What to Know About the Panama Canal Drought

Date: Monday, June 26, 2023
Source: Sourcing Journal

A months-long drought at the Panama Canal creates concerns for cargo being transported between the Pacific and Atlantic Oceans.

The Panama Canal Authority, which manages the canal’s operations, is expanding restrictions on the largest vessels traveling through the 51-mile waterway as concerns over shallower water levels grow. With every restriction, less cargo can sail through the canal.

In a navigation notice, the agency said it will decrease the maximum draft for “Neo-Panamax” vessels—those built to fit within the expanded Panama Canal after it added two new sets of locks in 2016 to 43 feet on July 19, if rainfall doesn’t improve. This would represent a downturn from the current depth of 44 feet, further requiring the ships to either carry less cargo or shed weight in order to float higher.

“With the ongoing tightening of draft restrictions in the Panama Canal, smaller ships may return to favor with the carriers, as they find themselves unable to utilize the full capacity of larger vessels,” wrote Peter Sand, chief analyst at ocean freight rate platform Xeneta. “This puts upward pressure on short-term market rates and may prompt shippers to alter their supply chains if port calls also change in line with the ship sizes.”

Since the start of the year, the lack of rainfall at the canal coincided with more cargo volume shifting to the East Coast amid importer concerns about West Coast port negotiations, which resulted in port disruptions before employers and dockworkers reached a tentative deal on June 14.

The Panama Canal plays a significant role in ensuring the flow of goods from Northeast Asia to the U.S. East Coast, commanding 46 percent of the total market share of containers moving through those trade lanes, according to data from the U.S. Department of Commerce.

A canal trip saves ships from having to circumvent South America, shortening the Asia-to-East Coast journey by roughly five days.

While those routes may be the most prominent, the canal’s ability to operate smoothly has global trade implications. Ship traffic using the canal between the Pacific Ocean and Atlantic Ocean accounts for an estimated 3.5 percent of global trade, per the canal authority. The Panama Canal serves more than 144 maritime routes connecting 160 countries and reaching some 1,700 ports globally.

The Panama Canal Authority already implemented restrictions last month to avoid ships running aground, and since then some large vessels have had to cut container loads by roughly 25 percent.

Canal administrator Ricaurte Vásquez Morales said he had not ruled out taking the “extreme measure” of limiting daily transits on the waterway from the current 36 vessels to 28 vessels.

The first batch of new restrictions will take effect Sunday, holding Neo-Panamax container ships to a depth limit of 43.5 feet. The previous maximum depth has been adjusted multiple times since April from a 50-foot limit.

Panamax ships, which still use the canal’s older locks, will also face tighter rules on July 9, according to Reuters. The new locking system made it possible for the Panama Canal to accommodate double the size of vessels it previously handled.

By the time the newest restrictions are in place next month, the situation at the canal could be worse. The Panama Canal Authority has estimated that the water levels in the country’s Gatún Lake—located in the center of the canal—could hit record lows in July even though water levels typically rise that month.

The drought is linked to El Niño, the climate pattern that typically brings higher temperatures and less rain to the central and eastern Pacific Ocean.

According to the agency, the first five months of 2023 accumulated 47 percent less rainfall than the historical average.

The Canal’s last period of intense drought came in 2019-2020, when Gatún Lake’s water levels fell below 82 feet for 10 out of 14 months, the authority said. In May and June this year, the levels also dipped under 82 feet.

“This is an issue that the Panama Canal has been warning and preparing for; however, we could not have predicted exactly when the water shortage would occur to the degree that we are experiencing now,” said Vásquez earlier this month.

These major drought cycles have historically happened once every five years.

“What we are experiencing now is that these events are being reduced to once every three years,” Vásquez said.


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