Posted on May 18, 2022
Major ports along the west coast of the Americas have been snarled for much of the last two years due to COVID and global shipping challenges such as the Ukraine war.
Outside a sleepy South American fishing town, Chinese state-owned conglomerate COSCO Shipping Holdings is moving forward with its own solution to untangling this knot: building — virtually from scratch — a $3 billion deep-water port linked with a sprawling industrial and logistics park, in collaboration with a unit of Swiss trading house Glencore.
Here in Chancay, 55 km north along Peru’s Pacific coast from the capital Lima, the whir of Chinese heavy machinery and the thud of underground explosions now frequently drown out the sound of breaking waves at the site of the only new port development underway in the Americas.
Signs in Spanish and Chinese hail construction milestones and upcoming public works. Thousands of workers move around the 1,100-hectare site, pouring concrete, driving construction equipment and breaking up rock.
“This port is going to change Chancay and our way of life,” said Johnny Ching, 51, a teacher whose ancestors arrived in the town from southern China in the late 19th century. “It is not only the port, but all the industry that will come with it. We already can see Chinese influence.”
COSCO runs operations at around 35 ports globally, but Chancay will be the conglomerate’s first outpost in South America.
“COSCO Shipping will jointly cooperate with Peru to develop Port of Chancay into an important hub port in Latin America,” Chairman Xu Lirong said in 2019 when the company closed the deal to buy 60% of the project from Glencore’s Volcan unit for $225 million.
“The Port of Chancay is an important initiative to implement the Belt and Road Initiative for China and Peru,” he added. “COSCO Shipping is committed to develop Port of Chancay into an example under the Belt and Road Initiative framework.”
COSCO is not taking on this challenge alone. Fellow state companies China Railway Group and China Communications Construction, especially its China Harbour Engineering unit, are leading the building of the new port.
According to COSCO’s plan, the new port will be able to handle the world’s largest container ships and process up to 1 million standard shipping containers a year, with the first piers due to open in a year’s time.
“The port is conceived to grow, and we have space to continue expanding for 50 years,” said Gonzalo Rios, deputy general manager of the port. “There is no other project like this, in terms of size and [construction] technology, being built right now.”
Peru’s primary value to China as a trading partner comes in the form of copper, a crucial input for manufacturing and construction. But while Chinese state companies run two of Peru’s biggest copper mines, none of their output is likely to go out via Chancay as COSCO is prioritizing infrastructure to handle standard containers and agricultural commodities. Fish meal is another major Chinese import from the country.
Peru’s container trade with China lags well behind that of neighboring Chile. Chile received 643,958 twenty-foot equivalent units (TEU) of containers last year from China while sending out 331,047, according to S&P Global Market Intelligence’s Panjiva data service. For Peru, 397,046 TEU came in and 133,239 went out.
The port of Callao on the outskirts of Lima, now Peru’s main commercial port and South America’s busiest container hub, handled about 2.4 million TEU. The port unit of Danish shipping line A.P. Moller-Maersk controls Callao’s north side while Dubai terminal operator DP World runs the south, where it is investing $350 million to expand capacity.
COSCO now trails behind Maersk in trans-Pacific service to the west coast of South America. According to data released last year by research service BlueWater Reporting, the Danish group controlled 21% of capacity along the trade route while COSCO was tied for second with two other shipping lines at 14%.
But COSCO’s share can be expected to grow once the company’s new port is up and running, whether or not the port itself makes money.
“This is a strategic development,” said Peter Sand, chief analyst at shipping data service Xeneta in Oslo. “If it goes according to the plans made, it will become a hub for Chinese containerized exports on the South American continent.”
“Some China state/COSCO investments have a different objective than outright commercial (monetary) success,” he added. “The objective is wider and more long-term.”
If Peru is able to catalyze development in planned nearby industrial parks that could take advantage of the new port and its location along the Pan-American Highway, said Omar Narrea, a professor of public management who focuses on infrastructure at the Universidad del Pacifico in Lima, Chancay could become a significant area growth engine too.
“Peru needs to focus on the idea of hinterlands as a way of developing value chains,” he said.
Chancay port, however, also has its critics, particularly among environmental groups. Alejandro Chirinos, director of CooperAccion, which supports local communities affected by mining and infrastructure projects, said the port development has hurt area agriculture by destroying wetlands, damaged homes through underground blasting and ruined fishing in the Chancay bay with its many new piers.
“The construction of this port has inflicted a severe impact on the lives of many people and the environment,” Chirinos said. “They were able to get around environmental requirements and other demands Peru has for large investments, taking advantage of a state weakened by years of political crisis, complicated by the pandemic.”
Responding to such complaints, the port’s Rios emphasized steps developers are taking to minimize negative impacts. The underground blasting relates to a 1.8 km tunnel that will link the immediate port area with the industrial and logistics park site so that trucks can travel underground between the two zones rather than using city streets.
A new desalination plant will enable the port to avoid stressing existing water supplies. Land is also being provided for a wastewater treatment plant, which should improve water quality in the bay, as most effluent now reaches the sea untreated. The port project is also subject to archaeological review due to the namesake pre-Columbian Chancay culture that flourished in the area.
“Our environmental impact assessment has been approved by two state agencies, but the critics are not interested in what they say,” Rios said.
Under the terms of the original agreement between COSCO and Glencore, Lima-listed Volcan can obligate COSCO to buy out its remaining 40% stake within five years of the launch of commercial operations at the port. In its annual report, COSCO estimated the potential purchase cost as of Dec. 31 at $232.3 million.
Back in town, Johnny Ching is counting on COSCO’s presence to revitalize Chancay’s local Chinese-Peruvian association, which has about 250 members and marked its 132nd anniversary earlier this month.
“The relationship between Chinese Peruvians and Chinese companies is not that strong, but we hope that will change,” he said. “We can help each other.”
