A Bigger Canal for Larger Ships

After a century of distinguished service, the Panama Canal, which opened in 1914 to link the Pacific to the Atlantic Ocean through the Gatun Lake, is undergoing a major overhaul. After eight years of incessant work and a 5.2 billion dollar investment by the US government, in 2016 the new system of levees and access routes will allow the transit of larger ships and cut down the time needed to ship freight between the two oceans.

The role of the Panama Canal in international trade has been stable for a decade. In 2013, 3% of world maritime trade went through the Canal, although the value is considerably higher for certain nations: for the US it's 15%, for Ecuador it's 40%, while China stands at about 5%, the same value as Italy. More specifically, 4.7% of world container traffic, 10.6% of wheat, 5.8% of chemicals transit through Panama.

The driver of change is economies of scale, namely the huge size reached by contemporary container ships, which account for 51.5% of the toll fees raised by the Canal. In fact, the development of containerization has been such that 54% of the ships supplied in 2014 exceeded the Panama Canal's size. And the figure was projected to reach 60% by 2018. Bringing the current limit of 4,400 TEUs (Twenty-Foot Equivalent Units, the international unit in container freight) to 12,400 TEUs in 2016 means a cut in maritime costs of 34% and a 24-hour reduction in travel times, thanks to the higher speed of operations, so that a single container ship can save about 100,000 US dollars per trip.

The new shipping routes of gas and cereals

The new ability to deal with larger ships and the doubling of overall capacity will have interesting effects not only on container traffic, but also on the logistics of the cereals trade, and especially the world market for Liquefied Natural Gas (LNG).

Container services are very already important for US imports, but LNG coming from the Gulf of Mexico to be exported toward India and Japan, or the export of wheat and corn toward South East Asia could boost American exports. In 2014, there were about 30 major container carriers using the Canal, for and average capacity of 3,900 TEUs. As the average size is bound to grow, the number of players and ports touched will be shrinking. The effect on US harbors is likely to be consolidation, with Gulf of Mexico and Atlantic ports benefiting from increased container traffic as long as they have the right size and depth, and have upgraded their equipment and services. So traffic is expected to become more concentrated in East Coast ports to the detriment of West Coast ports, which are likely to be at a disadvantage, in spite of the high efficiency levels reached (e.g. 400-TEU trains traveling from Chicago to Los Angeles in four days).

Summing up, the 80 kilometers of the new Panama Canal are bound to alter the shipping routes of world trade.