Panama Canal deadlock rattles shipping industry

Panama Canal deadlock rattles shipping industry

The Panama Canal expansion is a project of huge dimensions, and the shipping industry tries to tailor ships to its prospective needs. The project recently came to a halt rattling several industries, which are relying on the future benefits the project will bring.

In December 2013 the expansion of the Panama Canal came to a halt. Led by Spain’s Sacyr, the international consortium in charge of the project stated they would not cover the unforeseen costs of the expansion, which amount to $1.6 billion. In response, the Panama Canal Authority argued that cost increases were stipulated in the contract. The issue has yet to be resolved, although it looks like Panama might just take control of the project. The implications of the project are enormous for global trade, for Panama and for the US.

Impact on global trade and the US

5 percent of the world’s commercial shipping goes through the Panama Canal, and the expansion is meant to substantially increase that figure. The canal’s biggest user is the US, and ports in the East Coast and the Caribbean are already being adapted to suit the new ships, which should be able to carry about three times more than they currently do, and the larger ships would be 30 to 40 percent more efficient.

Miami alone is spending $2 billion on improving ports to match the requirements of Panama’s Canal. The expansion of the canal was meant to benefit from the growing trade routes between Asia and the American East Coast. However, already the stalemate is causing countries and companies to think about alternative routes for larger ships, such as the Suez Canal.

It is not just ports that are adapting to the Panama Canal, the shipping industry is also making changes. The secretary-general of the International Chamber of Shipping reported that effects of the delay will be felt by the industry, since changes to ship capacity are already underway.

How Spain and Panama are involved

Spain’s economic woes and the government cuts on public works have led its companies like Sacyr to look abroad. In the first nine months of 2013, 55 percent of Sacyr’s revenue came from outside of Spain, and Panama accounted for 25 percent of its international sales. Ironically, the rolling lock gates that won Sacyr the project, is the feature that the company is now claiming exceeds its estimated costs, because the gates were made on the basis of faulty geological studies. While Sacyr’s shares have been affected, it is still picking up projects in Latin America. In any case, the crisis is simply more bad publicity for Spain.

Panama’s economy relies heavily on the canal. The deadlock will have a great impact on the industries that feed from the canal’s activity, which in 2009 were estimated to contribute 28 percent of Panama’s GDP. The projected revenue from toll charges would suffer a rough blow. More importantly, the capacity to host bigger ships was expected to attract cruise ships, which would contribute to tourism, an important sector of Panama’s economy.

Some sources point to the involvement of Odebrecht in this affair, a company with a strikingly wide span of influence in Latin America, which owns a large chunk of the contracts of Panama’s public works and which would benefit from taking over the expansion of the canal.

There is a strong nationalistic aspect to any issue that arises between a large part of South America and Spain. In this case, the canal is a historical symbol of independence, both from Spain but also from the US, hailed as a bonding source of national pride. Panama’s suggestion that it will carry out the project by itself will draw significant public support.

Categories: Economics, Latin America

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