Full steam ahead on the Panama Canal Expansion

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Amid significant challenges the Panama Canal Expansion project moves forward

Given the magnitude of the Panama Canal expansion project, there were bound to be some obstacles, as was the case when the United States built the Canal a century ago. Instead of mudslides and malaria, the new challenges are centered around a financial dispute, with the consortium of European construction firms (GUPC), and the Panama Canal Authority (ACP) butting heads over who should pay the $1.6 billion in cost overruns. The spillover can be attributed to adjusting costs for circumstances like rare soil conditions and higher-than-expected earthquake potential along the canal.

The project is moving forward and 78% done.

The project is moving forward and 78% done.

The GUPC suspended work on the Panama Canal expansion earlier this year after the two parties failed to reach an agreement on who would pay for the additional costs. Work resumed after a two-week strike as both sides agreed to pay $100 million each in order to keep the project going, but it was estimated that the impasse has resulted in a three-month delay in the expansion.

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JLL’s South Florida Managing Director, Steve Medwin, on a recent Panama Canal site visit.

Despite the setback, the project is moving forward and is 78 percent complete, set to be post-Panamax ready by no later than Q1 2016. An integral component of the project, the rolling gates – which will be used in the new locks – are in the process of being installed. The second shipment totaling four gates arrived in June this year, with eight more expected to be onsite by February 2015. There will be 16 gates total, eight each for the Atlantic and Pacific locks complexes. Once completed, the locks will be able to accommodate mega ships carrying up to 14,000 TEUs. Progress has also been made on the new Pacific Access Channel, the navigation channels, as well as improvements to the Canal’s water supply and draft dependability.

Post-Panamax ships make up 16 percent of the world’s container fleet, but they carry 45 percent of the cargo. By 2030, these ships are expected to carry more than 60 percent of all the containers traversing the ocean.

“Exporters are likely to save an average of 25 percent by shipping on Post-Panamax vessels, and this is why many east-coast ports –Miami and Fort Lauderdale included– are feeling the pressure to modernize their infrastructure so they are equipped to handle the increased shipping capacity” Steve Medwin, JLL’s Managing Director, commented.

Some believe the expanded Panama Canal will stimulate new economies of scale, and faster passage between the Americas and Asia will not only change maritime routes and cargo logistics, but also will create new markets to exploit the bigger ships and deeper ports.

The impact of the canal will depend heavily on the level of demand for goods at home and abroad. The Army Corps of Engineers foresee an increase in the bulk shipping of U.S. grain, fertilizer, oilseeds and petroleum, which would put the canal in a great position to thrive amid the U.S. inland waterways and post-Panamax ships carrying these goods. On the other hand, the financial dispute between the ACP and GUPC has heightened concerns over the economic viability of the project, and only time will tell whether or not the canal, shipping companies, and U.S. ports will experience lower costs and higher returns in the Post-Panamax era.

By Matthew Walaszek, Research Analyst, JLL South Florida