Record drought hitting Panama Canal may ruin your kids’ Christmas


TAIPEI – 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 camper vans to Christmas toys.

Sudden downpours in the central American nation may not be enough to mitigate changes to the way trade operates.

Rainfall this wet season, which runs from April to November, has been 41 per cent lower than normal, reducing levels at key reservoirs including Gatun Lake. The 64km-long 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 will drop to 18 by February 2024.

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. Centralising manufacturing and piling products into ever-larger ships makes less sense if transport bottlenecks diminish economies of scale.

To allocate slots, the Panama Canal Authority (PCA) auctions off crossings. Japan’s Eneos Group paid US$3.98 million (S$5.34 million) in a sale in November, 20 times more than the average. Carriers of fuels such as liquefied petroleum gas and liquefied natural gas were the hardest hit early on – restrictions started to bite in May – because they don’t 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. But even scheduled crossings are being cut. In fact, 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 class can hold 2.8 times more containers than the Panamax variety. Crossings for NeoPanamax 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 its hull sits below the 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 won’t make it to their destinations in time for Christmas.

Every one foot cut in maximum draught requires lightening a ship’s haul by about 400 containers, Mr Christian Roeloffs, co-founder and chief executive officer of Container xChange wrote in a Nov 30 report. 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. But this slowdown doesn’t help move goods more smoothly when there’s a bottleneck at the canal, especially for the north-bound route that connects journeys from Asia to the US East Coast. By Dec 2, the average wait for non-booked vessels had ballooned to 11.7 days, from just 4.3 days on Nov 7, according to PCA data. At least one ship had queued for 30 days.

Now it’s crunch time. December is the peak month for NeoPanamax transits as consumer goods get shipped for Christmas and energy gets 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 on Dec 1 announced it would tack on a US$130 per TEU surcharge for transit across the Panama Canal from Jan 1, while Geneva-based Mediterranean Shipping Co. is charging an extra US$297 effective Dec 15.

THE Alliance, a consortium comprising four major shipping companies, is re-routing three of its Asia-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’s the waterway blocked by the Ever Given two years ago, and currently facing security concerns amid increased terrorist attacks in the Red Sea, which it connects. This adds up to 10 days to the voyage time, according to Lloyd’s List analysis.

Changes to routes and longer transport times aren’t likely to be temporary, because climate change is making the boom-bust cycle of droughts and floods more severe and unpredictable. Entire supply chains from toy makers to auto-parts manufacturers will need to find permanent workarounds.

At the minimum, they’ll build more inventory into their forward planning – raising expenses – while bracing for longer lead times between order and delivery. Buyers and suppliers will also need to rethink their geographical footprints. Higher prices to cover the new surcharges and the cost of larger stockpiles will become systemic – extending a period of inflation.

Climate change, and its more severe and unpredictable effects, means sporadic disruptions to power and gas supply, delayed delivery of goods from Asia, and unanticipated price spikes will put a dampener on the annual festive season for years to come. BLOOMBERG



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