Finally! Panama Canal Expansion Open for Business

GEP | Finally! Panama Canal Expansion Open for Business

Originally scheduled for October 2014, the expanded Panama Canal finally is set for inauguration this month. The renovated canal will feature new lock complexes on the Pacific and Atlantic sides, deepening and widening of the existing channel and canal entrances. The project also would facilitate an increase in the operating level of the Gatun Lake, which would improve the canal’s water supply and draft dependability.

Initially, the expanded canal would offer transit to container vessels with capacity 12,000 TEUs (20-foot containers). Eventually 14,000 TEU vessels will be able to use the canal. The greater volume will lower the average cost per TEU due to economies of scale in labor, insurance and fuel costs.

The expanded canal would unsettle the established patterns of sea trade between Asia and North America. Historically, importers on the East Coast have been shipping goods from Asia to the U.S. West Coast ports and the goods would be moved through trucks and rail into the U.S. inland regions and to the East Coast. However, with the canal becoming operational in June, end users now can ship their goods directly to the East Coast. Studies have estimated a shift of 10 percent cargo from West Coast to East Coast by the year 2020.

Furthermore, the canal expansion is expected to encourage increased movement of LNG from the United States to Asia. The Asian markets currently are highly dependent on liquefied natural gas (LNG) shipments from Russia and the Middle East. The larger sized LNG vessels could bring down the cost and add a new dimension to the Asian chemicals market.

The major agro commodities such as soybeans, wheat, corn, barley and sorghum that are exported from the U.S. Midwest to East Asia also are expected to get a boost with the opening of the canal.

The canal expansion would have an impact on rail operators (such as BNSF Railway and Union Pacific) on the West Coast. The shift in cargo volume would reduce volume for West Coast rail operators. The Union Pacific is expected to witness a drop of approximately 5 percent in its market share as the cargo volumes increasingly shift toward the East Coast.

The expansion also would impact the movement and trading volumes of commodities like soya and cotton between South America and Asia. Panama’s position as the distribution hub for South American ports would be greatly boosted with the canal expansion.

The Panama Canal expansion project is one of the key developments in the recent past expected to have a wide impact on ocean freight and US market in particular. It would bring down the cost of shipments from China to the U.S., bring about a gradual shift in volume to the East Coast ports, and give an impetus to the LNG trade from the U.S. to Asia. It remains to be seen how the dynamics of the global shipping impacts the economies of the country involved with this landmark event.

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