Panama Canal imposes shipping restrictions amid severe drought

The new measures will probably result in delays and higher costs for goods that are shipped through the canal

A ship navigates through the Miraflores locks, at the Panama Canal. The canal, which connects the Atlantic and Pacific oceans, has been struggling with water supply shortages due to lower rainfall. AFPShow less

A severe drought affecting the Panama Canal is forcing container vessels to lighten their loads and pay higher fees, with further increases in the cost of shipping cargo through the canal expected this summer.

The largest vessels will have to reduce their drafts – how low they sit in the water – by carrying less or cutting the weight of their cargoes as of May 24, followed by another decrease that kicks in on May 29. Some major ocean carriers have also announced new fees for goods shipped on the route as of June 1 in response to the canal restrictions.

These measures are likely to result in delays and higher costs for goods that are shipped through the canal, which typically sees 5 per cent of annual global maritime trade pass through its locks.

The canal, which connects the Atlantic and Pacific oceans, has been struggling with water supply shortages since before a 2016 expansion that allowed much larger ships to pass through. It has a protocol of transit fees and weight restrictions that kick in as drought conditions worsen.

Rainfall was less than 50 per cent of normal from February to April near the canal and the lakes that feed it. That amount of rain ties with 2019, which saw the lowest level in two decades, according to Everstream Analytics. And there’s no sign of the rainy season that typically starts ahead of summer.

Water levels in Lake Gatun, the largest of two lakes that feed the canal, are projected to hit historic lows by July, restricting ships’ drafts and how much cargo they can carry.

Starting May 24, Neo-Panamax vessels – the largest ships that transit the waterway – will be allowed drafts of up to 44.5 feet (13.56 metres), down from an already restricted 45 feet, according to canal spokesman Octavio Colindres.

The draft limit will decline again to 44 feet on May 30. While that seems like a minor change, it could translate to 40 per cent less cargo on some containerships. A 50-foot draft is considered normal. During the droughts of 2019 and 2016, the draft limit went as low as 43 feet.

At least four ocean carriers have announced weight limits or imposed container fees between $300 and $500 per box effective June 1 in response to the canal’s measures. More carriers are likely to follow suit as restrictions ramp up.

“The lower-than-usual water levels in the Gatun Lake are causing severe draft restrictions on vessels transiting the Panama Canal,” ocean carrier Hapag-Lloyd said in an April 30 customer advisory. The notice said shippers from East Asia to North America will have to pay a surcharge on all cargo as of June 1.

Maintainance works are being carried out at Panama Canal's Pedro Miguel Locks in Paraiso, near Panama City. AFP

Among the Neo-Panamax users of the Panama Canal in April, container vessels made up 45 per cent of traffic, followed by carriers of liquefied petroleum gas, dry bulk and liquefied natural gas.

LNG carriers, which are highly dependent on the canal, are not as affected by the draft changes because the vessels have fewer draft restrictions than those carrying heavier industrial goods or commodities. But any bottlenecks are a cause for worry considering that US LNG export expansions are due to come online in the next five years.

The 44-foot draft restrictions are set to reduce space for most shippers on Neo-Panamax by 40 per cent, according to Nathan Strang, director of ocean freight at Flexport, a freight forwarder. That means it will take more ships to move the same amount of goods, potentially increasing queuing times for vessels waiting to get through.

Some shippers will have to split heavier cargo into two containers instead of one, Mr Strang said, with vessels carrying heavier commodities affected more. These measures could cost importers and retailers using the route an extra $1,500 per container, he said.

“If you ship two containers a week at 12 tonnes each at roughly $3,000 apiece then you’ll need to ship three containers. So your price per shipment went from $6,000 to $9,000,” Mr Strang said. And for shippers who typically move 25 tons per container, they’d now need three or four boxes. “That’s a much bigger hit and those shippers simply won’t use the canal,” he said.

Asia-to-US cargo can take alternative routes through the Suez Canal. Or they can use ports in southern California, which would involve loading containers on to lorries or trains bound for Midwest and East Coast population centres. Strang said some shippers are already considering those options.

“The pattern continues to feature below-normal rainfall across Panama in the foreseeable future,” said Jon Davis, chief meteorologist at Everstream Analytics. “As a result, we expect the lake levels to decrease and the impact on shipping over the canal to get worse.”