Severe drought in Panama hits global shipping industry

A severe drought in Panama is leading to unusually long delays and tough restrictions along one of the world’s most important trade routes, illustrating the challenge climate change poses to global commerce.

High temperatures and one of the driest years on record have led authorities in the Central American country, which is usually one of the world’s wettest, to lower the number of crossings and bar ships with heavy loads from using the Panama Canal, The Financial Times reports.

The restrictions — rare during Panama’s wet season, which lasts from May to December — have led big carriers including German group Hapag-Lloyd to announce surcharges for routes that rely on the gateway between the Atlantic and Pacific. While lower demand for goods exports has lessened the impact, vessels with loads still light enough to use it are facing extended waits of more than two weeks.

“The Panama Canal is really the wild card in the container shipping market right now,” said Peter Sand, chief analyst at Xeneta. “Shippers should consider their options and manage their risks as Panama congestion is on the rise.”

More than 3 per cent of world trade by volume, including liquid gas from the US and soft fruits from South America, passes through the nearly 110-year-old canal, which also provides essential income for Central America’s richest country per head of population.

Up to 29 per cent of container trade crossing the Pacific travels through the canal, according to data provider MDS Transmodal.

The restrictions, which have been increasing throughout the year, will now be in place into 2024 barring unexpected weather changes, the canal authority said on Thursday. The limit on the number of transits came in July, just as carriers were set to increase trade ahead of Black Friday and Christmas in the US.

“If all of a sudden our customers see a stronger-than-expected demand for [Christmas goods], then of course you want to have the ability to try and inject more capacity,” said Lars Ostergaard Nielsen, Maersk’s head of customer delivery in the Americas, based in Panama, adding that doing so had “become a little bit harder” with the restrictions.

The Panama Canal is the only big maritime route dependent on freshwater, with more than 50mn gallons needed for each ship to cross.

The canal’s locks rely on reservoirs. But the first half of the year was the second driest in almost a century in the canal’s watershed, according to the Smithsonian Tropical Research Institute. The drought led Panama to declare an environmental state of emergency in May.

The lack of water pushed the Panama Canal Authority, or ACP, to toughen restrictions and in May it imposed a depth limit of 44 feet on the largest ships, capping the amount of cargo they can carry. From the end of July it also limited daily crossings to 32, down from an average of 36.

That had contributed to a backlog of 264 ships waiting to cross the canal on Friday, a 16 per cent increase compared with the same day last year, according to shipment tracker MarineTraffic.

Average waiting times for larger tankers carrying liquefied natural gas north through the canal increased from eight days as of July 10 to 18 days as of Thursday, according to shipping agency Norton Lilly.

The ACP said on August 10 that it was limiting pre-booked slots for crossings to ease congestion for ships without reservations, and noted that demand was still high despite the restrictions.

The average cost of sending a 40ft container from China to the US Gulf Coast via the canal at short notice has risen 36 per cent to $2,400 since the end of June, according to data provider Xeneta.

Industry executives said tankers carrying liquid gas were more likely to be disrupted, as container carriers often book access to the canal months in advance.

Michael Aldwell, an executive in the sea logistics business at Kuehne+Nagel, said the freight forwarder had advised customers that containers travelling between Asia and the US could be diverted to the Suez Canal if necessary, although experts say this could add a week to journey times.

The prospect of further delays could also affect time-sensitive food deliveries from the South American west coast to Europe. Food and drink made up 77 per cent of container shipments between these regions last year, according to MDS Transmodal.

“If shipping lines have to find a different way of moving fruit and veg, that will cost money,” said Antonella Teodoro, a consultant at MDS Transmodal. “[This] definitely doesn’t help food inflation.”

Global temperatures have soared this year, with countries battling extreme heatwaves and flooding. July was the hottest month ever recorded, according to the European earth observation agency.

Panama is also affected by El Niño, which happens every two to seven years. It warms the Pacific Ocean’s surface, changing temperature and rainfall patterns and is expected to exacerbate the effects of climate change.

This is not the first time the Panama Canal has imposed depth restrictions. But the fact that the restrictions were in place during the rainy season was highly unusual, Steve Paton, director of the physical monitoring programme at the Smithsonian Institution in Panama City, said, adding that the next dry season was “looking very, very problematic”.

The ACP — owned by Panama’s government — has been working on the looming water problem for years. It introduced a freshwater surcharge in 2020, and in 2021 hired the US Army Corps of Engineers to advise on its water supply programme.

Ilya Espino de Marotta, the canal’s deputy administrator, said short- and long-term measures were being taken to secure water supply. Discussions have stepped up over solutions in recent weeks, with a new reservoir in the Rio Indio region one of the leading options, she said. Espino de Marotta said this would mitigate issues until 2075.

“We are seeing a pattern that tells us we need to take action now on a significantly bigger project to avoid these situations,” she said. “It’s a somewhat bitter pill now but we are definitely going to take action soon.”

The canal finished a $5 billion expansion in 2016 to make room for larger ships. Now these vessels, which have become increasingly important to trade through the passage, are more likely to be affected by the restrictions due to their heavier loads. The curbs could cost the canal up to $200 million in lost revenue this year, according to the ACP.

The freshwater sources the canal relies on are not just used for trade. More than 2mn Panamanians get their drinking water from its watershed, creating a potential tension as scarcity grows.

To mitigate the water problem, continuing to protect the forest around the canal, which acts like a “sponge” by storing water for the dry season, was vital, said Paton at the Smithsonian Institution.

In the short-term, the shipping and logistics world is bracing for more frequent disruptions. “Engineering-wise, I don’t know if there is a solution,” said Jonathan Roach, container market analyst at shipbroker Braemar. “It’s likely to be a continuing problem. It’s going to happen again and again.”

Panama has been working to shake off its reputation as a global haven for shady money and is burnishing its environmental credentials. It is now one of just three countries in the world which is carbon negative, along with Bhutan and Suriname.