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Drought in the Panama Canal: What impact will it have on global trade and logistics?

Updated: May 9

The Panama Canal is an engineering marvel that has forged a vital link between the Atlantic and Pacific Oceans. However, scarce rainfall has drastically reduced the levels of artificial lakes that feed the canal's locks, reaching almost record lows. This has led to a significant decrease in the number of daily passages allowed, causing a considerable buildup of ships forced to wait their turn to cross.

Ships from around the world transit through the Panama Canal daily. Almost 6% of global trade and 40% of U.S. container traffic pass through this route, translating to over 12,000 ships crossing each year to deliver cargo to more than 160 countries. They traverse 180 maritime routes connecting 170 countries with destinations to around 1,920 ports. With the efforts of approximately 9,000 workers, the Canal operates 24 hours a day, 365 days a year, providing transit service to vessels of all nations without discrimination.

The Canal utilizes a system of lock compartments with entry and exit doors. The locks function as water elevators, lifting vessels from sea level (either Pacific or Atlantic) to the level of Gatun Lake (26 meters above sea level). Thus, ships navigate through the Canal's channel in the Central Cordillera of Panama.

The problem: Gatun Lake is drying up. In 2019, the region experienced a 20% reduction in rainfall compared to the average, making it the driest year in the history of the canal. In 2023, the presence of the El Niño phenomenon has caused a shortage of rainfall in the region, making it the second driest.

The drought has impacted supply chains by reducing the operational capacity of the canal, causing transit restrictions, and simultaneously leading to ships carrying less cargo. With a waitlist of over a hundred vessels (meaning several days of waiting and millions in losses for companies), many ships are opting to pay high amounts of money to skip the line.

The Panama Canal Authority is organizing auctions for those wishing to avoid the queues. The highest bids usually come from liquefied petroleum gas or liquefied natural gas carriers. "You can skip the line, but it's immensely expensive. It has increased very quickly. And if you add the regular fee, it's around 3 million for your ships to pass," explained Oystein Kalleklev, CEO of Avance Gas.

The operator of the Panama Canal has admitted that there are no immediate prospects for relief from the drought. The administrator of the Panama Canal, Ricaurte Vásquez Morales, said that unusually high ocean temperatures, an unpredictable rainy season, and the persistence of the El Niño climate phenomenon mean that officials will have to continue restricting vessel traffic until 2024.

This means that the long waits affecting the canal are likely to continue in the months leading up to Christmas and the Chinese New Year when it is normally busier. This would result in a projected reduction in revenue of between 150 million and 200 million dollars for the next year, according to the official.

While the Canal Administration estimates revenue of 4.9 billion dollars for 2024, Vásquez acknowledged that the Canal is in a critical situation mainly due to the complex situation of the vital waterway. He also pointed out that the composition of the world fleet is shifting towards larger vessels that the neopanamax locks can't accommodate, and there are limitations due to the volume and quality of water.

Shippers and consignees must consider the importance of advance planning to ensure efficiency in shipments through the Panama Canal. At SPARX logistics, we will keep you informed of possible canal limitations or closures, also considering the seasons and weather conditions that may affect navigation. This will allow you to anticipate potential delays and adjust your logistics planning accordingly.

It is crucial to consider alternative routes to maintain the continuity of your operations. Evaluate alternative maritime options and multimodal modalities together that can bypass potential issues in the Panama Canal. SPARX logistics will provide specific recommendations to explore these alternatives and have a solid contingency plan in collaboration with our experienced local agents and strategic partners.

We have a specialized team with a deep understanding of local regulations, a robust network of agents in Panama, and the ability to offer flexible logistics solutions. We maintain proactive communication and provide real-time tracking tools to ensure total visibility of your shipments as they cross the Panama Canal. Trust SPARX logistics to optimize your supply chain in this key region.



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