Panama canal expansion, reordering maritime trade

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The Panama Canal Expansion programme is nearing completion and soon the new 14,000 TEU Neopanamax vessels will be able to cross straight from the Pacific to the Atlantic. A major reshuffle of all the card held by international shipping, the CMA CGM Group has anticipated this sea change, particularly with its Kingston hub.

It was an event that took the world by surprise when on October 22nd 2006, the Panamanian people gave the nod in a referendum to a project launched six months previously by their President to expand the Panama Canal. With 66% of voters saying “yes”, everyone understood that the face of international trade was about to undergo a sea change.

Ten years on and the titanic works are nearing completion, a prelude to the official opening of new locks, essential to international shipping. “The expanded canal will turn international trade on its head, and it is shipping lines that will be affected the most, particularly those involved on the Asia / East Coast United States routes,” explains Farid T. Salem, CMA CGM Group Executive Officer.

In the former configuration, the canal could take what were referred to as “Panamax” vessels, with a length of 294m and 32m wide. Tomorrow, ships measuring 363m x 49m with a draft of 15m will be able to use it. It’s a major evolution as traffic moves from a TEU capacity of 5,000 to 14,000.

It would have been an unimaginable volume to the captain of the steam-powered cargo ship, the Ancon, which on August 15th 1914 was the first to cross the Panama Canal, ensuring a place in the history books. By crossing from the Pacific to Atlantic without having to go round the whole of South America via Cape Horn, the Ancon realized a dream the conquistadors had in the 16th century. During this period of discovery and conquest, the Isthmus of Panama that was under Spanish domination was a passage route for gold and silver from Peru. But the road was long for overland convoys, and galleons loaded with treasure on route to Europe were exposed to storms and proved heaven-sent victims for pirates.

While Holy Roman Emperor Charles V had dreamed of doing something in 1534, it all really began in 1881 as the result of a French initiative. Given that Ferdinand de Lesseps had led a successful project to build the Suez Canal in Egypt, which opened in 1869, why not repeat the feat in Central America? Work began but had to stop in 1888, due to the monumental scale of the project and the financial problems that dogged the company responsible for the project. Geopolitics then intervened as a separatist movement supported by the United States broke with Columbia. In 1903, at the same time as Panama gained its independence, a deal was reached giving the US “rights in perpetuity” over the canal zone that remained to be completed. It took another 11 years to finish the construction which was beset with problems. It was not until 1914 that ships could finally navigate the 77km canal and its locks to go from one ocean to another without having to take the interminable detour. For example, where a boat sailing from New York to San Francisco via Cape Horn would have had to travel 24,500km, now it had a 9,700km alternative, less than half the distance, if it chose to take the Panama Canal that could be crossed in eight to ten hours.

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15cm either side of the hull

Obviously, such a significant reduction in distances and navigation times had a major impact on the international shipping trade, to such an extent that the canal had to be continually altered over the years to adjust to economic contingences and changes to transport. In 1939 for example, the United States launched a project to build new locks to allow passage for larger ships. When the Second World War broke out, work was suspended and in 1945 the giant USS Missouri battleship squeezed through with a margin of just 15cm either side of the hull at the canal’s narrowest point!

Simply trying to widen it was not enough and it became essential to find a more radical solution to significantly increase the canal’s capacity: namely to add a third set of locks with larger basins. However, it was not the Americans who passed the act but the Panamanians themselves. In fact, Washington agreed to renounce its “rights in perpetuity” drawn up in 1904, as the result of a treaty signed in 1977 which culminated in the US completing its withdrawal in 1999. On December 31st 1999, the canal came under the sole control of Panama which was finally able to make the passageway a central element of its economy and vital source of revenue. But it had to act quickly as neighbouring Nicaragua was planning to open its own competing canal. “The canal is our oil ! ” declared Panama’s Head of State General Torrijos in 2004. “Its capacity needs to be expanded to absorb the growing demand of cargo ships and to generate more wealth for the Panamanians.”

Evolution of shipping routes

Every year some 15,000 vessels cross the canal, around 40 a day, carrying over 200 million tons of merchandise.

