Work to expand the Panama Canal was suspended today following a breakdown in talks between the canal authority and the construction consortium to resolve a bitter dispute over more than $1 billion in cost overruns.
The head of the Panama Canal Authority demanded in a statement today that the consortium led by Spain’s Sacyr SA return to work, but it wasn’t clear when that would happen or what the impact on the completion date, already delayed by a year to late 2015, would be.
The dispute over $1.6 billion in cost overruns already estimated for a project whose total cost was supposed to be $5.25 billion had already slowed the work to 25 to 30 percent of the normal pace, Canal Deputy Administrator Manuel Benítez said at the Georgia Foreign Trade Conference this week.
The dispute became public in December when Sacyr and its partner, Italy’s Salini Impregilo SpA, sought compensation from the canal authority for the cost overruns. At the time it gave the authority a month to find a solution, but that time frame was extended until yesterday, at which point the contractors walked off the job.
“They put a threat on the table and today they executed it,” Jorge Quijano, head of the canal authority, told reporters in Panama City today, Bloomberg reports.
The timing of the delays, in the midst of Panama’s dry season, is inopportune. In a statement issued today, Canal Administrator Jorge Quijano said the authority “continues to try to find a solution, but stressed that the contractor must resume normal activity which is especially crucial during the dry season in Panama.”
The delays will particularly affect container trade between Asia and the U.S. East Coast, with containers being the largest segment of canal traffic and the U.S. accounting for by far the largest share of tonnage among countries sending or receiving cargo moving through the Canal.
Benítez said at the Georgia conference this week that once the Panama Canal expansion is complete it will quickly recapture container services that now ply the trade between Asia and the East Coast through the longer Suez Canal route. The small, 5,000-TEU maximum size of ships able to transit the Panama Canal currently has led some major carriers, including Maersk Line, to shift cargo moving on that route exclusively to Suez services, where ships exceeding 8,000 TEUs, which are less costly to operate, are able to be deployed.
“I am absolutely confident that we will gain back that market share; the one simple reason is that our route is shorter,” Benítez said. Due to the shorter transit times, a carrier can deploy 10 ships on an Asia-U.S. East Coast service through the Panama Canal but has to deploy 12 ships to operate the same service through the Suez. “So you are saving on crews, fuel, capital, insurance,” he said. A full round trip rotation for a ship operating on the Suez route is 84 days versus 69 days through the Panama Canal, he said. It can take a ship 10 days longer to reach Savannah via the Suez route versus Panama.
Others agree the shorter transit time to the East Coast via Panama versus the Suez from Northeast Asia will result in a reversion of vessel strings to the traditional “all-water” route once the canal expansion is completed. “I agree completely (with Benítez) that once the largest ships can transit the Panama Canal, the natural market for Panama Services, which is Hong Kong and North, I think that reverts back to the Panama Canal pretty quickly,” said Georgia Ports Authority Executive Director Curtis Foltz.
“The expansion of the Panama Canal will provide ocean carriers opportunities to look at new service structures between Asia and the U.S. East Coast,” a Maersk Line spokesman said. “Of course, many factors influence service deployments such as the needs of customers, the operational capabilities of ports, tonnage availability, and overall operating cost including canal fees.”
Benítez said the canal authority has backup plans, and Quijano said today the canal will proceed “with or without” the construction group, Bloomberg reported. “We always have a Plan B, such as, if we cannot reach an agreement with this contractor, we will have to exercise a Plan B,” Benítez said.
The canal authority could fire its contractor, Benítez said recently, and appoint a management firm to oversee subcontractors working on construction.
Firing the consortium would likely result in a one- to two-month delay, he said, which would still place completion in the fourth quarter of 2015.