Severe drought conditions are hitting a critical global trade artery, the Panama Canal. This has resulted in a tremendous reduction in shipping traffic, as well as increased costs and disruption to supply chains on a global scale. The future viability of this crucial trade route has become increasingly uncertain due to climate change and the El Niño phenomenon, which have exacerbated concerns amid the ongoing drought. In this blog, we will look at the Panama Canal, how drought conditions could impact global shipping, and long-term solutions.
In summary:
- Drought conditions: The critically low levels in Gatún Lake, combined with reduced rainfall due to El Niño, are alarming
- Shipping restrictions: Strict limits have been imposed on ACP transits and its draft capacities
- Economic impact: Global trade dynamics are affected by high costs and delays in shipping
- Future considerations: Climate change is likely to lengthen the impact of long dry periods well past the end of current droughts
Looking ahead into this uncertain climate future, the ability to understand these dynamics will be paramount to businesses that are reliant on maritime trade routes like the Panama Canal. In so doing, they must; therefore, regard resilience planning as a priority and seek novel ways to address such environmental risks.
Understanding the Panama Canal’s role in global trade
The Panama Canal is one of the busiest maritime passages in the world, accounting for nearly 5% of global seaborne trade. Routes around South America are lengthy, and vessels between the Atlantic and Pacific Oceans travel by way of them; however, this shipping route is a shortcut, cutting travel time in half. As per estimates, 46% of the containers that move between Northeast Asia and the East Coast of the US travels through the canal
Taking this route can save shipping companies time and fuel, deliver goods quicker to consumers, save operational costs, and ensure a more effective price completion. Last year, over 14,000 vessels passed through the canal and carried more than 500 million tons of cargo, including key products such as oil, gas, automobiles, electronics, and consumer goods. The canal operates through a series of locks that raise and lower ships over the Isthmus of Panama, and the number of locks varies based on the number of ships held stationary in the canal. The effective operation of the locks relies significantly on Gatún Lake, as it constitutes the sole source of fresh water. But as climate patterns change and rainfall become more unpredictable, water levels in Gatún Lake have fallen to record lows.
Current drought conditions
Gatún Lake is at an altitude of about 26 meters above sea level and is a reservoir for the canal. It roughly releases 200 million liters of fresh water for each ship that transits through the canal, which is then flushed out to sea during the transit process. As per recent reports, Gatún Lake hit its lowest water levels in a long time at the start of this dry season in January 2024. The lake has been witnessing the driest spell since 1950 as it rained 43% lesser than normal in October 2023.
As a result of these low water levels, in July 2024, the Panama Canal Authority (PCA) implemented the following drastic measures to manage traffic through the canal:
- Reduced daily transits: Navigation through the Panama Canal has been reduced from an average of 38 vessels per day to just 24 per day. That is almost a 40% reduction compared to the previous year
- Weight restrictions: The water is shallow; therefore, heavier ships are prone to run aground. As a result, a maximum draft has been imposed on passing vessels
- Economic impact: Since October 2023, earnings from toll traffic by the PCA has decreased by about US$100 million per month, largely because it is not transporting as many people and its operational limitations. In addition, the PCA says the existing drought could cause revenue losses between US$500 million to US$700 million by April 2024
Implications for global shipping
The restrictions imposed by the PCA have far-reaching consequences for global shipping and supply chains. The following are some of the consequences:
Increased costs:
This also means that shipping companies are paying higher costs for routing vessels around South America or on longer opting for ocean routes. It not only results in higher transit time, fuel consumption, and carbon emissions but also requires higher investments from the market that contributes to these emissions
Draft restrictions:
The canal's draft restrictions have been imposed in response to dwindling water levels. The maximum draft for neo-Panamax vessels, which are bigger than the traditional Panamax ships, has been reduced from 50 feet to 44 feet. The same applies to smaller Panamax vessels, now the draft limit is 39.5 feet instead of the usual 45 feet. So, these limitations not only impact shipping schedules but carriers are also forced to lower their loading of cargo, adding to the complexity of logistics and increasing the operational costs
Supply chain disruptions:
Industries reliant on timely deliveries are suffering due to this delay as 4,000 fewer ships are expected to pass through the canal in 2024 alone. From consumer goods to critical medical devices, all these products are affected
Prioritization of container ships:
So far, container ships have been more relaxed than bulk carriers or tankers, but as things worsen, even these ships might be affected. However, the PCA forecasted that current conditions could see container ship transits cut in half by autumn 2024
Recent instances highlighting the crisis
Several recent instances underscore the urgency of addressing this crisis:
- Maersk’s response: Shipping giant Maersk announced plans to shift some of its cargo from maritime transport to rail services in the wake of ongoing restrictions. It marks the latest trend of shipping companies searching for less time-consuming ways to stifle delays caused by current draft restrictions, which have those at Maersk loading some 2,000 fewer containers than normal on those vessels
- Economic analysis by S&P Global: Capacity pressures at the Panama Canal are beginning to weigh on supply chains, warn analysts at S&P Global. Although container ships have the priority status, other ship categories, such as bulk carriers, already feel the pressure from transit limitations, they said.
Long-term solutions and considerations
Addressing the challenges posed by drought conditions at the Panama Canal requires both immediate action and long-term planning. Some of them are listed below:
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Water management strategies:
Potential solutions such as devising new reservoirs or revitalizing existing ones to guarantee sufficient water supply for canal operations are being explored by the PCA. One of the solutions considered is to build a new reservoir on the Indio River for at least US$900 million, which could take 6 years to complete. However, such efforts are hampered by legal restrictions on watershed management
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Forest restoration projects:
The PCA and environmental organizations have joined forces to restore forests around Gatún Lake. These initiatives could increase water retention, reduce the risk of flooding, and promote biodiversity
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Climate adaptation measures:
As weather patterns continue to changed across the globe, infrastructure and operations on critical trade routes such as the Panama Canal will have to adapt. This includes purchasing water conservation and lock operation efficiency technologies
Conclusion
While this drought appears be caused by a local issue, the impact on global shipping and trade dynamics warrants a emphasis on finding solutions faster. With industries facing high costs and supply chain disruptions, insurance industry stakeholders – from governments, industries, and environmental organizations – need to collaborate on finding sustainable solutions that guarantee long-term safety of this important maritime passage.
This is a stark reminder that our global economy is interconnected and shows how environmental changes can impact our economy. As we chart our way forward, we must identify proactive immediate needs and enforce long-term sustainable measures to address such unprecedented challenges. Grasping these dynamics and advocating for effective strategies will enable us to forge a more resilient future for the global shipping industry in the face of a warming planet.
Grasping these dynamics and advocating for effective strategies will enable us to forge a more resilient future for the global shipping industry in the face of a warming planet. To know more…
