Date: Monday, September 4th, 2023
The Panama Canal’s drought induced low water problems are causing vessel traffic jams that could last for the next ten months according to the Athens-based shipbroker Intermodal.
In an exclusive interview with AJOT, Intermodal’s Research Analyst, Chara Georgousi reported that: “According to the Panama Canal Authority's latest update, water-saving measures will be in place for the next 10 months. The effects on supply chains could be further pronounced as the disruption will coincide with the peak holiday season when retailers increase shipping activities to accommodate the upcoming holiday consumer demand.”
While there is no immediate threat to container shipping to and from U.S. East and Gulf Coast ports, container shipping linking the ports to Asia rely on the Panama Canal. If low water conditions persist, the conditions “can have implications … they will be more long term rather near term, not so short term, because for the moment … they (container carriers) do not face immediate consequences ... They appear rather resilient….”
Georgousi added that if drought conditions continue over a 10 month period the impact to East and Gulf Coast trades could be an “increase in freight rates and changing dynamics.”
Diverting ships away from the Panama Canal and through the Suez can add weeks onto a voyage: “The voyage through the Panama Canal takes around 58 days to reach Asian ports. However, going through the Suez Canal, the voyage could be extended to 81 days. And in the case of using the route around the Cape of Good Hope, a journey could be extended to 88 days.”
Georgousi, who is currently in South Korea, stated: “The reduced weight limits and fewer daily crossings have resulted in queues of ships waiting to pass through, leading to congestion and longer wait times. This congestion has caused shipping prices to surge, affecting trade routes that rely heavily on the Panama Canal”
Georgousi provided an analysis of persistent low water conditions at the Panama Canal for the following vessel categories:
LPG trades are seriously impacted
“The more pronounced effect being the gas sector, because within the sector the trade is driven by price differentials between the regions … That is a crucial factor for maintaining the competitiveness of the US cargo. In this instance, VLGCs are commonly used to transport LPG from the US to Asia, and the Panama Canal is a critical route for this trade. The shorter route through the Canal saves time and fuel compared to longer alternative routes, such as going around the Cape of Good Hope or transiting the Suez Canal … Looking at the economic implications, the LPG trade is often driven by price differentials between regions. The cost savings achieved by using the Panama Canal can be a crucial factor in maintaining the competitiveness of US LPG exports to Asia. Therefore, any disruptions or delays in using the Canal can impact the overall economics of the trade. VLGC spot freight rates have recently experienced an upward momentum which is a result of the subsequent increased ton-mile demand as ships are opting for alternative routes.”
LNG shipping is also impacted
The Panama Canal “is a crucial route for LNG carriers transporting LNG from the US to Asia. The draft restrictions can disrupt the supply chain and affect the competitiveness of U.S. LNG exports, especially at a time when Australian strikes are disrupting the current market fundamentals. Due to the (Canal) draft restrictions, LNG carriers with deeper drafts may now need to reduce their cargo load to meet the Canal's requirements. This can result in less efficient voyages, as vessels might have to carry less LNG than their capacity allows. Alternatively, LNG carriers may also opt to take longer routes around the Cape of Good Hope or through the Suez Canal to reach their destinations. These longer voyages and potential delays can impact spot rates for LNG carriers. This, in turn, can affect the economics of the LNG trade and supply chains.”
Bulk carriers are heavily impacted as they have fewer advanced bookings
“Within the bulk sector, Handymax and Supramax vessels are more impacted. … From a technical point of view, these vessels typically have smaller dimensions and shallower drafts which makes them more susceptible to draft restrictions since they are less flexible to accommodate such changes.”
Larger vessels may be given priority
“Larger vessels like Capesizes may be given priority due to their cargo value and size. This can push smaller vessels to the back of the queue, resulting in longer waiting times and potential delays. From an economic aspect of view, these vessels often operate on tighter profit margins compared to larger ones ... Therefore, any delays can disrupt these schedules and impact delivery commitments. For instance, the rate for a Supramax bulker transporting pet coke from the US Gulf to the East Coast of India has marked this week the highest level since May and increased by more than 30% from the lows seen in August.”
Tankers appear more resilient
Tankers on the other hand “appear more resilient than bulkers. More specifically and from a technical point of view, tankers tend to have larger drafts which means that they usually have more flexibility to navigate through the Panama Canal without being significantly affected by the draft restrictions. However, there could still be some indirect effects due to congestion and delays caused by the increased waiting times for other types of vessels. More specifically, delays in the transit of containers and bulkers could lead to congestion in the Canal and longer waiting times for all vessels, including tankers. This might result in some scheduling challenges for tankers, potentially affecting their arrival and departure times at their destinations.”
Medium Range (MR) Product Tankers
“MR tankers could see the biggest impact: MR tankers, which have seen their waiting times nearly doubling in July and August compared to June due to Southbound laden vessel congestion. With Russian diesel shipments to Brazil having displaced US Gulf MRs, these vessels now have to use the Panama Canal more often as CPP volumes shift to West Coast South America. This extended vessel occupancy is tightening tanker supply in the region and, along with increased long-haul CPP flows from the US Gulf, has driven Atlantic basin MR freight rates up by over 40% on average since mid-July.”
Intermodal Deputy CEO, George Laios, who joined the interview, told AJOT that the impact of delays at the Panama Canal “could result in possible congestion at the Suez Canal, although it is still too early to predict.” He added: “However, we cannot answer this. We cannot be specific on this because we are monitoring changes on a daily basis, and dynamics could change from one point to another. So that, I think that is something that needs to be seen in the, in the future. And especially with the weather globally as it is now, you see dry periods and then you have flooding in other, so there may be in a month's time flooding in the US … So, predicting on a case, depending on weather nowadays, it's like, very difficult to predict.”
Georgousi noted that climate change-related droughts are getting worse and adversely impacting vessel transits in the Panama Canal: “Periodic droughts and water shortages have affected the Canal's operations over the years. However, the severity and duration of the current drought, coupled with the impact of the El Niño weather phenomenon, have created a more significant and prolonged disruption than in previous instances. The current drought is unique in its extent and the measures required to conserve water are leading to draft restrictions and reduced transits for ships using the canal. While vessels are not required to pay increased fees to transit the Canal, the restrictions in place are likely to result in a $200 million loss of earnings for the Panama Canal Authority in 2024 compared to this year.”
The situation involves drawing water from the primary reservoir that supplies the Panama Canal. Unfortunately, due to the recent scarcity of rainfall, the water levels have fallen below the normal minimum levels. As a result, each time a vessel passes through the Panama Canal, it necessitates the use of fresh water, which is subsequently discharged into the ocean. In an effort to address this issue, measures are being considered to recycle this water for multiple transits, aiming to improve operational efficiency. However, it's important to note that these measures are expected to offer only limited mitigation of the problem.
Athens, Greece-based Intermodal provides shipbroking services along with tanker chartering, ship repair representations, ship valuations, market research and consultancy.