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The importance of the worlds canals to global trade

Panama Canal at night

 

Shipping trade lanes have played an important role throughout history enabling countries to trade in everything from spices to electronics, and cars to clothing. Today Over 90% of all products made and sold globally are transported by ship, making the oceans, seas and rivers of the world an integral part of the supply chain of many businesses.

The transportation of goods by sea can take several weeks, sometimes more - But these goods would take even longer to get to us had it not been for an ingenious innovation; the construction of man-made waterways, which has had a significant impact of increasing the efficiency of this invaluable industry.

Whilst charges are made to transit the main canals, the costs are offset by the benefits.

By cutting new, more direct routes through land, the construction of canals shortens shipping routes. These shorter distances save time and operating costs for vessels.

As a result of the quicker transits, major commercial centres are serviced in a less amount of time, enabling ships to be used for additional sailings per year. These additional sailings mean more frequent shipping schedules, with the capability of more goods being traded on a global scale.

 

Two main canals serve the key trade lanes that connect the East with the West

 

Suez Canal

Officially opened in November 1869, the Suez Canal in Egypt, connects the Mediterranean Sea to the Red Sea. One of the world’s most heavily used shipping lanes, the Suez Canal provides the shortest maritime route between Europe and the lands lying around the Indian and western Pacific oceans. This 120 mile (193km) stretch of water allows ships to travel between Europe and South Asia without navigating around Africa, reducing the sea voyage distance by about 4,300 miles (7,000km)

 

Panama Canal

Opened August 1914 the Panama Canal connects the Atlantic Ocean (via the Caribbean Sea) to the Pacific Ocean and serves more than 144 of the world's trade routes. This 48 mile (77km) stretch of waterway enables vessels to avoid the lengthy Cape Horn route around the southernmost tip of South America, where strong winds, strong currents, large waves and Icebergs make these some of the most treacherous waters in the world to navigate. The Panama Canal, which takes between 6 to 8 hours for ships to transit provides a reduced route from the Far East to the US East Coast of around 3,000 miles (4828km).

 

Expansion to Cope with 21st Century Shipping Vessels

With growing trade between East and West due to manufacturing in the East and a growing middle-class in Asia with a demand for Western goods, there has been a sharp rise in the number of vessels navigating these canals. The increase in shipments has led to delays, whilst, at the same time, there has been a dramatic increase in the size of the modern ships being built, to the extent that many are too large to navigate the canals. As such, steps have been taken to improve these important shipping channels to cope with the increased demand, through the largest expansion projects on both the Suez and Panama since the initial construction of either canal.

On the Suez Canal construction was undertaken to develop a new channel parallel to the original to allow for separated passing of ships. When the new 22 mile stretch of canal channel opened in August 2015, the ‘New Suez Canal’ as it became known, doubled the daily capacity of the canal and more than halved waiting times, whilst deepening of the main waterway allowed for larger ships to navigate the canal.

The Panama Canal expansion, which opened in June 2016, has created a new lane of traffic along the Canal through the construction of a new set of locks, doubling the waterway’s capacity. The expansion of the canal has enabled the passage of vessels that can carry up to 13,000/14,000 TEUs; Nearly three times the size of the 5,000TEU, which the original locks could handle.

 

Competition between Suez and Panama canals

With the increase in international trade, and shipping companies paying in excess of £165,000 to £300,000 for one of their 4,500 TEU vessels to transit the world’s busiest shipping lanes, it is no surprise that the Suez and Panama Canal operators are keen to maximise the effectiveness of their channels.  Investment on both canals has been made to increase operating capabilities and to obtain a competitive edge over the other.

The operation of a productive canal system has positive effects on the surrounding community. Economic investment in the expansion and development of ports and supporting infrastructure in countries within the vicinity of the canal brings with it jobs.  

And in the instance of the World of shipping, it appears that size really does matter. Due to the limitation on the size of ships capable of passing through the Panama Canal prior to expansion, Maersk took the decision in 2013 to move all shipments to the Suez Canal as it worked out more cost effective to put 1 x 9,000 TEU through Suez as opposed to 2 x 4,500 TEU through Panama.

However, the Panama Canal expansion appears to have prompted a revised routing for the shipping line as amongst the carriers that have committed to commercial transit through the new Panama Canal locks, Maersk have confirmed that they will be operating a service string through the canal.

The increased capacity at both canals has increased choice for shipping lines operating on East to West trade lanes. So, how do they decide which route is more cost effective? Although ships utilising the Suez canal from Asia to US navigate a distance of an additional 5% to those utilising the Panama Canal, the distinct variance in the toll charges between the two canals means that the Suez is actually more cost effective when fuel prices are low. However, if fuel is expensive, the Panama Canal becomes the more attractive proposition due to its shorter distance.

The Suez Canal is still capable of accommodating larger ships than Panama Canal as despite the expansion at the Panama Canal, it is still not capable of handling the largest of the container shipping vessels.

However, is the competition set to get tougher?

 

A New Canal?

Recognising the economic benefits that can be gained from operating an international shipping lane, the Nicaraguan parliament has approved plans for a Chinese company HKND Group, headed by billionaire Wang Jing, to build a 173-mile canal through Nicaragua.

Three times as long and almost twice as deep as its rival in Panama, Nicaragua’s channel will require the removal of more than 4.5bn cubic metres of earth. With the dimensions of each of the locks' chambers planned to be  520 m (1,706 ft) long, 75 m (246 ft) wide, and 27.6 m (91 ft) sill depth, the Nicaragua Canal is being designed to allow passage for larger ships than those that pass through the Panama Canal. For comparison, the new third set of locks in the Panama expansion are only be 427 m (1,401 ft) long, 55 m (180 ft) wide, and 18.3 m (60 ft) deep.

Originally due for completion in 2019, the future of the Nicaraguan Canal, it is suggested, may now be delayed or even possibly cancelled, following media reports that Wang Jing's personal wealth declined over 80% due to the 2015–16 Chinese stock market crash.

News that the project may not yet go ahead will be encouraging to the competition.
A new Canal in Nicaragua could potentially have a detrimental effect on the Panama Canal trade.With its geographical position, the Nicaraguan channel would offer the capability to operate larger vessels in servicing similar ports.With Panama and Suez already in competition, would there be enough trade for all 3 canals? Even if so, would the additional competition decrease income from toll fees? If this were the case, it could spell good news for carriers in so far that it could push down shipping charges – But would this mean less investment in future on these integral transit routes? 

Whilst there is uncertainty as to how many authorities will be vying for the business of the international shipping industry and at what cost, one thing that is certain is that canals have played an important role in international trade for many years, and will continue to do so for many years to come.

 

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