The number of ships waiting to cross the Panama Canal has reached 154.
The red squares represent the Panama Canal area, surrounded by ships waiting to cross the Panama Canal from the Pacific side. Image source: CNBC
As an important conduit for global shipping, the Panama Canal is suffering from droughts and droughts unprecedented since records began in 1950, and its capacity has dropped significantly. According to CNBC, affected by this, there were long queues on both sides of the channel, and the waiting time for ships to open navigation reached 21 days.
The Panama Canal, a golden waterway connecting the Pacific and Atlantic oceans, is on a par with the Suez Canal and plays a vital role in world trade and economic development. According to the Panama Canal Authority, the Panama Canal currently offers about 180 sea routes, connecting about 170 countries and regions to about 1,920 ports around the world. According to the U.S. Department of Commerce, the Panama Canal is the "artery" of shipping trade between Asia and the United States, and the volume of cargo transported through the canal accounts for 46% of the total container market share from Northeast Asia to the east coast of the United States.
According to Interface News reported on August 11, about 6% of the world's maritime trade (mainly from the United States, China and Japan) depends on this shipping lane. The United States is the largest user of the Panama Canal, with exports and imported containers accounting for about 73.7% of the Panama Canal traffic. Each year, 40 percent of U.S. container traffic passes through the canal, worth about $270 billion. China is the second largest user of the Panama Canal, accounting for 21.4% of the canal's total freight volume in fiscal 2022.
In fiscal year 2022 (October 1, 2021 to September 30, 2022), more than 14,000 vessels passed through the Panama Canal, carrying 518 million tons of cargo.
The analysis believes that with the intensification of climate change, water shortage in the Panama Canal may become the norm. The drop in the canal's water level due to water scarcity also means that the draft of shipping is limited and the number of ships passing through is reduced. Industry insiders are worried that international logistics costs may rise as a result, pushing up the market price of international raw materials and adversely affecting the global supply chain.
Image source: Google Maps screenshot
Persistent drought caused by El Niño
The Panama Canal was further restricted
The number of boats queuing up far exceeds the same period
Since the spring of 2023, drought has plagued the Panama Canal, a major shipping gateway for global trade, and the average wait time to cross the canal is currently around 21 days as the number of times carriers can book the channel is decreasing.
This is the Pedro Miguel Lock of the Panama Canal from an aerial photograph on November 18, 2018. Xinhua News Agency (Photo by Mauricio Valenzuela)
According to CCTV news, due to the continuous drought, the Panama Canal Authority recently introduced more restrictions on travel, including temporarily limiting the number of applications for new reservations. The new restrictions will remain in place until at least the 21st of this month.
It is reported that the Panama Canal Authority notified the new restrictions to canal users on the 8th of this month. The new measures reduce the daily reservation limit from 16 to 14 vessels in the old canal locks used for smaller vessel passage, allowing passage of vessels without prior reservations. The number of reservations for the largest locks remains the same. The Canal Authority said the measure was to ease congestion on the canal.
It is understood that as of the 10th of this month, there were 161 cargo ships waiting in line near the mouth of the Panama Canal, far exceeding the routine situation of about 90 cargo ships queuing during the rainy season.
The Panama Canal is 81.3 kilometers long, connecting the Atlantic and Pacific Oceans, and is an important waterway for global trade. At the same time, Panama is a lock canal that uses locks to raise or lower the water level in order for ships to pass through the river between the mountains of Panama. About 200 million litres of freshwater need to be discharged into the ocean at a time. One of these important sources of fresh water is Lake Gatun, from which a large amount of fresh water is pumped every time the locks lift and lift ships. This artificial lake mainly relies on precipitation to replenish its water source.
On October 16, 2011, the Chinese Navy's hospital ship Peace Ark passed through the Panama Canal locks. (Photo by Xinhua News Agency reporter Zha Chunming)
Since the beginning of this year, due to the ongoing drought caused by the El Niño phenomenon, the Panama Canal Authority has begun to limit the maximum draft of ships passing through and its upper limit since the beginning of this year to ease the pressure on water supply.
The latest adjustment came in July, when the Panama Canal Authority required no more than 32 ships per day and no more than 44 feet (about 13.41 meters) in draft, which also meant that large cargo ships had to cut their cargo capacity to pass through the canal. Previously, the average daily transit vessel on the Panama Canal was 35-36. According to the Maritime Services Network, the relevant staff of the Panama Canal Authority said that the restrictions on the passage of the canal will last until September next year.
Although Panama's rainy season has arrived, the intensification of El Niño not only makes the rainy season later than usual, but also significantly reduces rainfall compared to normal years, and the hot weather further increases evaporation, making the Panama Canal face more severe water shortages. The water level in Lake Gatun has fallen to its lowest point in four years.
The Panama Canal Authority said in mid-July that the water level in Lake Gatun had dropped to 24.26 meters, approaching the minimum design level of 22.86 meters.
Comparison of water levels in January and July on the Panama Canal (Source: Panama Canal Authority)
Murillo, meteorological and hydrological expert at the Panama Canal Authority: We expect El Niño to further strengthen by the end of this year, so the outlook for the Panama Canal is bleak.
