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Severe transit restrictions on the Panama Canal due to drought-induced water shortage

The ongoing drought linked to the El Nino climate pattern has been causing severe problems for shipping companies recently, with water levels dropping severely on the Panama Canal, one of the most important global trade routes. Starting this week, the Panama Canal Authority (ACP) is taking steps to address a water conservation challenge caused by an exacerbated drought, CNBC reports.

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ACP has thus decided to reduce the daily transits of vessels from 29 to 25; in the coming weeks, the authority says that this reduction may be further escalated until it reaches a daily transit limit of 18 ships by February.

This signifies a decrease of approximately 40%-50% from its full operational capacity. In typical conditions, the canal accommodates between 34 to 36 vessels daily. The drought, coupled with these vessel reductions, is significantly impacting global trade flow, as reported by CNBC Supply Chain providers.

According to Project44, the delay in shipping containers passing through the Panama Canal en route to the U.S. East Coast has led to certain ports, like the Port of Charleston, experiencing the most pronounced delays.

The Panama Canal is a critical conduit that substantially shortens the time and distance for ships traveling between the Atlantic and Pacific oceans. It operates around the clock, every day of the year, with an annual usage of approximately 13,000 to 14,000 ships, according to the canal authority.

This water shortage issue is attributed to the natural El Nino climate pattern, characterized by warmer-than-usual water in the central and eastern tropical Pacific Ocean, exacerbating the drought in Panama.

Gatun Lake, which serves as the primary water source for the canal’s lock system, is experiencing an unprecedented decline in water levels for this time of year, according to the ACP.

Starting on November 3rd, booking slots will be reduced from an already limited 31 per day to 25 per day, according to the ACP’s announcement. This reduction will continue over the next three months, reaching a daily slot allowance of 18 ships by February 2024.

In recent months, the BBC reports that the ACP has been implementing various passage restrictions to preserve scarce water resources. Earlier this year, they reduced the number of ships passing through the canal for the first time in history.

The measures already in place have led to substantial delays, with numerous ships forced to wait for their turn to use the canal. These delays, in turn, have contributed to higher shipping rates in other regions by decreasing the overall availability of vessels, as reported by the BBC.

What will be the impact of these restrictions?

According to Glenn Koepke, GM of Network Collaboration at supply chain visibility FourKites, the following can be expected:

  • More freight will flow on vessels with available capacity through the US West Coast ports then moving via intermodal and truck to the southeastern US and east coast.
  • Rates will increase in the low double digits for sailings through the Panama Canal, and rates to the US west coast will increase moderately over the next 6 weeks and then will tick back down post holidays as general demand is always slow in January and February.
  • This disruption will help provide a needed bump to the steamship lines and freight forwarders who are struggling with profitability and operating margin. With the weak economic outlook lasting into mid next year at least, we anticipate this causing a bump in rates for the next 2 months and then post February, there is too much variability to predict what market conditions, route availability and economic demand will look like.

Update Nov 9, 2023 

Eneos Group, a Japanese company, has reportedly spent a record $4 million to secure a spot in the crowded Panama Canal queue, in addition to the standard tolls. Similarly, Avance Gas, a Norwegian tanker shipping company, paid $2.4 million for priority access for one of its LPG tankers, making the total cost for that passage nearly $3 million. The Panama Canal restrictions are expected to persist until at least 2024, according to a Wall Street Journal article.