Aug. 15 (Bloomberg) — A century after the U.S. steamship Ancon first sailed through the Panama Canal, a $5.3 billion expansion delayed by bickering contractors and angry workers is nearing completion. The problem is it might not be big enough.
With the expansion 16 months behind schedule, canal administrator Jorge Quijano said officials are studying whether to dig a fourth set of locks to handle a growing fleet of super- sized ships. Those include the 400-meter-long “Triple E” vessels capable of carrying more than 18,000 containers, four times more than current ships passing through the canal.
“We are always analyzing the market and as soon as we can economically justify it we will begin,” said Manuel Benitez, deputy administrator of the Panama Canal Authority, adding that he thinks the current expansion is sufficient for now. “If that changes and the demand exists we are ready to begin.”
Panamanian officials today will celebrate the anniversary of the French and U.S.-built canal, which cut thousands of miles off global trade routes and generated almost $10 billion in tax revenue for Panama since the U.S. handed over control at the end of 1999. A new expansion could help sustain economic growth that has averaged 9 percent per year since 2007, the fastest in Latin America.
Delays on the current expansion, approved by voters in a 2006 referendum, have cost the country about $200 million, pushed the completion date back to December 2015 and may force the government to trim spending.
“We are going to elaborate a plan to tighten public spending and we are going to review the budget,” Economy Minister Dulcidio De La Guardia told congress on Aug. 11, citing lower-than-expected canal revenue.
President Juan Carlos Varela, who took office in July, needs the boost that would come with increased ship traffic to fulfill campaign pledges to reduce poverty, expand public transportation and sustain growth as canal construction winds down. The country’s fiscal deficit reached 3.2 percent of gross domestic product in the first half of 2014, above the 2.7 percent allowed by Panamanian law, De La Guardia said.
“We have already felt the impact of not having the canal expansion done,” said Benitez.
The canal authority says the current project is 78 percent completed.
A consortium led by Spain’s Sacyr SA halted work on the expansion at the start of the year in a dispute over $1.6 billion in cost overruns. Construction workers demanding higher salaries went on strike in the days leading up to the May presidential elections and Quijano, the canal administrator, said a regional drought may limit ship traffic later this year.
Economic activity in May, when the labor strike hit, eased to 1.7 percent from a year earlier, the slowest pace in almost five years. Growth will be 7.2 percent this year, the least since 2009, according to the International Monetary Fund. The country’s dollar bonds have returned 1.1 percent in the past three months, below the 1.9 percent average of emerging markets, according to JPMorgan Chase & Co.’s EMBIG index.
The global financial slowdown since 2008 has also hurt revenue in the 77-kilometer (50-mile) canal. Total ship transits declined to 13,660 in 2013 from 14,685 in 2011, according to the Canal Authority. Officials expect those numbers to rise when the new locks open.
With a surge in U.S. natural gas production expected to boost trade with Asia and shipping companies including A.P. Moeller-Maersk A/S rerouting their largest vessels away from the canal, Panama is vowing to finish the expansion next year.
The project, which has spurred a series of port and infrastructure upgrades throughout the Caribbean and the U.S. eastern seaboard, will make room for vessels with the capacity to carry as many as 12,600 containers, almost three times what the existing locks permit.
One 20-foot container can hold 329 19-inch televisions or 48,000 bananas, according to Maersk, which says it has a fleet able to transport 4.1 million containers.
“Vessels are getting larger because of the economies of scale,” said Robert Brodesky, director of transportation consulting for IHS. “There is a lot emphasis being put on ports particularly on the east coast of the United States in being able to deepen their channels.”
The expansion will coincide with the delivery in the coming years of about 165 ships capable of carrying as many as 10,000 containers, said Jonathan Roach, a shipping analyst at Braemar ACM Shipbroking in London. About 140 ships, including some under construction, will be too big to fit through the new canal, Roach said.
Benitez said the idea for an additional set of locks emerged as a way to attract increasing shipments of iron ore and coal from Brazil and Colombia and oil from Venezuela to the canal. Officials have blueprints of the land where contractors would build the locks, Benitez said.
China Harbor Engineering Co., which built Pakistan’s Gwadar Port and Macau’s airport, said it is ready to make the canal ever bigger. Chairman Mo Wenhe announced interest last week in “exploring our participation in all canal projects, especially in the design, construction and financing of a fourth set of locks.”
Talk of new locks may be driven by Nicaragua’s efforts to pursue its own canal, a $40 billion project it announced last year in partnership with a previously unknown Chinese company. Honduras also said it wants to build a rail line connecting it’s Pacific and Caribbean coasts to spur more trade.
The route through Nicaragua would be longer than Panama’s and the cost of the undertaking, at nearly four times Nicaragua’s GDP, has raised doubts over whether the project is feasible.
“The Nicaragua canal has incited Panama to play its cards and to push it a little bit further,” said Jean-Paul Rodrigue, a professor of global studies and geography at Hofstra University in Hempstead, New York, who estimated that an additional expansion would cost $10 billion to $20 billion.
The Panama Canal’s more immediate rival, Egypt’s Suez Canal, announced plans this month for an $8.4 billion expansion. About 18,000 ships pass through the Suez each year.
Plans for a canal across the Central American isthmus date back to the Spanish colonial era. Cornelius Vanderbilt funded a failed effort in Nicaragua in the 1850s. The French government, fresh off the completion of the Suez, first backed efforts starting in the 1880s to build a waterway across Panama.
As many as 20,000 men at one point worked on the French canal project, which was abandoned multiple times as debt and deaths piled up. In 1904 the U.S., led by President Theodore Roosevelt, took control of the project and the entire canal zone, which it would relinquish 95 years later.
Shortly after the Panama Canal opened in 1914, the 4,500 container ship that came to be called the Panamax became the new standard in shipping. By 1996 the first so-called post-Panamax ships were in use, and two generations of larger ships have been built since then.
With more than 50 million tons of dirt excavated since 2006 and sets of Italian-made gates awaiting placement at the new locks, Benitez said the canal has reached an agreement with its contractors on how to resolve any disputes and will finish by the end of next year.
“We are at the point of no return,” Benitez said. “It’s perhaps the most important project being built in the world right now and it’s to the benefit of both sides to finish it as soon as possible.”
–With assistance from Naomi Christie in London.