With the discovery of the new world in the 15th century and the a new route opened up to the east, the era of globalisation of cross border trade had dawned.
The advent of steam ship and other forms of transportation, served as a catalyst for the rapid growth of maritime trade, allowing it to take an irreplaceably dominant position in global commerce.
In 2012, according to World Trade Organization (WTO) statistics, global trade monetary value stood at $18.3 trillion, shipping trade volume stood at about 90% of total global commerce, or about 9 billion tones.
Throughout the history of maritime trade mankind has sought to shorten shipping distances, reduce transportation costs, improve the efficiency and safety of navigation and search for more convenient maritime trade routes. Generations of people continue to explore, build canals on par with such splendid feats of engineering as the Suez Canal and the Panama Canal.
As an important conduit for linking Asia, Europe and Africa, the 193.3 km long Suez canal is known as the throat of Europe, it shortens the shipping distance from Asia to Europe around Cape of Good Hope by about 10,000 km. Known as the spine of the Americas, the Panama Canal stands at 81.3km long linking the Atlantic and Pacific oceans. This canal enables ships traveling from the East Coast and the West Coast of North America to shorten the distance by about 15,000 km from the previous route around Cape Horn.
The Suez and Panama canals have also made outstanding contributions to the development and progress of human civilization through the facilitation of global trade and promotion of friendly relations between nations.
The Panama and Suez canals were designed and built over a century ago. Globally there are ever increasing ship sizes and maritime trade volumes. Even when taking into account the present Panama Canal expansion there are opportunities for a canal on a much grander scale.
New Developments in Global Maritime Trade Require a New Canal
The first decade of the 21st century saw unprecedented changes in global maritime trade. Volume of global trade increased rapidly prior to the 2008-09 financial crisis, with one of the drivers being China’s own growth and the fact that China became a main trading partner of many developed and developing economies alike.
Post financial crisis, China and many other countries in the global economy have faced lower economic growth trajectories. Yet after some consolidation, China should be expected to again accelerate its own economic growth in the coming decades, while many other countries will re-establish more respectable growth rates than those experienced in recent years.
At the same time, from the mid-90s onward, container vessel sizes have increased some three fold, contributing not only to the rapid growth of maritime trade and containerization but also to continued revolutions in the lowering of transportation costs per unit and, as a result, lower costs for consumer goods around the world.
These developments culminated early on in the rationale for a third set of locks for Panama Canal in 2006. And, when these locks are complete, the Panama Canal will be able to accommodate vessels up to about 13,000TEU. The Panama Canal Authority has already committed over $5.3 billion in the development of the third set of locks, with additional funds now expected to be disbursed to complete the project, potentially by 2016. Since the expansion of Panama Canal, several ports in North America have begun investing to upgrade their facilities to accommodate the larger ships that will pass through the expanded Panama Canal.
However, since the Panama expansions began in 2006, maritime trade value and volumes have expanded more than expected as vessel equipment dynamics have shifted and grown more than initially projected back in the early 2000’s (when the third set of locks were on the drawing board). Despite, and perhaps also partly because of, a slower rate of economic and trade growth post 2008, the global maritime transport infrastructure industry has seen vessel size growth accelerate more than previously anticipated. New shipbuilding orders for container 10,000 TEU vessels and above have grown far more than expected from 2010 onwards. We believe this trend will end up putting additional strain on the newly expanded Panama Canal once again (i.e., vessel congestion, queuing and delay costs, etc.), while at the same time leaving container lines operating 13,000+ TEU vessels over dependent on the Suez Canal.
We believe, the following three fundamental trends support the creation of a new Interoceanic Canal:
(1) Global Maritime Trade, in particular global maritime trade between Asia and the Americas, will continue to grow even in the context of a weaker US consumer compared to the 90s and 00s.
(2) Globalization, technological advancements and the power of new emerging businesses will prove driving factors for renewed rapid growth of global trade, even if the nature of trade growth will be different from the “China industrial breadbasket to the world” model of the ‘90s and ‘00s. From 1999 to 2008, the average annual growth rate of the global trade stood at about 6%, while the long term growth rate of containerization stood about 10% pre-crisis. And although, the 2008-2009 economic downturn and its aftermath have caused a slowdown in this growth rate, we expect trade growth to rebound after adopting different drivers.
(3) Global trade patterns are expected to continue shifting in structure, with growth tilted to new trades. In 2012, global trade achieved a record value at $18.3 trillion dollars, while growth to 2030 is expected to recover and record average growth above 5%, according to the WTO. Emerging markets and North – South trades are expected to contribute more to global trade growth going forward. Africa and Latin America are expected to continue seeing accelerating, even if sometimes uneven, growth, while China is expected to continue growing its internal market. Continued growth of China’s internal retail markets will continue to form the basis for strong inward trade growth demand from China.
