Panama Canal Expansion: Delay Scenarios And Outcomes

Work on the Panama Canal expansion project, due to be launched in 2015, has all but ground to a halt following the breakdown in negotiations between the Panama Canal Authority (ACP) and the Grupo Unidos por El Canal (GUPC) consortium concerning cost overruns. BMI investigates the different scenarios for this project and who stands to benefit and who is disadvantaged by these delays.

The disagreement between GUPC and the ACP stems from the consortium (which includes Spain's Sacyr Vallehermoso, Italy's Impregilo, Belgium's Jan de Nul and Panama's Constructora Urbana) seeking compensation for US$1.6bn in cost overruns. The dispute erupted in December 2013, with Sacyr giving the ACP a month to reach a decision on the overrun payment. During this period, production levels on the project dropped by 75%, and following the breakdown of negotiations on February 5 2014, reports have emerged that almost all construction activity has ceased.

The work being undertaken by GUPC on the Canal expansion project is about 70% complete, but the current delay threatens the launch of the whole project, which is already nine months behind schedule, with a current launch date of June 2015.

Market Reacts To Negotiation Breakdown
Sacyr Share Price (EUR)

Work on the Panama Canal expansion project, due to be launched in 2015, has all but ground to a halt following the breakdown in negotiations between the Panama Canal Authority (ACP) and the Grupo Unidos por El Canal (GUPC) consortium concerning cost overruns. BMI investigates the different scenarios for this project and who stands to benefit and who is disadvantaged by these delays.

The disagreement between GUPC and the ACP stems from the consortium (which includes Spain's Sacyr Vallehermoso, Italy's Impregilo, Belgium's Jan de Nul and Panama's Constructora Urbana) seeking compensation for US$1.6bn in cost overruns. The dispute erupted in December 2013, with Sacyr giving the ACP a month to reach a decision on the overrun payment. During this period, production levels on the project dropped by 75%, and following the breakdown of negotiations on February 5 2014, reports have emerged that almost all construction activity has ceased.

The work being undertaken by GUPC on the Canal expansion project is about 70% complete, but the current delay threatens the launch of the whole project, which is already nine months behind schedule, with a current launch date of June 2015.

A number of scenarios should be considered and with them the potential impact on the Panama Canal Expansion's deadline.

Panama Canal Expansion Delay Scenarios
Scenarios Outcome Impact On Deadline
1 Negotiations Resume Likely Deadline Likely To Be Pushed Into H215
2 GUPC Backs Down And Resumes Work Unlikely Deadline Likely To Be Pushed Into H215
3 ACP Backs Down And Pays GUPC For Cost Overruns Unlikely Deadline Likely To Be Pushed Into H215
4 GUPC Is Dropped And A New Contractor Is Picked Unlikely Deadline Likely To Be Pushed Into H215-2016
5 The Plan To Expand The Panama Canal Is Scrapped Very Unlikely Project Is Cancelled
Source: BMI Research

Scenario 1: Negotiations Resume

Both parties have a lot to lose if negotiations fail to restart. BMI believes that over the next few weeks the parties are likely to return to the negotiating table; a quick resolution however, will be a lot harder to achieve.

During the next stage of negotiations construction might resume, but we highlight that during the original month-long talks productivity dropped by 75%, and so construction development on this level must expected. This would therefore likely push back the deadline of the Canal expansion's completion into the second half of 2015.

Further negotiations would likely lead to some form of compensation package being agreed upon, but the full US$1.6bn figure is unlikely to be met.

Scenario 2: GUPC Backs Down And Resumes Work

The consortium would not have raised its grievance if it was not seeking some form of compensation for cost overruns, and so it is unlikely that GUPC will back down at this point and return to work. CEO of consortium member Sacyr, Manuel Manrique, has stated that 'there have been unforeseen costs', and that 'after four years the claims haven't been resolved and there's a liquidity problem.'

Scenario 3: ACP Backs Down And Pays GUPC For Cost Overruns

If ACP were to pay GUPC the compensation it is demanding then work would likely restart immediately and a deadline of around June 2015 would be achievable. This scenario is, however, unlikely. The ACP has already been in negotiations for a month and if it planned to pay GUPC compensation it would have agreed to such a demand by now. Indeed, GUPC has already reduced its claim to US$400mn, whilst the APC has offered no more than US$100mn in negotiations thus far.

BMI also highlights the rhetoric from the ACP indicating that an agreement on the US$1.6bn compensation is unlikely. The head of the canal authority Jorge Quijano has demanded that the consortium restart the expansion work, using the phrase 'blackmail' about the current delay in the Panama Canal expansion project.

The total cost of the expansion project has reached US$5.2bn and finding a further US$1.6bn will be difficult, especially at this late stage in the project.

Scenario 4: GUPC Is Dropped And A New Contractor Is Picked

BMI considers this scenario unlikely, but it is being discussed. GUPC has completed around 70% of the work and bringing in a new company would seriously disrupt operations and increase the likelihood of further delays to the project.

The choice of a new company would also lead to legal wrangling between the ACP and GUPC, leading to further cost increases as the courts become involved.

