Panama is currently experiencing a historic drought with some of the driest conditions near the Panama Canal. Drought is not only a major ecological and economic concern but also poses a pressing problem for the global supply chain. Approximately 6% of the world’s maritime trade travels through the Panama Canal and a drought of this scale means that several products are at risk of being negatively impacted. Agriculture products, such as grains and oilseeds, are a major user of the canal, as are coffee, bananas and more.
To further put it into perspective, nearly 15,000 vessels with 520 million tons of cargo passed through the canal last year meaning that any disruption in the waterway will certainly be felt across supply chains worldwide.
Typically, February to April marks the start of the rainy season which replenishes lake levels in the interior sections of the country. This spring, however, rainfall in the area near the canal was 50% less than normal levels. Receiving an appropriate amount of rainfall is critical as the water from Lake Alajuela and Lake Gatun is what “lifts” vessels across the country. The “lift” is around 85 feet above sea level and covers 12 locks from the Pacific to the Caribbean. Additionally, every vessel that moves through the canal requires approximately 52 million gallons of water.
This isn’t the first time Panama has experienced extreme drought. In 2019, a drought continued throughout the spring and into the summer causing major impacts on shipping. As a result, the Panama Canal Authority put out more than 1 dozen advisories to try and keep goods moving. However, the solution to keep vessels passing through the Canal required authorities to limit the weight of the vessels. Inevitably, a ripple effect was sent throughout the global supply chain as less weight means fewer goods can be transported. All in all, the 2019 drought negatively impacted the vessel flow in the canal for nearly a year.
Rainfall in 2023 and 2019 are tied for the lowest in this century so far, therefore the Canal Authority is yet again imposing restrictions on container ships. In fact, in January, the Canal implemented water-saving measures to prepare for the dry season. Come April, the Authority adjusted the draft level for Neopanamax vessels to 47.5 feet instead of 50 feet. Now, starting in July, newer restrictions will limit vessels to a depth limit of 43.5 feet.
The good news is that rainfall is improving in the region as June saw rainfall levels closer to normal. However, this doesn’t mean supply chain issues will be solved or improve immediately. Looking ahead, El Nino conditions are expected through the remainder of 2023 and into 2024. El Nino is known as a period of warmer-than-normal ocean temperatures in the central and eastern sections of the equatorial Pacific, which are expected to exacerbate drought.
El Nino in years past featured a strong correlation to drier than normal conditions. The phenomenon has historically been a rainfall suppressor in Panama as well as much of Central America. Therefore, below-normal rainfall accumulation is likely to continue across the key lakes that feed the Panama Canal through the remainder of 2023 and into 2024.
It’s safe to say that looking into late summer and early fall, we can expect more restrictions on vessel traffic and disruptions in the supply chain at the key choke point of the Panama Canal. While the weather may be uncontrollable, businesses can take control of their responses and start to prepare.
Shippers that rely heavily on the Panama Canal should continue to monitor the situation closely and pay attention to adjustments in draft levels for vessels traveling through. Shippers may also consider rerouting vessels to the West Coast ports and then transfer cargo to rail and ground freight routes to the rest of the country. Preparation is key to weathering this drought.