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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Would you have a figure for intercoastal trade between the West Coast to the East Coast through the canal. I cannot but think this should be near zero, surely the railway connections for cargo from eat to west coast would be much more efficient in all possible ways.
Intercoastal US traffic through the Panama Canal was a little over 2 million long tons in FY2019, down about 4% over FY2018.
Intermodal has really started to make itself felt here.
Yes, 2 mil tons out of 111total. A rounding error.
I felt so. Cheers MC.
I worked for a large retailer for many years. All its stores got cargo from Asia via Long Beach and other West Coast ports. The containers went onto rail cars, and went to regional centers across the country. There the containers went onto trailer trucks and directly to distribution centers. I never heard of anything going by ship to the East Coast. Some small, light, expensive things like jewelry, bras, and women’s shoes went from Asia directly to the East Coast via air cargo companies like EVA and Korean Air. I wonder what kind of cargo goes thru the Panama Canal instead of cross country on flatbed railway cars.
Maybe cars. I have seen huge ships coming directly from Japan in New York Harbor. Also, container ships, but they might be from Europe.
I had thought, as did many port authorities on the GOM that the widened Panama Canal would allow shippers to by pass West Coast ports and bring more ships to their ports. Apparently this has not happened to any signficant degree.
One wonders if Panama itself has not shot itself in the foot with the new locks since one ship can carry more than two and half the cargo as the old locks thus overall transits might be reduced even if total volume stays steady or even grows somewhat.
Since we have no idea about the true final cost of the third set of locks apart that it’s way more than original estimate of $5.25 billion in 2007 dollars, we do not know how much of a gamble the Government of Panama has taken.
There’s also a problem that I have chosen not write about in the piece: these new locks started to leak mere days after the transit of the MOL Beyond, opening a completely different can of worm: these new locks won’t last a small fraction of the old ones, at least not without extensive and expensive repairs. Patching them up as has been done for the past three years will buy time but it’s not a definitive fix.
The original locks have been in operation since 1914, admitting everything from battleships to intrepid swimmers.
So why did the chief design engineer in their wisdom implement a different and new inadequate design rather than back engineer the original locks which have 100 years of service?
The lowest bidder won, and that was all that mattered.
That’s the same pernicious mechanism that ensues a freshly resurfaced road will look like a Flanders battlefield c.1917 in under six months.
The lowest bidder, but with neither intention nor ability to meet the bid price.
Just as with US defense acquisition.
The swimmer was the American adventurer and author Richard Halliburton, who paid 36 cents to swim it in 1928. He later died in 1939 (at the age of 39) while trying to sail a Chinese junk from Hong Kong to San Francisco. The ship vanished in a storm, his last message was “Having a wonderful time, wish you were here instead of me.”
The mysterious “stock market billionaire” Wang Jing reminds of Clarence Hatry.
A big promoter in London in 1929.
The “Wiki” on Hatry seems thorough.
Yes, good article….but don’t forget the Northwest Passage will be opening soon. No locks, no maint.
After Roald Amundsen finally crossed the North-West Passage in 1906 he remarked the greatest challenge had not been so much braving the ice but navigating the shallows and narrow passages. And his boat was a tiny one.
During WWII there was again interest in the North-West Passage, given the success the North-East Passage was enjoying to supply the USSR, but it wasn’t until 1944 that a RCMP cutter, and again a tiny one, managed to repeat Amundsen’s feat. Sending convoys through the North-West Passage was deemed eminently impratical due to navigational challenges and the Battle of the Atlantic had been won anyway, so interest waned.
Opening up the North-West Passage to modern commercial maritime traffic would require at very least large scale dredging: remember that modern day commercial ships are on the large side and handle like a flying brick. They aren’t Amunsen’s tiny fishing boat. And this is to say nothing of transit times, fuel consumption, insurance costs etc.
That is unless somebody will start pushing a whole new family of cargo ships designed specifically for plying the North-West Passage, not to mention deep water ports to move goods to ocean-going freighters… as I said harebrained schemes abound these days, but it is the norm when money is cheap.
