Exporters’ costs rise amid ongoing Panama Canal drought

Ships are waiting for their turn to pass near the Panama Canal on Sep. 10 (local). [Photo by AFP-Yonhap]

South Korean exporters shipping their containers to the New York-New Jersey port are closely monitoring maritime freight rates, as maritime freight rates passing the United States’ East Coast have been on the rise again since April, largely due to the ongoing drought in the Panama Canal.

According to the Panama Canal Authority on Tuesday, the water level in Gatun Lake was 79.65 feet (24.28 meters) as of Sunday. The water level is 6.8 percent lower than the five-year average for September of 85.5 feet and is causing disruptions in the canal’s operations.

The Panama Canal operates by using the water from Gatun Lake to move ships. When a vessel enters, the lock gates are closed, and the water level is adjusted by adding or removing freshwater to match the level of the next lock. This process allows ships to transit through the Panama Canal, which consists of a total of six locks, each at different elevations.

Due to the persistent drought, the canal authority has controlled the volume of transportation through the canal since July, reducing the daily transit capacity to around 32 ships from the previous 36 ships., Since June, the Panama Canal Authority has also imposed a lower limit of 44 feet on ship drafts, or the distance between the waterline and the deepest point of the boat, compared to the earlier 50 feet. Limiting drafts reduces the ships’ cargo capacity, since heavier cargo leads to deeper drafts.

Alternative maritime routes to replace the Panama Canal are limited and add about a month to shipping schedules. The only viable alternative to the canal on the Pacific-U.S. East Coast route is the route through the Strait of Magellan.

However, this route is significantly longer. Assuming a ship speed of 10 knots, transportation through the Strait of Magellan takes about 33 days longer than using the Panama Canal.

The Panama Canal drought has already sparked a freight rate hike for shipping from Shanghai to the U.S. East Coast, hitting $2,869 per forty-foot equivalent unit (FEU) as of Friday. This represents a 43 percent increase compared to $2,010 per FEU at the end of March.

The issues from the drought could significantly worsen next year as Panama experiences its dry season between December and April and typically sees the lowest water level in Gatun Lake in April and May. Even if the lake’s water level rises by the end of this year, sustained drought conditions are expected to lead to logistics bottlenecks in April and May next year.

The Panamanian government is working on a project to improve the canal’s water resources to address the underlying issue. However, the project‘s implementation will take a considerable amount of time, as no details have been finalized to date.

Some suggest, however, that the impact of the recent Panama Canal drought crisis may not be as severe as initially anticipated because the economic slowdown in the United States has prompted retailers there to reduce their inventories and reduced the trade volume through the canal. For instance, major U.S. department store chain Nordstrom Inc. saw its inventory decrease by 18 percent in June year-on-year.

“Transits through the Panama Canal have slightly improved recently due to a decrease in consumer goods volumes being exported from China to the United States,” a logistics industry insider explained. ”Given forecasts that the slowdown in imports into the United States could continue until mid-2024, the risks associated with the Panama Canal could potentially be alleviated on the condition that the drought does not worsen,” the industry insider added.