Panama Canal: Slowdown in US-Asia/China Trade?
One of the world’s critical choke points for maritime traffic.
By MC01, a frequent commenter on WOLF STREET:
On 26 June 2016, the third set of locks of the Panama Canal was inaugurated to great fanfare with the transit of a container carrier owned by COSCO of China. These gargantuan expansion works had already been proposed in the 1930s, and work on it had actually started in 1939 before the outbreak of WWII put an end to it.
By 2007, when the excavations for the new locks started, the Panama Canal had effectively reached its limits, with over 13,000 ships passing through the canal each year. The existing locks, almost 100 years old, had become too small for an increasingly large number of ocean-going commercial vessels. For decades, commercial vessels that could clear the Panama Canal locks were limited to the so-called Panamax size, which limited container carriers to a capacity of 5,000 TEU (Twenty-foot Equivalent Unit, a measure of how many standard twenty-foot containers a ship can theoretically carry).
The new locks allow for much larger ships to clear the Panama Canal, the so called Neo-Panamax size with a capacity of 13,000 TEU.
This expansion has proven to be extremely costly, technically challenging, and marred by countless episodes of embezzlement, corruption, and just plain old shoddy engineering.
While the Panama Canal Authority (PCA) and the Government of Panama have declined to comment on the real final cost of the expansion work, originally estimated at $5.25 billion (in 2007 dollars), it’s well known that Spanish engineering firm Sacyr SA alone is seeking $3.4 billion for “excessive expenses,” and that the PCA itself is seeking a complete refund on the new $158 million tugboats bought to operate in the new locks due to extremely unsatisfactory performance. These litigations are sure to drag on for years.
As the Financial Crisis started to bite in 2008, the PCA approached Mizuho Corporate Bank to put together a $2.3 billion financing package as liquidity worldwide was fast disappearing and as expenses of the project were ballooning. The chief contributor to this “rescue package” was the state-owned Japan Bank for International Cooperation (JBIC) with a 20-year $800 million loan at extremely generous conditions, including a 10-year grace period.
The PCA finances itself and by extension the Government of Panama through two chief sources of income: tolls and the sale of additional services, such as bunkering, to commercial vessels.
The cost of crossing the canal include the toll itself; necessary services such as the use of tugboats and locomotives to maneuver and move the ship inside the locks; mooring fees; and accessory services, such as unloading and reloading part of the cargo to allow a ship with a very deep draft to clear the canal.
The record for a toll paid to the PCA (including all accessory services and fees) is presently held by Hong Kong-registered and Japanese-owned MOL Beyond container carrier which paid $837,203 to cross the canal in July 2016, mere days after the new locks had been inaugurated. But the average toll is about $140,000, and the transit of just a few very large cruise ships, the class paying the highest tolls, can considerably skew that average figure for a given year.
As the Panama Canal is one of the world’s critical chokepoints for maritime traffic, alternatives to it have long been sought, often involving harebrained schemes.
The latest of these came in 2012 when the Government of Nicaragua signed a memorandum of understanding with the newly formed Hong Kong Nicaragua Canal Development Group (HKND) to finance and build a canal passing through Nicaragua.
Prior to this point, nobody had ever heard of HKND and its founder, Wang Jing, one of China’s many “stock market billionaires,” meaning nobody is sure how he built his fortune or what his ties to the government are. Wang Jing boasted impressive backing from two State-owned conglomerates, the China Railway Construction Company (CRCC) and XCGM Group, a large manufacturer of construction equipment: CRCC and XCGM were to provide qualified labor, technical expertise, building equipment, and capital to the new venture.
How much of this impressive backing was real and how much imaginary we’ll never know because construction of the Nicaragua Canal never started.
Wang Jing allegedly lost an enormous fortune in the 2015 Shanghai and Shenzhen stock market crashes. Last year, the HKND offices in the International Finance Center, a super-exclusive and super-expensive office tower in Hong Kong, were suddenly vacated. HKND has left no forwarding address and all attempts by reporters and investigators to contact Wang Jing have met with failure.
What is the Panama Canal telling us about the so-called trade war between China and the US? According to Panama Canal data, during the fiscal year ended on September 30, traffic between Asia and the East Coast of the US was a mixed bag: it very slightly decreased in tonnage (-2%) but it strongly increased in PC/UMS (Panama Canal/Universal Measurement System), a measure of volume equivalent to 100ft³ (+18.1%).
The PCA doesn’t provide us with a detailed breakdown, but there are some tidbits for FY2019:
- Container cargo traffic from the Pacific to the Atlantic (read: from China, Japan and Korea to the US East Coast) increased by 9.1% to 36.8 million long tons.
- Traffic of petroleum products and LNG from the Atlantic to the Pacific (read: from US Gulf Coast refineries and LNG export terminals to China, Korea and Japan) increased 4.4% to 66.8 million long tons.
- Shipments of coal from the Atlantic to the Pacific remained stable at 14.5 million long tons.
- Shipments of grains, which include everything from soybeans to rice, from the Atlantic to the Pacific remained stable at 24 million long tons.
These are hardly numbers indicative of a global economic slowdown caused by US-China trade frictions.
In terms of what is being shipped through the Panama Canal, the US absolutely dominates when it comes to cargo origination. Excluding intercoastal trade from the West Coast to the East Coast and vice-versa, the US shipped 109 million long tons of goods through the Panama Canal in FY2019, ranging from scrap metal to highly sophisticated oil-drilling equipment. By contrast China accounts for “just” 20 million long tons of cargo, the Republic of Korea for 10 million long tons, and Japan for a measly 6 million long tons.
While these data are only a small albeit important window on worldwide trade, they paint a radically different picture from the present narrative about a worldwide economic slowdown caused by US-China trade frictions. And they fly in face of the idea that even more extraordinary and unorthodox monetary policies are needed to stimulate the global economy. By MC01, a frequent commenter on WOLF STREET
And these are still the good times, with growing passenger traffic. Read… The September Airline Massacre in Europe
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