Was just referring to melting icecap on open Arctic Ocean, and climate change. No beef with your economic notions. We likely won’t live to see it, but it sure looks like it will happen.
Maybe “soon” was a poor choice of words?
“…all attempts by reporters and investigators to contact Wang Jing have met with failure”
Have been told that Chinese re-education camps (officially known as Vocational Education and Training Centers) have become popular destinations among Uyghur folks and HK billionaires.
I have seen a lot of these “stock market millionaires/billionaires” over the past decade: they are supremely adept at preying on foreigners’ fascination with China and, dare I say, childish belief into the superiority of the Chinese economic model.
When they are unmasked for what they truly are (it’s not exactly hard nor prohibitively expensive to have inquiries carried out in China, Hong Kong and Macau to determine if these folks have the financial firepower to back their claims) or the scheme falls to pieces because it has advanced far more than it should have had, these people vanish into thin air.
In at least one very embarrassing case a “billionaire” was found to be using an alias and the mining company he claimed as the source of his wealth was actually owned by a provincial government, whose representitives strongly denied having ever heard of this man before. Journalists investigating the case were told by the Beijing police this man “may” have been already involved in real estate scams, again using an alias, but there was no sure way to know. So much for the much vaunted and all-seeing “social credit system”.
We like to think of China as some sort of ant colony but like all human societies it’s composed by ordinary human beings, not obedient little red ants ruled over by all-powerful super villains.
We like to think of a “billionaire” as someone who is more clever and intelligent than the ‘average’ human. Take a closer look, billionaires have taken short cuts, whether legal or not, taken it on the nose if not legal. The addiction to greed and perceived success among their own peers and network propels them onwards to commit more short cuts where others perform due diligence for ethical and moral reasons. The alias case study you cite MC01 is typical of a billionaire attitude. What can I get away with. Get me the best lawyers. Make it happen. Pay them more to get it done, I dont care how.
Two things happen. Their children either grow up loving this unethical behaviour and are programmed into unethical addictive behaviours to sustain their luxuries for perceived success amongst their peers. Or their children shun their parents realising that ethical and moral values are more important and should not be passed on to their own children aka the grandchildren of unethical and immoral billionaires.
The more socially active people are in shunning ugly unacceptable behaviour, the quicker we rid ourselves of billionaire parasites on honest kind gentle caring mainstay populations.
A few random thoughts on the Panama Canal.
Completed on time and under budget by America after the French gave up.
Nicaragua has been looked at as an alternative route for almost 100 years. A huge lake in the middle of Nicaragua makes it somewhat feasible.
The Japanese were going to bomb the canal with planes launched from surfaced submarines at the beginning of WWII.
Guatemala is trying to do a Panama Canal by freight train as it has two deep water ports (built by America) in each ocean.
Yeah, but it is outside the Wall Street Zone of Influence now, which means that in any western nation any such project will be seen as a crackpot idea. If you are inside the western propaganda bubble, anything outside that bubble is horrible, awful, evil, and certainly crackpot…. for the obvious reason that Wall Street doesn’t get their cut.
Teddy Roosevelt fomented civil war in Colombia to split off Panama to get his canal built.
On his fourth voyage Columbus failed to find the promised strait across Panama to another ocean. His ships were wrecked there and he was stranded at Jamaica for a year.
Construction of the Corinthian Canal was delayed 3000 years until the invention of dynamite and was obsolete upon completion.
The Canal has a history of scandal.
The US bought the Panama Canal project equipment and rights from the French Panama Canal company which had collapsed in scandal after much of the money was stolen. Later, Teddy/the US paid 40 million dollars to buy the shares of the company, (2 Billion in today’s money), and nobody knew where the money went. There was a congressional inquiry that strangely found out nothing. Documented in the book ‘Responses of the Presidents to Charges of Misconduct’.
Nero started the Corinthian Canal in about 67 AD, and supposedly turned the first shovel of dirt. Unfortunately the project was abandoned for 1800 years after his death but was completed in the late 1800s. It did quickly become obsolete for commercial shipping purposes, but still busy with pleasure and tour boats.
In the 7th century BC Periander proposed completing the project begun by the Mycenaens in the 11th, both stymied by a shortage of dynamite.
