Worsening Panama Canal drought conditions are adversely affecting businesses all around the world. Significantly lower-than-usual water levels at this critical maritime passage have directly impacted supply chains and world trade. As fewer ships carry less cargo through the canal, stakeholders must change their shipping methods.

Continue reading to learn about the effects of the drought on global shipping. Discover strategies to protect supply chains and logistics in an evolving global trade environment.

Why is the Panama Canal Important to World Trade?

The Panama Canal serves as a crucial shortcut for global trade and holds a reputation for being highly successful. About $270 billion of trade passes through every year.

The canal connects the Pacific and Atlantic Oceans. It does this by passing through the Caribbean Sea. This route is 8,000 miles shorter than going around South America. It has been a major win for international logistics and global trade.

Overview of the Panama Canal Drought

People know Panama for its high levels of rainfall. The Pacific coast gets 70 inches of rain each year, and the Caribbean mountains get over 100 inches annually. The rain helps ships move through the Panama Canal.

However, in 2023, Panama had less rain because of climate change. Scientists expect El Niño to continue driving this trend in 2024 and beyond.

The canal uses anywhere from 55 million to 125 million gallons of fresh water with each ship that traverses its passage. The drought will only worsen as El Niño continues to intensify.

Lake Gutan (Lago Gatun) is one of the biggest sources of freshwater for the Panama Canal. The rainy season in the country is from May to January.

However, the water level in the man-made lake is currently at its lowest point in nearly 60 years. Even when you include the shorter dry season, Lake Gutan is still at its lowest in 10 years. Lake levels are now close to the minimum.

The Panama Canal is experiencing a prolonged period without rain and scorching hot weather. This is causing worry now and could affect the future of the canal.

Ricaurte Vasquez Morales, the Administrator of the Panama Canal Authority, stated that the Panama Canal depends on the climate. This means that climate change is a significant concern for them.

How Much Time Does the Panama Canal Save?

The Panama Canal stretches about 40 miles from shoreline to shoreline. Ships use locks and lakes to travel between the Pacific Ocean and the Caribbean Sea/Atlantic Ocean, in both ways. An important route for global trade, it links key Asian markets to the east coast of North America.

Most vessels cross between 8 and 10 hours. Upon its completion in 1914, it reduced ship travel time by as much as five months.

These days, it saves anywhere from 10 to 22 days compared to taking the Strait of Magellan around Cape Horn. Providing 8,000 miles of time and fuel cost savings.

How Does the Panama Canal Drought Affect Shipping?

The lower water levels have had a profound effect on shipping operations in 2023. The lower water levels have had a profound effect on shipping operations in 2023. The canal is a major issue for cargo ships as it deals with 40% of global traffic. The United States either sends or receives as much as two-thirds of the traffic flowing through the Panama Canal.

How Many Ships Pass Through the Panama Canal?

The Panama Canal Port Authority will increase daily transits from 32 to 33 starting July 11th.” Right now, there are 24 ships going through the Panamax Locks and 8 ships going through the Neopanamax Locks every day. As of June 27th, 2024, there are currently 15 cargo vessels in the port. Marinetraffic.com reports that 51 more cargo vessels will arrive soon.

Panama Canal Drought Shipping Backlogs

As fewer shipping vessels are able to pass the Panama Canal each day, this has led to severe shipping backlogs.

Delays or missed deliveries are affecting a broad range of industries. A “waiting room” has developed on either side of the canal for ships waiting to cross. Wait times have increased to over two days on the Pacific side, a figure that continues to grow. As many as 100 vessels or more are waiting to cross the Panama Canal at any given time now.

Some shipping companies spend a significant amount of money to prioritize their shipments. In turn, increasing the cost for the buyer.

The recent auction for ships passing through the canal set a new record of $2.85 million. This amount surpassed the previous high of $2.6 million, achieved in November 2022.

East Coast Shipping Delays

The Panama Canal Authority reduction of daily transits will greatly affect shipping routes. Specifically, it will have a significant impact on routes going to the East Coast of the United States. This will lead to longer delays and higher costs.

The Panama Canal has been a popular route for getting goods from Asia to the East Coast. Shipping from Shenzhen to Miami takes 41 days via Suez Canal, but only 35 days via Panama Canal.

