News Home 18

News    Nr. 17

16 ES EN
AUG-14, 2013
Big Report - part 2
splash Canal Nicaragua
THE GRAND CANAL OF NICARAGUA:
A Question of Adding and Subtracting or a Geopolitical Equation?

Oil America, Inc.

Nicaragua and the impressive launch of its "Grand Canal" Project grab international attention, arousing great expectations and crossed emotions.

All starts June 14, 2013, when Chinese Group HKND is granted exclusive rights to the development and management of the Canal from Nicaragua , a railroad, two ports, free trade zones, airport and other infrastructure valued at roughly U.S. $ 40-billion.

And no wonder. With this project and a regional refinery, the second poorest country in America - with poverty rates surpassed only by Haiti - dares to challenge and rethink its destination. Aspires, say its spokesmen, to be "the most prosperous country in Central America," the transit of attracting a new generation of ships with capacity to load two and a half times the tonnage of the largest ones that will cross through the expanded Panama Canal and even significantly higher than those now crossing the Suez.

Do we need another Canal?

Trade and economic analyses performed by Nicaragua 7 years ago and the preliminaries studies conducted by Hong Kong Company HKND --beneficiary of the contract to build the waterway using the Great Lake and by channeling some of its rivers-- bless its feasibility.

The definitive feasibility studies are only beginning and will take a year to complete, at a cost of some U.S. $ 900-million. In this regard the President Ortega notes: "We are optimistic, but only when the feasibility study is known, we will be clear about the project's viability: Meanwhile everything else is speculation. The study is the one that will tell us which way and what actions need to be taken to become a reality."

The truth is that in the first decade of the twenty-first century an explosion occurs in international trade, driven in part by the growth of the Asian economies, especially China and its emergence as a key partner for the world's developed economies.

As a result of this big explosion, the maritime industry is forced to make major adjustments by multiplying the size of their container ships and super tankers, adapting their design in search of economies of scale. These trends were once the fundamentals for the Panama Canal Authority to initiate the construction of a third set of locks, at a cost of U.S. $ 5.300-million, and are now support for the Nicaraguan ambition to build a canal twice the capacity of the one in Panama.

If we sought to exemplify the ongoing transformation in the marine world it would be enough to look at the evolution of orders for transatlantic container ships from Maersk, the world's largest shipping company [capabilities defined in TEUs, equivalent units 1 container of 20 feet (6.1 m ).]

Tamaño de buques de la flota de Maersk en TEU
Figure 1: Mærsk triples in 17 years the size of their orders for transatlantic container ships

Experts anticipate that global trade will continue to grow for the rest of the decade, especially between Asia and America, driven by technological breakthroughs and growing international trade. According to figures from the World Trade Organization, between 2000 and 2012, world trade increased by 290%, reaching U.S. $ 18.3-billion (always mean million of millions). This year is expected to increase nearly 9%, growth rate that according to the same source will be maintained on average until 2020, when the WTO estimates that global exports reach U.S. $ 35.6-billion.

Global Exports of Goods 2000 - 2020

Of the total world trade (shown in the graph above), the experts consulted say that historically 85% is moved by sea and ensure that this percentage will continue until 2020, when the world fleet will move $ 35.6-billion in goods, which means converted into weight to transport 59-billion MT / year. A task only achievable, according to the judgment of all consulted, by using ships with much greater draft than could be handled by the Expanded Panama Canal.

How is this explosive growth of international trade affecting the design and size of new ships? Especially container ships, tankers and warships, which accounts for the majority of the great movements: Obviously they will become increasingly large, more efficient and with greater autonomy.

Let us look at concrete examples: The Emma Mærsk launched in 2006 and shown in the illustration # 1, baptized after the last spouse of Mærsk Mc-Kinney who died in 2005, powered by a Wärtsilä Sulzer - at the time the largest diesel engine the world - were surpassed in just five years. On February 21, 2011 Mærsk announced that it had ordered the Korean shipyard DSME to build 10 mega ships with a capacity of 18,000 containers each, the Mærsk Triple E which exceed by 16% the capacity of the first Emma Maersk.

