The Panama Canal, a key player in global shipping, faces a dire crisis due to an unprecedented drought, casting shadows over trade dynamics and supply chains.
The Panama Canal, an 80-kilometre-long, man-made waterway connecting the Atlantic with Pacific Ocean, is experiencing a severe drought with water levels at record lows not seen since 2016. The passage has been in operation since 1914 and is a key maritime transit point for global trade with 13,000 vessels transiting the canal in 2022. Container ships and dry bulk carriers are the top two segments that transit the canal.
When a vessel transits the canal, around 50 million gallons of water is thrown out of the lake which needs to be replenished, but with less rainfall in the past few months, this is unlikely to happen. The authorities are working on possible solutions – reducing the cargo level, helping ships maintain draft levels and measures to reduce the amount of water lost from the lake.
To preserve fresh water in the Gatun lake, which is also the only fresh water source for Panama country, the Panama Canal authority imposed draft restrictions from 24 May at 45.5 feet, which was later revised to 44.0 feet for Neo-Panamax locks with water levels not improving and forecast to remain at five-year lows until October.
The Panama Canal Authority has also restricted the number of vessels transiting through the Panamax locks from the usual 23 slots to 14 slots – 10 large vessels and 4 regulars with premiums on heavier and larger ships. The imposed restrictions have increased the vessel backlog to a high of 162 vessels on 8 August, with the average waiting time rising to over 20 days. As the holiday season approaches, the movement of merchandise will soon pick-up, potentially leading to further congestion.
The current draft restriction of 44 feet is expected to remain so for the next 10 months. The draft restriction will increase the number of vessel trips required to move the same amount of cargo, squeezing fleet efficiency. Another solution is moving on alternative routes, such as the Suez Canal and Cape of Good Hope, which will again increase transit time and hurt fleet efficiency.
All three situations – waiting at the Panama Canal, reducing the cargo level and moving on alternate routes – will tighten vessel availability, leading to increased freight rates.