Update November 2023
Booking Slots Decrease as Drought Continues
As of Wednesday, November 1, The Panama Canal Authority (ACP) has announced further cuts to the maximum number of ships allowed to pass through the canal daily. The ACP will reduce booking slots from 31 to 25 per day starting on Friday, November 3. The number will be further reduced over the next three months to 18 slots per day from the start of February 2024.
The decision comes as water levels in Gatun Lake, a crucial water source for the canal, have reached unprecedented lows for this time of year. As a result of these cuts, global shipping rates are set to increase, affecting the transport of goods, including liquefied gas. Contract rates for Very Large Gas Carriers (VLGC) have already spiked following the news, with one route from the Arabian Gulf to Japan leaping by more than $25,000 to $110,000 a day.
What’s happening in the Panama Canal 2023?
The Panama Canal, a crucial 50-mile waterway that six percent of all global trade passes through, faced major traffic jams this month due to a historic drought. In August 2023, 160 ships were stuck waiting to pass through the canal, carrying everything from auto parts, Barbie dolls, and diabetes test kits, according to Reuters. Some ships were delayed by as much as 21 days. As of this week, the bottleneck has lessened.
Due to the drought, the Panama Canal Authority (ACP) updated booking conditions for ships for the Panamax locks (the older locks of the Panama Canal used by smaller ships). During the drought, 32 vessels will be permitted to cross, down from 36 usually. Weight limits have also been adjusted, forcing some ships to unload and transport cargo to the other side of the canal via train—increasing transportation costs. The ACP recently stated they expect to maintain these restrictions for at least ten more months.
The ACP also implemented “Condition 3” until September 2, 2023. Under Condition 3, the total number of booking slots is limited to 14. This includes ten slots for large vessels and four slots for regular vessels. According to the ACP, Condition 3 was implemented to “alleviate congestion for ships already in queue to transit or in route, who were unable to secure reservations beforehand.”
How long will the Panama Canal drought last?
Demand for the canal remains high, leading to increased wait times. Companies should expect the bottleneck to be around for a while as the current situation at the waterway may become the new normal due to El Niño and climate change.
El Niño, a naturally occurring climate pattern that takes place every two to seven years, is contributing to the historic drought. Panama currently faces one of the driest years in over 140 years, with rainfall 30-50% below normal. This is a significant problem for the Panama Canal, which requires vast amounts of water—between .55 to 125 million gallons per ship, depending on size—to move ships through the canal.
Higher air temperatures due to climate change have also led to increased evaporation of Lake Gatun, which provides fresh water to move ships through the Panama Canal. As climate change continues to make unusual events more normal, events like this will continue to happen again and again.
Which countries are impacted by the Panama Canal drought?
The main countries affected by the drought are China, Japan, South Korea, and the US, as the Panama Canal facilitates 46% of container movement from northeastern Asia to the US. The current situation in the Panama Canal has already caused China-US spot shipping prices to rise by as much as 36%.
These aren’t the only countries that have been impacted, though. Restrictions in the Panama Canal have affected over 170 countries and virtually every good: soybeans and liquified natural gas from the United States, copper and fresh cherries from Chile, and beef from Brazil.
The impact of the bottleneck goes beyond the canal itself, causing delays in container shipping and inventory replenishment along various shipping routes. It could impact the pricing of imported goods and lead to missed business for many during the upcoming holiday season.
Are there alternatives to the Panama Canal?
Before the Panama Canal was built, boats had to travel for nearly 22 days to sail from the Atlantic to the Pacific Ocean. Now, crossing the Panama Canal takes only 8-10 hours. Thanks to the cost and time savings, the Panama Canal is the only choice for many companies. Because of this, there are few alternatives.
Ship owners and cargo owners can either wait in line, which may last as long as 21 days, or shift to alternate routes, adding thousands of miles to their journey and significantly increasing costs. If they choose to wait in line, they must be prepared for the new weight restrictions and the limited number of boats allowed to pass per day.
Other waterways have also been impacted by climate change
The Panama Canal is just the latest example of how climate change can impact logistics in waterways. Extreme weather events, including droughts, are on the rise. Last year, Resilinc saw a 36% year-over-year increase in severe weather events. Currently, in the US, the Mississippi and Ohio River water levels are falling at an alarming rate due to heat and lack of rainfall. Last fall, when the Mississippi River closed sections due to low water levels, it caused $20 billion in economic damage. In Germany, the Rhine River faces a historic low this year, preventing many vessels from moving cargo.
If any of the five major waterways are disrupted, it could significantly impact the global supply chain. These five waterways include the Suez Canal, the Panama Canal, the Strait of Malacca, the Strait of Hormuz, and the Babel-Mandeb. Take the 2021 Suez Canal blockage, for example, in which one of the world’s largest container ships ran aground due to high winds, costing global trade between $6 billion to $10 billion a week.
How can companies prepare for future waterway disruptions?
There is no solution for adding more water to Lake Gatun unless there is adequate rainfall (in 2023 and into the foreseeable future)—and El Niño is here to stay until February 2024. With the rise in climate risk, the canal (and all waterways) could be increasingly high risk. So, what can supply chain managers do?
First, managers must identify potential choke points in their supply chains. Mapping the supply chain with Resilinc’s Multi-Tier Mapping can give businesses crucial sub-tier visibility into their supply chain. Our Multi-Tier Mapping solution deploys breakthrough proactive mitigation strategies that enable companies to recover swiftly, reducing freight expedites, preventing lines from going down, and optimizing working capital.
Then, managers should invest in a 24/7 supply chain monitoring system. Resilinc’s EventWatchAI monitors 50 supply chain event types, including climate-related disruptions. By scanning over 104 million sources and sites worldwide, it can identify supply chain disruptions in over 100 languages and 200 countries to help users respond to and mitigate potential threats more effectively.
Next, managers must run what-if scenarios and develop business continuity plans (BCP) for climate change-related disruptions. For example, in the case of the Panama Canal, ships had to redirect to unload, in some cases, 45% of their cargo to traverse the canal. That has a huge delivery time and potential total cost implication. Resilinc’s EventWatchAI can also run robust What-If Scenario Models to help businesses build critical infrastructure and increase business continuity. Users can run risk analytics per any selected region of the world and get full analytics delivered in seconds.
Another lever that supply chain managers need to consider is how, when, and where they deploy inventory. Managers should pay attention to shifting demand patterns to ensure they have the appropriate level of inventory to match customer demand. What is the lesson to be learned from the 2023 Panama Canal bottleneck? Start preparing for supply chain disruptions today. Schedule a demo today.