Drought Conditions Worsen in the Panama Canal

Continuing Drought Increases the Panama Canal Shipping Regulation

The Panama Canal serves as a vital route for importing goods into the United States via East Coast ports. However, persistent drought conditions in the region have prompted sanctions on the canal’s operations, leading to restrictions on the number of vessels that can pass through daily. In August, these restrictions reduced the daily vessel allowance from 36 to 32. An additional restriction added on November 1 has further reduced this number to 25 vessels daily. This is an over 30% reduction in vessel capacity. Thankfully, this additional restriction went into effect after holiday freight had been shipped, so volumes in the next few months should cyclically decrease, but the remaining volume will experience additional delays.

Vessel Congestion Surrounds the Canal

Since the capacity reduction was announced, there has been a noticeable buildup of container vessels waiting on both sides of the canal for their turn to pass through. The chart below depicts the number of vessels awaiting passage as of November 1st, 2023.

Extended Lead Time from China to the US East Coast

Initially, the canal restrictions did not have an immediate impact on the overall container lead time. However, as vessels contend with increased wait times to cross the canal, we are now observing a trickle-down effect on the overall lead time. Since early August, the median lead time for shipments from China to the US East Coast has surged by over four days, signifying almost a 10% increase in the time it takes for goods to travel from China to the United States’ East Coast. In recent weeks, this has started to go down, indicating that high volumes attributed to the holiday season played a role in the increase.

While this uptick is concerning, it is important to note that despite the issues plaguing the Panama Canal, the overall container lead time for China to the US East Coast is lower now than it was at this time in 2022 and 2021. Rather than facing a series of obstacles such as lockdowns and port congestion, the restrictions on the Panama Canal are the only notable obstacle being faced, allowing overall performance to still improve over the past two years. It is, however, preventing numbers from returning to pre-COVID and early COVID levels.

Outlook and Recommendations

The Panama Canal continues to present challenges for global supply chains, with no relief in sight. Upcoming months will have lower volume as holiday shipments have been delivered, but the additional restrictions will add obstacles to vessels that are moving through the canal. Expect lead times for the canal to remain high, and as drought conditions continue, additional restrictions will most likely follow.

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