Join our crew and become one of the 107,194 members that receive our newsletter.

An LNG carrier transits through the Panama Canal. Photo credit: Flystock/Shutterstock

Photo credit: Flystock/Shutterstock

Panama Canal Traffic Is Being Throttled by Climate Change

Total Views: 2041
November 3, 2023

(Bloomberg) —

The Panama Canal doesn’t have enough water.

A lack of rainfall, blamed on climate change, is leading to a steady decline in water levels on the vital conduit. The problem is so bad that quotas are being imposed on how many ships can pass through it, a move set to snarl trade in energy, consumer goods and food as carriers are forced to sail thousands of extra miles to make deliveries.

Restrictions started this month and will continue through at least February, the canal’s managing authority said. By then, trips will be limited to 18 per day, a 50% drop from a year earlier. Excluded vessels will likely alter course to the Suez Canal — adding at least a week to the journey between the US and China — or around the bottom of South America. Such voyages will burn more fuel and lead to higher freight costs.

“It’s really a disaster playing out in slow motion,” said Peter Sand, chief analyst with Oslo-based Xeneta, which analyzes ocean and air freight markets. “We expect this will drag on for at least another year.”

The crisis mirrors what happened to Europe’s rivers during record-setting heat waves in 2022. The Rhine and Danube, for example, were evaporating at such a rate that trade valued at about $80 billion annually was disrupted. It affected oil refining, power generation and corn farming.

This October was the driest on record in Panama since record-keeping began in 1950. The level of Gatun Lake, a body of freshwater that vessels navigate on their way through the canal, has dropped to an unprecedented low.

Trade through the isthmus generated $4.3 billion in revenue last year, according to the canal authority. Core users include tankers bringing petroleum products — especially liquefied propane — from US refineries to Asia; container ships delivering made-in-China goods to the US eastern seaboard; and bulkers moving millions of tons of grains and other agricultural products.

Severe traffic restrictions appear to be particularly challenging for propane traders. US inventories of propane and propylene have risen to their highest seasonal level on record, while Asia’s demand for the petrochemical feedstocks keeps rising.

The US is expected to export as much as 12% more propane this winter compared with last, according to a government forecast. Much of those exports need to go through the canal, and delays there can be costly to shippers and consumers alike.

To one shipper, avoiding the wait was worth $2.85 million — the amount paid in an auction to skip the line next week, said Oystein Kalleklev, chief executive officer of shipping companies Flex LNG and Advance Gas.

More than half of US propane shipments went to Asia in 2022, according to data from the US Energy Information Administration.

Prices in Asia surged to the highest levels since January this week at more than $750 a ton on mounting concerns about delays, according to traders who specialize in that market. That jump took place even amid signs of softer demand in the region, particularly from China’s petrochemical sector.

For container carriers, the drought is the latest in a string of events that roiled capacity during the past several years — whether it was the pandemic-related chaos gripping China’s manufacturing exporters or the blockage of the Suez Canal by a giant ship that wedged itself into its banks.

The February curtailment in booking slots will hit just as importers seek to restock after the holidays. Though spot container prices from Asia to the US Gulf and East Coasts through Panama have declined in recent months, they have been “ticking up” recently and may continue to rise as the waiting line lengthens into February, Sand said.

The canal bottleneck has the effect of reducing capacity and putting a floor under seaborne freight rates for goods for vessels going through.

Transpacific freight likely will be rerouted through US West Coast ports and then loaded on trains or trucks to reach the East Coast, rather than wait to transit Panama, said Glenn Koepke, general manager of network collaboration at Chicago-based FourKites Inc., a supply-chain visibility provider.

That should put upward pressure on rates and “help provide a needed bump to the steamship lines and freight forwarders who are struggling with profitability,” he said.

The snarls mean it takes about 10% longer for a container to move from a Chinese port to a destination on the US East Coast, according to project44, a supply-chain data company in Chicago.

“Expect lead times for the canal to remain high, and as drought conditions continue, additional restrictions will most likely follow,” project44, a logistics firm, said in a research note this week.

About 38.4 million long tons of grains — the vast majority of it going from east to west — went through the canal in 2022, Panama Canal Authority data show.

If waiting times are too long, some agricultural traders will consider diverting grains through the Suez Canal, said Jan Rindbo, chief executive officer of D/S Norden A/S, which operates a fleet of oil and bulk carriers.

It’s also possible that fertilizer shipments from Europe to the west coast of South America are replaced by supplies from Asia, he said. 

“There are big challenges with the canal with the drought they have,” Rindbo said. “It is not a challenge that is going away.”

© 2023 Bloomberg L.P.

Unlock Exclusive Insights Today!

Join the gCaptain Club for curated content, insider opinions, and vibrant community discussions.

Sign Up
Back to Main
polygon icon polygon icon

Why Join the gCaptain Club?

Access exclusive insights, engage in vibrant discussions, and gain perspectives from our CEO.

Sign Up


Maritime and offshore news trusted by our 107,194 members delivered daily straight to your inbox.

gCaptain’s full coverage of the maritime shipping industry, including containerships, tankers, dry bulk, LNG, breakbulk and more.