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Panama Canal Expansion Open in 2016: Impacts

After a long wait that spanned a decade, the Panama Canal expansion is finally complete and opened for business on June 26, 2016. The canal is 51 miles long and connects the Pacific Ocean to the Atlantic Ocean via the Caribbean Sea. The Panama Canal was initially opened in 1914 and has been used for more than a century as a cost-effective way to ship goods to the U.S. East Coast instead of shipping through another 5,000 miles on the southern tip of South America.

The expansion of the canal cost $5.25B and involved adding a third lane, thus effectively doubling its capacity. The expanded Panama Canal can now handle 1,200-foot long Post-Panamax ships which are capable of carrying three times as much cargo as 965-foot long Panamax ships, which were previously the biggest vessels the canal could allow.

Post-Panamax Ships

The cargo transportation business is typically a low-margin business. For a shipping business to be profitable, the vessels need to be fully loaded. The ''max'' suffix is used in shipping to denote ships that are specifically designed to pass through certain bottlenecks such as canals while carrying the maximum amount of cargo. Panamax ships are designed to pass through the Panama Canal. Post-Panamax ships are much bigger than Panamax ships. They are 14-20 TEUs (20-foot Equivalent Units, which is the length of a 20-foot container) wide and can carry 5,000-8,000 containers. These massive ships require a channel that is at least 17 meters deep. Meanwhile, Super Post-Panamax ships are even bigger and can carry more than 13,200 containers.

Lowering Shipping Costs

Post-Panamax and Super Post-Panamax ships carry 27% of the world's cargo. Bigger ships have lower per-unit costs. The expanded Panama Canal can now handle these massive ships which will help to lower shipping costs.

Before the expansion, only 20% of ships carrying cargo from China to the U.S. passed through the Panama Canal with most preferring to go to take the West Coast route. East Coast-bound cargo was then carried by railroad from the West Coast. Using this route instead of shipping to the East Coast directly via the Panama Canal takes a significantly shorter amount of time (21.6 days via the Panama Canal vs. 18.3 days by taking the West Coast route).

But rail transport is not as cost effective as shipping. A single Post-Panamax ship can carry as much cargo as 16 trains.

The refurbished canal will help to keep the costs of imported goods from Asia and China down. Additionally, commodity exporters will also benefit from the expanded canal by lowering the cost of exporting commodities to Asia thus making U.S. goods more competitive. World Trade 100 has estimated that the expanded Panama Canal could take as much as 35% of West Coast freight.

Further, the expanded canal will help to make maritime transportation in the U.S. more efficient by relieving congestion on LA/Long Beach Port (Port of Long Beach), one of the world's busiest ports.

Mixed effects for railroads

The new Panama Canal is likely to have mixed effects for railroad businesses. Western railroads such as Union Pacific and BNSF are likely to see a drop in freight volume while eastern railroads such as CSX, CN, and Norfolk Southern are likely to see an increase.

The loss of business for western railroads, however, is likely to be mitigated by the fact that the new Panama Canal still cannot handle the largest ships, such as the CMA CGM Benjamin Franklin which can carry more than 18,000 containers. Further, many Eastern Coast sea ports cannot accommodate huge amounts of cargo.

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