Although BMI believes that this scenario is unlikely, it is being discussed. Panama's ambassador to Spain, Roberto Eduardo Arango has stated that a Plan B is required and Quijano is quoted as saying that the Panama Canal expansion will be completed 'with or without' the companies.

Scenario 5: The Plan To Expand The Panama Canal Is Scrapped

With GUPC having completed about 70% of work and the Canal scheduled for launch in 16 months' time, cancelling the project is very unlikely. On January 22, Panama's president vowed that the project would be completed, and the shipping industry's expansion plans have been based on the ability of the expanded Canal to handle larger vessels. Therefore, cancelling the project at this late stage would cause issues both politically and in the shipping sector.

The Panamanian government is reported to have had second thoughts about the Panama Canal expansion in the past however, with a cable released by WikiLeaks and published in the El Pais newspaper in 2010 citing Panama's Vice President Juan Carlos Varela as describing the project as a 'disaster' and stating that in two or three years 'it will be obvious this is all a failure'.

Whichever of these scenarios plays out, it looks likely that the Panama Canal expansion faces further delays and the scheduled launch date of June 2015 is looking less likely. This delay will be beneficial for some, but will be a disadvantage for others.

Who Will Be Disadvantaged By Further Delays To The Panama Canal Expansion?

The major parties that stand to be negatively impacted by a delay in the construction of the Panama Canal expansion are the two entities involved in its development, ACP and the companies which form the GUPC consortium. A further delay for ACP will mean that the Canal Authority's plans to handle larger vessels will have to wait longer to see the benefits it would have on its coffers.

The impact has already been notable on the share prices of the companies involved. Sacyr has seen its share price drop by 6.9% following the breakdown in negotiations. The company will face further problems if it receives no reimbursement for the cost overruns. The impact is also notable on sub-contractors for the Canal, such as Colombian cement and concrete producer Cementos Argos, which has the contract to provide cement to the project. The company has seen persistent weakness in its share price, with the Canal contract dispute partially to blame.

Market Reacts To Negotiation Breakdown
Sacyr Share Price (EUR)

Shipping firms that have ordered larger ships in preparation for the expansion of the Panama Canal will also be negatively impacted by a further delay in its launch. Ships that are set to be utilised on the Canal will have to be placed on other routes, if they come online before the Canal opens, and this could cause issues of greater overcapacity in the shipping market, which in turn would force freight rates down.

Port authorities that are currently investing to expand and go deeper to be able to handle the larger vessels that will be able to transit the expanded Panama Canal will also be negatively impacted by delays, as it will take them longer to regain the money they have invested in preparing their ports for larger vessels and greater volumes of cargo.

BMI notes that up and down the US Gulf Coast and US Eastern Seaboard, port expansion and dredging projects are underway. Investment is also being made into ports in Latin America and in the transhipment hubs of the Caribbean in preparation for larger ships from June 2015.

Commodity producers will also suffer on the back of a further delay to the Panama Canal expansion. The expanded Canal offers more trade options for shippers of coal, oil and gas as larger ships will be able to transport these goods from the East Coast of South America and from the US East Coast and the Gulf of Mexico. A delay in this will impact export projections for these commodities.

Finally, the Panamanian economy will be severely disadvantaged by further delays to the Panama Canal expansion project. Indeed, fixed investment has been an important driver of real GDP growth in recent years, fuelled by a construction boom related to the Panama Canal expansion. Should delays persist in the coming months, we would likely revisit our real GDP growth forecast of 7.1% for 2014, although we could see upside risks to our 6.4% headline growth forecast for 2015.

Who Will Benefit From Further Delays To The Panama Canal Expansion?

Rivals of the Panama Canal stand to benefit from a further delay to its expansion. The ability of the Canal to cater to larger ships opens up the possibility that container lines will be able to reach the major demand hubs on the US' East Coast. This will negatively affect the US' West Coast ports' role in the country's supply chain, and so any delay to the Panama Canal expansion is good news for the US' main container gateways of Los Angeles and Long Beach.

Both ports have been investing heavily to combat the expansion of the Panama Canal by catering to larger ships. Post expansion the Panama Canal will be able to cater for 12,600TEU capacity vessels, the US Port of Long Beach is already able to handle ships with a container capacity of 14,000TEU.

BMI believes that a delay in the launch of the Panama Canal will bolster the US West Coast ports as they will further establish themselves as calls on services with 14,000TEU ships. As such, when the Panama Canal expansion opens, its ability to cater only for 12,600TEU capacity vessels will make it look outdated.

A delay to the Panama Canal will also benefit Nicaragua's plans to develop its own Atlantic-Pacific Ocean Canal. The project was first mooted in 2013, with a feasibility study due to be completed in May 2014.

A New Rival Emerges
Planned Nicaragua Canal

The Canal has the backing of the Hong Kong Nicaragua Canal Investment Company (HKC) and seeks to be able to handle larger ships than the Panama Canal post-expansion. The Nicaragua Canal would be in direct competition with the Panama Canal and so any further delays in the latter's expansion will enable the Nicaraguan project to edge closer to realisation.

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This article is tagged to:
Sector: Infrastructure, Freight Transport, Shipping
Geography: Panama, United States
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