Water levels at the Panama Canal – one of the world's most important shipping routes – have dropped to alarming levels, necessitating restrictions on vessel traffic.
According to Clarkson Research Services, a subsidiary of leading shipbroker Clarkson, many ships now have to wait up to four days to pass through the canal, compared to just over a day previously. Some vessels have even faced delays of up to 20 days.
The Panama Canal, which connects the Atlantic and Pacific Oceans, is a critical artery for global trade, transporting more than 500 million tons of cargo each year, including grains from Latin America, U.S. oil and gas, and consumer goods like furniture and toys.
Prolonged drought conditions, combined with low water levels, have forced local authorities to limit the number of ships passing through and require vessels to reduce their cargo loads since May, as water levels in the canal have dropped significantly due to lack of rain. Notably, water levels in Lake Gatun, one of the two main lakes supplying water to the canal, hit a seven-year low at the end of July and are expected to remain below average for the next five years, even during Panama's rainy season.
This drought is not only affecting Panama but also reflects the broader impact of global climate change. In Europe, water levels in the Rhine River have dropped, threatening the German economy. Maersk, one of the world’s largest shipping companies, has warned of potential traffic disruptions on the Amazon River in Brazil from September to December.
A series of ships waiting to pass through the Panama Canal. Photo: Planet Labs PBC
The Panama Canal Authority has acknowledged this as an unprecedented challenge, describing the current drought as "historically unprecedented”. In addition to cargo restrictions, they have imposed limitations on large container ships and the number of vessels allowed to pass through the canal.
In response, many ships have sought alternative routes. Some are opting to use railways to transport goods from the U.S. West Coast instead of the canal. Logistics company Container xChange has warned that if this situation persists, there is a real risk that goods may not arrive in time for the Christmas season, especially since around 40% of containers from Asia to Europe transit through the Panama Canal. This would severely impact global supply chains and food security, threatening surrounding economies.
The situation could worsen if the drought extends past September, which is the peak export season for wheat and soybeans from the U.S. With the current congestion, the number of ships ready to transport goods to East Asia will drop significantly. Some shipping companies, such as International Seaways, have already begun rerouting vessels around South America to avoid the bottleneck and high costs at Panama.
Oystein Kalleklev, CEO of Flex LNG, noted that this situation cannot be resolved in the short term. Experts have also warned that incidents similar to the Ever Given grounding in the Suez Canal in 2021 may become more frequent due to climate change. The impact of this phenomenon on supply chains, food security, and regional economies could be far greater than anticipated.
According to expert Peter Sand from Xeneta, the situation could worsen next year, as the El Nino phenomenon is expected to cause severe drought in the first half of 2024.
Source: Bloomberg, CNBC
