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American ShipperIntermodalShipping

Special Coverage: Panama Canal’s transit to the future

The expanded Panama Canal locks, which just opened June 26 to handle vessels up to 14,000 TEUs, are expected to reshape U.S. East Coast port operations.

All photos courtesy of the Panama Canal Authority and Chris Dupin

   It seemed a little incongruous, lying there on the stage minutes after Jorge Quijano, the chief executive officer of the Panama Canal Authority (ACP), had spoken to thousands of executives from shipping companies, port authorities and shippers at a reception the day before the waterway’s new, third lane opened for business.
   It was a Spanish edition of Don Quijote de la Mancha. An employee explained it was given to Quijano by a Spanish guest because of his name—at the end of the novel the hero reveals his real name to be Alonso Quijano.
   The canal expansion had seemed for many to be an “impossible dream.” Yet here it was, completed after nine years of construction, even though, as ACP Chairman Roberto Roy has written, it was “something pessimists and doomsayers bet plenty of money against!”
   Juan Carlos Varela, president of Panama, said the expanded canal is the largest investment and infrastructure project in Panama’s history and is designed to maximize the advantages of the company’s geographic position.
   Panama expended treasure, labor and even lives to the canal expansion.
   The cost of the canal was originally estimated to be about $5.25 billion, including around $3.18 billion for the new locks at the canal. That was about a third of the country’s annual GDP when voters in a national referendum voted to go forward with the project.
   The cost did increase to about $5.4 billion, part of which was anticipated as there were escalation clauses in the contract where the price of the project would rise up and down because of changes in the cost of labor, steel, diesel fuel and cement.
   The country is now engaged in a tussle with contractors over the legitimacy of billions of dollars more in cost overruns.
   Varela noted that 95 percent of the 40,000 persons who worked on the project were from Panama.
   Celebrations were held throughout the country on June 26, when the 9,400-TEU vessel COSCO Shipping Panama became the first neopanamax ship to pass through the waterway on its way from Piraeus, Greece to Asia. 
   Tens of thousands were invited to watch the first neopanamax pass through the locks at either end of the canal and the entire passage was broadcast live on Panamanian television. About 1,000 members of the media from around the world were present. In short, it was a very big event for a country of 4 million people.
   There were special ceremonies held to recognize the men and women who worked on the canal expansion, and the eight workers who lost their lives during its construction.
   “Panama should be so proud they built the 21st century project of the Western Hemisphere,” said Mario Cordero, chairman of the U.S. Federal Maritime Commission, one of many dignitaries that were present at the canal locks’ opening. “It’s going to do a lot for the new dynamic of trade and commodities.”
   The expansion project included several different components:
   • Deepening and widening the entrance channels to the canal on both Atlantic and Pacific sides of the waterway.
   • Construction of three massive new locks on each side of the canal—the Cocoli locks on the Pacific side near the Port of Balboa and Panama City and the Agua Clara locks on the Atlantic side near Colon.
   • Three water-saving basins that accompany each lock chamber. These ingenious devices allow lockage of ships through the expanded canal with 7 percent less water than is required to lift or lower ships in the 1914 locks, even though the new locks can lift and lower ships that are much larger. The technology has been used elsewhere, but never on this scale.
   • Deepening, widening, and raising the elevation of Gatun Lake, which supplies the water for the canal.
   • Deepening of the Culebra Cut, the eight-mile artificial gorge that was dug through the Continental Divide in Panama during its original construction.
   • A new 3.8 mile Pacific access channel that joins the new Cocoli locks with the Culebra Cut, a project that involved construction of a dam that was nearly 1.5-miles long.