Each step seeks greater savings in energy and transport, greater autonomy for navigation and reduction of environmental emissions, including recycling technologies such as exhaust gas, which is mixed with fresh air for reuse in the engine, increasing efficiency up to 12% and reducing emissions. How has varied the size of ships, Let us see: In 67 years container ships have increased in size 60 times, a real revolution!

Evolución de los tamaños de los buques portacontenedores

Los nuevos mega buques clase Triple E de Maersk
A new generation of container ships, the largest ships that sail the seas, entered service in June 2013.

Each Triple-E can load 18-thousand containers of 20 feet, which placed in blocks of two, would fill more than 30 trains of 1.61 km of length each. Within these containers fit 36,000 cars or 863 million cans. This ship can reduce the cost per container and energy consumption by 26%.

THE DANISH COMPANY MÆRSK ALREADY BOUGHT 10 SHIPS TRIPLE E AT A COST OF U.S. $ 1,370-MILLION.

NOTE GBCB

Reduce costs, increase efficiency; compliance with new environmental legislation has become mandatory. Shipping companies already implement new strategies and countries should pay attention to what happens when formulating their policies.

Søren Skou, CEO of Maersk Line, announced in early April this year from Singapore that his company would abandon the Panama route:

- For cost reasons we have decided that from next April 7, the last ship Maersk on the route Asia-East Coast of the United States will cross the Panama Canal. We moved to the Suez Canal.

Skou added that Maersk was basing its decision solely on economic reasons. "The Suez route is 5% longer, but allows for bigger ships to pass, is more efficient and by not using the Panama Canal we would save $ 450,000 in tolls each transit."

How are the future prospects? Do we need another canal? And how do existing and planned canals prepare to face this challenge? As shown below for its size, the scheduled Nicaragua Canal in the project from 2006 will be the only one who can accept ships with more than 200-thousand MT capacity.

Comparación Canales de Panamá (ampliado), Suez y Nicaragua
Figure 2: Comparison of Canals of Panama (extended), Suez and Nicaragua

With increasing size of the ships, a significant portion of the world fleet will exceed the dimensions of the expanded Panama Canal. The Post-Panamax container ships (now 37% of the fleet of container ships in the world) cannot pass through the locks 1 and 2 of the Panama Canal, which forced the expansion culminating in 2015, and which will allow the passage of container ships of up to 13,000 TEU. But, as we saw, this limit is already being challenged by pressures related to the profitability of the vessels.

Transport Capacity measured in containers

It is reported that vessels Super-Post-Panamax represent more than 10% of world capacity containership fleet. As these vessels cannot navigate the expanded Panama Canal, substantial efficiency represented by these mega ships will be partially overridden by the longer route to be traversed to move the corridor Asia-East Coast of the U.S. . The Nicaragua Canal would be a new alternative and the shortest route for the new generation of ships. But is this mega project with a price tag of $ 40 billion feasible, affordable and viable?

ANNEX I: WHO IS IN CHARGE OF THE PROJECT OF THE GRAND CANAL OF NICARAGUA?

People ask who is Wang Jing?, The man on whose shoulders rests the organization, promotion and implementation of the Major Project Nicaragua Canal, which has been baptized "logistic project of the century". Many times the question brings its seasoning and is made to disqualify the Chinese tycoon who is leading it, but it is still absolutely valid. We explored a bit and look what we’ve got.

Mr. Wang Jing: Sponsor of the Nicaragua Canal and Development Project. Founder, owner, president and CEO of HKND Group, a recent private company based in Hong Kong created with the objective of developing large-scale infrastructure and which leads the design, construction and operation of a new canal and transportation hub in Nicaragua. He currently owns and serves as president of the board of more than 20 companies operating business in 35 countries around the world, among which includes Xinwei Telecom Enterprise Group in China. The Financial Times estimated his Xinwei Telecom shares would be worth about $ 3-billion.

Engineer Bild Wild: The main consultant of the project. He has over 40 years of experience in engineering and construction of large projects, having participated in some of the most important projects in Australia and Asia. Wild spent four years with QLND Main Roads and 36 years with the Leighton Group. At Thiess, Leighton Contractors & Leighton Asia, he held all management positions from project manager, contracts manager, operations manager and general manager. He also led the acquisition of John Holland and in 2002 was appointed its general director. In 2010 he was appointed Vice CEO at Leighton Holdings Limited. In 2011 he left the company to start his own business.

