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The Panama Canal is struggling to persuade traders in liquefied natural gas and food commodities such as grains to return to the trade route after they were forced out by a historic drought last year.
The 110-year-old canal, through which goods ranging from US LNG to Latin American crops have for decades reached the rest of the world, was forced to cap crossings last July because of a lack of rainfall needed to operate its locks. It hopes to return close to capacity in September after months of higher rainfall.
But only 13 LNG ships crossed the canal last month, fewer than half the number in July 2022, according to shipping analysis group Marine Traffic. Transits by dry bulk ships also dropped 35 per cent to 129 over the same period.
Officials in Panama have shrugged off the impact, as other types of ships, such as container vessels, used the waterway at normal levels and the canal’s income rose thanks to intense bidding for a limited number of slots.
But the development highlights how increasing supply chain disruptions, including those linked to climate change, threaten to reshape and drive up the cost of global trade.
It comes amid broader uncertainty over the future of the canal — an important source of income for the Central American nation that handles about 5 per cent of global maritime trade — as officials grapple with lower rainfall and local demands to protect drinking water supplies.
Last summer’s drought was blamed on the natural weather phenomenon El Niño, but rising temperatures are expected to continue to affect water supplies.
Roar Adland, head of research at shipbroker SSY, said the canal was simply “a less attractive option than in the past” for lower-value goods, as it struggled to offer the same cost and time savings as before.
Because the canal has forced all customers to pre-book slots since the drought, businesses faced “an extra cost and a loss of flexibility [compared with] the past when you could just show up and wait in a queue,” he added.
“This may mean structurally lower transits for the kind of low-value, time-insensitive cargoes typically transported by [dry bulk ships].”
At its peak, the canal allowed upwards of 36 vessels to cross per day, but a lack of rainfall forced restrictions that pushed the number down to 20 in January this year.
The cost of transiting the canal also rocketed, with one Japanese shipowner paying almost $4mn to skip the queue, the canal said in November. This meant that despite the drought, the canal’s revenue rose 15 per cent in the year to September 2023, with 3 per cent revenue growth forecast for the following fiscal year.
Panama Canal Authority director Ricaurte Vásquez said that while officials could not control the rain, the canal was focused on reliability. The authority will review prices next month.
“Continuing to raise prices indefinitely is not the way forward, and we are very careful to keep the Panama Canal as a relevant transit route for the whole world,” he said.
This month the canal had enabled earlier pre-booking, aiming to help LNG customers that generally use larger Neopanamax ships, he said.
“They have very precise windows, precise itineraries and we have addressed that with this whole reservation process,” he said.
Vásquez said LNG shipping patterns had also shifted regardless of the drought, with more US LNG going to European importers seeking to replace Russian gas supplies, rather than to Asia via the canal.
Shipbrokers, which link traders with shipowners, also said vessels would gradually return to the canal as supply chains readjusted to higher water levels.
But they said LNG traders had grown accustomed to using the route around Africa between the US east coast and Asia, which is much longer but recently more reliable than the canal.
“People have made their minds up that you might as well factor in the long time [and] just stay away from [the canal] if you can afford it,” said Jérémie Katz, an LNG broker at shipbroker Braemar. One client had recently had to find an alternative route after they could not book their desired transit slot, he added.
Bigger troubles may lie ahead. Climate change is increasing the likelihood of further droughts as global consumer demand and the need for shipping are only expected to grow.
Meanwhile, more LNG projects are set to come online in the US thanks to demand from developing Asia as well as Europe. For the canal, that could contribute to unmanageable demand.
“The Panama Canal would continue to be a valuable route,” said Alex Froley, LNG market analyst at consultancy ICIS. “But it’s likely that many ships will continue to have to take alternative routes.”
“It can only get worse in a way,” said Katz. “We have a lot of ships coming and a lot of volume coming. It can be a recipe for disaster.”
Panama’s new government, in office since July, is working on a long-term solution to the water crisis, said minister for canal affairs Jose Ramón Icaza.
A new Río Indio reservoir would provide enough water for the canal and consumers for the next 50 years, officials said. But convincing local residents to approve the mega project at a time of domestic political upheaval will not be easy.
During its five- to six-year building process, the canal would be likely to face further droughts, Icaza said. “All countries in the world are experiencing climate change,” he said. “The important thing is to send a message to our clients far and wide [that] we are working on a solution.”
| FT Rethink