Currently, there is an unprecedented drought in the area surrounding the Panama Canal. This is expected to be exasperated by the weather pattern El Niño, which brings warmer-than-average temperatures.
The Panama Canal serves as a vital artery for international trade, facilitating the movement of goods between the Atlantic and Pacific Oceans. However, the current drought conditions pose a considerable challenge to this critical trade route. With lower water levels, ships are required to reduce their draught or draft, which refers to the depth to which a vessel is submerged in water. As a result, vessels passing through the canal must carry less weight, limiting their overall capacity.
Container Lead Time
Container lead time is a measure of how many days a container takes from the time it gates into its origin port to when it gates out at its destination port. This is a key metric to monitor because if this is to drastically go up, it shows that carriers are favoring shipping around the Panama Canal. It can also point to operational bottlenecks in the canal because of the drought.
As the chart shows, there have not been substantial changes to container level lead time along the top trade lanes that utilize the Panama Canal, but this will continue to be monitored, especially if the draught maximum continues to decrease or there are additional fees implemented.
Schedule Reliability
Schedule reliability tracks the accuracy of the original vessel schedule and calculates the median deviation in days from that initial schedule. As supply chain disruptions occur, we expect the schedules to have higher deviations from initial schedules until the carriers have time to adjust future scheduling to respond.
Currently, the drought has not had a heavy impact on vessel schedules to the US East Coast, which is the main trade route that utilizes the Panama Canal. This shows that currently, vessels are continuing to take this route without unplanned bypasses, and while less volume moves through the canal, the vessels are continuing to move at a normal pace with no significant delays.
AIS Metric Data:
By utilizing vessel-transmitted information, project44 can track the number of vessels passing through the canal, the median TEU capacity, and the median draught level.
While there’s no current indication of shippers changing routes, as restrictions increase, there may be a shift towards alternative routes such as shipping to/from the US West Coast or longer routes to/from the East Coast to avoid the Panama Canal.
While we are not seeing fewer vessels, recent weeks have shown a decrease in median TEU capacity. TEU capacity measures the amount of TEUs (Twenty Equipment Units, which are 20’ containers) a vessel can possibly fit on it and it serves as an indicator of how much volume is moving through the canal and the size of the vessels that are travelling through. Based on the steady but slightly low number of vessels in recent weeks paired with the lower TEU capacity, it does appear there is less volume currently moving through the Panama Canal compared to most weeks in April and May.
Draught is the metric that is being restricted by the Panama Canal. This measures the depth (in meters) in which a vessel goes below the sea level. Currently, the maximum draught that is allowed to pass through the canal is 13.26m. As the chart shows, the median amount of draught that vessels is already consistently lower than this number, but it does still impact larger vessels and prevents them from fully utilizing their capacity. While most vessels that move through the canal currently are not impacted, further restrictions are expected to be implemented as the drought conditions worsen. This will cause an underutilization in capacity on the canal, which will either result in more vessels flowing through the canal or shippers exploring other routing options to optimize capacity.
Conclusion
These restrictions on draft levels have ripple effects on various industries and global supply chains. Reduced carrying capacity means that each vessel can transport fewer goods, leading to potential delays, increased shipping costs, and potential disruptions to supply chains worldwide. Industries relying on the Panama Canal for the transportation of raw materials, finished products, and commodities will likely experience significant challenges due to these limitations. Substantial lead time is added if vessels choose to avoid the Panama Canal and continue to ship to the same ports, so it is possible that we will see shippers opt to West Coast ports in the US over East Coast to help limit route of this route. This shift comes very shortly after labor issues on the West Coast have been tentatively resolved.
The impacts extend beyond just the maritime industry. Sectors heavily reliant on timely and efficient transportation, such as manufacturing, retail, and agriculture, may face difficulties in sourcing necessary inputs or exporting products. This situation could result in higher prices for consumers, inventory shortages, and potential economic setbacks.
Furthermore, the consequences of the drought are not limited to the immediate term. If the drought persists or intensifies, it could have long-lasting effects on global trade patterns. Companies may be forced to seek alternative routes or modes of transportation, potentially leading to shifts in supply chain strategies and increased costs.
Summary
- Unprecedented drought in the area surrounding the Panama Canal is expected to worsen due to El Niño, impacting air draft levels and overall capacity of vessels passing through.
- Container lead time and schedule reliability are key metrics to monitor for operational bottlenecks and impacts on shipping routes.
- Current data suggests that vessel schedules and volume through the Panama Canal are relatively unaffected for the main trade route to the US East Coast.
- While there hasn’t been a decrease in the number of vessels passing through, recent weeks have shown a decrease in median TEU capacity, indicating lower volume moving through the canal compared to April and May.
- The restrictions on draft levels have significant ripple effects on industries relying on the canal, potentially leading to delays, increased costs, disruptions to supply chains, higher prices for consumers, and inventory shortages, prompting exploration of alternative routes and transportation modes.