Dr. Ronald MacLean-Abaroa: Spokesperson for HKND Group. Bolivian politician and recognized international expert in anti-corruption programs, former mayor of La Paz, re-elected four times to the same position. He has held five ministerial posts: Planning, Foreign Affairs, Information and Communications, Finance and Sustainable Development and Environment. Presidential Candidate defeated by the ruling MNR in 2002 general elections. He worked at the World Bank, the Harvard Institute for International Development and was a professor at Harvard University's John F. Kennedy School for Governments as a specialist in public sector of management for governance, decentralization and poverty reduction.

Environmental Resources Management Environmental Resources Management (ERM): One of the most recognized global names in environmental management and sustainability consulting, environmental, social, health, safety, risk and sustainability related services. Headquartered in England and more than 140 offices in 40 countries and territories, employing more than 5,000 scientists, engineers and skilled personnel. Their website claims of having worked in the last five years with half of the companies in the Global Fortune 500 and in some of the most relevant projects worldwide.

McKinsey & Company, Inc.: Another of the most prestigious consulting firms in the world. It focuses on solving problems concerning strategic management. Number four on "The Fortune Magazine List of Best Companies for Leadership". It is famous for having produced more CEO for large global companies than any other company in the world and hire the world's brightest students from business schools like Harvard Business School, Stanford Graduate School of Business, University of Chicago, Booth School of Business, and Wharton School of Business. They have 100 offices in 50 countries. It was founded in 1959 in London.

McLarty & Associates: A U.S. law firm active worldwide. In collaboration with the Scowcroft Group, offers its capabilities in China and Latin America. Represents the HKND Group.

The Harbour Group: A Washington D. C. based company defined as a boutique for public relations. Founded in 2001, the company focuses on three practice areas: issue management, public relations and crisis communications. Their current and past clients include: HKND, Biotechnology Industry Organization, International Relief & Development, Pfizer, Shure, the Washington Chapter of the Grammys, and Revolution Health Group.

The Skeptics

The same way the Nicaragua Canal awakens dreams and expectations it also awakens strong conflicting emotions and, obviously, many of them are concentrated in Panama. The first strong reactions came from their Foreign Minister Fernando Núñez Fábrega who said:

- I do not see that North Americans are going to feel sympathy for the Chinese opening a canal there, Let's wait for the feasibility study do be done. There are technical problems that have not been addressed yet.

He also argued that Nicaragua is a seismic country: "The canal was not made in Panama because Americans loved us more, but because we don't have earthquakes," adding, "If the locks don´t seal up after an earthquake, the canal would be useless and the project would have to start all over again."

He also said that Nicaragua will need some 200 years to amortize the projected investment of U.S. $ 40,000 million. "The slightly more than U.S. $ 4,000-million (actually $ 5,500-million) that we invest in the Panama Canal will be recovered in just four years."

Another who dismisses the idea is the engineer Alberto Alemán Zubieta, who administered the Panama Canal between 1996 and 2012.

- The Nicaragua Canal is an unfeasible project - Alemán Zubieta says - and it is not necessary since it will not save time to ships traveling to or from the United States. Furthermore, the one in Panama will be sufficient for much longer and the step that would make Nicaragua offers no advantage over Panama that in 2014 will fulfill a century of being in operation.

Both the former administrator of the Canal and the Foreign Minister of Panama, agree that the Nicaraguan mega project would be operational in a decade and would have a higher cost than the figures that have been released since the locks that they propose are wider and they talk about greater drafts. They argue that this would be a project of more than U.S. $ 40.000-million and that they do not believe the numbers for returns would work out to make viable the project.

Another question in the air is how are they going to fund the project?

Christopher Erckert, a partner in the U.S. firm Mayer Brown, who advises the Panama Canal Authority in its expansion, argues that the main risk would be if Nicaragua nationalized the canal in the future.

