9 min read

Will Panama Canal avoid Suez-type logjam?

Featured Image

The Suez Canal is open again, now that the container ship Ever Given has been refloated. Could the same thing happen to the maritime world’s other shortcut, the Panama Canal? 

Panama Canal

In this exclusive American Shipper interview, Ricaurte Vásquez Morales, administrator of the Panama Canal Authority (PCA), addressed that question, provided other thoughts on the Suez Canal crisis, and spoke about the volumes moving through the canal and what growth opportunities he sees for 2021 and beyond. He also unveils the goal of using hydrogen fuel.

Panama Canal vs. Suez Canal

AMERICAN SHIPPER: Thankfully the Ever Given has been refloated. There are differences between the Panama Canal and the Suez. Let’s go over what the PCA is doing to make sure something like this does not happen.

VÁSQUEZ: “We are a freshwater canal with locks. The Suez is depending more on the ocean tide. The soil here is essentially rock, so we dredge day in and out to make sure we have adequate draft. We are more confined and have a defined watershed.

“When vessels close into the locks, we take control of the vessel. The Gaillard Cut [also called the Culebra Cut], is the only narrow part of the canal. We always have tugboat assistance. When the vessel is out of the cut, we make sure the lake level is high enough for the vessel to have enough clearance under keel. Our procedures are more complicated than the Suez. 

“We also do not have large vessels like the Ever Given moving through the canal. The largest vessel we will have is in the neighborhood of 14,000 TEUs. We do not have VLCCs (very large crude carriers). The Suez does. So the scale is different. In our canal routes, we move the workhorse vessels.”

AMERICAN SHIPPER: What do you think went wrong with the Ever Given? 

VÁSQUEZ: “That section of the Suez Canal where the Ever Given was located is the most narrow part of the canal and is the equivalent to our Gaillard Cut. 

“That vessel is 5, 6 stories high and if you have crosswinds, the boxes work as a sail. How fast that sail effect moves the vessel depends on how fast the storm moves in. 

“There is another theory of sand going into intakes of the vessel and then hampering the engine operation. That is just speculation. But just with the wind effect, it’s a big factor.

“Here in Panama during the dry season, you have wind. We are in this season right now. If you have a vessel coming to the lock system, that’s when you can have incidents like banging the side of a vessel on the wall. Some of them minor. Some of them are more complicated. But we provide tug assistance because the wind effect is critical. For car carriers, container vessels, anything that is high above the water level, we must be careful because it acts like a sail.”

AMERICAN SHIPPER: What is the role and authority of the canal pilot guiding the vessel through the canal?

VÁSQUEZ: “In Suez, the pilot works as an adviser to the master. Here at the Panama Canal, we take control of the vessels. The Panama Canal is responsible. We have a vested interest in making sure that pilots do it well and all of the assistance is in place because we carry the liability. 

“Unfortunately, one of the ripple effects as a result of this [Suez blockage] is the modification in cargo rates. We in the industry, even though we had no role in this accident, we expect our insurance contracts to go up in the next renewal.”

West Coast port congestion impact

AMERICAN SHIPPER: The Panama Canal has been a beneficiary of the West Coast port congestion as we have seen more trade moved to the East Coast. What kind of volumes are you seeing?

VÁSQUEZ: “We have seen a migration into larger vessels using the Neopanamax locks and increasing efficiency. They are working on a higher load factor. In doing so, if it is containers, you will have more boxes in East Coast ports. It is not more vessels; it is a higher payload.”

SONAR Insight

The Panama Canal spread is calculated by taking East Coast rates and subtracting West Coast rates. When the spread is this low, shipping to the East Coast becomes more affordable — especially when the West Coast is experiencing major congestion issues. The 30-32 day average transit time (+plus additional 6-10 days for the boat to get a birth and offload for the East Coast) also becomes a more viable option for shipper lead times when the West Coast is a 14-16 day transit (+plus additional 8-12 days for the boat to get a birth and offload).
This intermodal spread is another extremely relevant chart. It explains decisions by shippers that are located or trying to ship to inland locations like Chicago. It shows how much more affordable it is to ship East Coast and then rail into Chicago vs. Los Angeles to Chicago. 

AMERICAN SHIPPER: Let’s talk about the third lock. How is that going?

VÁSQUEZ: “About 55% come from the third lock. We are going to renew our rates eventually in order to balance the utilization of the new lock versus the old locks. We are making a $2 billion investment in order to ensure the required water levels to guarantee sufficient drafts for vessels. This is all about cargo efficiency. We are also looking into green technology.”

AMERICAN SHIPPER: What kind of energy technology? 

VÁSQUEZ: “We are moving green to reduce our carbon footprint. We were thinking about it before COVID. It [the pandemic] just accelerated our process and we are moving into high gear. 

“There are three elements: first, providing reliable water infrastructure to get loaded ships through the canal. The more product loaded on a ship, the more efficient it is.

“Everything works on gravity, which is an energy source. Now into the future we will do more water recycling, which will require more energy. That will come from hydrogen, not fossil fuels. 

