Panama Canal drought threatens global trade and supply chains

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Since its completion in 1914, the man-made waterway has reshaped global trade by reducing the distance, time, and cost for cargo ships between the Atlantic and Pacific Oceans. However, a prolonged drought that began in mid-2023 has strained the canal’s operations, disrupting the normal flow of global trade and supply chains.

The 52-mile canal uses a complex system of locks to lift large ships at one end, pass them through the Isthmus of Panama, and lower them at the other. To operate, the locks require millions of gallons of water to be pumped into the canal from nearby lakes. After one of the worst droughts in recent memory, water levels have dropped to critical levels at Gatun Lake, the main source of water for the canal.

Hạn hán ở kênh đào Panama đe dọa chuỗi cung ứng và thương mại toàn cầu

A corner of the Panama Canal

In response, Panamanian authorities tightened restrictions on transit and traffic through the canal. Daily transits gradually decreased in November 2023 before improving slightly to 24 from January 16 and most recently to 27 through the end of March. Under normal conditions, the canal can handle up to 40 transits per day.

The restrictions have led to longer wait times to transit the canal, especially for tankers — ships carrying petroleum products and other liquid cargoes — and have changed global shipping routes. Shipowners have begun to bypass the canal, opting for long and dangerous alternatives. Egypt’s Suez Canal, which connects the Mediterranean to the Red Sea, is set to become the main alternative route for LNG tankers by November 2023.

After Houthi attacks on shipping vessels in the Red Sea intensified in December 2023, more US LNG vessels bound for Asia took the longer route around Africa’s Cape of Good Hope. LNG shipments from the US to Asia via the Panama Canal fell 7% year-on-year in late 2023. Until March, no LNG volumes were shipped from the US to Asia via the Suez or Panama Canals, and while deliveries via the Suez or Panama Canal have yet to be made, traffic around the Cape of Good Hope remains high.

Capacity constraints in the Panama Canal are starting to impact supply chains. Longer voyages have led to tighter supplies, higher costs and delayed deliveries of commodities ranging from refined petroleum products and LNG to agricultural products. In the clean tanker market, refined product exports from the U.S. Gulf Coast to the west coast of South America fell 57% year-on-year in October 2023.

Container ships have yet to see an impact due to their priority, although that is changing as authorities look more closely at the rankings when deciding who goes where and especially when through the canal. The bottleneck at the canal, combined with the deepening impacts of climate change and the risk of war in the Red Sea, is putting a spotlight on shipping logistics and the potential for higher prices for consumers as freight and other costs are eventually passed on to seaborne products.

As more ships choose to take longer voyages, supply in each region can affect freight rates; the more ships loaded and carrying cargo over long distances, the less capacity there is to take delivery at any given time. A sudden demand to export a product, such as LNG or petroleum products, out of the key US Gulf Coast region could mean that the supply of ships to transport those products could quickly tighten, potentially raising freight rates again.

The Panama Canal drought dilemma and the resulting shipping restrictions have raised questions about the long-term viability of the waterway as a conduit for global trade, so solutions are being considered to mitigate the impact of future droughts.

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