Panama Canal Drought: The Impact on Global Shipping Worsens

A severe drought has reduced the water level in the Panama Canal, making it difficult for ships to pass through. 

As a result, the Panama Canal Authority has restricted the number of ships passing through the canal. This has led to delays and increased shipping costs. 

There has been a 36% reduction in ship crossings through the canal. 

Shipping companies are not seeking alternative routes and methods, such as shifting cargo to railway lines running parallel to the canal.

The significance of the Panama Canal cannot be overstated. It manages nearly 3% of the overall global maritime trade volumes, with a 46% share  in containers originating from Northeast Asia and destined for the East Coast of the United States. Nearly 40% of all U.S. container traffic traverses the Panama Canal each year, facilitating the movement of roughly $270 billion in cargo. 

The Growing Restriction of Ship Crossing  

The lowest recorded water levels in decades in the Panama Canal has been worsened the El Niño weather phenomenon. 

Until recently, the low water level primarily impacted tankers and dry bulk carriers, with container ships facing minimal restrictions due to their predictable sailing schedules, benefiting container shipping companies. 

However, as the canal water continues to dry up, canal authorities have substantially reduced daily transits, extending these limitations to container ships. 

The canal authority has cut overall ship transits by about one-third but from February 2024, the daily transits for container ships will be nearly halved. 

The daily transit allowance has been reduced to 24 ships of any size, a notable reduction from the previous capacity of 35 to 40 ships before the drought. 

Additionally, vessels are required to carry less cargo, as the canal has imposed limitations on the maximum depth of neo-Panamax vessels, reducing it from 50 feet to 44 feet. 

Similarly, smaller Panamax vessels, like those in the OC1 service (connecting the trade route between Oceania and the Americas), are now confined to a depth of 39.5 feet, compared to the usual 45 feet.  

Impact of Rerouting on Shipping Costs 

Prominent shipping alliances are altering their networks, and numerous services from Asia to the East Coast of the United States are opting for routes through the Suez Canal instead of the Panama Canal. However, given the attacks on ships by Houthi rebels from Yemen on the Red Sea, traffic on this route too is dwindling, given the risk. 

Also Read: Red Sea Crisis What Procurement and Supply Chain Leaders Should be Doing

For shippers, all this translates to extended transit times, along with elevated freight rates to offset the increased sailing distance. 

On the return voyage from the East Coast of the United States to Asia, an increased number of departures are now being planned to traverse via the Cape of Good Hope in South Africa.

The introduction of surcharges due to drought-related restrictions on the Panama Canal has the potential to elevate pricing on Asia-US East Coast shipping routes by several hundred dollars per Forty-Foot-Equivalent-Unit (FEU) container. 

Furthermore, various carriers have instituted surcharges associated with the Panama Canal, potentially resulting in an additional $400 to $500 per FEU atop the base spot rates.  

The Mediterranean Shipping Company has already introduced a Panama Canal surcharge of $297 per container while Hapag Lloyd has implemented an additional charge of $130. 

What’s Ahead 

Water levels in the Panama Canal are unlikely to go up before the second half of 2024. The dry season extends from December to May, with May commonly experiencing the lowest water levels.

Given the infrequent sailing schedule resulting from a reduced number of vessels and leading to extended transit times, customers are encouraged to plan proactively. It is advisable to secure container bookings in advance or explore alternative transportation modes.