Melissa Lawford
Thu, 9 November 2023
Around 5pc of all goods that are shipped around the world travel through the Panama Canal - M. Timothy O'Keefe
The Panama Canal has a water problem: there’s not enough of it
Ships travel through the canal using a system of freshwater locks. Each vessel that passes through the canal uses more than 50 million gallons of water, which comes primarily from Lake Gatun. But Lake Gatun is drying out.
“Rain last month was half what it should have been,” says Steven Paton, director of the Physical Monitoring Program at the Smithsonian Tropical Research Institute.
Water levels in the lake are the lowest seen at this time of year in 98 years of data. November is the last month of rain before the dry season starts.
“As soon as the rains stop, that level is going to plummet,” says Paton, who is based in Panama.
It is not just the Panama Canal. Last year, a historic drought in the Rhine derailed European trade. Earlier this year, water levels in the Mississippi hit an all-time low.
Storms have triggered a wave of port closures across China. And wild weather in Brazil has triggered the collapse of a port on the Amazon river.
Extreme weather conditions are increasingly disrupting key shipping routes around the world, slowing global trade and pushing up prices.
In Panama, low water levels at Lake Gatun are adding millions of dollars to companies’ costs.
Before the water problems began, 38 ships passed through the canal each day. But with less water to maintain the freshwater lock system, just 24 have been allowed to pass through daily since November 7. At the current rate, the number will fall to just 16 by February.
Some ships are rerouting and taking months-long detours through the Suez Canal in Egypt, adding to fuel and crew costs.
Others are paying through the nose to get a berth on the Panama Canal. On Wednesday, Japanese oil and gas company Eneos paid a record $3.98m at auction to buy a slot. This was more than four times the typical $900,000 fee.
As well as reducing the number of ships that pass through, canal authorities have also reduced the amount that the ships can carry to maintain a minimum gap beneath the keel of the ships and the bottom of the canal.
“Some ships are already carrying 40pc less,” says David Jinks, head of consumer research at Parcel Hero.
The significance of the disruption should not be underestimated: around 5pc of all goods that are shipped around the world travel through the Panama Canal.
The delays are a particular blow for the US. Two fifths of all US container traffic travels through Panama.
“All kinds of things like clothes, toys and phones are going to be impacted just in time for Christmas,” says Jinks.
The Panama hold ups have little direct impact on the UK but there is a risk of repercussions across the global supply chain.
While the world’s inflation crisis is receding, higher shipping costs could reignite it, says Ariane Curtis of Capital Economics. During the worst of the Covid supply chain crisis, global shipping costs soared by 260pc.
This flowed into a 1.5pc increase in global consumer prices, according to Capital Economics.
For now, shipping costs on routes through Panama are still well below the levels recorded during the pandemic. However, if rates start to climb permanently this will flow into higher costs for goods, Curtis warns.
Restrictions will be a major problem for ships carrying oil and gas because they tend to book slots more last minute, unlike container ships that have predictable cargoes and can book a year in advance.
Freight rates for very large gas carriers (VLGCs) have already jumped by around 15pc since the canal authority announced restrictions on the daily number of ships in October.
Ships are increasingly travelling through Suez. However, detours are adding 30 days to the journey times for ships carrying gas and an extra third to their costs.
Heavy reliance on Suez comes with its own risks as the 2021 blockage of the waterway by the Ever Given container ship showed.
On the Mississippi River in the US, water levels have also hit historic lows. Recent storms have somewhat replenished it but supply chains that rely on the river are not running at full efficiency.
“This is driving up costs for everyone involved,” says Peyton Coker, operations manager at Braemar. “Barges are not able to carry their full capacity and trips are taking longer due to delays and bottle-necking.”
It is a similar story in Brazil, where the Amazon and its tributaries have not only been hit by a major drought but also smoke from fires around Manaus that have made the river harder to navigate.
Transport of goods in and out of Manaus, a city of 2 million people, has been suspended and is not expected to resume at reduced capacity until mid-November.
Knock-on effects have been significant: the extended dry period means part of the port in Itacoatiara in the Amazonas has collapsed.
Back in Europe, a drought in the Rhine meant freight on Europe’s inland waterways slumped to the lowest level in 12 years in 2022.
All these crises trace their roots back to the changing climate. The world is getting hotter, which is making weather more unpredictable and extreme. A month’s worth of rain can fall in a day, followed by weeks of drought.
“The very short answer is any extreme weather anywhere has the potential to interrupt the supply chain,” says Matthew Wilmshurst, partner at Holman Fenwick Willan law firm.
“If we get more examples of extreme weather, then there will be more supply chain disruption.”
Perhaps counterintuitively, flooding is also likely to become a bigger problem as well as rivers running dry, says Wilmshurst. Last year in Durban, South Africa, countless shipping containers were washed away from storage facilities after the region recorded its heaviest rainfall in 60 years.
Back in Panama, “this is now our third extreme water deficit in the last 25 years,” Paton says. “That is a huge red flag. It is very worrying that something may be altering rainfall patterns.”
As well as more frequent water shortages, Panama is experiencing more storms. The region has had eight of the 10 biggest storms in its history over the last quarter century.
“That is wholly consistent with climate change,” says Paton.
Air temperatures are rising, which in turn increases evaporation from the lake.
“It’s a worst case scenario for what you don’t want to happen if you want to use water.”
Solutions are tricky. The Panama Canal watershed also provides more than half of the country’s drinking water, and the population is growing fast. Using seawater in the canal is not an option because that would mean mixing two ocean ecosystems.
“It would be a total ecological disaster,” says Paton.
In the meantime, companies are scrambling to adapt and overcome.
“This may be the new normal,” says Coker.
As well as more frequent water shortages, Panama is experiencing more storms. The region has had eight of the 10 biggest storms in its history over the last quarter century.
“That is wholly consistent with climate change,” says Paton.
Air temperatures are rising, which in turn increases evaporation from the lake.
“It’s a worst case scenario for what you don’t want to happen if you want to use water.”
Solutions are tricky. The Panama Canal watershed also provides more than half of the country’s drinking water, and the population is growing fast. Using seawater in the canal is not an option because that would mean mixing two ocean ecosystems.
“It would be a total ecological disaster,” says Paton.
In the meantime, companies are scrambling to adapt and overcome.
“This may be the new normal,” says Coker.
