Doubts raised over Nicaraguan canal project as trade patterns shift
The proposed Nicaragua Canal may struggle to find private investors for financing as the project developer will find the case for a second waterway connecting the Pacific and the Atlantic a hard sell given current global trade patterns.
Hong Kong-based HKND Group, which was awarded a 50-year concession by the Nicaraguan government to build and operate the canal in 2013, started construction on the mammoth project last month that it said would cost US$50 billion and be completed by 2019.
Pang Kwok Wai, HKND deputy general manager of construction, told the South China Morning Post that the company expects a 12-year payback period and will source much of the capital needed from a stock exchange listing. He declined to elaborate.
HKND has yet to release an economic feasibility study it commissioned from McKinsey. An apparently flawed analysis on the HKND website, looking at projected trade growth between 2012 and 2020, bases much of the demand for a second interoceanic canal on trade between Asia and the Americas, export of US shale gas, and China's demand for South American commodities. However, shipping experts question the rationale of such projections.
Andy Lane, partner at Container Transport International Consultancy, struggles to understand why the multibillion-dollar splurge would be a good bet for potential investors.
"Let's assume US$25 billion is spent on the canal itself - the other half on hotels, roads, airports and free-trade zones that HKND also plans to build along the canal. Assuming global trade grows at 6 to 7 per cent per annum during the concession period, and also assuming that the Nicaragua Canal will in 10 years' time take more than 60 per cent of the expanded market share and the rest by the Panama Canal, the annual internal rate of return after 25 years would be less than 2 per cent," said Lane. He added that these assumptions were skewed in favour of the new canal and were highly unlikely in the real-world scenario.
"You can easily gain a lot more than 2 per cent by buying US government bonds," he said.
Nicaragua was the favoured option when 19th century merchants considered carving a passage through Central America to reduce shipping distance. The Panama Canal had not been built and the northern hemisphere was the sole engine of global trade.
The global mercantile fleet, responsible for 90 per cent of world trade volume, can be divided into two types: container ships and bulk carriers. Container ships, which did not exist until the 1960s, carry cargo in standard steel boxes, including a wide variety of industrial and consumer goods, from toys and fruits to garments and steel plates. Cargoes on board bulk carriers, by comparison, are in the form of unpackaged mass material, such as iron ore or crude oil.
Lane, who has extensive experience working for shipping lines and ports, pointed out container ships are the major earners for a canal because routing alternatives are more costly for a container shipping line, which profits from regular sailing schedules and networks - similar to a bus service.
For the 100-year-old Panama Canal, which HKND plans to rival, container ships account for a quarter of the traffic but half the revenue, said Lane.
The designed width of the proposed Nicaragua Canal - of 230 to 520 metres - means it will allow only one-way traffic. Lane estimates the new canal will only be able to have 16 vessel transits a day, whereas the Panama Canal averages 34. And, the Panama Canal is not the only rival for the Nicaragua Canal. Suez Canal in the Middle East may be an even bigger competitor.
"Hong Kong is the geographical breakeven point in shipping routes between Asia and US East Coast. It takes approximately 11,000 nautical miles to reach the US East Coast going both west via Suez Canal or east via Panama Canal," said Lane.
With the global manufacturing base shifting to South and Southeast Asia, more shipping lines are expected to transit via the Suez Canal to reach the US East Coast. Maersk Line and Mediterranean Shipping, the world's two largest container shipping lines, have already decided to transport all Asia-US East Coast cargo via the Suez Canal in their operational alliance called 2M starting this year.
Jonathan Beard, who heads ports, logistics and transportation advisory work at US consultancy ICF International echoed Lane: "The Nicaragua canal's construction costs are substantial. Given the tendency for major projects to over-run, the final cost can be expected to significantly exceed US$50 billion. It is extremely difficult to make the financials stack up.
"A second canal will no doubt be good for shipping lines, but it's doubtful it will be good for the project financers."