When Captain Andrew Kinsey started in the shipping industry, his boats made runs from West Africa to the United States carrying coffee and cocoa beans on pallets. “I grew up in the industry,” Kinsey said. “My father, brothers, cousins—we all go to sea. I was on my first tug when I was seven.”
This was before his lengthy career in the Merchant Marine and before containers changed the world. Pallets have long been replaced, and the era of giant containerships has pushed worldwide maritime commerce to $9 trillion per year.
Yet increasing vessel size has threatened the relevance of one of the world’s most vital shipping lanes: the Panama Canal. Although $270 billion in freight passes through each year, most boats have outgrown the man-made waterway, which celebrated its 100th birthday in August. For a time, size limitations in the canal kept ships small—after all, why build a boat that cannot fit through this critical passage? In the mid-1990s, however, economy-of-scale benefits superseded those concerns. Every year since, ships have gotten bigger and bigger, carrying more containers (measured in “twenty-foot equivalents,” or TEUs).
The first time Kinsey took the helm of a 2,000-TEU container ship, he said, “My word, who can expect anything larger than this?” A cargo load that size is now considered quaint. Today’s largest ships carry nine times that volume (18,000 TEUs), which highlights the nonstop increases in size that have occurred since the largest containership company, MaerskLine, introduced its 6,000-TEU Regina in 1996. After that milestone, “Panamax” ships (industry jargon for the biggest that can fit through the Panama Canal) were dwarfed by the hulking vessels taking to sea.
Panama realized the threat. After securing ownership of the canal from the United States in 2000, the country knew it had to protect its economic lifeblood. Trade from China to the United States was exploding and, while canal traffic rose, the nation also saw shipping companies begin favoring alternate routes from Asia to the East Coast. More shippers were sending large boats through the Suez Canal in Egypt or to California ports, offloading the cargo and moving it eastward by rail. There was also a future risk emerging from routes that have started to open north of Canada and Russia as climate change melts more ice.
In 2006, the government acted, putting a $5 billion expansion project up for a national referendum. Nearly 80% of Panamanian voters approved the plan, and ground was broken in 2007. The country expects the expansion to be complete by the end of 2015. When the new lanes open, the Panamax standard will be redefined, allowing for ships that carry almost 13,000 TEUs. Some 5,000 more vessels may traverse the canal each year.
The largest ships today already pay a $300,000 toll, so it is easy to calculate why Panama is investing so heavily in the project. But effectively re-digging a second canal next to the old one has caused many problems. At least five workers have died, leading to protests over working conditions, and there have been environmental concerns and other complications, all of which pushed back the project’s end date by more than a year. But now, with the government reporting that expansion is three-fourths complete, the country has cleared its largest hurdles.
The same cannot be said for shipping companies, cargo owners and North American ports, however. The issues they face are vast and complex—and time to prepare is running out.
Kinsey is part of Panama Canal history. In January 2000, he commanded the first U.S. naval vessel to pass through after ownership was transferred from the United States to Panama. It was an honor for the merchant captain, who spent 23 years in charge of vessels up to 950-feet long for MaerskLine.
“It’s an engineering wonder,” Kinsey said. “While I used to go through it as part of my job, there was always a period of the transit where you would just sit back and really be in awe of the engineering marvel that it was.”
Kinsey’s roots with the canal go deep—both of his parents were even stationed in the Canal Zone during World War II. Today, he no longer captains ships. Instead, he serves as senior marine risk consultant for insurer Allianz and works with shipping clients to prepare for business after the expansion.
The biggest concern he sees is literally the biggest: the next generation of Panamax containerships are immense and carry cargo loads that cost $250 million to insure. Allianz projects that, if the new canal lanes operate at peak capacity, an extra $460 billion in insured goods will pass through each year. With numbers like that, an increase in losses seems inevitable.
More cargo also means that delays will prevent more products from reaching their destinations on schedule. That equals major disruptions in a just-in-time economy, and fallout will be magnified if the new lanes malfunction.
The natural catastrophe risk is worse. While hurricanes do not hit Panama, big storms on the Atlantic and Gulf Coasts could park ships in port for days. The property exposure is worrisome enough, but the fuel stores of large ships mean a total loss could spell environmental disaster.
Even without catastrophes, larger vessels spew more exhaust, which can run afoul of environmental regulations in certain ports. Adopting a “dual fuel” capability (burning diesel in the ocean and natural gas in the port) can mitigate this, but some ports lack reliable means to refill tanks. In practice, this leaves such advances as useful as buying an electric car but having nowhere to plug it in.
Then there are problems with simply maneuvering mega-ships. “It’s like coming from a parking garage where you’re in a subcompact to now being in an SUV,” Kinsey said. This will undoubtedly cause some accidents and losses. Fortunately, the Panama Canal has a glowing safety record. From 2007 to 2013, there were only six incidents registered as insured casualties by Allianz, three of which came last year. Even in a bad year, this gave the Panama Canal a rate of 1-in-4,000 ships suffering an incident, compared to 1-in-1,100 in the Suez Canal.