As soon as the project was announced, CMA CGM started examining the different options. Up until then, the canal’s dimensions set the rules of the game as they limited the size of ships. “Whether it’s the Kingston hub, other ports in the Caribbean region or shipping connections between the United States’ East and West Coast, the region’s technological and commercial strategies were all intimately linked to the size of the Panamax ships,” explains Olivier Tretout, CEO of the Kingston Terminal.

The moment President Torrijos received the support of his electorate to expand the canal, we started studying the cascade effects this major change would have in order to adapt our capacities and strategy in the best way possible,” continues Patrice Mittard, Vice President Operations at CMA CGM.

Destinies are linked between the Panama Canal and CMA CGM, as the Group is its fourth largest customer, even number two when talking container transport. Now the very large vessels will be able to make this rapid connection via the Pacific and Panama Canal. “The increase in capacities will be gradual,” explains Patrice Mittard, with vessels passing first from 5,000 to 9,000 or 10,000 TEU before the even larger ships, time for the port of New York to finish its project to raise the height of the Bayonne Bridge. CMA CGM is already set to integrate 13,000 TEU containerships on this route and six 14,000 TEU giants are currently being built. For Farid T. Salem: “The new situation will allow us to adapt our offer to global economic fluctuations even better and faster than ever before. It has reshuffled the cards and led us to rethink our traditional lines between Asia and the rest of the world.” When questioned further about whether new markets will develop or emerge given the new opportunities, and how customers will react, he says: “It’s not that simple. While it may be an evolution it’s not a revolution. For sure, between New York and Shanghai, going via Panama shortens the route compared to Suez (10,582 miles as opposed to 12,366). On the other hand, between New York and Hong Kong the difference is only one day at sea. It’s a subtle choice between Panama and Suez and requires a lot of thought on our part to give our customers the best service.”

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Kingston: a strategic crossroads

The canal’s expansion will also have a major impact on imports coming from Asia to the United States West Coast. As goods unloaded at Long Beach or Los Angeles are then taking inland links to the East where two thirds of Americans live, the delivery chain could be turned upside down by the development of direct Asia-USA East Coast trade. “With their higher volumes, the Post-Panamax ships will offer major price advantages”.

Regarding the Kingston hub in Jamaica which is centrally located in the Caribbean Sea, opposite the Panama Canal just one day’s sailing away, CMA CGM decided long ago to make this a strategic location. “Establishing a hub in Panama would have lengthened the route for certain lines plying the region, while Kingston has all the advantages, both for the very big ships and all the others,” explains Olivier Tretout.

While around 10% of goods unloaded at Kingston are for the local market, 90% of volumes transhipped onto other vessels are heading off in all directions, East Coast and Gulf of Mexico. A 30-year concession was signed between the Jamaican authorities and the CMA CGM Group (and its subsidiary Kingston Freeport Terminal Limited) to develop the container terminal’s staffing and technical capabilities: more than 900 employees, 2,400m of dock, 14 then 18 gantry cranes and a deeper channel, will all help to meet the new challenges. “It’s a whole new network for everyone, that’s the issue,” says Olivier Tretout.

For CMA CGM, everything is now in place and it’s just a question of waiting until June 26th 2016 , the date set for the official opening of the “new look” canal. As well as the widening and deepening of existing navigational channels, the makeover sees new lock systems that will be nothing like the old ones. Two sets have been built, one Pacific-side and the other on the Atlantic side, each comprising several water retention basins.

On the administration side, the old lock gates, “curved centenarians”, have been replaced by new rectilinear gates that slide into the walls once open, thus increasing the usable width. Another notable change: while the old locks took eight minutes to fill, the new ones, although much larger, will fill in just 10 minutes. There are many anecdotes related to this massive project, including the meticulous operation to clear 400 hectares rigged with explosives in a former US Army shooting range along six kilometres of the channel leading to the Pacific coast. In a few months, all these technical details will be forgotten and priority given to the new opportunities it provides for global trade. It’s important to remember that 90% of goods on international markets are carried on the world’s shipping routes: it is the safest and most economical mode of transport, facts that made it imperative to modernize the Panama Canal. But to properly assess the consequences will take around three to five years, the time it takes for a gradual evolution to occur. The era of the Neo-Panamax is only just beginning…

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