ABOARD THE MAERSK BATAM, On the Panama Canal—Everything about this Danish-flagged ship is big. It is longer than two football fields, as high as a seven-story building and carries 3,000 cargo containers weighing 30,000 tons.
But as shipyards from India to Korea continue to build vessels that are longer, wider and taller, the Maersk Batam actually is a midsize ship. Some people even call it small.
"Not that there's anything wrong with smaller ships," says Capt. Mike Hands, a Briton who has spent 40 of his 57 years working on ships. "Smaller ships go to smaller ports, which are always more interesting," he says, as the Batam begins its 10-hour passage through the Panama Canal.
Interesting isn't what the Panama Canal is about. Panama's government has kicked off a multibillion-dollar project to widen the canal's navigation channels and build larger locks—the pools of water that lift boats from sea level to canal level—in an effort to catch up with the industry's new standards and collect more in fees.
The canal's current tale of the tape is rather modest. The biggest ship it can handle is 965 feet long and 106 feet wide. A new and improved Panama Canal, one highly anticipated by shipbuilders, will be able to accommodate vessels 1,400 feet long, 155 feet wide and capable of carrying three times as many containers as today.
But Panama's plan has suddenly run into rough waters because of ballooning cost overruns. European construction companies hired to expand the canal are threatening to bring the project to a halt as soon as Monday.
With the spat nearly a month old and construction work all but shut down, the shipping industry is growing restless, especially after one of the companies warned that the planned completion date of June 2015 may be delayed by another three years.
"Across the industry, especially in the U.S., there is a great deal of activity preparing for the possibilities. But until the expansion is complete we will not know the real impact of the project," says Christopher J. Wiernicki, chief executive at the American Bureau of Shipping, a certification and classification organization founded in 1862.
The canal expansion broke ground in 2007 with a $5.3 billion budget, a third of the cost to build the entire 50-mile waterway in 1914. Now, expansion costs are estimated to reach $7 billion, in a country with an annual gross domestic product of $40 billion.
Who's going to pay for the extra costs? Since the dispute, pitting Panama's government against a consortium of European construction companies known as GUPC, began in late December, it has become "a staring contest, and so far neither side is blinking," says an official from a major shipping company.
Two builders, Spain's Sacyr SA and Italy's Salini Impregilo SpA, which together control 96% of the consortium, have given Panama's government an ultimatum. They warn that if they don't receive at least $400 million from Panama by Monday, they will halt construction altogether.
Panama's government on Monday said work to expand the Panama Canal fell by up to 75% due to its still-unresolved dispute with a consortium of European companies it hired to do the job.
The move puts further doubt to a scheduled completion date of June 2015.
Panama hired the consortium, Grupo Unidos por el Canal, in 2009 to build a third set of massive locks in the canal for $3.1 billion. The historic project will allow bigger ships to pass through the canal and is more than two-thirds complete. When finished, it would allow the Central American nation to quadruple its yearly income of $1 billion from toll fees it charges to shipping firms that use the maritime shortcut.
But the consortium, which is 96%-controlled by Spain's Sacyr SA and Italy's Salini Impregilo SpA, suddenly threatened in late December to halt construction by the end of Monday if not paid an extra $1.6 billion for cost overruns it says were unavoidable.
With little response from Panama over the past month, the consortium known as GUPC reduced its immediate demand to $400 million two weeks ago. On Monday, it offered another proposal which calls for the builders and Panama to "co-finance" the project, which it said currently sees monthly costs of more than $100 million and employs some 10,000 people.
Panama, through the Panama Canal Authority, again offered a chilly response.
"This solution is not contemplated within the contract," the canal authority said in an emailed statement Monday afternoon, adding it is preparing a more complete response.
GUPC also said in its latest proposal that it was suspending its threat to halt construction altogether. But that seemed rather moot given that earlier in the day the canal authority said GUPC has already reduced activity at the site by 70% to 75%.
The canal is the country’s major moneymaker and central to the nation’s identity. The government argued that the passage needed an upgrade to stay competitive in world trade. Roughly half the ships that come through the canal travel between the east coast of the United States and Asia. But as freighters have gotten bigger than the canal, the canal has lost business.
Halting construction on the project would also be a setback for companies eager to move the largest ships, such as containers with liquefied natural gas, from the US Gulf coast through the canal to Asian markets.
So-called Panamax ships, behemoths of the 20th century, pass through the locks guided by small locomotives on each side, tethered to the ship by cables. The largest ships have just 24 inches of clearance on each side, so it's a tight squeeze.
The post-Panamax ships are too large to pass through the current locks. Many of those ships go around Cape Horn, at the bottom of South America. Others have to unload their cargo at US west coast ports like Long Beach, CA, where it is put onto trucks or rail to get to its final destination in the eastern US.
An extra set of locks would handle the wider ships and accommodate increased traffic through the canal. Currently, the canal can handle 43 ships a day. It takes 8 to 10 hours to pass from Pacific to Atlantic, or vice-versa.
Source: WSJ, PRI's
