The Panama Canal Drought Increases Shipping Expenses

With its importance to global trade, there is no ignoring the jammed Panama Canal. Facing an unprecedented drought, the Panama Canal Authority has issued restrictions that are greatly slowing transit through the waterway–especially for container ships. In addition to limiting how many ships can pass through each day, the Canal Authority has also lowered the draft limit from 50 ft to 44 ft. In a video report by the Wall Street Journal, Ricuarte Vásquez, Panama Canal Authority administrator, explained that reducing the draft by just 1 foot, forces ships to lose about 30-35 containers.

This container reduction is an obstacle for the supply chain. According to Vásquez, the Canal handles 55% of all containers that ship from Asia to the United States. Given the massive volume of goods involved at the port, some shippers are taking the following actions to try and alleviate issues:

• Moving containers to trains. According to the National Association of Manufacturers, “The Panama Canal Railway has seen a 20% uptick in cargo volume as a result of the drought.”

• Charging customers more per box to cover the rising tolls issued at the Canal.

• Offloading cargo before crossing the Canal to lighten their ships.

Paying high auction fees to jump ahead in the Panama Canal queue.

Will Shippers Reroute?

A recent S&P Global Commodities Focus podcast reported that most shippers are not yet desperate enough to reroute to the Suez Canal or sail around Cape Horn. At this point, the extra time associated with these routes make them too costly to consider. Another possibility is switching to a West Coast port (and turning away from the heavily trafficked Panama Canal to Northeast route). The podcast did note that the West Coast is beginning to regain some of its shipping volume. However, much trade was routed away from the West Coast ports due to problems during the pandemic. Understandably, this makes many companies reluctant to once again revamp their supply chains.

Panama Canal Outlook for 2024

Looking ahead to 2024, the prognosis for the Panama Canal is continued drought. The Climate Prediction Center recently projected that “El Niño is anticipated to continue through the Northern Hemisphere winter (with greater than 95% chance through January – March 2024).” El Niño has been a contributing factor to the lowered water level at the Panama Canal. Anticipating a prolonged drought, the Panama Canal Authority stated at the beginning of September that vessel and draft limitations would stay in place for the rest of the year and remain into 2024.

Consumers might start to feel inflationary pressure from the drought. “Panama Canal surcharges and vessel restrictions will likely mean higher clothing and shoe prices for U.S. consumers this holiday season,” Stephen Lamar, President and CEO of the American Apparel & Footwear Association, told CNBC.

Although most major container shipping companies are not yet rerouting, there is no telling what decisions an extended drought – and increased shipping costs – might trigger. For Panama, the drought is a chance to rethink infrastructure. Vásquez told the Wall Street Journal, the country is working to increase rail and add storage facilities to help shippers moves product. It is also planning to divert more rivers into the Panama Canal. However, Vásquez noted that it is a delicate balance to provide both water for transit and water for its population to drink.