A Good Start. Only time will tell how heavily the new third lane of the canal will be used, but canal officials predict an eventual doubling of tonnage moving through the waterway.
   The first signs are encouraging. The day the canal opened, 170 ships had reserved bookings in advance, even as the port was limiting reservations to four neopanamax ships per day, two in each direction, but said it can handle more.
   In just the first two weeks after it opened, two dozen neopanamax ships had used the canal—11 containerships, 11 liquid petroleum gas (LPG) carriers, and two car carriers.
   “The major beneficiaries will continue to be the people and places joined by our reliable connection,” Quijano said. 
   American consumers of construction materials, household goods, electronics, clothes, shoes and toys will benefit from the ability to move cargo on larger, more economical containerships.
   For the roll-on/roll-off trade, it means that ships carrying 30 percent more cars, trucks and other vehicles—8,000 car equivalent units (CEUs)—will be able to pass through the locks. The first of those neopanamax ro-ros, the NYK Iris Leader, called the Blount Island Marine Terminal at the Port of Jacksonville on July 11.
   In South America, Ecuadorian exporters of bananas and Chilean producers of wine, grapes, apples, salt, and copper will be able to take advantage of lower transportation costs.
   The dry-bulk and tanker trades will be able to use ships with twice the capacity, which should make U.S. exporters more competitive.
   Even the size of the cruise ships that transit the canal will double in size, from ships able to carry 2,000 passengers to those capable of transporting 4,000 passengers.
   The ears of FMC Commissioner William P. Doyle perked up when Quijano mentioned that a ship carrying liquefied natural gas (LNG) had made a reservation to transit the canal. It turned out that ship was coming from Trinidad and Tobago, but Doyle, as well as Panama Canal officials, expects large amounts of both LNG (predominately methane) and LPG (propane and butane) to be exported from the United States as the “trains” at LNG liquefaction plants come on line.
   The U.S Energy Information Agency said the Panama Canal’s new lane will be able to accommodate 90 percent of the world’s current LNG fleet compared with 6 percent prior to the expansion. Sailing time from the U.S. Gulf through the Panama Canal to Japan, South Korea, China, and Taiwan—and those four countries collectively account for two-thirds of global LNG imports—will be reduced sharply. For example, the voyage to Japan will take 20 days, compared to 34 days for voyages around the southern tip of Africa, or 31 days if transiting through the Suez Canal. To Chile regasification terminals, transit time will be cut from 20 to eight or nine days.

Much Needed Improvement. The original two lanes of the canal opened in 1914 and will continue to operate.
   Panama has seen the need for a third lane for a long time.
   Even before the canal was transferred from the United States to Panama on Dec. 31, 1999, an office had been established to study an expansion.
   The canal was able to increase capacity by upgrading the original canal. Quijano said by spending $3.3 billion on improvements it was able to increase the total tonnage moving through the waterway from 228.5 million tons in 1999 to a record 341.8 million tons in 2015.
   Those improvements, which also increased the depth of the lake channels by 2.1 meters, and added better lighting, new tugs and launches, mooring stations and vessel traffic systems, have also increased the reliability, safety and improved transit times at the canal, he noted.
   Manuel Benitez, the canal authority’s deputy administrator, said the expansion comes just in time as the 1914 canal was nearing its capacity.
   “Even though shipping, especially in the container sector, which is in one of its worst years, we have had a very sound year. Last year we had a record in terms of tonnage that passed through this canal even though the container industry and the world as a whole is in a slow period,” Benitez said.
   In addition, the shipping industry has seen a continued increase in the size of ships.
   Last year saw transits by 12,386 oceangoing vessels. About 63 percent of those ships were panamax vessels, compared with 35.4 percent in 1999. Panamax ships are 965-feet long and 106-feet wide, the maximum size that can be accommodated by the original 1914 locks, 1,000-feet long and 110-feet wide.
   The new locks, which are 1,400-feet long and 180-feet wide, can accommodate ships up to 1,200-feet long and 160-feet wide. The depth of water in the new locks is also 60 feet, compared to 42 feet in the 1914 locks.
   “The water level in the canal is quite important, because we would always like to go through with full ships and occasionally we have had times of the year where with the old locks there were restrictions where you could not go through with a full load,” said Anders Boenaes, head of network for Maersk Line.
   This past year has been particularly difficult, because Central America went through one of the most intense La Niña droughts, the counterpart to the El Niño that brought much needed rain and snow to California over the past year.
   Benitez said the expansion includes extensive improvements to improve the water supply for the canal. He noted that in late June the old canal was able to allow ships drawing 39.5 feet and that the draft in the new canal was 43 feet. 
   He said the new locks can handle ships drawing 55 feet of water, but said “we will not be able to give that throughout the year. We think that throughout the year, with 99.9 percent confidence, we can offer 46 feet and most of the time we could offer 50 feet of draft.” He noted this is tropical fresh water, which is less buoyant than salt water.



