon for exporters of oil derivatives on the U.S. Gulf coast.

The investment boom in Western Hemispheric ports — as a result of the planned expansion as well as the gradual enlargement of ships in the global fleet — has introduced a multitude of variables that will affect the eventual outcomes of the canal. Every port in North America hopes to improve its competitiveness to secure a larger share of the anticipated uplift in maritime trade. The individual financial profiles of seaports will determine their resilience in the face of a delayed Panama Canal upgrade. Looking at the maritime distribution system as a whole, however, it becomes clear that while a short delay will have a limited impact globally, a long delay could put serious stress on existing North American infrastructure. 

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview


To empower members to confidently understand and navigate a continuously changing and complex global environment.