“We will have to have a system built for reliability and firm power. Essentially that will be LNG [liquefied natural gas]; of all fossil fuels, it’s a lower carbon emission. We are setting up a research and development institute with local universities because we deal with water and we will explore the possibility of using hydrogen as a fuel. So that is a very long-term commitment and interest. You are the first to learn about this. I have not spoken about this even locally.”

Future of the Panama Canal

AMERICAN SHIPPER: You need those leaders for Panama’s future. Let’s talk about tapping into the talent pool at the university.

VÁSQUEZ: “In addition to my work at the PCA, I have been a university professor for 20-something years and it’s something I really enjoy. Human capital is vital. Talent is critical. Concrete and steel, you can buy. Talent is priceless. If we can generate great talent, it will not only benefit the Panama Canal, but also for the world.”

AMERICAN SHIPPER: China continues to expand its trade universe with more alliances and port investments. The Nicaragua Canal is said to be attracting Chinese investment. What are you doing to keep up with the port competition?

VÁSQUEZ: “We are looking at the longer term. Not only generating talent on the inside but also outside. We are looking at real-time data, information management, internet of things and machine learning. All of this must come into play for the canal. 

“As we look to China, what we see is the center of gravity for the world economy moving across the Pacific to Asia. 

“The opportunity we see for the Panama Canal depends on the trade relationship between Asia and North America. We see opportunity coming from U.S. energy products going to Asia. Also, we expect to continue to see shorter supply chains versus long supply chains as a result of the trade war. COVID has accelerated this phenomenon. 

“We must position ourselves to be more selective in the movement of tradeables and use a price system in order to have the right allocation. Having this balance of transits will generate the most value for the customer and canal.”


AMERICAN SHIPPER: Are you concerned that another value chain breakdown will further play into rising economic nationalism and the case for reshoring instead of global trade?

VÁSQUEZ: “What we see here is a shift in what’s moving. The fastest trade growth is in manufactured products. That is why we built the third set of locks. It allows the canal to have higher rates for containers. The transit price is higher because of the goods value. 

“What we are also seeing now is a situation where raw materials are playing a more relevant role in freight flow. If this continues to happen, the vessel composition will be different. Tradeables will be different. Raw materials and commodities have less value in transit price.

“This also changes our business model. With manufactured goods, we do not deal with the end user. With commodities we know those involved. The business model is going to move from an undefined end customer to a better-defined end customer. So, the approach will be different, how you will deliver the volumes. Commodities are on the spot market, so there is a timeliness to the product. We are going back to pre-globalization times as a result. From pricing to operations, everything will be impacted.”

AMERICAN SHIPPER: LNG traditionally moves through the Panama Canal. During the Suez blockage, we did see some diversions of LNG vessels, which originated from the U.S. and were scheduled to go through the Suez. As China’s insatiable appetite for energy increases, what is your outlook on more LNG and liquefied petroleum gas (LPG) moving through the Panama Canal?

VÁSQUEZ: “We anticipate energy products will become more relevant and move through the canal. Using a fourth set of locks to move the cargo is how we can be an efficient energy transshipment center. This will probably be what a fourth lane would look like. By doing so we release capacity into the navigational channel and then we try to do transshipment through gases, fuels and others. 

“We already have in Panama an oil pipeline and are in conversation with authorities about how we can operate jointly. We could move some of the cargoes there so we can create capacity; not confining capacity through the canal itself. Let’s see how we can go to the next level, not just with the canal but also across the Isthmus of Panama. That is the vision of how we can meet the challenge and expansion.”

AMERICAN SHIPPER: How long of a timeline for you to achieve this?

VÁSQUEZ: “For crude it can be relatively soon. The government is the largest shareholder of the oil pipeline. We will be working on other possibilities later this month.” 

AMERICAN SHIPPER: What trends are you seeing with vessels now?

VÁSQUEZ: “Peak season, which is traditionally November to now [March], we have had a high volume of container vessels and have seen an increase in bulk carriers from Louisiana to China because they have to feed their stock. 

“As a result of [COVID} phase one, we saw huge volumes of U.S. soybean and corn. We have also seen LNG and LPG. The lower volumes are the car carriers. Manufacturing lines were disrupted because of COVID. Sixty percent of our revenue is coming from containers. We see raw materials and commodities catching up. The rate of growth is faster in commodities. Containerized and manufactured goods are plateauing for the time being.”

AMERICAN SHIPPER: COVID has thrown peak season out the window given the strong consumer. When did your peak season really begin? We started seeing the surge of containers in the United States in the summer. 

VÁSQUEZ: “I would say our peak season started in September. It is still going. Volumes are very, very high. We are at the same tonnage as last year but the momentum into the third quarter remains high. Cruise ships have been replaced by energy vessels. The energy trend is significant. We are making sure we have the structure in place and are working with cargo owners. We may consider the possibility of a joint venture with them. One way or another, we will get the products through.”

AMERICAN SHIPPER: You were able to make up for the loss in cruise volume because of energy. Once cruise volume comes back, say in 2022, how do you plan to meet all of that volume demand?

VÁSQUEZ: “We must generate more capacity. At the margin, we can get two, three, four vessels through a day. For resource allocation, there is only one secret — and that’s pricing.”

Source: American Shipper/Freight Waves