Please ensure Javascript is enabled for purposes of website accessibility

Are Panama Canal Delays Imminent?

By Karl Avard – Feb 6, 2014 at 7:28AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Potential delays have big implications for interior transportation channels.

On Oct. 22, 2006, the general public of the Republic of Panama voted in a national referendum that overwhelmingly approved the proposal by then-President Martin Torrijos to improve and expand upon the 50-mile Panama Canal. This project was delegated to Panama Canal Authority and formally began on Sept. 2, 2007. The PCA planned to complete this expansion and improvement by 2014 to mid-2015, at a cost of $5.25 billion. The project includes building two new locks, one on each side, excavating new channels to these locks, and widening and deepening the existing channels to accommodate larger vessels.

Since the start of 2014, a dispute between the construction consortium tasked with the expansion, Grupo Unidos Por el Canal, and the Panama Canal Authority has come to the surface regarding $1.6 billion in additional costs. The consortium, fronted by Spanish firm Sacyr, alleges that the $1.6 billion are unforeseen costs that have arisen over the course of work on the project, such as the exact quality of the stone and other geotechnical concerns, that will double the shipping capacity of the canal and bring in billions in revenue for Panama.

In addition, they set a deadline of Feb. 1 for negotiations on this dispute to be complete, or they will walk off the site, delaying work on the canal indefinitely. The panel of independent international advisors on the project, the Dispute Adjudication Board, has advised that a delay in construction for negotiations at this juncture would likely push back completion of the canal to 2018 or later. Panama's current president, Ricardo Martinelli, has vowed that the canal expansion project will be completed by 2015 no matter what, even if that means finding other contractors to finish the job.

What it means for business

This expansion will be a boon to both Panama and the United States by allowing significantly larger bulk transportation and container transport vessels to pass through the canal that could not in the past. For Panama, they will bring in billions in additional revenue through the various costs and fees incurred by the much-increased shipping traffic that will take advantage of this new all-water route.

For the United States, the expansion will allow East Coast ports and shipping companies (as well as those in the Caribbean and South America) to be much more competitive and connected to the Asian markets. This will allow eastern ports and companies to be far more viable in their efforts to directly contend with West Coast ports and interior trade transportation lines such as rail and truck.

These groups, regardless of when the Panama Canal project is complete, will realize these benefits. However, depending on the duration of the delay, the effects will be felt in different ways by several other industries.

A long-term delay will put a larger strain on the interior modes of transportation. The cargo that would be transported through the expanded canal by these always expanding ocean ships will have to go through rail or truck freight routes across the U.S. While this would be an amazing opportunity for these companies, it would put a large strain on the networks, which are even now already operating at near capacity. In addition, it would be short-sighted of these industries to invest money in expansion to accommodate this increased traffic when they know that as soon as the canal project is complete, a large percentage will return to the ocean.

A longer delay would also work to the advantage of the interior modes of transportation in other ways. Much of the discussion thus far has been mostly referring to traffic going from the East Coast to the West or from North America to Asia. With the much increased production capacity of China and the Asian continent as a whole, transportation that moves from West Coast ports to East Coast consumers would also see more and more of an increase in traffic. The slow but steady U.S. economic recovery will certainly increase demand of these Asian goods as well, putting more strain on the existing infrastructure at West Coast ports, cross-country railways, and freight truck lines as time goes on.

It remains to be seen how the many interested parties in this dispute will eventually resolve the funding issues for the canal expansion project. The government of Panama and the governments of Spain and Italy, who own 96% of the project, will do everything they can to ensure that the project is completed as soon as possible. A lot of money is to be made by all of the groups involved, and other companies will be lining up to win the work of completing this project in lieu of the GUPC.

No matter how it is resolved, this resolution will have far-reaching effects for a variety of companies and industries, both those directly and indirectly involved with this historic expansion.

None

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.