This is the third in a series related to the 2014 Forisk Forecast.

Question

What is the status of the Panama Canal expansion and its implications for the U.S. forest industry?

Short Answer

The expansion of the Panama Canal has fallen further behind since our last update.  This fact and the expansion itself continue to have no material, measurable implications to timberland investors, forest industry firms and timber prices.

Discussion for Diehards

Growing log exports from the U.S. South continues to support interest in the expansion of the Panama Canal from timber selling clients. The largest ships began outgrowing the Canal in the 1980s and, in 2007, Panama started a $5.2 billion expansion project that adds a third deeper, wider lane, which will permit ships with three times the capacity of the largest vessels currently using the Canal.  Currently, the Canal handles about 5% of the global maritime trade, much of which of is destined for or departing from the United States.

What is the status of the project?  As of August 2013, the project was six months behind schedule and expected to wrap-up in 2015.  Then, in February of this year, work on the expansion temporarily stopped due to a dispute regarding $1.6 billion in cost overruns.  Now, assuming no more delays, the earliest possible completion date is December 2015.

Temporary disputes create uncertainty and affect many investment efforts in the U.S., the Canal’s biggest user.  Key industries hoping to leverage the expanded Canal include citrus growers and U.S. liquefied natural gas.  According the The Economist magazine (“Trouble at the Panama Canal: Dead Locks”, February 8, 2014), the delays have encouraged businesses to explore alternatives for the largest ships.  These include increasing volume coast-to-coast over land via trains and trucks, using the Suez Canal, or “relocating manufacturing to Mexico instead of Asia.

Ironically, delays actually benefit ports such as Charleston, Jacksonville (FL), and Savannah.  These ports have time to address critical limiting issues.  Today, most U.S. ports cannot accommodate these ships. Most East Coast ports currently lack the necessary depth (50’+), maneuvering space, suitable cranes, docks or some combination of these elements to handle the enormous ships.  Technically, only the ports in Baltimore, Maryland and Norfolk, Virginia can handle these ships at this time.

Currently, the Panama Canal has no direct impact on price estimates in the Forisk Forecast.  As housing returns and domestic saw log prices strengthen, we expect export activity to prioritize lumber over logs.  Moving forward, our research in this area will continue to track the development of log export markets from the South and will focus on potential changes to forest industry trade routes and how an expanded canal could facilitate more exports from the U.S. Southeast to Asia.

To learn more about the 2014 Forisk Forecast or Forisk’s market-specific forecasts of softwood and hardwood stumpage and delivered prices tailored to individual wood-using facilities or timberland ownerships in the US, contact Brooks Mendell at bmendell@forisk.com, 770.725.8447.