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Global Category Intelligence

Q2 2025

Panama Canal Water Levels Impacting Shipping

The Panama Canal, a vital waterway in the Western Hemisphere, connects the Atlantic and Pacific Oceans, facilitating 6-7% of global seaborne trade. It's a linchpin of Panama's economy, contributing approximately 20% of its GDP. However, an extended drought is now jeopardizing this critical artery.

Panama is grappling with one of its driest rainy seasons in decades. This extraordinary weather pattern, driven by the warming effects of El Nino, could have profound impacts on the global supply chain and the world economy. Water levels at Gatun Lake, the primary artificial lake feeding the canal system, have consistently been below 80 feet, approaching record lows, since this summer.

The Autoridad del Canal de Panamá (ACP) took steps to mitigate this situation at the outset of the 2023 dry season in December 2022, implementing various conservation measures. The hope was that the rainy season would compensate for the deficits. Unfortunately, as of October 2023, Panama had experienced 41% less rainfall than usual, the lowest recorded since 1950. With less than a month left until the rainy season's end, Panama faces the dry season with minimal water reserves.

The prolonged drought within the Canal watershed has forced the ACP to reduce transit capacity to roughly 32 vessels per day since July 30, 2023. This involves managing available rainfall over the watershed to maintain Gatun Lake. On September 29, 2023, the ACP announced an additional reduction in capacity, effective November 1, 2023. The reduction of booking slots intensifies from November 3 to November 6, 2023, to only 24, with further reductions to 22 in December 2023 and 20 in January 2024. From February 1, 2024, booking slots will be limited to 18 per day until further notice.

POTENTIAL IMPACTS

The repercussions of potential disruptions in the canal's operation will have extensive effects, ranging from navigation constraints to the impact on shipping schedules, increased freight costs, and environmental consequences. The continuing drought will significantly affect global trade.

Navigation Restrictions: Ships with deeper drafts may be compelled to reduce their cargo load, leading to delays and increased expenses. Vessels may be required to take longer and less direct routes to reach their destinations, increasing transit times and costs. Some shippers might need to split heavier cargo into two containers, raising prices for importers and retailers. Vessels carrying heavier commodities are affected even more.

Impact on Shipping Schedules: Drought-related restrictions and closures in the Panama Canal can disrupt shipping company schedules, leading to a cascading impact on global supply chains. Delays in transiting the canal can result in congestion at ports on both the Atlantic and Pacific sides, affecting the movement of goods and commodities. These delays can create bottlenecks in the supply chain, affecting the timely movement of goods. Manufacturers, retailers, and distributors may experience disruptions in their production and distribution schedules, impacting inventory levels and causing supply chain inefficiencies.

Higher Freight Costs: Extended queues at the waterway tend to lead to higher freight costs, as ship operators may charge more or opt for longer routes. Longer transit times, diversions, and delays can increase transportation costs for shipping companies, potentially leading to higher costs for imported and exported goods. Two main alternatives are available for shippers if Panama becomes overly congested: transport goods from Asia to the East Coast through the Suez Canal or go directly from Asia to ports in southern California. The latter option requires loading containers onto trucks or trains bound for Midwest and East Coast population centers, either way, leading to increased costs.

MANAGING THE RISK

Businesses operating within the global supply chain must consider the heightened risk of disruptions during El Nino events. Effective risk management and contingency planning are essential to mitigate the impact of weather-related disruptions. Consider the following strategies:

Diversify Shipping Routes: Explore alternative shipping routes such as the Suez Canal, the Cape of Good Hope, or the Northern Sea Route. Diversifying your shipping routes can reduce dependence on a single canal, helping maintain supply chain continuity.

Optimize Inventory Management: Maintain strategic safety stock levels to buffer against potential delays in transit. This can help bridge supply gaps caused by disruptions and ensure the ability to meet customer demand.

Utilize Multiple Ports: Diversify port options by using multiple ports for loading and unloading. This can provide flexibility if one port experiences congestion due to canal restrictions.

Collaborate with Logistics Partners: Work closely with logistics and shipping partners to stay updated on canal conditions and any changes in transit schedules. Effective communication can help adapt quickly to disruptions.

Evaluate Intermodal Transportation: Consider intermodal transportation options that combine multiple modes of transportation, such as rail and trucking, to bypass canal-related disruptions and move goods to their destinations.

Analyze Supplier and Vendor Networks: Assess your supplier and vendor networks to identify potential vulnerabilities and alternative sourcing options. Diversifying your supplier base can help mitigate supply chain risks.

Develop Redundancies: Introduce redundancy into your supply chain, including secondary suppliers, transportation providers, and alternative production facilities. This redundancy can act as a safety net during disruptions.

Conduct Regular Supply Chain Risk Assessments: Periodically assess and update your supply chain risk management strategies. As conditions change, your risk profile may evolve, and adjustments may be necessary.

By implementing these strategies, your organization can better prepare to manage potential risks associated with supply chain disruptions due to canal restrictions or similar events. Building resilience and flexibility into your supply chain is essential for maintaining operations and meeting customer demands, even during challenging times.

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