Panama Canal Doppelganger

shutterstock_168782900-PanaBy Richard L. Wottrich, CEO & Senior Consultant, DSI Global View LLC, Atlanta USA

Imitation is the sincerest form of flattery. If true then Nicaragua’s recently launched Mini-Me canal-on-steroids is both a sincere compliment to and a doppelganger of the Panama Canal. The Nicaraguan government and Chinese billionaire Wang Jing supposedly have launched work this past December 2014, on a proposed $50 billion, 173-mile long canal across the Central American nation – 3.6 times as long as the Panama Canal.

Nicaraguan President Daniel Ortega adamantly claimed that his country was not signing over its sovereign territory to Wang’s Hong Kong Nicaragua Development Group (HKND Group) to build “Nicaragua’s Grand Interoceanic Canal.” It is widely presumed that Wang is a cut-out for the Chinese Communist Party.

Forbes’ 2014 “China Rich List” ranks Wang as the 12th richest man in China, reporting that, “Wang Jing’s net worth surged $5 billion since last year, thanks to a September backdoor listing transaction in which Wang sold his 37% stake in private wireless tech firm Beijing Xinwei Telecom Technology to a listed company, which changed its name to Beijing Xinwei. He is much better known for this audacious plan to build a $50 billion canal across Nicaragua.”

In the U.S. sales of share blocks this large are traded in Dark Pools. In China such a backdoor listing would be cleared by Wang’s Communist Party doppelganger, if indeed Wang is not a Party member himself. No trade – no canal.

The proposed canal has been lambasted as white elephant in the making, but China is no stranger to over-the-top public projects. Environmentalists fear the loss of tropical forests and contamination of Lake Nicaragua, through which vessels will transit. The lake is so shallow that it will require dredging over its entire width, while providing enormous volumes of water for the operation of canal lock systems on both sides of the lake.

What are we to make of China ignoring the U.S. Monroe Doctrine? We are tempted to view the Panama Canal as an anachronism – a relic meriting two paragraphs in school history books. It is a 48-mile ship canal that connects the Atlantic Ocean (via the Caribbean Sea) to the Pacific Ocean. The canal cuts across the Isthmus of Panama and is a key conduit for international maritime trade. Over 14,000 vessels transit the canal every year carrying over 3 percent of world trade [$65 trillion global GDP times 60% trade share times 3% equals $1.8 trillion], but the Canal cannot take vessels wider than 110-feet; hence roughly 40 percent of the world’s container ships are too large to use the canal.

The country of Panama is attempting to make its Canal relevant again via a massive construction project to add a third world-class canal to its two side-by-side canals. The Panama Canal expansion project (also called the Third Set of Locks Project) is intended to double the capacity of the Panama Canal by 2015 by creating a new larger lane for ship traffic at a cost of over $6 billion. When completed Panama hopes that it will double and eventually triple Panama’s current $1 billion in annual Canal revenues.

It does not take an Ouija board to predict that Nicaragua (China) will undercut Panama Canal transit fees substantially to gain traffic through its new canal. If Panama currently clears roughly $1 billion a year in revenues, then doubling its capacity plus adding in the new Nicaragua canal will most certainly dramatically lower transit rates and perhaps reduce Panama’s Canal revenues. China can be patient and undercut Panama transit fees for decades.

Ports and industries around the world have been spending billions in anticipation of the new Panama Canal expansion. The nascent U.S. liquefied natural gas (LNG) industry has been planning to vastly increase exports to Asia when the larger canal opens. The shorter trips and larger LNG vessels will increase revenues exponentially. The global LNG glut notwithstanding, long term energy growth trends are clear.

Ports across the Eastern U.S. have been spending over $11 billion to deepen their harbors and upgrade port facilities. The Port of Miami is building an underground tunnel for trucking servicing ships in port. The citrus industry in Florida sees expanding shipments to Asia as a result. Savannah, currently the third busiest port on the East Coast, is investing in new capacity as well.

The Panama Canal expansion has triggered a worldwide increase in orders for larger container vessels. Over 200 New Panamax container ships, which are each over 400 yards long and 100-ft high, have been ordered. This will lead directly to retiring smaller older model Panamax vessels, of which some 40 were scrapped in 2014.

So it makes sense that the Chinese government might want in on this expected explosive Panama Canal growth by building a direct competitor. After all, China is the world’s second biggest shipbuilder after South Korea and most of the ships at sea are moving exports out of China to the rest of the world and importing raw materials and the products demanded by an exploding Chinese Middle Class.

Most of China’s goods are unloaded at major ports on the U.S. West Coast. But these ports have been stuck for over a year in a dispute with unions over contracts, wages and retirement plans. The near-paralysis at these ports is hitting productivity across the U.S. Containers are stacking up and railroads are reducing West Coast trips. A Meat Industry trade group estimated that the port slow-downs were costing meat and poultry companies more than $30 million a week.

So owning a key part of the Western hemisphere infrastructure makes eminent sense for China. It protects their shipbuilding industry, lowers their global logistics supply chain costs and insures continued consumer demand for their goods in the U.S.

What is amusing in all this is that the International Longshore and Warehouse Union (ILWU) members slowing down the unloading of goods at U.S. ports are providing some of the stimulus needed to motivate China to build an alternative canal system that will reduce growth at West Coast ports, putting future union workers out of work. You reap what you sow.

Richard L. Wottrich