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Here’s Why The Panama Canal Expansion Has Everyone Excited

Peg Fairbairn by Peg Fairbairn
Jul 28, 2016
in In Focus: Panama, Investing, Panama
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Unveiling The New Panama Canal
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Panama Makes History Again: Canal Expansion Success

If you need just one bit of evidence that Panama is on an upward trajectory, you need look no further than the sliver of water that bisects the isthmus just west of Panama City—the Panama Canal.

The sliver is a little larger now and was the scene of quite a to-do recently to celebrate that fact. A crowd estimated at 25,000 gathered near the Agua Clara locks on the Atlantic side of the canal on June 26, waving Panamanian flags and cheering in the tropical sun as the first supersized vessel made the transit from one ocean to the other.

Among those attending the ceremonies were jubilant Panamanians, canal employees, dignitaries from around the world, shipping and trade executives, and hundreds of journalists. They celebrated the first expansion of the waterway since its original construction in the early 1900s.

All of us with ties to Panama have reason to cheer the long-delayed opening of the expanded canal, not just folks involved in the shipping industry. Time and again, this tiny country has weathered worldwide economic storms because of the waterway. Shipping ebbs and flows as economic fortunes rise and fall, but it never stops entirely. The Panamanian Government reaps the rewards as this continues.

The US$5.4 billion expansion, which was initiated in 2007, allows much larger ships to make the 50-mile trip from ocean to ocean. Previously the maximum size of the ship, known in shipping circles as Panamax, was limited by the size of the canal’s locks and the depth of the water. Building the new locks allows for so-called New Panamax ships with a capacity nearly three times—14,000 containers instead of just 5,000—that of Panamax ships to travel the canal.

Each container ship passing through the canal pays a toll based on the ship’s capacity, expressed in what are called 20-foot equivalents, or TEUs. A TEU is basically the size of a standard shipping container. That toll is now about US$90 per TEU.

The first vessel to transit the new locks was the Chinese COSCO Shipping Panama, which set sail from Piraeus on June 11 carrying 9,472 TEUs and measuring just under 300 meters—or nearly 1,000 feet—in length. Assuming it’s owners didn’t get a discount for being on display for the crowds, it paid a toll in the range of US$850,000.

Canal officials said they have 170 reservations from neo-Panamax ships planning to make the trip during the next three months. By 2021, the Panama Canal Authority (known by its Spanish acronym ACP) is hoping the project will bring in US$2.1 billion per year in revenue on top of what it was making before the expansion, a figure that would represent 2.8% of Panama’s gross domestic product. The ACP is already eyeing the prospect of adding a fourth set of locks to lure even bigger ships that can now only travel through the Suez Canal.

Excitement about the canal expansion has been rippling across the hemisphere for years. Ports on the United States’ East Coast and Gulf of Mexico have been racing to expand and make room for larger vessels and cargo going to and from the Far East—cargo that previously had to dock on the West Coast because of the canal’s limitations. American coal and grain exporters are also salivating about easier and cheaper access to markets in China and elsewhere in Asia.

Work on expanding the canal was initially scheduled to be completed in October 2014. Billions of dollars in cost overruns and delays pushed that back to April 2016, then again to June. But the work finally got done, and that’s all that matters at this point.

The bigger canal is the main reason economic prognosticators see a good year, and years, ahead for Panama. The canal previously accounted for about 15% of the country’s GDP, so doubling its capacity makes for some compelling math and easily leads one to conclude that the country’s prospects are brighter for the foreseeable future.

It’s not only the government that stands to benefit from the canal expansion. The private sector is stepping up in a big way as well. Much of the activity centers around the Pacific entrance to the canal just outside Panama City. A new container terminal at Corozal is planned within two years and has generated interest from 13 of the world’s largest port operators, and the Panama Pacifico Special Economic Area is shaping up to be something special.

The wide range of new initiatives around the canal demonstrates that the Panamanians are aware that the best way to take advantage of the expanded canal is to build around it. The canal is not just about ships coming and going, it’s about ancillary services. Companies are beginning to realize that Panama is an attractive location to set up an Americas hub.

The expansion has already bolstered Panama’s efforts to become the Singapore, or maybe Dubai, of Central America. It also promises to help transform the role that Panama is playing for many U.S. and other foreign firms doing business in Central and South America. And everyone in the country stands to benefit from that.

Peg Fairbairn
Panama Insider

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Tags: economy panamainvest panamaneo-panamax shipsPanama Canal
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Peg Fairbairn

Peg Fairbairn

Peg Fairbairn, a former middle school science teacher, is the author of In Focus: Panama, a weekly newsletter published by Access Panama and Live and Invest Overseas.

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