- Erckert claims that Nicaragua is not a country with investment grade and this limits the type of investors who may show interest. If you had to make that level of investment - which would be greater than that posed by Managua – you would have to have annual revenues of more than $ 5,000 million, an amount much higher than generates the Panama Canal - he said, adding - the pathway that they would make does not offer advantages over Panama, which in 2014 marks a century of being in operation.

Another dissenting voice is the current Administrator of the Panama Canal Authority, Jorge Luis Quijano, who when asked said that "definitively until some six years ago the canal through Nicaragua was not envisaged to pick any boom. At this time, what we understand is that there is simply a promoter of a proposal."

- We have made an evaluation of the possibility of the construction of the Nicaragua Canal - said Quijano - with information from the Internet and information transferred to us, we estimate that it will be more expensive than it is considered, given the experience Panama has had with the expansion. The Nicaraguan work starts from zero, while Panama has a canal, is doing an expansion and the country also has the ability to make a fourth set of locks.

THE PANAMA CANAL CONSTRUCTION AND ITS REAL COST

The Panama Canal was built between 1903-1914, at a cost of U.S. $ 375-million. This figure includes U.S. $ 325-million in direct costs, $ 40-million for the purchase of the shares of the New Panamanian Company of the Canal, which Philippe Jean Bunau-Varilla and William Nelson Cromwell sold to the government of President Roosevelt and U.S. $ 10-million for the newly installed government of Panama.

In addition to this $ 375-million, the U.S. Government repeals U.S. $ 158-million for facilities and military bases, executed simultaneously and considered essential to maintain control of their newly acquired property.

To get an idea of the magnitude of such an investment it is enough to say that the total budget of the U.S. in 1904 was U.S. $ 541 million, which means that the cost of the Panama Canal was equivalent to 65.8% of the budget of that country, not including the costs of fortification.

Another way to gauge the investment is to calculate its value in U.S. $ of 2013, for which we use the average rate of inflation in those 99 years, which is 3.339%.

Results:

Investment for the Panama Canal without fortification: U.S. $ (2013) approx. 10-billion.

Investment for the Panama Canal with fortification: U.S. $ (2013) 13.8-billion.

Economic Decision or Geopolitics?

The reasons to build or not a canal through Nicaragua cross country and economic borders, becoming a geopolitical determination of the first order, as at the time was building the Panama Canal, which was part of a whole strategy to promote a global changes in the correlation of forces from Europe to America and to meet the needs of prevailing global capitalist development.

Viewed from the narrow margin of profitability, the Panama Canal may never have been built. After the failed experience of the French Canal and the bankruptcy of the sponsoring company, all that was left was more than 22,000 dead and an insuperable financial hole. The idea of a sea level canal through malaria infected jungles - when its vector was still unknown and therefore the cure to the disease - was a flop, but the project materialized and was revived under the leadership of President Roosevelt, who acquired the French company, "took Panama" and twisted arms to have his congress --which favored a canal through Nicaragua-- to approve the project of a canal through Panama by a narrow margin of six votes.

Did he think of the Canal in terms of being a good business? Frankly we doubt it: He commissioned its design and construction to the Army Corp. of Engineers, put eminences to investigate and solve the problem of malaria and other viral diseases and spent $ 356-million of that time in its execution. To calibrate the size of such huge disbursement it is sufficient to say that it represented well over half the total U.S. budget, which in 2013 dollars would mean about U.S. $ 10.2-billion, according to our calculations. But, even more clearly, the Panama Canal Commission administered during most of the life of the Canal with 0 base budget, approved by the U.S. Congress, which obliged to balance income and expenses to get 0 profit and also granted special prices to American ships transiting subsidized the waterway.

How do we explain this? Simply that the decision to build a canal through Panama was taken as a decision based on global economic environment, where what was at stake was not the project's profitability, but the expansion needs of American capitalism and global geopolitical interests. The same can happen now and be a possible element of a "stop" Sino-American.

Note: In our previous edition we wrote about Chinese chess, now we see that it's actually more than that. In our next article we will see the great interest (China, U.S.A., Europe, Brazil, etc.) that could come into play and make it a global chess We also promise to consider ecological factors and of course, the seismic factor, unavoidable consideration in a country where quakes happen 4 or 5 times a day and which has suffered dozens of severe earthquakes.

TO BE CONTINUED