The impact of a record-breaking drought in Panama has spread beyond energy supplies and is now affecting container shipping, a crucial sector of the global freight market that moves everything from campervans to Christmas toys. Sudden downpours in the Central American nation might not be enough to mitigate changes to the way trade operates.
Rainfall this wet season — which usually runs from April to November — has been 41 percent lower than normal, reducing levels at key reservoirs, including Gatun Lake. The 64.37km Panama Canal relies on these water sources to operate a system of locks that allow ships to transit between the Pacific and Atlantic Oceans. From 36 crossings per day, capacity has already been cut to 25 and is to drop to 18 by February.
The possibility of a canal bottleneck turning into the Pinch that Stole Christmas should be a catalyst for buyers, manufacturers and shipping companies to reassess their whole approach to supply and logistics. Centralizing manufacturing and piling products into ever-larger ships makes less sense if transport bottlenecks diminish economies of scale.
Illustration: Constance Chou
To allocate slots, the Panama Canal Authority (PCA) auctions off crossings. Japan’s Eneos Group paid US$3.98 million in a sale last month — 20 times higher than average. Carriers of fuels such as liquefied petroleum gas and liquefied natural gas were hardest hit early on — restrictions started to bite in May — because they do not have fixed schedules and need to queue up when they arrive at either entrance.
As the drought continues, caused by a severe bout of the El Nino effect, container vessels are now starting to be impacted.
These vessels tend to operate on a fixed timetable so they can book ahead and sail straight through. Yet even scheduled crossings are being cut. The impact on container transport has the potential to be much worse because the majority of these ships are now larger, following an upgrade to the canal in 2016 that allows larger carriers to pass through. This NeoPanamax vessel class can hold 2.8 times more containers than the Panamax variety. Crossings for NeoPanamax vessels have been cut by the biggest ratio because of their size.
Exacerbating the problem are curbs implemented by the PCA on a ship’s draught, which measures the depth a ship’s hull sits below the water’s surface. After the drought made the canal shallower, ships now have to lighten their loads. The result is fewer containers making the crossing per day, heightening the chance that many goods would not make it to their destinations in time for Christmas.
Every one foot (30.48cm) cut in maximum draught requires lightening a ship’s haul by about 400 containers, Container xChange cofounder and CEO Christian Roeloffs wrote in a report on Thursday last week. Total restrictions to date have cut average capacity by around 2,400 twenty-foot-equivalent units (TEUs).
Ameliorating the impact has been a reduction in transport demand that led to a fall in freight prices following a massive uptick during the COVID-19 pandemic. However, this slowdown does not help move goods more smoothly when there is a bottleneck at the canal, especially for the northbound route which connects journeys from Asia to the US east coast. By last Saturday, the average wait for non-booked vessels had ballooned to 11.7 days from just 4.3 days on Nov. 7, PCA data show. At least one ship had queued for 30 days.
Now it is crunch time. December is the peak month for NeoPanamax transits as consumer goods are shipped for Christmas and fuel is transported to meet winter needs. An uptick in demand coupled with the canal’s curbs have spurred shippers to implement surcharges or find alternative routes. Germany’s Hapag-Lloyd AG on Friday last week announced it would tack on a US$130 per TEU surcharge for transit across the Panama Canal starting from Jan. 1, while Geneva-based Mediterranean Shipping Co is charging an extra US$297, effective Dec. 15.
THE Alliance, a consortium comprised of four major shipping companies, is rerouting three of its Asia-US east coast services using two alternatives. One is to stop on the US west coast and go inland via rail or road; the other is to instead pass through the Suez Canal. That is the waterway blocked by the Ever Given two years ago, and which faces security concerns amid increased terrorist and pirate attacks in the Red Sea it connects. This adds up to 10 days to the voyage time, Lloyd’s List analysis shows.
Changes to routes and longer transport times are unlikely to be temporary, as climate change is making the boom-bust cycle of droughts and floods more severe and unpredictable. Entire supply chains from toy makers to automotive parts manufacturers would need to find permanent workarounds.
At the minimum, they would build more inventory into their forward planning — raising expenses — while bracing for longer lead times between order and delivery. Buyers and suppliers would also need to rethink their geographical footprints. Higher prices to cover the new surcharges and cover the cost of larger stockpiles would become systemic — extending a period of inflation.
Climate change and its more severe and unpredictable effects mean sporadic disruptions to power and gas supply, delayed delivery of goods from Asia and unanticipated price spikes that are to put a dampener on the annual festive season for years to come.
Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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