What’s Going on at the Panama Canal

Date: Tuesday, August 29th, 2023
Source: Sourcing Journal

The 120 ships queued at the Panama Canal amid a months-long drought put shippers in a tough post as peak season kicks in. But low container shipping demand might keep the bottlenecks from upending retail operations.

Last Wednesday, the Panama Canal Authority (ACP) told shippers it would extend restrictions for vessels sailing through the waterway—allowing just 32 per day through Sept. 2, down from 34 to 36 daily before the July 30 limit took effect.

Gatun Lake is the rainfall-fed reservoir that floats ships through the Panama Canal’s lock system. Water levels there have been lower than usual this year because of a stubbornly long dry spell. It was 79.7 feet deep as of Aug. 21, versus the 85.3 feet August average from the five previous years.

Northbound vessels waited 11.3 days on average at the canal this month, versus 2.5 days in June. Idle times for southbound ships averaged 9.7 days from 2.4 days two months ago, according to the ACP. Some ships are seeing 21-day delays, reports indicate.

Though nearly three-quarters (73 percent) of the commodity containers transported via the canal are U.S. exports and imports, the backlog might not be so bad in reality. Container ships usually get priority versus other vessels since their scheduled transits are booked ahead of time. Therefore, the movement of containers throughout the canal has not faced significant disruptions.

Pawan Joshi, PhD, executive vice president, products and strategy at supply chain management software E2open, said lower consumer spending is making the canal issue easier to deal with for companies preparing for peak season.

“Our congestion and utilization of ports and containers and ships has gone down as a result of the slowdown in the economy and the macroeconomic conditions, which is why reducing the number of ships to around 30 will not make that that big of an impact, as it normally would have during peak season,” Joshi said.

But freight companies want shippers to be ready in case congestion gets worse.

Earlier this month, OEC Group advised clients who typically route cargo to the U.S. East and Gulf Coast ports through the Panama Canal, to use the Suez Canal. Th freight forwarder told clients shipping heavy 20-foot containers to avoid the Panama waterway.

OEC also suggested that clients explore long-term alternative strategies to deal with the effects of climate change.

“One thing the customers are most concerned about is whether their container is going to get out, and whether there’s enough space. But so far, we haven’t seen many issues,” said Nick Klein, vice president of sales at OEC Group’s Midwest region.

Klein suggested that shippers divert cargo back to the West Coast for rail transport across the U.S. For now, the freight forwarder hasn’t seen many customer complaints.

“We just make sure there’s room on the vessel, and we don’t change anything unless we have to,” Klein said. “So far, knock on wood, we’ve been able to get all our stuff through the canal that we’ve needed to. Even though the boats may not be carrying as much weight, or the vessel isn’t as big, we’re fortunately getting the space we need so far.”

Holiday still hangs in the balance, however.

Mass merchants and department stores booking earlier shipments to avoid potential supply chain bottlenecks could be hampered from a short-term reduction in supply for a different reason.

According to E2open’s Joshi, early shipping comes with tradeoffs.

“The big companies like Walmart, Target, Home Depot and the dollar stores are all going to start pushing for and booking way ahead of time—not waiting until October to start booking but start booking right now in August,” Joshi said. “The flip side to that is that when you ship earlier, the less accurate your forecast is. You can usually say, ‘Is it going to be a warm or a cold winter?’ Now, you’re not as sure how many warm woolens to bring in from China as a result of the slowdown, and you start making those decisions way earlier than you could if everything was flowing together.”

Drewry, Freightos, Container XChange and Xeneta acknowledged that the canal’s closure has somewhat affected container prices, which have climbed since hitting a trough in July. But prices are rising faster for West Coast-bound shipments, suggesting that the canal is just one of several factors lifting freight rates.

According to the Freightos Baltic Index (FBX), spot rates have increased roughly $600 per 40-foot equivalent unit (FEU) to both coasts since mid-July, with West Coast rates increasing 47 percent to $1,936 per FEU and East Coast prices jumping 26 percent to $2,991 per FEU.

In a statement, Christian Roeloffs, co-founder and CEO of Container XChange, said he still sees potential fallout for container prices.

“The ongoing congestion and reduced capacity have led to heightened competition for available slots, driving up spot freight rates,” said Roeloffs. “The scarcity of available vessel capacity has prompted carriers to reevaluate pricing strategies to offset increased costs and uncertainties. Consequently, the traditional equilibrium of container prices may experience adjustments to accommodate the challenges of the Panama Canal congestion.”


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