Double-Wide: Who's Set to Benefit From the Expanded Panama Canal?
The historic renovation could be a boon for US ports, but right now the US is falling behind other global players.
The expansion will drastically increase the amount of cargo able to travel the canal at a single time. According to The Bulletin Panama, a Panama-based newspaper focused on logistics news and information, the expansion will cost $3.2 billion and will expand the container capacity of a single canal-bound ship from 4,400 to 12,600. The Seattle Times reports the expanded capacity will actually be as high as 13,200 containers, which will travel on ships as large as 1,200 feet long and 160 feet wide. This is more than twice the size of ships previously capable of crossing the canal.
Vessels that are specially designed to travel through the Panama Canal are known as Panamax ships. Their dimensions are maxed out using specific and often inefficient designs to fit the Canal's two original channels, which can accommodate ships no larger than 965 feet long and 106 feet wide. Post-Panamax ships are those capable of fitting the Canal's expanded third lane, they're much larger and much more fuel efficient.
One of the largest costs in shipping bulk goods between the Americas and Asia is fuel. Up to 16% greater fuel efficiency is just the beginning of the benefits post-Panamax ships could potentially bring to the United States. It's estimated that three-fourths of the new cargo traveling through the expanded canal will arrive on the East Coast, which would be a potential boon for US trade if only the United States were better prepared.
The Problem With American Ports
Aaron Ellis, the director of communications for the American Association of Port Authorities, explains in USA Today that thanks to naturally deep waters, the only US ports currently "in position" to receive post-Panamax ships are Baltimore and Norfolk, VA. New York Harbor should hopefully be ready too, although this depends on whether or not the Bayonne Bridge in New Jersey, part of the New York Harbor, can be raised 64 feet by 2014.
What's left is a majority of ports along the Eastern and Southeast seaboards and in the Gulf of Mexico at various stages in updating their facilities.
In June, the US Army Corp of Engineers submitted a report to Congress that estimates seaports in the Southeast would require up to $5 billion to deepen their shipping channels to accommodate post-Panamax ships, which can reach as deep as 50 feet. According to the Corps this is "critical" if the United States wants to be able to receive ships expected from China and the rest of Asia. But at the time of the report, none of these Southern ports – including Charleston, Miami, New Orleans, and several other Gulf ports – had moved past discussions and engineering studies, and none had begun to dredge their waterways.
The report also highlighted a number of vital factors that will remain uncertain in the years following the Canal's completion. These issues include the number of post-Panamax ships able to dock in US ports, which of these ports will be able to handle them, and the amount of cargo these ships will be able to carry into the ports able to receive them.
It's no surprise then that soon after the report was released, President Obama issued an executive order to expedite the dredging of harbors along the Eastern seaboard. This has been credited to the lobbying efforts of South Carolina Governor Nikki Haley and Georgia Governor Nathan Deal. Provisions of the Clean Water, Clean Air and Endangered Species Acts have been waived for the sake of readying American ports, and expedited updates have been approved for the ports of New York, New Jersey, Miami, Jacksonville, Savannah, and of course Charleston, which will now be completed by as soon as 2020. That's four years earlier than previously expected, which of course is still six years after the opening of the expanded Panama canal.
The extremes of the problem might best be exemplified by the current situation in Mississippi. Here administrators of the Gulfport Port have presented state Governor Phil Bryant with an evaluation of the issues facing them in anticipation of the expansion. They listed several daunting problems that need to be addressed, writing:
In order to see that port ready for post-Panamax ships, the governor is considering diverting funds from planned storm-surge protection and instead using the money to deepen the ship channel to 45 feet, which still would not be deep enough for the largest expected ships. It would require an additional $20 million dollars, and in the words of the governor, a "robust evacuation plan" in anticipation of future hurricanes.
However, it's likely none of this will happen unless the port can acquire federal funding. It's far down the line of ports approved for construction and federal funds, and would require years of studies by the Army Corps of Engineers before receiving approval, which isn't even guaranteed.
Brazilian Iron Ore and Colombian Coal
While the United States has been mired in legislative processes, preparations for the Canal's expansion have been underway in other countries for quite sometime.
