Beyond the Red Sea, can the Panama Canal drought break the crisis that has disrupted global trade?

The routes available for global shipping are as if they were more than a century ago.

When it began operations in 1914, the Panama Canal provided an alternative to the Suez Canal, the Cape of Good Hope, and the Strait of Magellan for the transportation of goods between the northern and southern hemispheres, but shippers are now returning to the options of a hundred years ago to avoid the Panama Canal bottleneck, while at the same time considering the Red Sea-Suez route.

The latest information shows that the water level in the Panama Canal is currently six feet (1.8 meters) below normal levels, and the Panama Canal Authority will limit the number of ships that can pass through to 24 per day. With the arrival of the dry season, the situation is likely to be even less optimistic.

Chris Rogers, head of supply chain research at S&P Global Market Intelligence Global Intelligence and Analytics, told CBN reporters that as an alternative to the Red Sea route, transportation through the Panama Canal has been restricted, although the degree of restriction is a little smaller than originally planned, but this also reduces the role of the route as an alternative route, which forces all major shipping companies to use the Cape route or some transshipment strategies.

Drought plagues under climate change

Tensions in the Red Sea have escalated, with some of the world's largest shipping companies saying they will avoid the Red Sea and the Suez Canal, but the Panama Canal, another major trade artery, is also mired in a crisis that could disrupt global trade.

A few hundred feet from the large oil tankers moored near the canal, the wizened stumps were already showing the waterline: they were all the remains of a woodland that was flooded for the construction of the canal more than a century ago, and it was not uncommon to see them at the height of the dry season, but now they should have been completely submerged just after the rainy season was over.

The premature "outcropping" of the stump is a stark reminder of how a dry climate has damaged this waterway that handles $270 billion in global trade each year, and there is no easy solution.

In contrast, the Suez Canal is a sea-level canal, while the Panama Canal is a freshwater canal that relies on artificial lakes and is therefore vulnerable to drought.

The current restrictions on the Panama Canal are the strictest in nearly 40 years, but the last time was due to geopolitical closures, not climate change.

The restrictions set by the Panama Canal have eased due to heavier than expected rainfall in November 2023, but the current maximum capacity of 24 ships per day is still well below the pre-drought capacity of about 38 ships.

In this case, some shippers pay millions of dollars to cut the queue, while others choose longer, more costly routes around Africa or South America.

However, the Red Sea-Suez Canal route is not currently feasible, and more and more ships are choosing to detour the Cape of Good Hope at the southern tip of Africa.

"Transshipment via the Cape of Good Hope adds at least 10 days and 15% to the cost of transportation. Land or rail transport requires passing through Russia, and trucking from the Gulf to Israel may only offset about 3% of sea traffic. Rogers analyzed.

The data from Clarkson's study are similar. For example, a route from Asia to Northern Europe that detours the Cape of Good Hope will add an additional 3,200 nautical miles, or 30 percent, to the distance, and the cost will also increase. In mid-October 2023, the freight rate of the Shanghai-North Europe route was only US$581/20-foot TEU, and on December 15, the freight rate of the Shanghai-North Europe route rose to US$1,029/TEU, which is close to the historical average.

Can you break the game?

Under these circumstances, is there a turning point for the Panama Canal to dry up? The Panama Canal Authority is also considering changes.

"As a canal, as a country, we need to do something because it's unacceptable," said Erick Córdoba, manager of the Panama Canal Authority's water department, in an interview. ”

Under normal circumstances, the Panama Canal handles about 3% of the world's maritime trade and 46% of the containers shipped from Northeast Asia to the East Coast of the United States. The canal is Panama's largest source of revenue, with $4.3 billion in revenue in 2022.

In order to allow the passage of 24 boats per day during the dry season, the canal will release water from Lake Alajuela, a secondary reservoir. Córdoba said that if rains start to increase in May, traffic on the canal could start to increase.

But these are short-term solutions. In the long term, the main solution to chronic water scarcity is to build a dam on the Indio River and then drill a tunnel in the mountains to transport fresh water to Lake Gatun, the canal's main reservoir.

Córdoba estimates that the project, along with other conservation measures, will cost about $2 billion. He said it would take at least six years to dam and fill the site. A feasibility study is under way.

The Indio River Reservoir will increase the flow of ships by 11 to 15 vessels per day, enough to keep the Panama Canal running at full capacity while ensuring the supply of fresh water to Panama City.

However, it will not be easy to move forward with the proposal. This would require the approval of the Panamanian Congress, and the land of thousands of farmers and ranchers would be submerged, who opposed the plan.

Another potential solution is clearly more experimental: in November 2023, a small aircraft operated by North Dakota-based Meteorological Retrofit arrived in Panama to test Cloud Seeding. But cloud seed technology is mostly used successfully in regions with dry climates, not in tropical countries like Panama.

In addition to climate change, infrastructure expansion in recent years has accelerated the rate at which the Panama Canal has been pushed into a drought.

In 2016, the Panama Canal Authority completed a new set of locks to increase capacity and keep pace with the growing size of cargo vessels. But the Panama Canal Authority did not build a new reservoir to pump enough fresh water.

The ensuing drought exacerbated the drying up of the Panama Canal. Steve Paton, director of the Physical Monitoring Program at the Smithsonian Tropical Research Institute, said the climate on Barro Colorado Island at Lake Gatun was the driest on record as of November 2023.

Jorge Luis Quijano, an adviser to the Panama Canal Authority, said it could take a year to restore normal flow. Mr. Kihano said he saw the problem emerge a decade ago, when he oversaw the addition of a new set of locks to the canal to accommodate larger vessels, which are engineering marvels but also water-intensive.

A veteran who is engaged in environmental protection work in international multilateral institutions told the first financial reporter that in addition to the Panama Canal, climate change has continued to have an impact on the shipping industry in recent years.

"In 2023, drought caused blockages on the Mississippi River in the United States and the Rhine River in Europe, increasing ice melt and opening up new shipping routes for the Arctic. All of this is a new reality that we have to face in the current climate change, and how to do a good job of adaptation is a major topic, the difference is that in the past, the discussion of climate change adaptation tended to discuss developing countries, but now the situation is the same. He told reporters.