Why the Panama Canal is getting a makeover

Panama's government is planning to deepen and widen the famous canal in time for its centenary in 2014. That will have big consequences for the shipping industry, says Simon Wilson

Who owns the Panama canal?

Until December 1999, the canal was owned by the US, which in effect created the nation of Panama in order to build and control a strategic canal connecting the Atlantic with the Pacific. In the first years of the 20th century, in exchange for obliging Colombia to grant its province of Panama independence, the US got control in perpetuity of the Panama Canal Zone. But after decades of campaigning by Panamanian nationalists, the US agreed, in 1977, to a staged handover. On the last day of 1999, full ownership passed to the Panama Canal Authority (ACP), a semi-autonomous agency of the Panama government amid dire predictions from some Americans that Panama would not be capable of running its best-known asset.

Were those fears justified?

Far from it. According to a recent report in the Miami Herald, "the Panamanians reacted to such criticisms as a national challenge and are now putting our record [of running the canal] to shame". The ACP has cut costs, cut queueing times, raised productivity and profits, and put $1bn into modernising and widening the canal, with the aim of boosting capacity by 20%. Average journey time from ocean to ocean (canal waters time') has been cut from 30 to 24 hours, and the safety record has improved: there were no more accidents in 2004 than in the early 1920s, despite much larger ships and many more of them (14,000 a year, instead of 3,000).

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

So what's the problem?

Since 1999, the total tonnage shipped through the canal has grown from 228 million tons to 279 million and will hit capacity (estimated at 330 million tons) within a few years. Yet the number of vessels crossing each year has stayed more or less static at about 14,000 close to capacity. Ships are getting bigger (about half the ships now using the canal are the maximum size known as the Panamax that can fit in the canal) and the canal as it is won't be able to cope for much longer.

Any room for manoeuvre?

None at all. These 106-feet-wide vessels, built specifically so they can use the Panama route, have just two feet clearance on either side as they are pulled through the narrowest stretch of the canal, the Culebra Cut. But as global trade increases, shipping firms need bigger ships. Panamax ships can carry at most 5,000 20-foot equivalent units' (TEUs) of containers; on non-Panama routes some ships already have more than twice that capacity. Unless it takes action, Panama faces a long, slow, decline. The Suez canal route from Asia to North America might be much longer, but that (lock-free) canal can already take the supersize, post-Panamax vessels. Meanwhile, Nicaragua is threatening to build a $18bn competing, sea-level canal. And the melting ice-cap means that there's now a realistic prospect of a navigable northwest passage through the Canadian Arctic.

What's the solution for Panama?

A deeper, wider canal with much bigger locks at the crucial entry points.

Panama's voters have just passed a referendum motion strongly backed by the government and business to rebuild the canal in time for its centenary in 2014. The massive $5.2bn project will double the canal's capacity by adding a third set of locks one at each end, through which ships gain access to the wider waters inland that are 40% longer and 60% wider. The ACP predicts that, a decade after completion in 2014, the expanded canal will generate $6bn a year far more than the $1.4bn expected this year. That is potentially a huge boost to Panama, which currently has a GDP of just $14bn and derives 17% of its government revenues directly from the canal (the average toll paid is £36,000).

Why does all this matter?

Because it's "the biggest change for the global shipping industry since containers replaced breakbulk as the main means of transporting manufactured goods" in the 1970s, according to the FT. Just as the Panama canal set the standard size for shipbuilders during the 20th century, a bigger Panama canal will influence the kinds of ships that are being built in this century reinforcing the trend towards bigger vessels. It will greatly improve the efficiency of shipping between Asia's manufacturing hubs and the great cities of the eastern United States. In turn, the big ports of the eastern US will receive a long-term boost, but will also need to invest and adapt to larger ships. Nor is it simply container ships that will be affected: for the first time, it will be possible to bring "Capesize" bulk carriers the largest kind of ship used to shift iron ore and coal through the canal. Meanwhile, countries such as Japan and South Korea will have a wide choice of suppliers of liquified natural gas and it could be cheaper to transport refined oil products to and from the west coast of the United States.

Who built the Panama canal?

The dream of cutting the canal dates back to 1534, when Charles V, Holy Roman Emperor and King of Spain, wanted a quick way of getting to his Andean territories (now Peru and Ecuador) on the west coast of South America. Three hundred and fifty years later, in 1880, Frenchman Ferdinand de Lesseps the engineer who built the Suez canal in the 1870s attempted a similar sea-level passage (ie, without locks) through Panama. The attempt, confounded by disease and unhappy geography, ended in failure. However, the US bought the French equipment and, starting in 1904, spent $375m building a 48-mile-long, elevated canal with locks. It opened in 1914, hence cutting 8,000 miles off the sea route from New York to San Francisco.