People in Panama sometimes refer to themselves as Americans, just to PO people from the US.
I recall reading an article in my younger years concerning the initial studies for the Canal route, including the Nicaragua option. Around that time, Nicaragua had issued a postage stamp depicting the lake and the large, smoldering volcano in close proximity to it. Someone in planning saw this stamp and the Nicaragua routing option was subsequently discarded.
A better day to us all.
I don’t think many people still think this trade war with China is primarily about trade. From the start it’s a proxy alternative to a hot war to bring China into line after they signalled their refusal to play along with the dream that granting them most favoured status amongst other trade exemptions would allow them to blossom into a new-age nation of tolerance and democracy.
Their grabbing of the Spratly Islands, moves into Africa, Sri Lanka and various South Pacific regions along with Xi’s declaration to be ruler for life was the wake up call, I feel. Note how the Democrats scream about every action Trump takes but never criticize him about China. Not once.
Pompeo and Pence’s recent remarks on China seal the deal on what’s going on. We’re talking about a country that has over a million minorities in concentration camps and harvests organs from political prisoners. This is about more than trade. America has been quietly urging its allies (Japan, Korea, etc.) to divest from China for some years now which they have been doing anyway, unbidden.
I predict next may be a move by the US to slowly squeeze China out of ASEAN by garnering the support of the multiple nations who find their South China Sea borders rudely cut off by China’s new claims. Philippines, Brunei, Vietnam, Malaysia, Borneo, Taiwan (did I miss anybody?) all now have a legitimate, existential concern about China’s sumo style expansion efforts.
If the US is playing a pantomime with China, stringing them along while arranging global alternatives, then this trade war will last for years. And I don’t see how China can stop it. They don’t have the reserve currency that buys the commodities they need and they’re trying to face off with their own biggest customers. Good luck with that.
Exactly, it’s a long-term squeeze on China – hopefully provoking internal instability – to maintain the geopolitical balance threatened by Chinese ambitions, which they have done nothing to conceal.
Just as the global order was menaced by a unified and newly- industrialised Germany in the early 20th century, which could only really be solved by going to war, crushing her and then remodelling Germany to a pattern agreeable to the victors.
Nothing at all to do with improving economic conditions for the US working and lower middle classes, although that might be a by-product in some areas.
At this level of politics, the welfare of the citizenry is never a principle objective of the state.
China claimed the South China Sea because the US has an active policy of containment. All Chinese naval vessels are being tracked as they enter the Pacific by way of relatively shallow coastal waters. Remember the incident of late 2016 in which China seized an underwater drone which the US said was an “ocean glider” system used around world to gather data on salinity, water temperature and sound speed – stop laughing ! The benefit of the South China Sea to China is that it is very deep water making it much more difficult for the US to use tracking drones.
I wonder how the US would react if China used underwater drones in the Bay of Mexico to help contain the US ?
Somewhere between 5,000 and 35,000 people died building the Panama Canal. It was a brutal project.
There was a famous Forbes article, claiming a Chinese billionaire “dies” every 40 days. They don’t mess about.
Expectations for US and global GDP growth have become delusional in recent years. The US is currently seeing record Dow and the longest economic expansion in history. But that is still not enough for people. They want more!
The US is currently seeing record Dow and the longest economic expansion in history.
I think you’ll find that most US ‘economic expansion’ is in the financial markets, along with military expenditures and other corporate welfare. It would also be interesting to know how evaded taxes secreted to overseas havens are calculated in US GDP figures. In some countries that information requires a security clearance.
One of these days I’ll have to look up how many dollars of debt it takes to generate a dollar of expansion of the Real Economy, keeping my spiffy new shot glass – er, beer mug, handy for emergency sedation.
It’s been great for the top 10%, OK for the next 10%, and more of the great slide downward for the rest of us.
Some of us voted for the current regime, some of us are studying our Marx and Kropotkin, but the thing we have in common is we are not happy about how things are going for us.
So, 20% vs. 80%, and since success and getting to work in a white collar vs. blue collar occupation has far, far more to do with social class than individual effort, we’re essentially dealing with people who know how to push buttons vs. people who know how to keep things working, or not, in the physical world.