The Role of Maritime Shipping in Global Trade
Maritime shipping serves as the cornerstone of and is the primary choice for the global transportation industry, with maritime trade historically constituting 80% to 90% of global trade volumes. In 2012, according to UNCTAD (2013), global maritime trade stood at about 9 billion tones.
A general expectation for long term maritime trade growth, includes continued strength for wet and dry bulks, with long-term demand growth around 4%, and somewhat more moderated container demand of 4-7% (note: before the ‘00s boom, which brought growth close to 10%, long-term demand growth was close to 7-8%).
The rapid emergence of China as the centre for manufacturing promoted an enormous growth of container shipping volumes between Asia and America, especially during the 2000s. At the same time, the super-sizing of container ships accelerated. Post financial crisis there has even been an acceleration of vessel size growth. This has led to and will continue to lead to further debates on maximum vessel sizes on several trades, and their impact on canal, port, rail and other equipment infrastructure.
With more trade being loaded onto larger and larger container ships on long haul East-West trades, and even to the US, which has seen more vessel size constraints than many other markets, more and more of these ships have had to travel West, through the Straits of Malacca and onward through the Suez Canal. Until the Panama Canal expansion is complete, this trend will only be accentuated, and lead to more mega vessel volumes through the Suez Canal, underscoring the need for the Panama expansion as well as the need for the future Nicaragua Canal.
Currently, some of the largest global trade lanes remain to the US West Coast and the US East Coast. The majority of container shipping volumes to the US East Coast rely on a Panama Canal transit. At the same time, a substantial portion of containers unloaded on the US West Coast transit further eastward, with some travelling to the same destinations as containers unloaded on the US East Coast. The largest vessels to be received on the West Coast can now range up to about 14,000TEU, while vessels to about 13,000 TEU will be able to transit the Panama Canal by 2016. The fact that the US can receive more and more larger vessels is itself already a big leap for US ports. But this shift-up in vessel sizes has been in the works for about the last decade. We believe, partly also because of the recent further acceleration in vessel sizes, that further North America infrastructure upsizing will likely take place post 2020. Reasons for continued upsizing will include:
1) Continued vessel upsizing to generate per TEU cost reductions to maintain cost cutting drives and fleet operation efficiencies;
2) The construction of new hub ports in the Americas able to receive vessels above 13,000 TEU, with more and more vessels in the global fleet again too large to transit the expanded Panama Canal;
3) A continued need to balance volumes between vessels transiting to the Americas via the Trans-Pacific and vessels transiting via the Suez Canal (including considerations on vessel fuel costs and fuel costs/TEU).
In addition to the export of manufactured goods from Asia to America, it is expected that US exports to Asia will increase as well. This will include coal exports from the east coast of North America as well as new LNG exports from the US Gulf. These commodity trades will benefit by the construction of a new Nicaragua Canal.
Trade between Latin America and Asia is also expected to grow in the next few years. This trade mainly includes bulk commodities such as iron ore, coal, and other mineral deposits, as well as wood, cereal crops, salt and ever increasing crude oil exports. At present, iron ore is the most important export commodity between Latin America and Asia. The shipping route going from Northern Brazil to China constitutes an important part of the iron ore maritime trade. However, due to the limitations of the Panama Canal, iron ore shipments must go around the longer route via the Cape of Good Hope. In order to remain competitive with other iron ore suppliers (such as Australian companies that benefit from a shorter route), Brazilian mining companies need to keep their running costs low. The Nicaragua Canal will aid in their competitiveness, and of other commodity suppliers, facilitating more growth opportunities.
Looking further into the need for continued growth in efficiency and economies of scale, in future, we expect the following four trends:
1) Due to the drive for continued trade globalization, and the further enhancement of growth in developing economies, international container shipment volume will continue to grow, even if the rate of growth will be below industry peaks. Conversely, if growth slows too much, even greater vessel cost reductions per unit and higher vessels utilization rates will be warranted, leaving larger vessels on trunk routes and major East-West trade lanes as more economically viable.
2) Continuing growth demands on vessels will also lead to greater pressure on port expansion plans. Bigger ships will command bigger hub ports, and continued advances in vessel network planning, including the cascading of medium sized vessels into smaller trades. In other words, we will see more cascading of 8,000TEU vessels in secondary trades.
3) Shipping companies will continue to seek ever more demanding efficiencies and cost reductions by continuously driving down operating costs/TEU. This will also play itself out through fierce competition between shipping companies, through larger vessel alliances, shipping company M & A and lower fuel cost strategies relative to peers. The optimization of shipping routes and slow steaming have been main cost cutting strategies. Therefore, investing in newer and bigger ships which also happen to be fuel efficient will help to further reduce costs/TEU.
