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American Shipper

Panama Canal project progresses

Panama Canal project progresses

Luck, good planning help keep massive expansion on time and under budget.



By Eric Kulisch



      The massive $5.2 billion project to expand the Panama Canal to accommodate much larger vessels is on time and under budget so far, according to Panama Canal Authority officials.

      'Right now we are still on track to complete it by the end of 2014 as planned,' said Rodolfo Sabonge, the authority's vice president for market research and analysis, at the Transportation Research Board convention on Jan. 13 in Washington.

Sabonge

      The upgraded passageway is expected to double capacity and change container-shipping patterns between northern Asia and the U.S. East Coast.

      The first two excavation stages for a new Pacific Ocean access channel are virtually complete. A third phase is halfway done and ahead of schedule. And earth moving recently began on a fourth section after the Panama Canal Authority (PCA) awarded a $268 million contract to a Mexican, Spanish and Puerto Rican engineering consortium to excavate a channel between the new locks and the Gaillard Cut, the narrowest part of the canal.

      Deepening and widening the Pacific entrance is two-thirds complete and also well ahead of schedule. A quarter of the dredging for Gatun Lake and the Culebra Cut is done.

      The Panama Canal Authority awarded an $89 million contract to a Dutch firm in late September for deepening and widening the Atlantic Ocean entrance, which is scheduled for completion in May 2013.

      In total, the dredging projects will move 55 million cubic meters of soil. Construction crews have finished relocating electric transmission towers and lines.

      The most complex portion of the project is designing and building the giant locks and water-saving basins. A consortium of major engineering companies won the lock contract last summer with a bid of $3.2 billion.

      Sabonge said cranes, concrete, steel and other large equipment for the lock project is arriving in Panama and clean up activities are underway to prepare the construction zone. In December, the United Consortium Group submitted a $300 million letter of credit to the PCA as a performance guarantee.

      Cost escalation and delays are frequent companions of complex infrastructure projects, but the fact that the Panama Canal expansion is still under budget is due to a combination of luck and good planning.

      The PCA, which raised $2.3 billion from multilateral banks and is paying for the rest of the project on its own, has benefited from the global recession and the resulting drop in demand for construction materials, fuel, commodities and services. The cost of construction materials was much higher when the PCA made its original cost estimates, but came down by the time the agency went out to bid, Sabonge said.

      The principal beneficiary of the canal expansion is the container shipping industry. But the PCA official said the dry and liquid bulk sectors are also gearing up to take advantage of the new capacity.

      Thirty percent of new ship orders by dry bulk carriers are compatible (up to 120,000 deadweight tons) with the new lock size and liquefied natural gas carriers have also expressed interest for the first time in transiting the wider waterway, Sabonge said. Very large oil tankers are also poised to use the canal.

      The new locks will be able to accommodate container vessels up to 12,600 TEUs, but 'we believe the workhorse will be the 8,000- to 10,000-TEU vessel for at least the next 10 years,' Sabonge said.

      Vehicle and refrigerated carriers do not plan to build post-Panamax vessels.

      Last year, vessel tonnage transiting the canal fell 2.8 percent to 299 million tons from 310 million tons in 2008 and a high of 313 million tons in 2007. Dry bulk, which hit a record 60 million tons, and liquid bulk traffic partially offset the 9.5 percent decline in container volumes. Given the huge slowdown in global trade, PCA officials say the traffic reductions could have been a lot worse.

      Several factors combined to boost bulk grain shipments through the canal, Sabonge said. Cheaper charter rates made it more economical for Midwest farmers to move their Asia-bound crops by barge to the Gulf Coast and then by vessel instead of utilizing more expensive rail transport to West Coast ports. The trend was compounded by an increase in demand for U.S. grain because of a supply decrease in Argentina and other parts of South America.

      Sabonge said the PCA conservatively estimates total volume in 2010 will come in slightly under the 2009 level.

      The expansion doesn't mean that all large vessels from Asia will opt for the Panama Canal route to reach the U.S. East Coast population centers. The Suez Canal is already handling some of the massive 14,000-TEU vessels in service that call on big European ports, but U.S. trade via the Middle Eastern shortcut is expected to increase over time. In the meantime, ports are scrambling to attract public and private capital to expand their facilities given that New York-New Jersey and Hampton Roads, Va., are considered the only ones with the deep draft, wharfs, and inland road and rail connections necessary to handle 8,000-TEU and larger vessels.

      In 2008, East Coast ports processed 5 million TEUs of Asia traffic, a little more than a quarter of the total U.S. volume.

      The Panama Canal expansion is widely predicted to accelerate the ongoing shift from West Coast to East Coast ports of entry for containerized goods made in northern Asia. The trend is fueled by shippers looking for least-cost routes, a stable waterfront labor situation, more direct access to markets and risk diversification. It is highlighted by the fact that 25 percent of apparel tonnage routes through East Coast ports compared to 12 percent in 2003, said Scudder Smith, a principal consultant with engineering firm Parsons Brinckerhoff.

      The PCA and other industry officials envision that mega-ships will only call a couple of mainland ports ' one in the Northeast (New York or Norfolk) and one in the Southeast (Savannah, Charleston) or Gulf (Houston; Mobile, Ala.) ' and a hub port in Panama, Cuba or the Caribbean where cargo can be transferred to smaller vessels to feed a handful of secondary ports like Tampa, Fla. A key reason that the Caribbean will serve as a load center is the Jones Act, a U.S. law that prevents foreign-flag carriers from operating in coastal trade between mainland ports. Using U.S. ships and crews would significantly raise costs for the maritime industry.

      Transshipment will take place on a greater scale in Latin America, where ports are even more unprepared to receive the giant containerships, according to Sabonge. By expanding the canal, Panama will not only boost toll income but also grow its own ports and logistics industry into a distribution hub for the Americas to take advantage of the expected increase in north/south transshipment.

      The disparity in port capabilities is underscored by the fact that there are more gantry cranes in Panamanian ports than in the rest of Latin America combined. Countries such as Chile and Peru already are very dependent on the canal for foreign trade. Half of Chile's imports and 72 percent of its exports connect with larger vessels in Panama, according to the PCA.

      It is not crystal clear which origin ports will support Panama or Suez services. The dividing line for United Arab Shipping Co. is Singapore, said Benjamin M. Massa, the company's general manager for North America, at a mid-October trade development conference in Virginia organized by the state.

      Eventually, any cargo originating east of Singapore is likely to transit the Pacific Ocean to the U.S. West Coast or Panama Canal and cargo from the west will move through the Suez Canal, he said.

      Sabonge placed the demarcation point a bit north, closer to Taiwan and Hong Kong. Products coming to the United States from Hong Kong, Taiwan, Vietnam, Thailand, Singapore and India will most likely use the Suez Canal, while shipments from northern China, Korea and Japan will utilize the Panama Canal, he said.

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