Canal expansion economics out of kilter

US imports from China by vessel weight, 1998-2006
graphic by the US Department of Commerce

Trends that were projected to last for a generation have proven ephemeral, costs have gone much higher than expected

Canal revises
its numbers
by Eric Jackson

In the 2006 canal expansion referendum campaign, the Panama Canal Authority (ACP) based the revenue side of its business plan on the projection that US imports from China, shown in the graphic above, would continue to increase at the rate that they did between 2000 and 2005 for a generation, through 2025. In 2006 and most of 2007, those projections went according to schedule. But in the last months of last year, US imports from China dipped below what they were for the same period of 2006 in absolute terms, and fewer tons of goods from China are going through the Panama Canal to the United States this year as well. In fact, this year fewer goods are moving through the Panama Canal, as measured by weight, when all routes are factored in. Tolls have been increased and new fees like linehandling charges have been added on, so in dollar terms canal revenues are still up. However, the optimistic rate of increase that was promised --- using government funds, and with the Torrijos administration and ACP shouting down anyone who expressed skepticism about it --- has not happened.

Now the ACP is beginning to admit some of the realities. In its fiscal 2009 budget, there is a tacit admission that canal usage will not increase. That's because most economic forecasts predict that the US economy will shrink by about one percent in 2008 and will grow only by about one percent in 2009. American consumer demand is already down, and even if the US economic downturn runs its course there is no guarantee that imports from China will rise again at the rate they did during the extraordinary period between the latter part of 2000 and the middle of 2007.

And so it is that the ACP, which said that the canal would reach full capacity in 2010, has pushed that expected date back to 2012 and predicated that projection on US demand for imported goods to regain its previous vigor within two years. The authority is now saying that there will be no increase in canal usage next year, but arguing that unless the American economic problems go deeper and last longer than they expect, the revenue side of the canal expansion plan won't be much affected.

During the referendum campaign the "no" side, and particularly former canal deputy administrator Fernando Manfredo, argued that it was ridiculous for anyone to presume to be able to project economic trends over a generation and that a continued rate of increase in US imports from China --- one that implicitly projected the export of virtually all US manufacturing to China --- was unlikely.

Meanwhile on the cost side of the canal expansion plan, which critics always said was unrealistic but which the ACP defended by saying that there was a 25 percent allowance for inflation built in, things are also off track. Largely because of higher world fuel prices and the soaring demand for construction materials by China and India, prices of key construction materials are way above the 25 percent fudge factor. According to Bloomberg News global prices of cement are up some 65 percent over what they were at the time that the ACP was formulating its canal expansion business plan, and here in Panama the local price hike is even sharper. Steel has gone up nearly 60 percent on the global market, and again, more than that here in Panama.

And so should any astute economic observer have been surprised when it was announced that the ACP has pushed back the due date for bids on the locks design and construction several months until this coming December? According to the authority that was at the request of the four multinational consortia competing for the job, and Jorge L. Quijano, head of engineering at the ACP told Sea Trade Asia that this "falls within our Expansion Program execution timeline, which has a projected completion date of 2014."

But notice that in La Prensa, which is more or less editorially aligned with the ruling Democratic Revolutionary Party, the reported expected completion date is now in 2015.

The next change in canal expansion economics is developing more slowly, but faster than anyone had predicted in 2006. Last year the Northwest Passage across the top of Alaska and Canada thawed enough to be navigable for two months, and the window of navigability is expected to be a little longer this year. Though it may be a decade or more before the route becomes a seasonal competitor with the Panama Canal --- during the referendum campaign the ACP said not before 2050 --- Canada has ordered a new fleet of icebreakers and is establishing new Arctic naval and coast guard bases in anticipation of commercial navigation. The other major Arctic route, the Northeast Passage across the top of Russia and Norway, remained frozen shut only in one small stretch at the height of last summer's thaw and the Russians currently have a fleet of ice-hardened oil tankers under construction in South Korea in anticipation of that route's opening.

But would a two- or three-month Arctic shipping season really threaten the Panama Canal's business?

Well, never mind that our canal's tolls have been jacked up on the premise of no viable competition. Think about the price of oil these days, and the prospect of it never again getting back to pre-Iraq War levels. That lessens the prospect of shippers taking longer routes around the canal in order to avoid the tolls.

However, consider that Tokyo is some 4,350 miles closer to London through the Northwest Passage than it is through the Panama Canal. (The Suez also provides a shorter way than Panama on that route, but still more than 3,000 miles longer than through the Northwest Passage and even longer if the Northeast Passage is used.) Shipping from Europe to the US west coast or from Asia to New York would also cover substantially less distance via Arctic routes than through the Panama Canal. So might shippers want to time the movements of their products to take advantage of the substantial fuel cost savings? It probably depends on the nature of the products being shipped. However, the Panama Canal is sure to face some serious new competition in at least some sectors, probably at about the same time that the canal expansion is projected to be done.

And thus, even before the bidding on the main canal expansion components, the ACP's business plan is out of whack.

business & economy