A roll-on/roll-off carrier squeezes through the Miraflores locks at the Pacific entrance of the original Panama Canal


Container Industry Boost. Containerships account for about a third of the tonnage and 47.4 percent of the revenue at the canal.
   What this means for the container-shipping industry is that carriers can now increase the size of vessels that they can move through the canal from about 5,100 TEUs to those carrying as many as 13,000-14,000 TEUs, though Benitez said it’s expected the “workhorse” ships will initially be smaller. For example, in the two weeks immediately after the canal opened, the neopanamax containerships transiting the canal initially ranged from 6,655 TEUs to 10,000 TEUs.
   Benitez said one advantage of the new locks is that wider, more stable ships will be able to transit the waterway, and carry less ballast and more cargo. 
   Unlike the original locks at the canal that have swinging “miter” gates, the new lock gates roll out from the side of the canal, much like pocket doors. Each lock has both an inner and outer gate. Benitez explained this was done originally so that the locks would be easier to maintain and repair—the locks would not have to be drained and the canal closed. But by combining an inner and outer gate, or using the two outer gates, the lock chamber can be extended to 1,500 feet or 1,600 feet.
   Carriers sending neopanamax ships through the canal in the first two weeks included COSCO China Shipping, MOL, Hanjin, Mediterranean Shipping Co., Evergreen and “K” Line, and other carriers have made reservations.
   Benitez expected the canal will have at least six container services using neopanamax ships by the end of this year. “By next year we are estimating 11 services of neopanamax and 21 services with panamax ships,” he added.
   The inability to operate large ships has seen more companies in recent years routing vessels from the Far East to the U.S. East Coast via the Suez instead of the Panama Canal.
   But the information service Alphaliner reported on July 6 that “the Panama Canal has successfully pushed back the Suez Canal’s inclusion into this trade,” with its share of trade jumping to 57 percent after the opening of the new lane compared to 48 percent at the beginning of 2016. The Panama Canal did this even as the number of strings through the Panama Canal fell from 16 to 13, as carriers combined some strings.
   Of course, there are some ships that are larger than 14,000 TEUs that will not fit through the expanded canal, and more are on order, but most of those operate between Asia and Europe. But the canal authority said that about 98 percent of containerships are able to fit through the expanded canal today. That percentage will drop to 95 percent by 2019, as more of the big ships are delivered.
   Maersk, the world’s largest container carrier, has had five services that use the Panama Canal—one between Australia/New Zealand and the U.S. East Coast; two between Ecuador and North Europe and Ecuador and the Mediterranean and Black Sea; one, the TP10, between China and Korea and U.S. East Coast ports; and another, the TP18, between China and Korea, and Houston, Mobile and Miami.
   He said Maersk would only increase the size of its ships in the TP8 or TP10 strings if demand was there.
   None of those services use neopanamax ships, but the company has announced plans to reroute one of its transSuez services through the expanded canal starting in September.
   The TP12 will be transformed into an eastbound around-the-world service. That string uses 11 ships with 8,500 TEU capacity. Maersk will continue to use the Suez Canal for its TP11 service.
   Boenaes said routing a ship through the Panama Canal instead of the Suez will improved transit times.
   According to the ACP, it is 10,582 nautical miles from Shanghai to New York via the Panama Canal and 12,370 miles via the Suez Canal.
   But carriers, including Maersk, reduced or abandoned routings via the Panama Canal in favor of the Suez Canal despite the longer route, because the economics of larger ships were attractive even if they had to travel further and a ship had to be added to a string to maintain a weekly schedule. Now, with the new lane of the Panama Canal open, Panama is in the big ship game.
   Griffith Lynch, executive director of the Georgia Ports Authority, said in 2011 about 25 percent of Savannah’s traffic came through the Suez Canal, 50 percent through the Panama Canal, and 25 percent from other parts of the world. At the end of 2015, the ratio had flipped—the Suez Canal was 48 percent and the Panama Canal 30 percent, even though, he said, the Panama Canal has told Savannah that it is its biggest trading partner. 
   But with the expanded canal, carriers are upsizing their vessels to take advantage of the new Panama Canal locks. Savannah said the share of ships with 6,000 TEUs or more will jump from 39 percent to 56 percent in July.
   With the third lane and lower fuel prices, the tide is turning in Panama’s direction.
   Boenaes said there issues at many U.S. ports—water depth, berth length, crane height, and lack of landside capacity—that would prevent carriers from handling the very largest containerships able to use the new third lane at the Panama Canal.