The Panama Canal drought may cause a delay in Christmas merchandise and other goods during the holiday season.

Reduction in Cargo Ship Size and Weight

It isn’t only the number of vessels affected, but the also the size and weight of those vessels. With lower water levels, authorities must mitigate the risks of larger ships bottoming out as they cross. As a result, larger, heavier ships can no longer get through the canal.

This result goes against the shipping industry’s trend of using bigger ships to carry more containers. Companies that have invested in these bigger vessels can’t use them as they previously had.

Two smaller vessels may load the goods instead of one immensely large cargo vessel trying to pass through. This process effectively doubles the number of ships in the queue, increasing the bottleneck and wait times.

Container Ships Given Priority Status at Panama Canal

Container ship operators have a long-standing agreement with the Panama Canal Authority, with passages booked well before arrival. The impact on container ships is much less than on vessels carrying bulk wet or dry goods.

Possible Strategies to Meet Shipping Needs

Several options may be available to better meet shipping needs in light of the drought. Companies should consider alternative transportation methods for moving their goods between the Pacific and Atlantic Oceans. They should not solely rely on the Panama Canal. They may need to explore longer routes or use other modes of transportation.

Rail and Truck Transportation

Mexico is improving its railway between the two oceans because of the Panama Canal’s limited capacity.

The new railway will be almost 200 miles long. Running from Coatzacoalcos, Veracruz, on the Gulf of Mexico, to Salina Cruz, Oaxaca, on the Pacific Coast.

This land route is the narrowest between the two major bodies of water. The project will be running by September 2024, according to Mexican President López Obrador.

Rail could also be a viable solution for goods arriving from Asia bound for the United States, especially on, or near, the West Coast.

Transporting goods by truck is another option. Currently, there are many carriers in the market, so trucking capacity is not an issue.

At MVP Logistics, we quickly reroute shipments to other carriers, including LTL freight.

Air

Using this transportation method is more expensive and can negatively impact consumers by increasing costs and prices of goods. However, it does allow for faster delivery.

Alternate Routes

While it takes longer and costs more, going around South America is possible. Depending on the origin and destination, another option is heading in the opposite direction via the Suez Canal. This route can add several days to the overall travel time, plus possible geo-political complications.

Fewer Smaller Ships With Less Cargo

The Panama Canal can’t handle bigger, heavier ships for a long time because of its limited capacity. Consequently, some ships reduce up to 40% of their cargo. This reduction prevents the ships from bottoming out in the lower water levels.

The reduction in the number of daily transits will further add to the congestion and cost in the area. Shippers will have no choice but to use multiple vessels to move their products if they want to continue using the Panama Canal.

Some ships are unloading containers on one side of Panama to meet the new weight requirements. They then transport the containers by rail, or road, to the other shore, loading them onto other vessels to complete their journey. Unfortunately, this decision is causing a significant burden on local ground travel in Panama. Typically, the area does not have to handle such a large volume of traffic.

Panama Canal Freshwater Management

Experts expect the drought conditions at the Panama Canal to continue, if not worsen, both in the short- and long-term. Considering how much time the Panama Canal saves, it is an invaluable resource and route worth preserving. The Panama Canal Authority is trying to find ways to reduce and improve its use of freshwater.

Moving a single ship through the canal takes anywhere from 50 to 125 million gallons of freshwater. Rather than flushing this water into the ocean, authorities are working to store and reuse at least some of this water.

Measures include water reuse basins in the Neopanamax locks and eliminating the use of hydraulic assistance. The Panamax locks have implemented a cross-filling maneuver that reuses water from one lock chamber to another. With smaller vessels, two ships may occupy the same chamber simultaneously. The Authority is also looking into constructing additional reservoirs, or diverting water from other rivers.

A Shipping Solution That Works

As the Panama Canal drought affects global trade, MVP Logistics helps clients find the best solution for their needs.

MVP Logistics is on the 2023 Inc. 5000 list and focuses on giving customers a great experience. We are proactive problem solvers, eager to keep deliveries moving as quickly, efficiently, and cost-effectively as possible.

Contact MVP Logistics today to learn how we can meet your company’s shipping and logistics needs.

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