China’s Colombian Railroad: An Alternative to the Panama Canal

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May 20, 2011 12:47pm NYSE:COLX NYSE:GXG

For over a century, travelers and businesses have sought alternatives to the Panama Canal. Naturally, they wanted an easier connection between the Atlantic and Pacific Oceans. One proposed route crossed southern Mexico. Another – last floated in 2006 – spanned Nicaragua. But massive

engineering costs and environmental hazards, such as endangering fresh water lakes and rivers, ultimately sink most of those plans. Similarly, road and rail links don’t often pan out, either. For example, it would take 20 to 30 trains to transport containers from a single ship.

So it came as a real shock when, in February, China and Colombia said they wanted to build their own substitute. They intend to create a rail link connecting Colombia’s Atlantic and Pacific coasts.

A 136 Mile ‘Dry Canal’ in Colombia

At first blush, the proposition sounds like one giant waste of money. After all, the 50-mile long Panama Canal Railroad operates just north of the proposed construction site.

The plan calls for 136 miles of track between the Pacific Ocean and a new city near Cartagena. There, imported Chinese goods would be assembled for re-export to the Americas.

More importantly though, it would act as a convenient place from which to ship Colombian raw materials to China. And it serves as yet another example of China’s aggressive efforts in its fellow emerging nations.

The Asian nation has put a number of other transport links on the table. And it’s done so in such a way as to benefit Colombia, with its creaking infrastructure.

In essence, China is taking advantage of a diplomatic misstep by the United States. Washington keeps stalling a free trade agreement – for four years now – despite the two countries’ close relationship.

So in a fit of pique, Colombia is turning to China instead, allowing trade between them to soar. It amounted to just $10 million in 1980 but soared to $5 billion last year.

That makes China Colombia’s second-largest trade partner after the United States. This works for the country’s President, Juan Manuel Santos, who says: “Asia is the new motor of the world economy.”

The Reasons Behind China’s Colombian Railroad

Despite cost issues, China’s Colombian tracks do make sense. Because China is interested in a very specific goal…

It needs vast quantities of thermal coal for its power stations and coking coal for its steel industry. Colombia, the world’s fifth-largest coal producer, has both in vast quantities.

Better yet for China, some of those high-quality mines lie close to the Caribbean end of the proposed rail route. It therefore becomes much cheaper to carry coal by train to Colombia’s Pacific ports.

That means the plan won’t serve as a larger shipping link between the two oceans. Both China and Colombia intend it to be much more exclusive.

Colombia has every reason to say, “Yes,” considering its problems with guerrillas and drug-related violence in its very poor, coal-rich eastern region. And as it diversifies itself away from its prior dependence to the United States, the route will only add to the country’s growth.

To take advantage of this situation, investors can look at two ETFs:

  • Global X FTSE Colombia 20 (NYSE:GXG)
  • Market Vectors Colombia (NYSE:COLX)

Both should do well as the nation expands.

Good investing,

by Tony D’Altorio, Investment U Research

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