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Panama Canal restrictions set to impact global supply chains following worst drought in decades

Panama Canal

Global supply chains are set to suffer the consequences of restrictions in the drought-affected Panama Canal, with nearly 4,000 annual crossings at risk as significant delays and increased shipping costs loom.

As previously reported by PASA, supply chains are already feeling the effects of tensions in the Red Sea, which have impacted the Suez Canal – one of the world’s other important shipping shortcuts.

The Panama Canal’s daily traffic quota has been slashed by a third, as the narrow 51-mile (82-kilometre) waterway – which typically sees US $270 billion of cargo each year – struggles with record-breaking low water levels.

Due to a combination of climate change and a strong El Niño, Panama has seen less rain than usual this past wet season, with recorded rainfall sitting at 41 percent below typically expected levels.

This has resulted in reduced water levels at key reservoirs that feed the Panama Canal, affecting the 200,000 cubic metres of water that is required for each canal transit.

Currently, only 24 vessels are permitted to pass through the canal each day (down from the usual 38), with Panama Canal Administrator Ricaurte Vásque estimating that restrictions could cost the Panama Canal Authority between $500 million and $700 million this year, as reported by the AP.

The dry season is expected to run until April, meaning shipping companies are faced with three options: pay to jump the line, wait or re-route.

The canal authority recently started to auction off extra transit slots, allowing shipping companies to skip the line, with one fetching a record-breaking $4 million.

The daily quota could increase to 36 vessels per day (around normal for the time of year) should rainfall in May increase as anticipated. If this doesn’t occur, transit could reduce again or the maximum vessel draft could reduce to 43 feet.

Strategy and management consulting firm McKinsey explains that a ship traveling from Asia to the Caribbean through the Panama Canal would typically complete a 26-day journey, but this could increase to 39 days if forced to travel via the Cape of Good Hope.

Meanwhile, a ship going from the west coast of South America to the Caribbean through the Panama Canal would typically complete a six-day journey, but this could blow out to 31 days if a diversion through the Strait of Magellan is put in place, meaning the vessel would essentially complete a full loop around South America.

Latin America and the East Coast of the USA are likely to be most affected by the restrictions in the Panama Canal, with 5 percent of the world’s and 14 percent of the USA’s seaborne trade sailing through the canal. 

This is as high as 32 percent in Guatemala, 28 percent in Ecuador and 24 percent in Chile, while smaller numbers exist across Europe, Canada, China, Japan and South Korea.

McKinsey’s research also suggests that Panama Canal restrictions could result in a significant increase to the total ocean transport costs of trade moving through the canal, with new routes resulting in a 5 percent (or US $1.1 billion) increase.

Dry bulk carriers (such as grains and coal), general cargo and vehicle carriers are expected to be hit the hardest financially, while approximately half of liquefied petroleum gas transits might need to be rerouted.

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