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Panama Canal Droughts Reshape the Shipping Industry

22 Jan 2024

What is Happening?

Maersk, the second largest shipping company in the world, has recently informed clients that some of their cargo arriving from Oceania will not travel through the Panama Canal. Instead, ships will deliver cargo through the Ports of Balboa and Manzanillo in Panama, moving containers between the two ports via rail networks. Maersk’s OC1 Oceanic service, operating between Australia and New Zealand and the US East Coast, will be the only route currently affected by this, with the rest of Maersk’s routes continuing to travel through the canal. 

The Panama Canal is a man-made waterway connecting the Atlantic and Pacific Oceans and is a key part of many maritime trade routes. It was originally built in 1904 and was extended in 2016 to accommodate larger ships. 40% of US container traffic travels through the canal, helping to deliver approximately $270 billion worth of products annually. 

An ongoing drought in the region has led to new weight and water depth restrictions, resulting in bottlenecks within the trade route. There was 41% less rain in October 2023 compared to the year prior, with the water levels in the canal’s main reservoirs reaching unprecedented lows. El Niño, a climate pattern occurring once every few years, has contributed to this – causing warmer ocean temperatures, disrupting wind flows in the region, and influencing precipitation. Its effects have likely become more pronounced due to climate change.

Typically, the Canal has allowed for 36 crossings per day, but new restrictions mean that it can now only accommodate 24 per day. The locks used to connect the two oceans lose significant amounts of water when being used, and droughts in the region mean the Canal is becoming shallow, unable to sustainably manage this demand. Maersk’s climate advisory has stated that changes have been made “to ensure that our customers are impacted as minimally as possible.” 

This announcement comes at a time when shipping companies have been rerouting their traffic to the Panama Canal in order to avoid the Suez Canal. Since Houthi rebels started attacking ships passing through the region in December, trade via the Suez Canal has dropped by 40% as ships have diverted to travel around Africa. 

The Panama Canal Authority, the governmental body overseeing the operation of the canal, said it “understands” Maersk’s decision to use alternative shipping methods, stating that there was a need for clients and the canal to “adapt their operations” to accommodate climate and water concerns. 

What Is In It For You?

Restrictions in transporting cargo via the Panama Canal will result in higher shipping costs and increased delays. These will likely cause inflation due to the higher costs associated with this shipping, potentially causing higher cost of living demands in Oceania, Asia, and the US – regions which are more reliant on trade via the Panama Canal. 

For our readers in Panama, the impacts of these droughts on the country could be significant, as its economy heavily relies on the canal, contributing to 6.6% of the country’s GDP in 2022. The drought could cost the country an estimated $100 million this year. 

However, for our wider Latin American readers, a shipping lane backlog could create new opportunities for growth in the region, with other routes potentially providing viable alternatives to the canal given the current situation. For example, the Mexican Interoceanic Corridor is currently being constructed, planning to provide a direct rail network between Mexico’s Pacific and Atlantic coasts, with many other alternatives being promoted by countries such as Colombia and Nicaragua. If there is an uptake in the usage of these routes, they would help create growth in their respective regions, reducing the impact of these backlogs on international trade. 

What Happens Next?

Delays within the Panama Canal are likely to persist, with Nadim Farajalla – director of the climate change and environment programme at the American University of Beirut’s Issam Fares Institute – stating that the region has not “experienced the full blast of El Niño”. The canal’s daily ship restriction is also scheduled to be reduced from 24 ships per day to 18 in February this year. 

The Panama Canal Authority has said it will start using new water-saving measures, revealing its plans to place new weight restrictions on ships travelling through the canal. The prospect of new reservoirs and shipping routes bridging the Atlantic and Pacific Oceans could place pressure on the authority and the Panamanian Government to provide the reforms necessary to ensure it can continue to be able to accommodate international demand. 

Normal traffic resuming in the Suez Canal could help ease this pressure on the Panama Canal, however this depends on whether Houthi rebels in Yemen continue posing risks to ships travelling through the Red Sea. Readers should monitor whether the interventions led by the US and UK militaries to respond to these attacks result in a decrease in these attacks on cargo ships.

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