   A major obstacle, he said, is the Bayonne Bridge between Staten Island, N.Y., and Bayonne, N.J., which has a roadway that’s too low for containerships carrying more than about 8,500 TEUs to pass beneath.
   The Port Authority of New York and New Jersey is in the process of modifying the bridge so that the roadway is higher. The lower roadbed is expected to be demolished by late 2017, so larger ships can pass beneath it. The entire bridge project will be completed in 2019.
   He explained New York is key to the Asia-East Coast services, because if a carrier does not call New York it is not possible to fill up the larger ships.
   Noting the restrictions on the size of ships in New York at the moment, Boenaes even called 8,500-TEU ships “Bayonnemax.”
   But not all companies are waiting for the Bayonne Bridge to be raised—the G6 is using ships with capacities of about 10,000 TEUs in its NYX string, which calls New York, Norfolk and Savannah.
   The G6 can do that because the ships are calling the Global Terminal in New Jersey, which can be reached without sailing beneath the Bayonne Bridge.
   Bob West, an independent maritime consultant, believes that even as ports like Miami and New York that are capable of bringing in 10,000- or 11,000-TEU ships, the amount of cargo moving through the Panama Canal will grow at ports such as Kingston, Freeport, Cartagena and terminals in Panama itself, including a new container terminal that Panama plans to build in Corazal.
   While some shippers prefer cargo to move directly to the United States without stopping at transshipment hubs, West said transshipment can be highly attractive to both carriers and shippers because “you can load the ship quickly and load it fuller.”   
   Quijano said the ACP is providing incentives to promote the use of the Panama Canal.   These include a loyalty program for container vessels that provides tiered price improvements of as much as six percent. He said 10 container lines are participating in the program.
   The ACP is also providing incentives to other sectors of the shipping industry to use the canal.
   Quijano said the canal, for example, will apply a ballast rate for LNG vessels so long as the voyage is 60 days after the laden transit and is developing a similar ballast rate for dry bulkers to promote the repositioning of ships that need to use the larger locks.
   Maersk’s Boenaes said moving cargo via the canal will help reduce the cost of transportation for carriers moving cargo from the Far East.
   “I’m not going to relate that directly to prices for customers, but we are always fairly good—and this is meant very ironically—at giving our cost savings away for our customers,” he said.
   The London-based consultancy Drewry wrote in July that it believes cargo will shift from the U.S. West Coast to the East Coast gradually.
   “Without doubt, the ability of the canal to handle much larger ships is a groundbreaking event and heralds a new era in which a large swathe of U.S. importers will have a much wider choice of options routing goods from the Far East. However, it will not all change overnight—the migration of seaborne cargo from the West Coast to the East Coast will continue to be a steady evolution,” Drewry said. Like Boenaes, the firm pointed to the Bayonne Bridge as one reason the ramp-up in ship size will be gradual.
   “The American market has become a difficult one to predict and, while demand for East Coast space improved from mid-May onwards, it is impossible to say with any conviction whether this year’s peak season is going to be a strong one or not,” Drewry said. “It has caused the carriers to err on the side of caution. On the one hand, they have introduced larger ships into new loops, but on the other they have removed services.”
   Carriers, Drewry said, are aware that “with spot rates at historic lows they can ill-afford to flood the market with excess capacity.”
   Oslo-based Xeneta, which maintains the world’s largest database of container freight rates, predicted freight rates could potentially deteriorate as carriers attempt to fill the larger ships capable of transiting the expanded canal.
   “There could be real trouble brewing on the horizon,” Xeneta CEO Patrik Berglund said. “Firstly, the neo-panamax vessels have to attract trade to this fresh route, and this could initially force them to keep rates artificially low—the last thing the industry needs. Then we have the fact that more ships will be able to compete on the East Coast, potentially pushing rates even lower.”
   Newly arriving 18,000-20,000 TEU megaships could also be deployed into the U.S. East Coast via the Suez.
   Boenaes said moving cargo via the Panama Canal to destinations in the eastern United States will certainly be lower than moving it by rail or truck.
   For years consultants have been speculating about how much cargo will shift to all-water routings.
   The Boston Consulting Group and C.H. Robinson have estimated that with the Panama Canal opening, as much as 10 percent of container traffic between East Asia and the United States could shift from West Coast ports to East Coast ports by the year 2020.