In Brazil, LLX Logística S.A. (LLXL3.SA) -- the logistics arm of Brazilian business magnate Eike Batista's EBX Group -- is building what is slated to become South America's largest port. Located in Rio de Janeiro state, the Açu Superport Industrial Complex will be fully operational by the time the Panama Canal's third lane opens.
"This port will be able to support the largest ships in the world, with piers extending literally a mile out into the ocean," says Robert I. Lax, who has been a lawyer and business consultant focusing on Brazilian trade mining and private equity in emerging markets for the past 19 years.
Lax tells Minyanville that he sees the sudden availability of Brazilian iron ore and Colombian coal to China, Japan, and other Asian countries as one of the biggest effects of the Canal's expansion.
"People like Batista [the chairman of EBX Group] and mining interests in Brazil and Colombia are entirely prepared to take advantage of the new port capacity. And they don't need to wait for political organizations to make the decisions to get the funding," he says.
Brazil is home to Vale S.A. (VALE), the world's largest producer of iron ore, and the second largest mining company in the world. Bloomberg.com reported Vale's second-quarter iron-ore output beat analysts estimates, climbing to 80.5 million tons from 80.3 million tons a year ago. At the same time, Anglo-Australian BHP Billiton Ltd's (BHP) iron-ore output in Brazil rose 15%. This is in the face of Brazilian exports of iron-ore rising 2.1%, much of which is being driven by Chinese demand for steel. Despite seeing prices at their lowest level since 2009, China is still the world's biggest iron-ore importer.
"Many of these Brazilian companies are betting quite heavily that they will be able to most efficiently supply China" Lax says.
Batista, who is Brazil's richest man, is leading the charge, and has placed himself on both sides of the potential boon better access to China will provide the Brazilian mining industry. In addition to building the Açu Superport, his EBX Group owns the modestly sized iron-ore miner MMX Mineracao e Metalicos (MMXM3.SA), which along with Companhia Siderurgica Nacional SA (SID) has recently been stealing marketshare away from Vale S.A.
Brazilian iron-ore miners are not the only South America interests poised to benefit from greater access to China and the rest of Asia. Lax says Colombian coal producers will likely see huge benefits too.
According to Sourcewatch.org, Colombia not only has the largest coal reserves in South America, but is the biggest coal producer there as well. It's the fourth largest coal producer in the world, and since hydroelectric damns provide a wide majority of Colombia's domestic electricity, the country is able to export a majority of its reserve. Colombia's mining minister Carlos Radado has said that coal output will reach 144 million tons by 2020, which has until now been restricted to European markets because of proximity and shipping costs.
It's important to note that Colombian coal is highly valued for its low-sulfur content, and considering China -- the world's largest producer and consumer of coal -- recently announced it's seeking to restrict coal consumption due to environmental concerns, Colombia's soon-to-be accessible clean burning reserves should be looking extremely attractive.
"The biggest competition for coal being imported to China is Indonesia," Lax says. "It has a tremendous advantage over places like Colombia because of transportation issues, but the expanded canal just might change that analysis."
The largest mining operation in Colombia is Carbones del Cerrejón Ltd, which is a joint venture between BHP Billiton, Anglo American plc (AAL), and Glencore International plc (GLEN). Vale S.A. recently sold it's Colombian mining assets for $407 million to the mining company Colombian Natural Resources, LLC, which is controlled by Goldman Sachs Group, Inc. (GS). Alabama-based Drummond Company, Inc. is a major player in the region as well.
Liquid Natural Gas
One of the biggest potential advantages of the expanded Panama Canal for the US lies in the Liquid Natural Gas market. At a recent discussion on the economic impacts of larger Canal hosted by the University of Houston, Michael Economides, a professor of chemical and biomolecular engineering, explained the expansion as "defining" moment for the American energy sector.
"The reason for that is LNG, liquid natural gas," Economides said. "The Panama Canal expansion will allow for super tankers to be able to traverse (the canal). We would be exporting energy from the US."
The increased use of hydraulic fracturing, aka 'fracking,' has exploded the size of the United States' natural gas reserves. From 2006 to 2008 new findings raised the estimated amount of extractable natural gas by 35%. The most efficient way of transporting this clean-burning gas is to liquefy it, hence creating liquefied natural gas.