“One of the things they did that was so wise from a safety point of view was to go to pilotage,” said J. David Rogers, chair of the geological engineering department at Missouri University of Science and Technology. Since the beginning, officials have prohibited ship captains from taking their own vessels through. The ships are instead “piloted” by professionals who work for the canal and have the sole job of driving boats in and out. Rogers has studied the Panama Canal for years and believes this seemingly small move is a huge factor in the culture of safety in Panama.
In the Suez Canal, by contrast, captains command their own vessels and have to deal with north- and south-bound traffic while watching for ferries cutting across. “It can be a bit chaotic,” said Kinsey, who has captained ships through both waterways. Panama has tighter controls and calmer traffic flow, so much so that, once into the canal, the likelihood of an incident is minimal.
In addition to increasing capacity, the expansion project will also upgrade the canal itself, specifically through improvements to its lock system. Since a large portion of the canal is above sea level, ships must be lifted out of the ocean to enter. To do so, a huge gate opens and the vessel enters the first lock, then the gate door, which weighs up to 660 tons, closes behind it and the chamber is flooded to lift the boat. The science is no different than filling a bathtub and watching a rubber ducky rise, except this tub uses 52 million gallons of water to buoy ships that are longer than three football fields.
Once the vessel sits even with the next lock, another gate opens for it to enter. This float-the-boat process happens six times, until the ship is 85 feet above sea level. After a 50-mile cruise through the man-made Gatun Lake, created during the canal’s construction, the locking process is reversed, with each chamber drained to lower the boat to sea level so it can continue its journey.
New locks will make life easier in many ways. One is obvious: the new locks are new. “Unlike the older locks, where they have to engineer the part or make it from scratch, the new locks will have spares available,” Kinsey said. No more trying to replace one-of-a-kind machinery from 1914.
Wider availability of parts should shorten the downtime that once plagued the canal. “When I was there as a naval officer, those gates were down for maintenance a significant amount,” Rogers said. “I think it was four months out of every 24. That’s a pretty low utilization.”
Another benefit is that about 60% of the freshwater used in the new locks will be recycled. At the old gates, all the freshwater, which comes from Gatun Lake, is flushed out during the locking process. This is not generally a big concern because Panama is full of jungle and there is usually plenty of rain to replenish the lake. But the El Niño cycle in the South Pacific sometimes causes erratic precipitation, leaving the canal parched. When the water level is low, officials are forced to impose draft restrictions, limiting a ship’s weight. At such times, vessels must either carry less cargo or take a different route, an issue that once left Kinsey in command of a heavy ship near Guam and wondering how to get back to the East Coast of the United States.
By recycling water, the new locks will ease this burden. One engineering study even predicts that overall freshwater consumption will fall by 7%. “That’s fascinating when you look at the size of the new vessels that they are locking through,” Kinsey said. “We’ll actually be looking at a reduction in the freshwater consumption.”
For cargo owners, the large size of the ships should also help in ways that are not just due to the economy of scale. Bigger boats carry more containers, and that means less offloading and transferring of boxes. Yes, shippers will be putting more eggs in each basket, but those delicate eggs will be touched fewer times.
As it stands now, many containers sent from Asia to the East Coast of the United States are offloaded in California and moved across the country by train. Each box is handled in port, at multiple train yards, by a trucker and also at its destination. That way is cheaper, but there are many more chances for something to go wrong, particularly if the container holds produce or other goods that require refrigeration and must be plugged in at each stop.
“The longer you can keep it on the ship and take it directly to the port, the greater the reduction in risk,” Kinsey said. “So even though we’re looking at larger vessels that, by their nature, present larger risks, for the individual container, we’re looking at a reduction in the risk because we have less handling.”
The first boat crossed the Panama Canal almost 13 years before Charles Lindbergh made his famous flight across the Atlantic and nearly 23 years before the Hindenburg disaster. The ship sailed in a disconnected world where getting from New York to San Francisco was a harrowing experience. Extracting millions of tons of rock from the Panamanian isthmus and connecting the world’s two largest oceans made it smaller.
One hundred years later, the canal is still having an outsized effect on industry and, while Panama is almost finished with a major expansion, the biggest risk may be that the project is not ambitious enough. The Suez Canal has announced an $8 billion expansion plan of its own, while China has set its sights on even larger goals. Wang Jing, a telecom billionaire from Beijing, wants to build a canal through Nicaragua and has reportedly made inroads with the government on a $50 billion project. Many doubt the feasibility of such an endeavor, but with all the talk, officials in Panama are already fielding questions about expanding further.
For now, the focus remains on the current build. But if the country wants to continue its lucrative monopoly on one of the world’s most prized shipping routes, it must keep pace with ongoing global trade growth. Panama may have to dig yet again.