These are hardly numbers indicative of a global economic slowdown caused by US-China trade frictions.
Yeah, well, Trump can claim a fact-free Victory anyway.
– I look at the US Trade Deficit and that Deficit seems – I repeat – SEEMS to be in a “topping process”. Too early to tell whether or not that is “rolling over”. But this could be the confirmation that the US economy is “weakening” (with or without quotation marks).
Well when I’m at the top in Singapore, I see ships as far as the eye can see.
When I’m in HK, I see ships as far as the eye can see, same for Shenzhen or Shanghai.
Maybe its because there is not much need for biz, its more of the NY shipping to LA via boat, then the canal makes sense.
Yes, like the article say’s if the ASIAN ( belt-road ) owned their own canal in this area they would use it, but now why use a USA controlled over-priced canal?
( Maybe ppl here don’t travel, but from HK to MENA all ships pass straights of Malacca in Malaysia, biggest choke point in world for shipping , but its FREE)
Suez canal is critical, I don’t think Panama is critical. Also most of the oil is again going from MENA to China(ASIA), so what does the real world have to do with Panama?
These days we have excess capacity on rail highway in USA, why would they ship by boat?
Draconian laws, Wolf your a sailor certainly you know that if you own a dinghy and navigate the canal you must hire a pilot-boat for your entire journey, its not uncommon for people doing world circumnavigation to give up their voyage at Panama, its much hassle or go-around, or have your boat trucked.
Panama Canal has sucked for 50+ years, and now its like the USA, a Zombie. All dressed up with nobody to rob.
If you wish to circumnavigate the globe in your sailboat the easy way, via Suez and Panama canals, about half the total cost of the entire voyage is the cost of transiting the Panama Canal.
You’d need finer data that year-total data to see the trade war impacts. For just one example, a data-set that covers one financial year would include both the pre-tarrif stocking up phase of things as well as any post-tarrif traffic slow-downs. In this data set, it all gets averaged out into oblivion. Since most of the tarriffs have only recently gone into effect, you’d have to see data for the last quarter.
What a great story. Thanks MC01. The stories regarding the building of the Panama Canal are fascinating. (Yellow Fever anyone?)
Anyway, I would love to hear from anyone who has traversed that stretch.
A partial explanation for the seemingly minor impact of the US-China trade dispute may be the decreased volume of shipments to/from the LA-Long Beach Port complex and instead directly to US Gulf and East Coast ports.
This concern was expressed by the Port when construction began, but despite steps taken to expedited cargo from it to Inland Empire rail terminals, the Canal appears to have taken a large chunk of its business.
Many thanks MC01. I just wanted to confirm the total freight tonnages:
Eastbound CH 20 + KO 10 + JP 6 = 36, check
But westbound, is it petroleum 69 + coal 15 + grains 24 = 108 + an *additional*109mmt of goods? Or is the “scrap metal to highly sophisticated oil-drilling equipment” less than 1m tons? Cheers!
Excellent article, thank you.
Well, if it isn’t the US-China trade war, it must be, roll drums……..BREXIT! :)
Seriously, we must look instead to the steady decline in prosperity which chokes off demand among the mass of largely over-indebted consumers, and to understand that we must dig even deeper into the – failing – fundamental structures of industrial civilisation.
Those who bother to look at that aspect will not find it particularly encouraging….
China operates six of the world’s ten busiest container ports. Their strategy is to control turnkey ports. The Chinese government has also funded the construction and operations of 43 ports in 35 countries under its “One Belt and One Road” (OBOR) initiative launched five years ago, according to China’s Ministry of Transport.
As part of its efforts to gain asset dominance, China has directed its state-owned companies to exclusively buy products and services from other Chinese state-owned enterprises. As a result, China International Marine Containers Group has become the world’s largest maker of shipping containers and Shanghai Zhenhua Heavy Industries has gained a 70 percent international market share for port cranes, and now exports to 300 ports in 100 countries.
1) Mearsk CEO : the global trade is rising.
2) Panama canal new 3rd lane targeting Europe and eastern US, compete with DJT & Cass R/R.