Ongoing Panama Canal drought continues to impact throughput and transit times

The ongoing drought conditions at the Panama Canal continue to significantly hamper operational throughput on various fronts.

At the end of October, data issued by the Panama Canal Authority (ACP) put the current situation into perspective, while also rolling out new operational measures with roughly 50 days (at that time) left in the “rainy season.”

“The month of October is the driest since the earliest registers, 73 years ago,” said ACP. “The drought caused by the El Niño phenomenon continues to impact the Panama Canal's reservoir system and, as a result, water availability has been reduced.”   

What’s more, ACP explained that in 2023, there has been 41% less rain than usual, which it said has lowered Gatun Lake to what it called unprecedented levels for this time of year. And it noted that this presents significant challenges, for the Canals, with less than two months remaining until the completion of rainy season.

“The Canal and the country face the challenge of the upcoming dry season with a minimum water reserve that must guarantee supply for more than 50% of the population and, at the same time, maintain the operations of the interoceanic waterway,” said ACP.

Taking steps to address these challenges, ACP has rolled out reservation slots, with the objective of maintaining a competitive draft from November to February, including: November 3-11, 25 reservation slots; November 8-30, 24 reservation slots; December 1-31, 20 reservation slots; January 1-31, 20 reservation slots; and as of February 1, 2024, 18 reservation slots.

ACP said these measures are being implemented in order to preserve fresh water resources and also to ensure the safety of transit operations like using water reutilization basins in the Neopanamax locks and also cross-filling in the Panamax locks.

The reduction in the number of available reservation slots is likely to hinder East Coast U.S. trade levels, as traveling through the Panama Canal, from Shenzen, China, takes 35 days, whereas the Suez Canal is 41 days, according to a CNBC report. And the report also pointed out that 40% of all U.S. container traffic travels through the Panama Canal every year, which moves around $270 billion in cargo per year.

Addressing the myriad supply chain and logistics challenges this situation has created, Pawan Joshi, EVP of products & strategy, for E2open, an Austin, Texas-based connected supply chain software platform services provider, told LM that it has moved on from being unpredictable, stating there is a high chance that the slowdown will be extended for another ten months pending getting to the next rainy season in hopes that the water levels in the Gatun Lake go back up. For shippers, he said, this is now really about how they deal with the situation.

“For goods that will still flow through the Panama Canal, the shippers will need to order them earlier than normal,” said Joshi. “In these cases, they will have to deal with the variability around forecasting even earlier than they had been. Due to forecasting so far in advance, [shippers] might find themselves lacking information about trending colors, consumer demand patterns and seasonal weather, all of which hold significant importance when placing orders. With longer lead times, insight into future buying behavior can be less accurate, leaving retailers with more margin for error to overbuy or underbuy, potentially resulting in a loss of revenue or overstock of warehouses.” 

As for other options shippers are considering, Joshi explained that some of it is being split between movement via the Suez Canal adding to the traffic along those lanes, as well as a slightly longer sailing time, which he said may again contribute to some forecast variability, but not much. The West coast ports, again adding to the traffic there and then moving to the East via road and rail for adding to additional logistics coordination and cost. If there is a silver-lining due to the slow macro-economic conditions, it is that the lower demand has not made this a burning problem that it could have if we were in a high-demand environment.

Note that we have been considering movements from Asia to North America, specifically the East Coast ports. There is trade flow in the reverse direction that is equally important to the U.S. as well as Asia. The canal slowdown will also have an impact on these ‘reverse’ flows, but again the macro-economic slow-down may dampen the effect.”

Research recently issued by Chicago-based project44 noted that the ACP’s recently announced reduction in reservation slots represents a 30% decline from its original capacity, adding that they were preceded by a reduction from 36 reservation slots per day to 32 in August.

“Thankfully, this additional restriction [in late October] went into effect after holiday freight had been shipped, so volumes in the next few months should cyclically decrease, but the remaining volume will experience additional delays,” said project44. “Since the capacity reduction was announced, there has been a noticeable buildup of container vessels waiting on both sides of the canal for their turn to pass through.”

While the reduction in vessel restrictions did not initially have an immediate impact on overall container lead time, project44 pointed out that there has subsequently been a trickle-down effect on overall lead time as vessels contend with increased wait times to cross the canal.

“Since early August, the median lead time for shipments from China to the US East Coast has surged by over four days, signifying almost a 10% increase in the time it takes for goods to travel from China to the United States' East Coast,” said project44. “In recent weeks, this has started to go down, indicating that high volumes attributed to the holiday season played a role in the increase.”

Even with this 10% increase, the company said that, amid these challenges, lead times, for China to the U.S. East Coast, are lower than they were in 2021 and 2022.

“The Panama Canal continues to present challenges for global supply chains, with no relief in sight,” said project44. “Upcoming months will have lower volume as holiday shipments have been delivered, but the additional restrictions will add obstacles to vessels that are moving through the canal. Expect lead times for the canal to remain high, and as drought conditions continue, additional restrictions will most likely follow.”

Siva Narayanan, Global Logistics and Customer Service Director, for chemical products shipper Solvay America, and Chair of the National Industrial Transportation League’s Ocean Committee, told LM that the impact of the Canal’s current conditions on container shipping are not as huge as the impact on bulk shipping.

“The impact on container shipping is less because container ships have scheduled appointments to make the Panama Canal crossing,” he said. “So, they are making those crossings and as such, you're not seeing the delays on ships. But what you are seeing is that the ocean carriers are lifting less cargo from Asia or from North America, going through the Canal, which means you might see your cargo getting rolled at the origin ports because the ships are going to carry lighter cargo going through the Canal or the other ships have to be lighter.”

From a transit time perspective, Narayanan said there is very little impact but he noted that the ability of cargo to be loaded on a ship could be impacted, especially for heavier cargo. And on the bulk side of shipping, he said the majority of carriers do not have appointments, as they make appointments on arrival.

“So, those that are making appointments on arrival find themselves to be anchoring off either coast, the Atlantic or the Pacific coast, longer than they usually used to anchor to get to go through,” he said. There are definitely extended delays on that type of vessel and that type of cargo carried on those vessels. Those delays could be anywhere from one to two weeks.”