The Panama Canal Authority (ACP) says it will extend water restrictions for at least another 10 months in an effort to conserve water if rainfall patterns do not vary significantly from projections.
Water levels in Gatun Lake, which feeds the canal, are at a four-year low. A canal lock uses 50 million gallons of water when a single vessel traverses the canal.
Current restrictions have reduced the number of daily vessel transits from 34-36 a day to 32.
Jon Davis, Everstream Analytics’ chief meteorologist, said disruptions in the Panama Canal are increasing on account of the lack of improvement in water levels of the freshwater lakes — especially Gatun Lake — that feed the canal.
“The short-term forecast into early September looks problematic,” Davis explained. “A continuation of below-normal rainfall across Panama and well-above-normal temperatures will not improve the situation. Normally at this time of year, lake levels are increasing since it is the core of the wet season.”
Davis said El Nino events are strongly associated with below-normal rainfall, especially during the winter months — December through February — which is the start of the dry season for the Panama Canal region.
“Hence, the issues that have developed in the Panama Canal look to continue for an extended period,” Davis said.
Additional lower water level restrictions imposed by the ACP in July also require vessels to be 40% lighter, impacting vessels that were in transit when the requirements were implemented. The reduction in vessel carrying capacity means more vessels need to be used to move the same amount of product. The additional vessels will only add to the congestion. Heavier items like appliances can take longer.
Adil Ashiq, head of North America for MarineTraffic, warned that if the dry season continues and water levels of the canal do not improve, the restrictions could further tighten, leading to even more delays and higher shipping costs, which would have a ripple effect on the global supply chains.
“This is most prevalent for bulk markets, such as raw materials and commodities like oil and gas,” Ashiq said. “Delays could lead to higher gas prices in the coming months or, worst case, shortages in certain markets. Shippers moving goods should prepare for higher shipping costs, longer transit times and delays. If a vessel is unable to make a transit through the canal, then a trip around South America will add up to two weeks of journey and higher fuel consumption — a cost which will be passed down to consumers.”
According to the ACP, 128 vessels were waiting to pass through the canal as of Friday; 65 of those vessels had no appointments. The ACP is encouraging all vessels to use the cueing system to reserve a slot. Without a slot, vessels have to wait for the other vessels that have scheduled transit. The ACP recently opened two additional slots for non-booked vessels in an attempt to alleviate the congestion. At that time, 160 vessels were waiting. The average wait for a vessel at this time is around 18 days for general cargo vessels, according to the ACP website.
“With capacity constraints being extended for the long term, importers’ supply chains will need to find alternate routes to avoid the ongoing delays,” said Alan Baer, CEO of logistics company OL USA. “The contract negotiations for the 2024-25 contract season may be impacted with pricing on services via the Suez rising more than expected. In a reversal of fortune, to reach the [U.S. East Coast] markets, importing via the [U.S. West Coast] may become the preferred route.”
In addition to the longer transit times, vessels using the canal are also being charged additional fees.
Nate Herman, senior vice president of policy for the American Apparel and Footwear Association, said, “Our members are watching the Panama Canal situation closely. Over COVID, many brands moved their shipments to the East and Gulf Coast ports, meaning that the Panama Canal is more critical to the industry and the impact of climate change even more important to mitigate.”
The extension and water-level fears are coming at a time when shippers around the world are moving goods for the holidays. More containers move on the water this time of year.
The Panama Canal is the preferred choice of U.S. shippers heading to the East Coast because it is faster than going through the Suez Canal. The shipping time for ocean cargo from Shenzhen, China, to Miami using the Suez Canal takes 41 days. Traveling through the Panama Canal, which is more expensive, takes only 35 days.
Ricaurte Vásquez Morales, administrator of the Panama Canal, previously told CNBC that the canal is maintaining an open line of communication to keep customers informed.
The Panama Canal is a critical trade link for U.S. shippers heading to Gulf and East Coast ports. The U.S. is the largest user of the Panama Canal, with total U.S. commodity export and import containers representing about 73% of Panama Canal traffic. Forty percent of all U.S. container traffic travels through the canal every year, about $270 billion in cargo. U.S. energy and agriculture also use this waterway to transfer goods.
Based on current port data compiled by American Shipper, the East and Gulf Coast ports are strongly favored over West Coast ports. The Port of Los Angeles earlier this week announced a 26% drop in twenty-foot equivalent units processed year over year in July. Compared to June, there was a drop of 148,744 TEUs processed in July. The ports of Savannah, Georgia, and Houston both recorded increases over the same time frame. Port Houston was up 5% year over year with its July container processing.
Paul Brashier, vice president of drayage for ITS Logistics, told American Shipper that in recent years, 5%-10% of trans-Pacific freight volumes moved from the U.S. West Coast to the Gulf and East coasts and the situation in the Panama Canal could be problematic for holiday shipment volumes in 2023.
“To avert the situation, some shippers are rebooking to the U.S. West Coast and this activity will continue to increase as we go through the next couple of months,” Brashier said.
Ashiq warned diversions to other ports can also lead to possible port congestion.
But delays are mounting, which has resulted in clean tankers that carry refined petroleum products avoiding the canal, shifting their preference to book routes to the Atlantic Basin, according to S&P Global. Data from its Commodities at Sea unit shows that in the combined June to July period, U.S. Gulf Coast clean petroleum product exports using the canal and traveling to the west coast of South America slowed by 82% year over year. Exports in July, specifically, were down 12% year over year.
Cheniere Energy announced in July that it would avoid the Panama Canal to ship LNG because of the wait times. The canal is the quickest route for the LNG market to reach Asia. Coal traffic is also being impacted and making adjustments. India is a big importer of U.S. coal and vessels carrying the commodity also use the Panama Canal.
Other commodities such as coal are also being diverted, according to the ACP.