The Panama Canal is suffering from drought and dry water unprecedented since records began in 1950, resulting in a significant decline in capacity. Since the spring of 2023, the average waiting time for crossing the canal is currently about 21 days, as the number of times available for Panama Canal carriers to book the channel is decreasing.
As of August 10, there were 161 cargo ships waiting in line near the mouth of the Panama Canal, far exceeding the usual queue of about 90 during the rainy season; Waiting times for ships to open for navigation are more than 20 days, and congestion continues to worsen.
Why is the Panama Canal so blocked this year? What measures have been taken against the current situation? How will this affect trade across countries?
The sluice canal is in drought
The Panama Canal connects the Pacific and Atlantic oceans, is one of the world's seven engineering wonders, the "world bridge", and an important shipping lane that carries about 6% of the world's maritime trade. At present, the Panama Canal provides about 180 sea routes, connecting about 170 countries and regions, reaching about 1920 ports around the world. The United States is the largest user of the Panama Canal, with exports and imported containers accounting for about 73.7% of the Panama Canal traffic. Each year, 40 percent of U.S. container traffic passes through the Panama Canal, with cargo worth about $270 billion. China is the second largest user of the Panama Canal, accounting for 21.4% of the canal's total freight volume in fiscal 2022.
According to the Panama Canal Authority (PCA), more than 14,000 vessels passed through the Panama Canal in fiscal year 2022 (October 1, 2021 to September 30, 2022), carrying a total of 518 million tons of cargo.
Workers perform maintenance at the Pedro Miguel Lock of the Panama Canal on May 12, 2023. Xinhua News Agency
Why is such an important trade lane so blocked this year?
Topographic map of the Panama Canal. Source: Google Maps
Let's start with the Panama Canal's own conditions. The Panama Canal is actually a lock canal. Panama is located in a relatively rugged terrain, just in the mountain valley area, and the Panama Canal must pass through Gatun Lake and Alajuela Lake are all on the mountain. So if you want ships to pass through the canal from the sea at low altitudes, you must "go over the mountains" to get there. How do boats "climb mountains"? Panama used the principle of the connector to build the lock canal.
Boats pass through the canal as if climbing a mountain. Each section of the "mountain road" is set up with several "steps", and each "step" has a pair of locks. When going up the hill, the two locks remain low; The water surface of the first-class lock is level with the sea surface, and the lock gate is open. After the ship enters the primary lock, close the gate. After that, water is filled into the lock, and when the water level in the primary lock is consistent with the water level of the secondary lock, the secondary lock is opened and the ship sails in. In this way, the gates are opened step by step, and the ship can successfully reach the top.
But every time the locks in the Panama Canal release water, they use fresh water from Lake Gatun, an inland lake. Each time the locks operate, about 200 million litres of fresh water are discharged into the ocean. The fresh water of Lake Gatun is key to the operation of the Panama Canal.
But this year is an extraordinary year, due to the El Niño phenomenon, the world has fallen into "big roast" mode. Although Panama's rainy season has arrived, the intensification of El Niño not only makes the rainy season later than usual, but also significantly reduces rainfall compared to normal years, while hot weather further increases evaporation, making the Panama Canal and Lake Gatun face more severe water shortages and persistent droughts.
Gatun Lake. Source: Panama Canal official website
In this way, the water level of Lake Gatun, an important source of water for the Panama Canal, has dropped to 24.26 meters (the lowest point in four years), which has caused severe drought and water levels in the Panama Canal, which directly affect the speed of ship traffic.
Murillo, a meteorological and hydrological expert at the Panama Canal Authority, analyzed: "We expect that by the end of this year, El Niño will further strengthen, so the outlook for the Panama Canal is bleak." ”
The Canal Authority restricts travel
Faced with falling water levels in the canal, the Panama Canal Authority had to reduce the passage of ships in late July.
The first is to temporarily reduce the number of Panamax bookings between August 8 and August 21, from 23 to 14 per day. Second, no more than 32 ships pass through each day, and the draft of ships does not exceed 44 feet (about 13.41 meters), which also means that large cargo ships have to reduce their cargo capacity to pass through the canal smoothly. Previously, the average daily transit vessel on the Panama Canal was 35-36.
According to the Maritime Services Network (CNSS), the relevant staff of the Panama Canal Administration said that the restrictions on the passage of the canal will last until September next year.
