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The expanded 102-year old Panama Canal was officially inaugurated on Jun 26 after the completion of a 10-year long intensive project. The expansion project, which is worth more than $5 billion, will now let huge ships carrying upto 14,000 containers travel from the Atlantic to the Pacific Ocean through a set of new locks.

The COSCO Shipping Panama, a Chinese container ship, was the first one to cross the expanded canal amid much fanfare. Panama hosts a major chunk of global shipments and its main competitor is the Suez Canal. This expansion will also increase competition for railroad companies that had been benefitting with lower fuel prices.

Expansion Motive and Investments

The Panama expansion project has primarily been focused on two aspects. First, an increase in the volume of containers which cross the canal by threefold thereby enabling massive ships to finally cross the stretch. Second, a reduction in the time taken by ships which sail from the Atlantic to the Pacific Ocean.

The expansion project is expected to open several other opportunities like increase in commodities trade with Asia, as well as transport of natural gas across the route, as ships sign up to use the expanded routes. Though most investors are hopeful of the canal contributing to growth in the current slumping shipment industry, some remain skeptical about the high expenses incurred.

In addition to investments in building the canal, a sizable amount has been spent by port owners to revamp their facilities to manage the arrival of the bigger ships and higher container volumes. The Port Authority of New York & New Jersey spent $6 billion, while Port Miami has undertaken projects worth $2 billion in this regard. However, besides the investments, the canal expansion is likely to reduce global maritime costs by $10.46 billion.

Transportation Sector Price Index

Transportation Sector Price Index

Impact on Western and Eastern Railroads
    
The Panama Canal expansion is significant for investors interested in the railroad industry. The railroad stocks will be the most impacted by the expansion as freight volumes across various routes would change significantly. Interestingly, the expansion will have a contrasting effect on railroad services based on their operational location.

In terms of transport between the U.S. West and East coasts, importers tend to prefer using large vessels for shipments as they can carry a higher number of containers and hence, are more cost effective. Historically, imports from Asia have followed the sea route upto the West Coast and then transported by road to the East Coast. However, given that now the Panama Canal can let large ships traverse through to the East Coast, railroads with sizable portions of West Coast railways traffic, such as BNSF Railways, a unit of Berkshire Hathaway Inc. (BRK.B - Free Report) and Union Pacific Corp. (UNP - Free Report) , stand to be adversely impacted.

However, companies are not viewing the canal as a major threat. United Pacific recently cited certain factors that make it confident that its business would not be significantly impacted. The company noted that much bigger ships with 18,000 20 foot containers that land on the West Coast cannot traverse the Panama Canal yet.

This is because these shipments are limited by height of the Bayonne Bridge in New York and inability of East Coast ports to accommodate increasing container volumes, thereby keeping the West Coast railroad volumes intact. The company also said that given a higher proportion of cargo would be at sea due to longer travel period to reach East Coast, financially struggling shipment companies would have to buy more containers which would be tough for them.

On the other hand, companies operating on routes, which move cargo from the Midwest south to Gulf Coast, are poised to witness a boom in business due to higher exports from this region. Companies with traffic concentration from the East Coast ports such as Norfolk Southern Corp. (NSC - Free Report) and CSX Corp. (CSX - Free Report) are expected to highly benefit from the increase in volume.

A study by C.H. Robinson and The Boston Consulting Group estimates that 10% of all cargo from Asia docks at the East Coast instead of the West Coast due to the canal expansion. Thus volumes managed by these companies are set to increase. Companies like Canadian National Railways Company (CNI - Free Report) and Canadian Pacific Railway Litd. (CP - Free Report) , which have operations on both coasts, could eventually see a rise in freight volumes.

Conclusion

The effect of the Panama Canal expansion depends on various factors such as improvement in the shipping industry, global macroeconomic positivity which could increase volume of exports and imports, and capacity management by ports and railroad companies. Though some companies are likely to suffer a setback based on traffic routes, an increase in volumes could benefit the overall sector.

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