Panama Canal: is it necessary to look for traffic alternatives?

China is still interested in promoting new interoceanic transit routes in Central America.

Climate change may have unsuspected consequences. One of them is that the Panama Canal is seeing its traffic reduced as a result of the lower amount of rainfall over the hydrographic basin that feeds its systems, which has caused a 20% drop in the number of ships that cross the inter-oceanic passageway daily, through which 6% of global trade transits.

In the midst of fears of a situation that could worsen as a result of climatic imbalances, and even though the project was designed to remain operational for at least another century, some alternatives have emerged that could help maintain the flow of trade in the event of a collapse, some of them in full development, such as the rail network being built by Mexico, while others have not gone beyond mere sketches, such as the construction of a canal in Nicaragua.

“It is viable and desirable to develop alternative logistics and communication routes to the Panama Canal. However, there are important challenges that must be considered,” says Fernanda Garza, partner at SMPS Legal and expert in competition and foreign trade, whose opinion suggests that there are many issues to consider before thinking that an alternative route between the Atlantic and the Pacific can replace the Panamanian canal.

What is happening with the canal?

While it is true that the Panama Canal is not at risk of suspending the transit of vessels, it is also true that it has been affected due to a decrease in water flow in the watershed that feeds the system, despite the fact that, according to the ACP’s 2024 Annual Report, rainfall in 2022 was 8.5% above the historical average.

Inaugurated in 1914 in the most important pluviometric zone of the planet, in its almost 110 years the Canal had never faced a water shortage problem as now, due to the fact that the Chagres River, the main source of fresh water for the Canal and the country, has lost 20% of its flow as a result of the drop in rainfall due to the El Niño phenomenon, whose effects are becoming more prolonged.

Although already in 2016 the Canal faced problems to maintain its usual navigation levels, 2023 has been an unusually dry season, which has forced to reduce traffic, and of the 40 ships that approximately use the interoceanic waterway daily, for several months now has fallen to 32, a figure that will remain until September 2024, according to the Panama Canal Authority (ACP).

“The Panama Canal has had to take drastic measures to restrict during certain periods of the year the draft of transiting ships. As a result, innovative measures have been adopted for the conservation of water resources and the water used by the locks has begun to be recycled with the intention of reducing the volume that is lost when it is discharged into the ocean,” says Julio Quijano, managing partner of Quijano & Associates.

In order for a ship to cross the 80 kilometers that separate the Caribbean from the Pacific, it must be raised 26 meters above sea level, so each time a ship crosses the canal, more than 200 million liters of fresh water must be spilled into the ocean. Unlike other canals, such as the Suez Canal in Africa, the Panama Canal runs on fresh water, and desalination is a technology that has not yet been considered.

Stagnant carrying capacity

The problem of water scarcity in the Canal also complicates the future traffic capacity of the waterway. Ricaurte Vásquez, administrator of the ACP, recently pointed out that the container ships that will enter circulation in the next decade will not be able to pass through the Canal because of their increased cargo capacity, which exceeds the tonnage of the neopanamax, the largest volume ships that can currently pass through.

This means that, in the medium term, approximately 20% of the world’s cargo vessels, or 47% of container cargo, will not be able to transit through the canal. The rest is represented by conventional ships whose size was designed at the time of developing the engineering works for the interoceanic waterway.

The solution would be to build a new set of locks, the cost of which, according to Vásquez, would be approximately double the amount invested in the third set inaugurated in 2016. At that time, the works cost some USD 5.25 billion, of which USD 3.15 billion were financed with the Canal’s cash flow and the rest with contributions from five multilateral agencies.

Less resources

Although it may seem unrelated to the economic issue, this situation will have consequences: as confirmed by ACN itself, revenues are expected to be USD 200 million lower than projected for that year (USD 4.9 billion), 13.34% above the USD 4.323 billion contributed in 2022.

It should be recalled that the canal is crossed annually by some 14,000 vessels which, for using this route, pay resources equivalent to 6.8% of Panama’s GDP and close to 20% of government revenues. According to calculations made by the Bloomberg agency, in the last two decades the canal has contributed more than 20 billion dollars to the Panamanian economy.

In an attempt to minimize the effects of water scarcity, the Central American country’s authorities have taken concrete actions to alleviate the situation and – in addition to reusing water – many ships transship cargo, unloading part of the containers at the Canal’s port of entry, which are transported by rail to the port of exit. This reduces the amount of water needed to activate the locks.

This kind of cabotage does not represent a higher cost for the shipping lines, since reducing the weight of the ship also reduces the amount of tolls they must pay for the crossing and, although this activity complicates the operation, it is an effective solution in the event of a contingency to avoid a possible interruption of traffic.