At the same time, the Panama Canal Authority issued new restrictions on August 8. The new measures reduce the daily reservation limit from 16 to 14 vessels in the old canal locks used for smaller vessel passage, allowing passage of vessels without prior reservations. The number of reservations for the largest locks remains the same.
Panama Canal Authority Announcement.
"This special adjustment was made to ease congestion on merchant ships who are already waiting in line to pass or are en route and cannot reserve locks in advance," the Canal Authority said in a statement.
However, these measures have not been effective in alleviating the congestion crisis of the Panama Canal in the face of the increasing pronouncement of the El Niño phenomenon. According to relevant data, in the first week of August, the average delay time per ship in the Panama Canal was as high as 15 to 19 days.
The canal's annual revenue may plummet
Whether it's ships lining up or the scorched Panama Canal, the impact of the crisis is enormous.
The Panama Canal Authority told the media in March this year that it is expected that the number of ships passing through the Panama Canal will be significantly reduced in fiscal 2023, and the total traffic is expected to be difficult to reach 500 million tons. If the current and future impacts are included, the total traffic of the Panama Canal in fiscal year 2023 will be further reduced, and the implementation of these measures will reduce the canal's annual revenue by $150 million to $200 million in response to drought.
And these losses inevitably go to the "cargo owners". Starting Feb. 15, ships transiting the Panama Canal were also subject to a "freshwater fee," which costs $10,000 if the vessel is more than 125 feet (about 38.1 meters) long. At the same time, depending on the water level of Lake Gatun in Panama when the ship crosses, the Panama Canal Authority also charges a variable fee of 1%-10%. The International Chamber of Shipping (ICS) expects the move to increase the cost of ships passing through the Panama Canal by as much as 15 percent.
Faced with the double whammy of restrictions and costs, some merchant ships choose to unload some of their goods at the entrance of the canal, transport them to the exit by land, and then reload them; Others had to consider other routes, such as a detour through the Suez Canal to the East Coast of the United States.
Top 15 countries of Panama Canal cargo origin and destination in 2022. Source: The official website of the Panama Canal Authority
As the main artery of shipping, after being hit hard, merchant ships "find another way" to survive in the cracks, which will undoubtedly bring a "wind and snow" to global trade.
First, the decline in capacity of the Panama Canal will hurt agricultural trade between the northern and southern hemispheres. Bananas from Ecuador, meat from Brazil, wine from Chile, etc. were originally shipped through the Panama Canal, but now some of these ships can detour through Cape Horn in South America or drastically reduce cargo capacity, both of which can significantly increase logistics costs, extend logistics time, and adversely affect international trade.
Second, the transportation of commodities such as energy may also be affected. According to the US Consumer News and Business Channel, about 26% of the Panama Canal's annual transportation business involves liquefied petroleum gas, liquefied natural gas and so on. The increase in transportation costs may also lead to an increase in the price of these goods. Although energy carriers are not affected by the new draft restrictions, canal congestion caused by falling water levels and an increase in small boats will affect transportation efficiency.
Algot, an economist at the American University in Panama, said: "If copper is an example, for example, from Chile or Panama to China, Singapore, South Korea through the canal, the export price of copper mines is more expensive." ”
However, the situation is not as pessimistic as expected. Some shipping companies and their customers believe that this congestion will not cause supply chain strains as it did during the coronavirus pandemic, nor will it repeat the Suez Canal blockage in 2021. Due to weakening demand for sea freight, international maritime logistics congestion during the epidemic period has eased and supply chains have been repaired.
Rolf Harben Janssen, chief executive of German shipping carrier Hapag-Lloyd, believes that Panama's current transit delays have a substantial but "not huge" impact on global shipping.
Water shortages in the Panama Canal could become the norm, and countries are looking for new alternative routes. Nicaragua's Minister of Transport and Infrastructure, Oscar Mojica, told local media in June that Nicaragua plans to build a railway connecting the country's two major ports on the Pacific coast and the Caribbean coast. In addition, El Salvador said it hopes to cooperate with Honduras in the construction of an interoceanic railway and compete with the Panama Canal for the status of a transportation hub.
Integration: Nandu reporter Huang Wei Intern Yang Nan
American editor: Lin Yongxi
Source: Panama Canal Authority, Overseas Network, CCTV News, Xinhua News Agency, Daily Economic News, etc