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How the Worst Drought in a Century Is Changing the Panama Canal

Updated: Jun 20, 2023

Source: Wall Street Journal

The Panama Canal is going through its driest spell in more than a century, and an extended lack of rainfall could saddle global supply chains with delays and higher fees to move cargo.

The government agency that manages the artificial waterway implemented travel restrictions in May to avoid ships running aground, and since then some large vessels have had to reduce container loads by roughly one-quarter. Further restrictions could go into effect in late June, authorities say. Meteorologists have warned that the water levels in Gatún Lake—located in the center of the canal—could hit record lows in July with the occasional climate event El Niño bringing higher temperatures and less rain.

Canal officials are hoping the second half of the year brings some relief. Panama is one of the world’s wettest countries, but in the first five months of the year accumulated rainfall in the area around the canal was 47% below the historical average, according to the Panama Canal Authority. The canal opened to traffic in 1914. Under normal conditions, cargo-laden ships are able to move freely through the canal system. Under drought conditions, ships are required to reduce their payload to pass through low water levels. The Panama Canal, whose daily water use is triple that of New York City, relies on rainfall. More than 50 million gallons of water are lost to the sea every time a ship moves through the locks. That water is replenished from a reservoir, which is in turn filled up when it rains. If there isn’t enough rain, as was the case during droughts in the late 1990s, a number of ships could avoid the passage, according to canal executives.

Officials have spent years planning for more extreme weather events to preserve the canal’s role as a vital trade route and avoid supply-chain bottlenecks like the grounded vessel that clogged the Suez Canal in March 2021. The large containership Ever Given blocked the waterway for six days, causing a backlog of more than 400 vessels and costing billions in trade.

Meanwhile, shipowners and charterers are adjusting their operations to meet the lighter-load requirements and are weighing the costs of routing shipments elsewhere.

Disruptions in the canal’s operations would hurt Southern Hemisphere exporters and importers in the north. Brazilian meat, Chilean wines and bananas from Ecuador are routinely shipped across the canal, along with copper from Chile and liquefied natural gas from the U.S. Gulf Coast. The isthmus connects the Atlantic and Pacific oceans and handles about one-third of Asia-to-Americas seaborne trade.

Any issues also could upend the Panama Canal Authority’s effort to boost business. It spent $5.4 billion for a new set of locks that accommodate larger containerships, aiming to be more competitive with Egypt’s Suez Canal. Routes through the Panama Canal shorten the one-way trip by sea from Asia to the U.S. East Coast by roughly five days.

The canal hauls in more money from larger ships crossing the newer locks, which are now responsible for about half of its business. About 10 ships a day move through the newer locks, and about 27 smaller vessels travel through the older locks.

“The rainfall volume has been consistently falling over the past 20 years,” said Ricaurte Vásquez Morales, the Panama Canal Authority administrator. “We are dealing with a climate crisis when we are at peak capacity, and we have to find new sources of water to store in our lakes.”

The Panama Canal is the country’s biggest foreign-revenue generator, responsible for more than $3 billion from tolls last year.

In addition to cutting cargo loads, shipowners are adjusting to Panama Canal restrictions by moving containers to trains to ensure safe passage through locks. In some instances boxes are unloaded from ships on the Pacific Ocean side of the canal, moved by rail and returned to ships before they continue their voyage through the Atlantic Ocean.

The Panama Canal Railway has had a 20% increase in volume in recent weeks from carriers affected by the drought, said Thomas Kenna, president of the railway.

“If the canal is seen as having limitations, it’s not good for anybody,” Mr. Kenna said. “The cargo will always find the most efficient way.”

Shipowners are also responding by charging customers an average $600 more a box on vessels crossing the canal. The daily freight rate from Asia to the U.S. East Coast was $2,400 a container in May, according to the Freightos Baltic Index, but it is expected to rise in June, in part, because of the Panama Canal drought surcharge.

For now, A.P. Moller-Maersk and other liners such as Germany’s Hapag-Lloyd and China’s Cosco Group have no plans to divert ships away from Panama, but executives said it could happen if drought conditions persist.

“The low water levels at the Panama Canal are a clear example of the effects of climate change, which causes a ripple effect through the supply chain,” said a spokeswoman for Maersk, the world’s second-biggest liner in terms of capacity.

Vásquez Morales said extreme rain or drought conditions are more frequent occurrences than in the canal’s earlier years of operation. That issue presents a challenge for the Panama Canal Authority, which supplies water to about 2.5 million people, or about half of the country’s population.

The canal has hired the U.S. Army Corps of Engineers, the original canal builder, and earmarked $2 billion over the next 10 years to divert as many as four rivers into the waterway in addition to the three that already feed it.

“We would have done the same over a 25-year period if the weather stayed normal, but now it has to be done in 10 years,” Vásquez Morales said.

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