4) In many parts of the world, ports have been putting new capital expansion plans into expanded vessel berths and larger super-post Panamax quay cranes and other supporting equipment. Recent ship size increases have prompted many ports to install bigger container cranes, and roll out new operation methods to facilitate the loading and unloading of these gigantic ships. Recently, ports in North America have also begun investing in widening their entry channels, delivering new cranes and other equipment and upgrading supporting infrastructure such as the recent height increase of the Bayonne Bridge in New York’s harbor.
With ever-growing vessel sizes, a large percentage of the container fleet will surpass the new Panama Canal “Panamax” dimensions, which will go from about 5,000TEU to about 13,000TEU. Recently only about one-third of capacity were “Post Panamax” ships (ships too large to transit the Panama Canal) and the logic has been that as the Post Panamax fleet grew, the new third lock coming on line in 2016 would pick up the slack and allow Post-Panamax ships to use the canal. This is likely to hold true initially.
However with accelerating up-sizing of vessels, the maths on Post-Panamax vessels below 13,000TEU able to transit the new third set locks will not prove as attractive as they once did in 2006. Based on our initial projections using current expected vessel deliveries, about 17% of the container fleet in 2015 will be too large to pass through the third set of locks. Beyond 2020, the number of vessels too large to transit will quite likely represent a return to a similar situation the Panama Canal faced prior to 2006 and its decision to move to its third set of locks which nearly doubled its capacity. The Nicaragua Canal will be able to accommodate Super Post Panamax ships up to about 23,000TEU, and will offer the shortest shipping route between Asia and many US East Coast ports.
New Non-Container Trade Demand
The Americas are still an important supplier of bulk cargo, and energy in particular, satisfying the requirement of continuously growing Asian markets.
For the transportation of bulk cargoes, economies of scale should have long ago dictated that ships should be as large as possible for bulk carriers and super tankers. However, they could not pass through Panama Canal. This limits the growth of raw materials from the Americas to Asian markets. For example, the Brazilian mining giant Vale, has planned for the construction of 35 Valemax ships of 400,000 dwt (dead weight tones) (and which cannot as yet call on China ports). These ships will not go through Suez Canal or Panama Canal. Vale accepted longer shipping distances to achieve vessel economies of scale. Due to the higher quality and quantity of Brazilian iron ore, this trade is expected to grow substantially in future.
Equally, the dimension constraints of the Panama Canal restrict the transportation of rapidly growing crude oil production in the Caribbean and Gulf of Mexico and the transportation of new light grade crude oil from the oil fields in the heart land of America. The heavy grade crude oil produced in Venezuela is not best suited to the refinery requirements in Asia. America is currently developing sources of new light grade crude oil to suit the refinery requirements in Asia. The rapidly increasing shale oil production will soon render America a net energy exporter. Therefore allowing super tankers a high efficiency route to the Asian refineries will generate enormous commercial interest from North American and Asian markets. In particular China is likely to be a primary importer for this American light grade crude oil.
In addition to iron ore and crude oil, the Americas will increasingly supply Asia with LNG (liquefied natural gas), coal and cereal crops. Recently, North America’s natural gas production has rapidly accelerated without any signs of slowing down, and this has prompted energy companies to explore the possibilities of developing a number of export ports for various LNG projects. The US Department of Energy (DOE) recently granted several export licenses allowing for the development of some these projects. This shows that the US DOE recognizes the value brought to America by the export of these commodities. The Nicaragua Canal will be situated along the ideal route between the Gulf of Mexico, Japan and South Korea. It will provide a shorter shipping route than the Panama Canal for time sensitive fuel cargoes. Coal suppliers from eastern US and South America’s Columbia which supply Asia’s power generation and steel production are also interested in this new maritime route, that enables them to use bigger bulk carriers to transport cargo. In addition, with the rise of population and standards of living, animal protein consumption is growing rapidly in Asia. The agriculture and livestock industries throughout the Americas will more efficiently tap into these Asian markets by using the Nicaragua Canal.
The Nicaragua Canal will satisfy the changing needs of the 21st century, and will complement the Panama Canal.
With the rapid increase in East-West trade volume and increasing ship sizes, there is a sufficient justification for a second Interoceanic Canal spanning Central America. The trend of increasing ship size alone demonstrates there is a huge market potential for the Nicaragua Canal. This market belongs to the Nicaragua canal.
We believe, in 2030, 16 years from now, the combined value of goods passing through the Nicaragua Canal and Panama Canal will surpass 1.4 trillion dollars. This will be one of the most important concentrations of shipping in the world. In addition, the fuel savings will be considerable for Super Post Panamax ships passing through Nicaragua Canal. For example, from Shanghai to Baltimore, the Nicaragua canal route is shorter than Suez Canal route and Cape of Good Hope route by 4000km, and 7500km respectively. Based on current fuel cost and average scale container ships, this results in round trip savings of $0.5m and $1m, respectively. Compared with the other two routes, a round trip savings for the biggest ships on a standard container basis will be 110 dollars and 327 dollars. These savings mainly come from reduction in fuel consumption.