By Vincent Wen.    Photo：Pankaj Mishra

The Panama Canal is an artificial waterway connecting the Atlantic and Pacific Oceans in Central America. It is the only waterway connecting North America and South America. About 40% of the annual container shipping quantity in the United States is transported by the Asia-Pacific Canal, and also about 6% of the world's annual transportation quantity is. As one of the world's most important waterway, the Panama Canal began to be affected by drought in early 2023. The number of passing ships began to be restricted, which affected shipping vessels and the stability of the supply chain of importers and exporters. In the past, the Panama Canal's traffic averaged 35-36 vessels per day, which started down to 32 ships from 2023 and will drop again to 31 vessels starting in November. It is predicted that the drought will become more serious in the future, which may lead to a further reduction in vessels in the near future, further affecting freight rates and the supply chain.


Panama Canal Authority (ACP) has implemented restrictions in recent months to save water, including reducing the draught of ships from 15 meters to 13 meters and controlling daily volume of water. The average level of evaporation increases, and the amount of water in April next year will be close to the lowest level in history, and it may also be the driest year since 1950. Among them, the most profound impact is on bulk carriers. In the current situation of increasing demand for bulk transportation, the shipping capacity of bulk carriers continues to decline. Affected by two factors, the freight rate of bulk carriers is expected to continue to rise, while container ships are facing a decline of demand in the global market, freight rates may not be affected.


The drought of canals has two impacts on importers and exporters:

1.   Supply chains are postponed. In normal times, it only takes about 11 hours for ships to pass through the canal. However, in August this year, it was reported that 154 ships were waiting in queue with an average waiting time of 21 days. This has affected the smoothness and efficiency of global trade and may cause some countries to the supply chains of important industries such as agriculture, energy, and retail to imbalances in supply and demand and fluctuations in product prices in the international market.
2.   Freight rates are increased. Since Panama Canal Authority (ACP) limits the draught of ships, container ships will need to reduce their cargo carrying capacity or reroute to other routes, which will also increase transportation costs and time. In addition, a "Panama Canal Surcharge" began to be charged in mid-February this year. Except to the basic fee of US$10,000, a variable fee of 1%-10% will also be levied based on the water volume of Gatun Lake. As tolls increase, the company's freight rates may increase.

Appreciate if you could share TGL Blog among your friends who are interested in first-hand market information of supply chain and updated economic incidents.