Representatives of Nicaragua’s government and the HKND Group broke ground on a new canal that will cross Nicaragua on Monday.
Well, they broke ground on an access road required to move supplies to be able to build a new port along the Pacific; this port is required to be up and running before construction on ‘El Gran Canal’ can commence.
According to HKND’s timetable, the Canal is expected to be completed in 2019 with the first ships passing through in 2020.
Right.
Anyone who has read The Path Between the Seas by David McCullough (highly recommended) about the construction of the Panama Canal has a right to doubt this timetable laid out by the Daniel Ortega-led government and Chinese tycoon Wang Jing’s HKND Group.
Geographical, developmental, and political issues that don’t exist in Panama will undoubtedly add further complexity to the construction of the Nicaragua Canal. Nicaragua is, after all, the least developed country in Latin America. More on that in a moment.
But why even attempt to build a new canal in Nicaragua? There’s a perfectly good canal just a few hundred miles south in Panama.
Forgive me for being slightly technical for a moment.
The Panama Canal is celebrating its 100 year anniversary this year and will finally open a third set of locks to compliment its already congested two locks. The old locks handle cargo ships up to about 5000 TEUs (ships that can fit into the old locks are referred to as Panamax) while the new set of locks handle up to 13,000 TEUs (New Panamax). While this necessary expansion will alleviate the often occurring logjam of ships awaiting passage, 15 percent of the world’s container ships are “Post Panamax” in size, meaning they cannot fit through the locks and must sail around either the Cape of Good Hope, Cape Horn, or through the Suez Canal (also presently being expanded). Even more striking, 45 percent of the world’s cargo is carried on these Post-Panamax type ships that include those like the Maersk E-Class, Maersk’s newest flagships that come in at over 18,000 TEUs. The BBC has a great piece on the growth of container ships and the infrastructure servicing them.
The Post-Panamax shipping fleet will have grown by 15 percent this year according to a report; each year ships that are too big for the Panama Canal are becoming ever more prominent on the high seas. It’s likely that in the near very future greater than 50 percent of global container trade carried on container ships (valued at over $5 trillion in 2012) will be too big to fit through the Panama Canal.
A potential Nicaragua Canal can service other shipping needs as well. America’s fracking boom has caused Asian countries to begin to look to the United States as a potential source of liquified natural gas (LNG). The ships that carry this material are massive, needing to make the LNG cooled to -140C to transport. It only makes sense to transport LNG as a power source if it is transported in large quantities due to economies of scale.
While the newly expanded Panama Canal will for the first time make America a viable LNG exporter to Asia, 11 percent of the world’s LNG carrier fleet is already too big to fit through the locks once they open in 2015. In countries like Japan, the imposed size limitations of LNG ships is an issue according to the Wall Street Journal.
It’s undoubtable that with the largest ships being able to transit the Canal will create new viable trading routes that are unimaginable at the moment. Likely new routes of trade would include points between the Eastern seaboard of the United States and Asia as well as Brazil and Asia.
Clearly, there is at the least an abstract need for a new canal through Central America. Whether the Nicaragua Canal is commercially viable is another question altogether, and one that cannot be answered right now. To read the HKND’s business caseclick here.
Others believe that a Nicaragua Canal is motivated by China’s geopolitical ambitions. Prior to the Nicaragua Canal project, few in the West had heard of Wang Jing, HKND’s Chairman. Mr. Wang has become a billionaire as CEO of a Chinese telecom company and through investments in a Southeast Asian goldmine. He is intensely patriotic but has shown a willingness to explore Western finance; Mr Wang hired McKinsey to construct the commercial case for the Canal and to structure his company. Another firm, UK-based Environmental Resources Management (ERM) has been conducting environmental assessments.
So, where can the discerning investor make money?
If you’re looking at opportunities to explore investments in American infrastructure enhancements to accommodate larger traffic, that ship has largely sailed. Here’s a great read on how America’s intermodal infrastructure is responding to New Panamax and the trend towards larger ships.
Nicaragua is the second poorest country in the Americas after Haiti. It has a GDP that is about 1/5th of Panama’s GDP.
This canal, costing between $40 to $50 billion will be built in a country with a GDP per capita of about $1,850 in 2013 – $11.26 billion in total, making Nicaragua the second poorest country in the region after Haiti.
The country is un-developed. As I noted, construction is commencing on infrastructure that needs to be in place before work even begins on the Canal. Much of the construction will be conducted by Chinese firms hired on the project.
But when discussing a project valued at $50 billion, the pie is large enough for many to benefit. Nicaragua’s largest construction company, Coperco, has been active since 1998. Cemex, the world’s largest building materials provider – headquartered in Mexico – has invested $35 million to expand a production cement production plant in nearby Costa Rica and a new $55 million cement production plant in Managua in anticipation of the Canal’s needs.
Outside of the resorts along the Pacific hotels, there is a dearth of quality options for business travelers to Managua, with the Crowne Plaza and the Intercontinental as the only primary options for those conducting business in the city.
With so much money flowing into tiny Nicaragua, the country’s banking sector, led by Banpro Grupo Promerica and Grupo LAFISE, two of the largest banking and financial services firms in Central America and amongst largest in Nicaragua might rise with the tide.
HKND plans to employ as many as 50,000 Nicaraguan workers with a total workforce of 200,000 working for contractors, lifting 80,00 Nicaraguans out of poverty according to their statistics. A great deal of these workers will need to be trained in construction and engineering practices.
Construction of the Nicaragua Canal is arguably one of the most ambitious construction projects ever attempted. According to one journalist this is the 73rd attempt at constructing the 173 mile long canal (that’s more than three times larger than the Panama Canal).
Many doubt that it will ever be built. It has to contend with seismic issues, Nicaragua sits along a fairly active fault line. There isstrong domestic opposition to the Canal and a legal case against the Canal as well. Canal workers will literally have to move mountains and build locks with the ability of moving the world’s largest ships up and down over hundreds of feet above sea level. In addition, financing for a $50 billion canal will be extremely difficult to raise through traditional sources. Panama struggled with financing its third set of locks priced at a measly $7 billion. Egypt’s $4 billion Suez Canal expansion project will be entirely self-funded.
Yet billionaires become billionaires because they are the ultimate contrarians, able to recognize opportunities and take risks that few others would take on. Whether or not Chairman Wang will realize self-transcendence through the completion of the Canal is very much to be determined. But Nicaragua is already experiencing a steady 4.5 percent annual GDP growth. The massive influx of capital will only be a boon for Nicaragua.
Courtesy of Emerging Frontiers
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