Prospects for the Panama Canal Alternative: Analysis

By George Backwell
Sunday, August 10, 2014
Panama Canal locks: Photo Panama Canal Authority

While infrastructure projects, especially canals, bear a certain element of inherent skepticism, their impact on global trade flows should not be taken lightly. Although the Panama Canal’s expansion will likely have a more muted effect on the tanker market than other shipping sectors, cost overruns and work stoppage has evoked a ho-hum prognosis for the project in general, considers Poten & Partners in their latest 'Poten Tanker Opinion'.

While infrastructure projects, especially canals, bear a certain element of inherent skepticism, their impact on global trade flows should not be taken lightly. Although the Panama Canal’s expansion will likely have a more muted effect on the tanker market than other shipping sectors, cost overruns and work stoppage has evoked a ho-hum prognosis for the project in general.

While endeavoring not to pile on to initial project hype, the recent announcements about the construction of a second Caribbean to Pacific canal, in Nicaragua, should prick some ears.

At an initial price tag of $40 billion, the proposed Nicaraguan Canal would facilitate trade between Punta Gorda on the Caribbean coast and Brito on the Pacific coast. The proposed route would run a total of 173 miles through the 55 mile-wide Lake Nicaragua: three and a half times the distance of the Panama Canal.

While the country of Nicaragua and the Hong Kong Nicaragua canal Development Investment Co. exude enthusiasm for the project, this undertaking is not without its fair share of obstacles.

For starters, the Nicaraguan Canal’s construction timeline is aggressive. Work is to start, reportedly, in December of this year with operations to begin in 2020. For perspective, the Panama Canal expansion was due to cost $5.25 billion; but overruns have amounted to $1.6 billion so far.

Total construction of Panama’s third set of locks was estimated to take seven or eight years, with an operational start date roughly 100 years after the original Christening of the Canal. In July 2012, it was announced that the completion date would be pushed back from 2014 to 2015. With the strikes and disputes putting a wrinkle in the progress, next year is even looking like a lofty goal.

A few other technical aspects remain unclear as well. The Nicaraguan Canal is slated to be able to accommodate vessels with up to 400,000 deadweight tons displacement, but not a whole lot of information exists about the parameters beyond that one number. The reversal of the 600,000 barrel per day Transpanama Pipeline in 2008 had an arguably larger effect on crude oil transportation than the expansion of the Panama Canal is likely to have, so the impact of the Nicaraguan Canal on oil flows could be even less significant.

Historically, tankers have made up a smaller percentage of Panama Canal traffic as compared to container ships and dry bulk carriers, and an even smaller portion of revenue per ton moved. Although tankers accounted for 24% of total cargo volume, the sector generated only 13% of toll revenue. On average, containerships paid roughly $20 per long ton of cargo, whereas tankers paid less around $4.70, according to 2013 statistics from the Panama Canal Authority.

Project leaders of the Nicaraguan Canal appear to be hanging their hats on its utility by large tankers, such as VLCCs, and ore carriers. While Panama Canal traffic could be used as a volumetric proxy, perhaps tanker trade patterns and their developments should be considered more carefully.

While potential certainly exists for crude oil exports to ramp up from Atlantic-basin Canada, or possibly the United States over time, infrastructure constraints on the loading side, and draft restrictions in places like the US Gulf, could stymie the size of tankers used and their interest in not one, but two canals.

Source: Poten & Partners


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