The Panama Canal Authority told the media in March this year that it is expected that the number of ships passing through the Panama Canal will be significantly reduced in fiscal 2023, and the total traffic is expected to be difficult to reach 500 million tons. If the current and future impacts are added, the total traffic of the Panama Canal in fiscal year 2023 will be further reduced.
Transit capacity dropped by 40%.
Airline freight rates have increased
As mentioned above, the latest restriction on the Panama Canal has taken two main measures: first, to limit the daily passage of no more than 32 vessels; Second, the draft of the vessel does not exceed 44 feet (about 13.41 meters).
According to interface news, in order to compete for 32 places per day, shipping companies have come up with various methods. The canal authority has also proposed that shipowners can reserve slots for slots at locks, a method that promotes the formation of a model of "auctioning" slots.
Starting Feb. 15, ships transiting the Panama Canal were also subject to a "freshwater fee," which is $10,000 if the vessel is more than 125 feet long. At the same time, depending on the water level of Lake Gatun in Panama when the ship crosses, the Panama Canal Authority also charges a variable fee of 1%-10%. The International Chamber of Shipping (ICS) expects the move to increase the cost of ships passing through the Panama Canal by as much as 15 percent.
Under the pressure of a variety of new costs, the increase in route freight rates has become inevitable. Currently, container shipping lines such as CMA CGM and Hapag-Lloyd have increased canal transit surcharges ranging from $300/TEU to $500/TEU.
Due to the limited movement and increased costs, some merchant ships choose to unload some of their goods at the entrance of the canal, transport them overland to the export and then reload them, thus increasing transportation costs.
At the same time, the above situation will also directly affect global trade. The Global Times quoted an international transport expert as saying that it is expected that the Panama Canal's weight restriction measures will reduce the capacity of ships by 40%.
According to a report by First Finance and Economics on August 13, a senior practitioner in the US freight forwarding industry told reporters that the Panama Canal is mainly a trade channel between Asia and the US Gulf of Mexico and East Coast ports, and there are alternatives, such as taking the Suez Canal, but it will be slower, but now the Panama Canal began to levy additional fresh water surcharges due to the drop in water level, which may also become a large cost, so how to take the goods is the most economical and appropriate, indeed need to be analyzed on a case-by-case basis.
Captain Adil Ashiq, head of North America at MarineTraffic, said, "It will get worse before it gets better." He explained that ships have to wait longer to pass through the canal, or that ocean carriers make commercial decisions to take alternative routes, which increases voyage time and fuel costs. Shippers using multiple vessels to transport goods increases freight costs and ensures extended scheduled delivery times.
Ultimately, he said, those costs could be passed on to businesses and consumers.
Logistics costs are rising or pushing up
International raw material market prices
According to a report in the Wall Street Journal quoted by the overseas network in July, the decline in capacity of the Panama Canal will hurt agricultural trade between the northern and southern hemispheres. Bananas from Ecuador, meat from Brazil, and wine from Chile were originally shipped through the Panama Canal.
Transportation of commodities such as energy could also be affected. According to the US Consumer News and Business Channel, about 26% of the Panama Canal's annual transportation business involves liquefied petroleum gas, liquefied natural gas and so on. The increase in transportation costs may also lead to an increase in the price of these goods. Although energy carriers are not affected by the new draft restrictions, canal congestion caused by falling water levels and an increase in small boats will affect transportation efficiency.
Algot, economist, American University of Panama: If we take copper as an example, for example, from Chile or Panama and go through the canal to China, Singapore, South Korea, the export price of copper mines is more expensive.
Li Qiang, dean of the School of International Studies at Tianjin University of Foreign Chinese, said climate change had raised concerns about international logistics being blocked. The measures taken by the Panama Canal Authority could either force unqualified ships to detour around Cape Horn in South America, or allow cargo ships to be significantly reduced in cargo capacity and the same weight of cargo to be distributed to more freighters, both options that would significantly increase logistics costs and lengthen logistics times, adversely affecting international trade.
Extreme weather could also impact the global trade order. Li Qiang said that the rising cost of Panama Canal shipping may lead to an increase in the prices of commodities such as energy, agricultural products and basic raw materials, which will aggravate the food crisis, energy crisis, global inflation, etc., or will strengthen the dominant position of developed countries in the existing trade order and supply chain, expand the "scissor gap" between the north and the south, and aggravate the relative disadvantages of developing countries.
According to Xinhua News Agency, in recent years, the Panama Canal has been restricted due to water shortages, and the idea of building alternative routes in Central American countries has become stronger. Nicaragua's Minister of Transport and Infrastructure, Oscar Mojica, told local media in June that Nicaragua plans to build a railway connecting the country's two major ports on the Pacific coast and the Caribbean coast. In addition, El Salvador said it hopes to cooperate with Honduras in the construction of an interoceanic railway and compete with the Panama Canal for the status of a transportation hub.
Felipe Agote, a professor at the Department of Environmental Analysis at the American University in Panama, believes that there is still a lack of competitive alternative routes, and "building parallel routes is not cost-effective in terms of ecological and economic costs." He said that the Panamanian government should ensure the long-term competitiveness of the canal in the field of international logistics by strengthening the construction of hardware facilities and improving the management of water supply systems.