The massive $5.3 billion project comes with “considerable safety concerns,” which could lead to accidents and delays for shippers and higher claims for insurers, according to a new report from the London-based risk management consultancy.
Safety risks at the recently inaugurated Panama Canal expansion could undermine the economic benefits of the $5.3 billion project to allow larger vessels to pass through the important gateway between Asia and the East Coast of North and South America, according to a new report from PGI Intelligence.
The expanded locks and gates, construction of which began back in 2007, allow containerships with up to 14,000 TEUs of capacity to transit the waterway, nearly three times the previous 5,000-TEU limit. Those larger neo-Panamax vessels, however, come with “considerable safety concerns,” which could lead to accidents and delays for shippers and higher claims for insurers, the London-based risk management consultancy wrote.
“Structural issues relating to the new locks could also threaten the long-term integrity of the project and risk new delays,” added PGI.
Not only are there economic advantages for the carriers in using larger, more fuel efficient vessels, but for the state-run Panama Canal Authority (ACP) itself, which sets its tolls based on the size of the ship. Recent media reports pegged the fee for the MOL Benefactor, the first neo-Panamax to transit the expanded locks and the largest ever to call the U.S. East Coast, at $829,468, a record for the canal.
The PGI report noted that the ACP predicts the expansion will generate annual revenues of USD $2.1 billion, around 2.8 percent of the country’s annual gross domestic product (GDP).
Despite these advantages, the report warns that at 427 meters long and 55 meters wide, the new locks are still too small for neo-panamax ships.
“The largest vessels can measure up to 366m long and 49m wide, leaving a distance of just 6m across the width of the canal and 61m length-wise, much of which will be taken up by tugboats on either end of the vessel to guide it through the lock,” said PGI. “A joint study by the International Transport Workers’ Federation (ITF) and Brazil’s Fundação Homem de Mar (FHM) found that under windy conditions the maneuverability of vessels would be compromised, making accidents likely due to the lock’s narrow dimensions.
“Further concerns have been raised over the structural integrity of the locks after cracks appeared in the Cocoli lock during the testing phase in August 2015,” it added. “Anonymous structural engineers cited in the New York Times said the cracks were likely a result of sub-standard pouring methods as a core sample of the lock showed air gaps in the concrete, which, they claimed, would require the lock to be demolished and rebuilt, a measure that would have bankrupted the expansion project. The ACP has denied the claims, blaming the cracks on insufficient reinforcement, which it said had been resolved with more steel bars and additional concrete.”
And the larger the vessel, the greater the financial risk for shippers and insurers in the event of an accident or collision. This is due both to the cost of the vessel itself as well as the much higher volume and concentration of cargo on board.
“An accident would also impose indirect costs as a result of delays to scheduled transits through the canal,” said PGI. “Insurance agency Allianz Global Corporate & Specialty released a report in June 2016 which estimated that the expansion will see an additional USD 1.25 billion worth of insured goods pass through the canal in a single day, based on the average value of USD 20,000 per TEU. The report called on shippers and insurers to take active risk mitigation measures to assess and spread the impact of an accident involving a neo-panamax vessel, as a single event could result in much larger losses than typically seen in the shipping industry.”
The canal also faces risk of disruption from labor actions on the part of unions representing workers operating the new locks and gates. Construction workers from the Grupo Unidos por el Canal (GUPC) and National Union of Workers in the Construction Industry (Untraics) staged regular strikes during the nine-year construction of the canal, and given the “safety issues over the new locks, any accident resulting in employee casualties is likely to spur industrial action,” according to the report.
In addition, ACP in 2015 and 2016 imposed strict draft restrictions during times of drought along the canal, which could undermine its competitiveness if carriers are forced to load fewer containers to keep ships lighter and floating higher in the water.
“With water consumption in Panama increasing and additional water diverted to expand the locks, such shortages are expected to remain a major issue,” said PGI.
“The success of the expansion of the Panama Canal is partly dependent on how the ACP manages and mitigates such risks through training and its response to the emergence of any safety and structural vulnerabilities,” the report concluded. “Encouragingly, the ACP has taken a cautious approach to the new locks, initially permitting four vessels per day during an initial trial period before increasing the canal’s maximum capacity to 13-14 transits per day, although a timescale for the increase has not yet been established.
“Any major safety failings, a fall in water levels or evidence of damage to the locks, however, would create significant pressure on the ACP to implement restrictions on the locks, with implications for larger vessels and a negative economic impact on the authority and its revenues.”
PGI Intelligence: Panama Canal expansion safety risks could undermine economic benefits
