Panama Canal drought adds more strain on supply chains; is it here to stay in 2024?

The supply chain has been facing disruptions for some time. On top of the recent attacks in the Red Sea, which resulted in shipping companies halting or rerouting their vessels, an unprecedented drought and ensuing shipment delays in the Panama Canal also added to the recent concerns.

A quick delve into problem causing restrictions

Panama Canal has been battling a period of no rain for a long while now, due to which the canal authorities have limited vessels passing through. In September, the Panama Canal Authority decided to cut the draft to 44 feet from 50 feet as larger ships have not been able to transit the canal fully loaded. This was followed by the decision to limit the transits, as tens of millions of gallons of fresh water is needed to be used for each transit.

It was late October when authorities required the number of daily transits to be reduced from 36, the regular number of vessels passing through the canal a day, to 32. In the proceeding weeks, they reduced vessel transits even more gradually to 24 in November and 22 in December. They planned to make it decline to 20 in January and 18 ships a day in February. That represents between 40%-50% of full capacity, according to CNBC . Hence, shipment delays were reported by traders, who pointed to the rapid changes in vessel schedules.

Which routes have taken a knock?

Panama Canal is popular for the US East and Gulf Coast trade because it is faster than other options between China and the US, as well as between the US and South American countries. The shipping time for ocean cargo from China to the East Coast using the Suez Canal takes 41 days. Traveling through the Panama Canal takes only 35 days as the waterway connects the Pacific and Atlantic Oceans.

As the transits through the Panama Canal are down by 40%, some shipping companies turned to Suez Canal, where another crisis broke out last week , and a glimpse of optimism about a return to normalcy has been heard this week.

Is there any relief in sight?

Meanwhile, as of mid-December, Panama Canal authorities announced that they will increase transit slots per day to 24 from 18, contrary to the earlier plan, starting as of mid-January since the current and expected levels of the artificial Gatun Lake provide necessary water for the canal.

Although this news provided some hope in terms of a relief in traffic, freight rates have not found much ease so far given the fact that there is a customer limit and prioritization of slots based on the highest bid in auction processes.

Freight rates have spiked since October

According to Freightos , freight rates from China/East Asia to North America East Coast showed an increase of 17% since mid-October. Particularly, the route from North America East Coast to China/East Asia displayed a jump of 20% only in the previous week, while the cumulative gain from mid-October to today reaches 43%.

Similarly, Drewry also suggested a 17% increase since mid-October in the route from China/East Asia to North America East Coast while 8% of this gain was achieved only in the last week .

2024: Another rocky road ahead

According to some industry sources, container shipping routes to Asia have not faced much trouble so far given priority to container shipping lines, although concerns remain over whether they will remain the same or deteriorate.

Players expect this issue to take a front seat throughout 2024. This is because Central America faced the driest October this year since at least 1950, along with the start of El Niño, a natural phenomenon in the tropical Pacific Ocean, typically bringing warmer-than-average temperatures. This may be the same in 2024, as it may be the warmest year on record, according to CNN .