Drought Crisis: 40% of America’s Cargo is at risk via the Panama Canal

The Panama Canal serves as a vital link connecting the Pacific and Atlantic Oceans and connecting Asian goods to major U.S. East Coast Ports such as Houston, Savannah, Charleston, Miami, New Jersey, and New York. In 2022, the Canal handled over 40% of all U.S. container traffic and processed approximately 14,200 vessels. Instead of sailing an additional 8,000 nautical miles around South America, ships traverse through a series of locks via a 50-mile stretch of freshwater lakes to complete their journey in about 12 hours.

Under normal circumstances, approximately 40 ships per day can navigate through three separate canal lanes. The first two are Panamax lanes that were designed with a capacity of approximately 4,500 TEUs, with dimension restrictions of 965’ long by 106’ wide with a draft depth of 39.5’ feet. America’s reliance on Imports increased and there was a demand for significantly larger vessels that were more efficient and profitable. Overtime, a larger shipping artery called the ‘NeoPanamax’ lane opened in June 2016 and accommodates vessels exceeding 10,000+ TEUs. As of today, the NeoPanamax lane can service approximately 96.5% of the world containerized fleet and recycle 60% of its water usage with lock dimensions of 1,200' long by 160' wide and a draft depth of 50 feet.

Recent Changes Due to Drought:
The Panama Canal Authority (PCA) has faced a series of challenging decisions to preserve their vital gateway due to the severe drought conditions it has experienced. Several significant and conservation measures have already taken place:

· Reduction in Draft Depth: Because of the lack of rain as well as the Canal’s consumption, water levels in Lake Gatan continue to decrease. This caused the PCA to reduce the draft depth to 44’ feet for the NeoPanamax lanes. If the draft depths drop below 42 feet, larger vessels may need to avoid the Panama Canal and opt for the longer route via the Suez Canal to reach the East Coast.

· Dwindling Water Supply: Each vessel that transits through the set of locks uses approximately 52 million gallons of water. To put this in perspective, normal daily water usage at the Panama Canal surpasses that of all of New York City. While Panama typically experiences its wettest season from October through December, the rest of 2023 is expected to remain dry due to El Niño conditions. The PCA has already extended their current drought restrictions through AT LEAST June 2024.

· Capacity Challenges: In 2022, the 3 lanes averaged a record 39 vessels per day, however, the PCA’s water conservation strategy has reduced daily traffic to a maximum of 31. The NeoPanamax is where the majority of containers travel because of its capacity for larger container ships. This lane has been reduced from 12 daily passages down to only 9. The smaller Panamax lanes have also been impacted as the PCA has reduced these lanes from 28 daily passages to only 22. With over a 20% reduction in daily traffic, this could result in an average monthly decrease of over 1,000,000 TEUs per month. Over the period affected by the drought, this could result in a potential decrease of approximately 10,000,000 TEUs divided up between the various receiving East Coast Ports.

· Delays and Queuing Lines: Due to the reduction of the daily transits, the line of ships have significantly increased with some vessels waiting an additional two to three weeks to traverse between Oceans. Container and Passenger ships have been less impacted as they have priority with scheduled appointments. However, the number of idle ships waiting in the queue was 154 in August. While still high, the line decreased to approximately 107 by Mid-October. If there are no further restrictions, the Canal could completely catch up by the end of 1st QU 2024.

· Decreased Cargo Capacity: In order for ships to sail ‘higher’ in the water to comply with the current 44’ draft requirement, they must reduce its weight. To lighten their ship, they are loading fewer containers at origin. With lower capacity per ship, this could also mean additional vessels are necessary to move the same amount of cargo, thus adding ships to the already congested Canal. Vessel owners worry about draft depth as that could cause a ship to run a ground like what occurred at the Suez Canal in April 2021. If this were to occur in Panama, delays and costs could be catastrophic as well as a major disruptor to America’s supply chain. This was a concern this past June for Evergreen’s vessel, The Ever Max.

Evergreen's Ever Max Ship: The largest ship ever to pass through the Panama Canal occurred in June of 2023; however, there were NOT any celebrations. The Evergreen's Ever Max ship boasted a maximum capacity of 17,312 TEUs with dimensions of 167 feet wide at the top deck and an end-to-end length of 1,200 feet; nearly touching all the edges of the NeoPanamax lanes. When leaving Asia, the ship was loaded with 14,747 TEUs onboard, but the PCA changed its drafts restrictions during its voyage. Fearing the vessel could get stuck, it was required to further reduce its cargo by an additional 10%. On the Pacific side, the Ever Max docked at the Port of Balboa and off-loaded almost 1,400 TEUs to reduce its weight - carrying ONLY 13,345 TEUs through the Canal. The containers were railed across the Panama Isthmus incurring substantial costs while the ship went through their locks. These goods were then reunited with the Ever Max on the Atlantic side of Panama to avert a crisis.

Summary, Takeaways and Forecasting:
In 2022, cargo started shifting to the East Coast because of the backlog of ships on the West Coast as well as the pending longshoremen union (ILWU) contract expiration. By the middle of the 3th Qu of 2023, the roles have completely reversed. This time, the Panama Canal has experienced an even bigger backlog of vessels than Southern California and the East Coast union (ILA) contract is set to expire on September 30, 2024.

Recently, there have been reports of traffic being diverted away from the Panama Canal. Some traffic is expected to enter via the Port of LA and Long Beach, but the industry is also utilizing the Mexican Port of Lazaro Cardenas to lighten ships as well as service cargo directly to the Midwest. For example, ZIM Integrated Shipping has announced bringing in Imports via Mexico and then using rail to service other hubs like Dallas, Laredo, Kansas City, Chicago with final destinations on the East Coast.

There are several potentials risks that could be game changers for shipping managers to considered as they book their freight in 2024.

· Water Levels: Over the next 6 to 10 months, the water table is expected to drop further. With a rising draft depth, the potential of a major disruption event becomes even more probable.
· Impacts: When the drought continues, costly factors such as arrival delays, increased congestion, fewer ship passages, decrease utilization of vessel capacity, potentially an increase in voyages due to the underutilization, as well as increased tariff fees. All these factors conclude it will almost be guaranteed using the Panama Canal will increase unit costs over time while the drought affects the region. While overall rates have eased since January 2022, recently some steamship lines have already added surcharges of $500+ per container and could increase further if the drought persists and demand increases.
· Restocking: IF demand returns or inventories become stressed, increasing goods through the Canal as they achieved in 2022 is NOT presently possible due to the in-place restrictions. Depending on rainfall and usage, this capacity might not be as available until after next year’s Peak Season when Panama hopes the fresh water levels return.
· Cost of Carrying Goods: Interest rates have significantly increased over the past 12 months. This has impacted the cost of inventories; therefore, receiving goods earlier on the West Coast may become more favorable to many suppliers.
· Competition from the West: West Coast Ports have ratified their contract, do not have water restrictions or a history of severe storm disruptions; the West Coast is now well poised for stability in the future. With the roles reversed, the Ports of LA and Long Beach’s value-add proposition for 2024 may reverse some of the cargo diversions from 2022 & 2023.

Let’s finish out the year and we look forward to updating you again once after the December volumes, cue lines and water levels are reported.