Gates for new locks each have duplicates so locks do not have to be drained for maintenance


Costs And Concerns. There were a number of problems that developed during the canal construction, and continuing concerns about the operation of the new locks, but it is still far from clear how important these will eventually turn out to be.
   The third lane of the canal was projected originally to have been completed in 2014 to coincide with the centennial of the opening of the original canal
   During the construction, disputes developed between the canal authority and the multinational consortium building the locks. Grupo Unidos por el Canal (GUPC), a joint venture of Spain’s Sacyr Vallehermoso, Italy’s Impreglio, Belgium’s Jan De Nul group and Urban Construction Inc. of Panama (CUSA).
   The dispute reached a crescendo with work stoppages in early 2014, but the two sides were able to come to an agreement so the work on the canal continued. 
   ACP advanced $872 million to the consortium so that the project would be completed and the funds do not have to be repaid until 2018, when disputed claims must be adjudicated.
   Of the $3.5 billion in disputed claims, $1.5 billion has been taken to a dispute adjudication board and the other $2 billion has yet to begin the dispute resolution process. 
   The dispute adjudication board has resolved around $950 million in disputed charges and awarded the contractor more than $300 million. Neither side is pleased with the ruling by the dispute resolution board. They have both taken the disagreement to a second stage—international arbitration, Benitez said.
   Benitez said in the event of that the rulings are nfavorable to ACP, the amounts awarded to the consortium would be taken out of the $872 million advance to the consortium.
   It’s not clear how much luck the consortium will have in recovering additional funds. The disputed claims seem to confirm the skepticism of other companies that bid on the project which thought GUPC had offered far too low a price. A consortium led by Bechtel bid $4.2 billion for the job, while the C.A.N.A.L. consortium led by Spain’s ACS bid $6 billion.
   A major bone of contention between the consortium and ACP had to do with the concrete mix.
   Ilya Marotta, executive vice president of engineering and administration of programs at ACP, said when contractors began pouring concrete there were problems with the quality and they had to repair or demolish and rebuild some areas.
   “They came in with a better mix of concrete and it worked much better. We have strict requirements for concrete and every meter of concrete deposited complied,” Marotta said.
   During testing, some concrete sills in the locks developed leaks, but the canal had those sections reinforced with additional steel.
   Benitez said ACP believes that eventually 15 ships could be moved through the new canal lane each day if the water-saving basins were used and 17 if they are not used.
   As ships move through the locks in the original 1914 canal, they are centered and pulled through by locomotives, known as “mules.” With the new locks, the ships use their own propulsion and are guided by tugboats. Tugs are also used to guide ships into the older portion of the canal and big ships are escorted the entire length of the waterway.
   Ivan de la Guardia, president of the union of canal towboat captains, said in the first weeks of operation there was an average of only one ship using the third lane, though on some days there were as many as four. Average transit times for each set of locks are about 3.5 hours, he estimated.
   He complained about a lack of training for the 130 tug captains and said there was a need for about 40 more. He also said more tugs are needed.
   De la Guardia also said there have been problems with lines snapping as ships are moved through the locks and fenders on the side of the lock sliding from the wall.
   While in the old locks ships are centered by the mules, in the new ones tugs are being used to press them against the sides of the locks, and Benitez said this procedure has worked well.

  Chris Dupin is Maritime and Intermodal Editor of American Shipper. He can be reached by email at cdupin@shippers.com.

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Chris Dupin

Chris Dupin has written about trade and transportation and other business subjects for a variety of publications before joining American Shipper and Freightwaves.
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