“This geographical shortcut is indispensable to make international logistics processes more efficient and faster. Global trade has been transformed thanks to this type of routes that considerably reduce transfer times. A theoretical interruption in Canal traffic would have devastating consequences on global supply chains and an inflationary effect on many products, making the current cost of living even more expensive,” says Quijano, who argues that the Canal is not at risk, as evidenced by the fact that the revenues it generates are increasing year after year.

He further recalls that a potential reduction in vessel traffic would be detrimental to the economic health of the country, as the economic impact of the Canal extends beyond revenues and jobs.

“Thanks to the Canal, Panama has become an important transportation and logistics hub in the region, attracting many multinational companies to establish themselves in the country, which has further contributed to economic growth and helped make Panama the wealthiest nation, per capita, in Latin America,” Quijano stresses.

Mexican alternative

Since the Suez Canal was built in 1869, several projects have attempted to open a breach in Central America, with Panama being the ideal site due to the shorter inter-oceanic distance. For various reasons, several of these alternatives have been reconsidered in recent times, and one of them, the construction of a railroad, is currently underway.

Indeed, the Interoceanic Corridor of the Isthmus of Tehuantepec (CIIT), a mega-project advanced by the Mexican government to unite both oceans in the isthmus that gives it its name, includes a railroad to transport goods between the ports of Coatzacoalcos (Atlantic) and Salina Cruz (Pacific), impacting the area with 10 development poles along its 324 kilometers.

Is this an alternative to the Panama Canal? Quijano considers that it does not necessarily represent a direct competition to the Canal, but recognizes that it will be highly beneficial for the region’s infrastructure. He adds that the use of trains would not compete with the large-scale economy offered by maritime transport. He gives an example: while a ship can carry 15,000 containers, a railroad can carry 2,000.

Fernanda Garza believes it can be a viable alternative maritime alternative to the Canal from the infrastructure point of view, and could even become the most efficient logistic option in the region, but to be viable it needs “legal certainty, predictability for investors and political support to conclude it”.

If the entire project is executed to create a logistics route that will combine maritime, rail and road transportation, it could become a leading multimodal logistics center in the continent and reduce the exclusive dependence on the Panama Canal, offering Mexico new alternatives as a nearshoring destination, strengthening its competitive position to attract investment.

The specialist lists the possible benefits of using the Tehuantepec railroad as an alternative to the Panama Canal:

• Diversification of transportation options: By having an additional land route, exclusive reliance on the Panama Canal would be reduced.
• Improved efficiency and capacity: The railroad could provide additional capacity for cargo transport, especially in cases of congestion or limitations in the Panama Canal. By using a multimodal corridor, existing infrastructure could be maximized and freight transport efficiency could be improved.
• Regional development: The construction of a modern transportation infrastructure could generate employment, attract investment, and foster the integration of local communities into the global logistics chain.

In addition to this project, Mexico has initiated a process of port modernization and construction. The Veracruz port has been significantly expanded to increase handling capacity and logistical efficiency. New anchorages are also planned, such as Tuxpan, also located on the Gulf of Mexico coast, which is projected as a world-class logistics center.

“Additionally, Mexico is looking to improve land infrastructure to facilitate the transportation of goods to and from ports. The country is looking to diversify its transportation options, improve competitiveness and strengthen its role as a major player in international trade,” says the SMPS Legal attorney.

Other ports

In its search for new ways to penetrate the region and, given the interest in that country, improve traffic to an area that continues to gain ground as a customer for its products, China has been insisting on the possibility of financing the construction of a new communication route in Central America.

In 2013, China showed interest in supporting a project of Nicaraguan President Daniel Ortega, which revives a dream from colonial times: to build a road connecting, through the San Juan River, the Caribbean Sea to Lake Nicaragua and from there to the Pacific.

Although the Beijing government was not listed as the builder and financier, it would facilitate everything for the multimillionaire Wang Jing to execute the work. In fact, Jing’s company received a 50-year concession for the rights to build the canal and another 50 years to manage it, and estimated that the work would cost some 40 billion dollars.

Having rejected the project, China has recently shown interest in accepting a proposal from the Honduran government to build a railroad linking the Atlantic and the Pacific, a proposal put forward by the Joint Commission on Trade and Investment between the two nations, which seeks to sign a Free Trade Agreement between Tegucigalpa and Beijing.

At a cost of 20 billion dollars, the project would be completed in 15 years and would be one of many that have been proposed as alternatives to the Panama Canal, which also includes an initiative to link the Colombian ports of Barranquilla (Caribbean) and Urabá (Pacific) with a 220 kilometer railroad at a cost of 7.6 billion dollars, financed by the China Development Bank.

The original interview was conducted in Spanish, and may be read in Lex Latin’s website: https://lexlatin.com/reportajes/canal-panama-alternativas-trafico-china