Drillers are having a difficult time finding domestic buyers to "absorb the glut," according to Businessweek. Congress has granted Cheniere Energy, Inc. (LNG) permission to build an extension to its Sabine Pass gas terminal located in Cameron Parish, Louisiana, which will become the largest liquid natural gas export facility in the US. A number of other companies have applied for permits with the US Department of Energy to become exporters -- application is required by a 1938 law. However, the Department of Energy has put these permits on hold until it concludes a study on the economic effects of exporting the gas.
Last week, a bipartisan group of 44 House representatives pushed for the approval of these permits to be expedited. NBC News reports:
"This surplus of natural gas has produced very low prices for producers and an absence of market opportunities for natural gas, leading to many wells just being shut in," said Rep. Gene Green, D-Texas, and Rep. James Lankford, R-Okla., in a letter joined by 42 other House members. They said the Energy Department's approval process for more LNG exports "does not seem to have a set timeline for decisions or a sense of urgency."
Among the reasons they cited for federal regulators to allow more liquid natural gas terminals to be built: job creation and the fact that exporting LNG would reduce the US trade deficit as consumers abroad paid for US-produced energy.
With a majority of shale deposits located in the Eastern half of the United States, America's exported liquid natural gas could potentially compete with Qatar's, Yemen's, Indonesia's, and Australia's in supplying customers in South Korea and Japan. The expanded Panama Canal route opens up this access to these countries for American companies.
Lax covers the potential advantages of this situation.
And while the US is once again encumbered by regulatory holdups, Japan, as well as Chile and Argentina, have shown increasing interest in Trinidad and Tobago's natural gas resources.
Chile recently completed its Quintero liquid natural gas terminal, which began receiving shipments from Trinidad and Tobago last week. Argentina's Escobar terminal has been receiving shipments from Trinidad and Tobago's Fort Point LNG Terminal since earlier this year. These shipments, which reach South America's west coast via Cape Horn's extremely treacherous waters, will likely benefit from a shorter, safer route about to open via the Canal.
Atlantic LNG is the state-owned natural gas mining company in Trinidad and Tobago, with stake holders including subsidiaries of BP (BP), BG Group plc (BG.L), Repsol S.A. (REP.MC), and GDF Suez S.A. (GSZ). It has been manufacturing liquid natural gas since 1996 and is one of the world's largest producers. It is the single largest supplier of LNG to the United States, according the US Department of State -- although those exports understandably dropped as reserves are being developed within the US.
While regional droughts have left US farmers facing some of the lowest crop outputs in decades, future competition from South American agricultural products may yield unfavorable competition as well.
"The Brazilians are able to grow soybeans without subsidies cheaper than we can grow them in the US with subsidies," Lax says of Brazil's agricultural advantages. "Once the expanded Canal is finished in 2014 it will not only allow Brazilian agriculture to continue, but also take advantage of their superior economies of scale and be able to underprice US agricultural goods."
With the expanded Canal, Brazilians will be able to better feed China's vivacious demand for soybeans and soy-derived products.
Brazilian sugar exports should benefit as well, Lax says.
According to a report released by the World Agricultural Outpout Board, Brazils soybean output is at a record high of 81 million, with their projected soybean exports boosted by a reduction in this years US crop.
As for the United States, three out of 10 bushels of domestic grain and 44% of total US soybean exports travel through the Panama Canal. A report titled "Panama Canal: Impact on US Agriculture" by Informa Economics, Inc., an agribusiness research and consulting company, details this and more on the potential impact of the expansion on US agriculture. Soybean exports are expected to grow from 365 million bushels to 750 million by 2020, and 11 new grain elevators recently have been put in place across the country in anticipation of increased volume. A larger Panama Canal can offer many opportunities to agricultural exporters -- larger export loads and lower transport costs among them. But these are met with various concerns over whether or not the US will be able to meet supply at more competitive global prices.
On the other hand, Brazil benefits from GDP growth over 4% and crop acreage that is not in production and available for development. This is in addition to Brazilian farmers forcing crop production out of their country quickly, because of lack of available storage and fewer hedging opportunities.
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