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 Panama Canal 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 the Panama Canal 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
Historically, Panama is one of the wettest countries in the world. The Pacific coast gets 70 inches of rain each year, while the Caribbean mountains get over 100 inches annually. This rainwater floats cargo ships and other vessels through the Panama Canal.
Panama had minimal rain in 2023 because of climate change. This will continue in 2024 and beyond because of El Niño. The region’s drought directly impacts the Panama Canal.
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. This challenge is not going away. “We are climate dependent,” notes Administrator of the Panama Canal Authority Ricaurte Vasquez Morales, “so this issue of climate change to us is real.”
What Does the Panama Canal Connect?
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.
How Much Time Does the Panama Canal Save?
Most vessels cross the Panama Canal in between 8 and 10 hours. Upon its completion in 1914, it reduced ship travel time by as much as five months.
These days, the Panama Canal 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 of the Panama Canal have had a profound effect on shipping operations in 2023. The canal causes significant problems for moving cargo ships because it handles around 40% of all the world’s traffic. As much as two-thirds of the traffic flowing through the Panama Canal is either destined for or leaving from the United States.
How Many Ships Pass Through the Panama Canal?
In November, the Panama Canal Authority decreased the number of ships passing through the canal each day. They reduced it from 36 to less than 31, then to 24 by the end of November. In December, they will continue to decrease it to 22, followed by 20 in January.
Starting in February, the canal authorities will only allow 18 ships to pass through the canal each day. This maximum quota will continue “until further notice.”
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 is reducing daily transits. This reduction will greatly affect shipping routes. Specifically, it will have a significant impact on routes going to the East Coast of the United States.
When there are 18 ships per day, it’s less than half the usual capacity, causing longer delays and higher costs.
The Port of Charleston is currently seeing the longest delays. Ports on the East Coast, such as Houston, New York, Norfolk, and Savannah, are also facing significant impacts.
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. Freight shipments that do arrive may be more expensive, too.
Reduction in Cargo Ship Size and Weight
It isn’t only the number of vessels affected by the Panama Canal drought. 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
The Panama Canal drought is causing shipping problems. However, the logistics industry is not as affected. Container box ships are receiving priority over other boats.
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 affecting the Panama Canal. 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
Responding to the reduced capacity of the Panama Canal, the government of Mexico is working to revive its railway between the two oceans.
The planned railway will run nearly 200 miles 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, the market is oversaturated, and trucking capacity is not an issue, as there are so many carriers.
At MVP Logistics, we have been quick in diverting shipments to alternative carriers, including less-than-truckload (LTL) freight shipments.
Air
Shipping by air is faster, but also more expensive. Using this mode of transportation can negatively affect consumers as costs will rise, and the price of goods will increase.
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 geopolitical 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 Panama Canal Authority will allow only 18 ships per day to pass through the area by February 2024. This cutback 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.
