The Panama Canal Has Become a Traffic Jam of the Seas

Date: Monday, August 21st, 2023
Source: Wall Street Journal

A flotilla of ships are stuck on both sides of the Panama Canal, waiting for weeks to cross after the waterway’s authorities cut transits to conserve water amid a serious drought.

Vessel-tracking data show more than 200 ships currently waiting to transit, a figure that has been climbing since the canal capped daily transits to 32 last month from an average 36 under normal conditions.

The waterway’s entrances on the Pacific and Atlantic oceans are dotted with ships that are backed up for more than 20 days. Most are bulk cargo or gas carriers that are typically booked on short notice. Some shipowners are rerouting traffic to avoid the backlog.

“The delays are changing by the day. Once you make a decision to go there is no point to return or deviate, so you can get stuck,” said Tim Hansen, chief commercial officer at Dorian LPG, which operates more than 20 large gas carriers.

The canal, which uses three times as much water as New York City each day, relies on rainfall to replenish it. If there isn’t enough rain, ship transits are cut and those that cross pay hefty premiums that boost transport costs for cargo owners such as American oil and gas exporters and Asian importers.

The canal’s administrator, Ricaurte Vásquez Morales, said in late July that the restrictions could stay in place for the rest of the year. He said the drought is expected to erase around $200 million in revenue from the canal next year if low rainfall levels persist into the fall and winter.

He said extreme rain or drought conditions are more frequent occurrences than in the canal’s earlier years of operation. That issue presents a challenge for the Panama Canal Authority, which also supplies water to about 2.5 million people, or about half the country’s population.

“The Canal communicates with its customers so that the information allows them to make the best decisions even if it means that they may choose another route temporarily,” Vásquez Morales said. “Demand remains high which proves the Panama Canal remains competitive in most segments, even with measures to save water.”

The canal has hired the U.S. Army Corps of Engineers, the original canal builder, and has earmarked $2 billion over the next 10 years to divert up to four rivers into the waterway in addition to the three that already feed it.

The drought hasn’t caused wide disruptions for containerships, the canal’s biggest users in terms of transits. Most boxships are given preferential status because they run on fixed schedules and book crossings up to a year in advance. But some are caught in the maze and have to pay multiple times the average tolls.

“We had two ships that couldn’t book and it was quite expensive,” said Lars Oestergaard Nielsen, A.P. Moller-Maersk’s head of customer delivery in the Americas. “We went to an auction and paid $900,000 on top of $400,000 normal toll fee for each ship to cross.”

Ships normally cross the canal at an average 50 feet of draft, which has been reduced to 44 feet. To match the lower water depth, big boxships have to cross with fewer containers aboard. Smaller ships are added to move the remainder of the cargo.

Vessels that aren’t on fixed routes like bulk and gas carriers that are booked to move cargo in short notice face the longest delays.

Oslo-based Avance Gas, which operates 17 vessels, has rerouted about three-quarters of its ships moving U.S. exports of butane and propane. Now vessels carrying those products to customers in Japan, South Korea and China sail through the Suez Canal or around the Cape of Good Hope.

“Waiting time is one thing, but it’s also the uncertainty,” said Øystein Kalleklev, the company’s chief executive. “It’s risky to fix a ship with no firm itinerary because you can lose the contract if the wait is too long.”

Bulk vessels that move commodities such as coal and iron ore are also stuck by the dozens. These ships are mostly owned by medium-size or smaller operators that get no priority at the port.

Coal-laden ships out of the Atlantic are deviating from their preferred Panama Canal route due to increasing transit times, shipping analysts at BRS Shipbrokers said in a report last week. Tankers with crude or petroleum products stuck on the Pacific side reached a two-year high at the end of July, according to shipping-data provider Vortexa.

“The Panama Canal is a big mess these days,” said Kalleklev. “Twenty days in a queue is unprecedented at this time of the year.”


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