March 08, 2024

Panama Canal Drought Issues Improved, But Not Eradicated

The Panama Canal, one the world’s largest shipping gateways is plagued by drought issues, adding another factor in the shipping market’s freight rate equation. In its latest weekly report, shipbroker Gibson said that “the Panama Canal stands as one of the world’s most vital intercontinental waterways, playing an important role in facilitating global trade, particularly along the routes connecting the Americas and Asia. However, in recent years, a combination of climate change and structural factors have posed significant challenges to the maritime trade passing through this essential artery”.

According to Gibson, “climate change has significantly impacted the water levels of Lake Gatun, one of the two natural lakes of the Panama Canal system. According to data from the Panama Canal Authority (ACP), the average water level for February currently stands at 80.3 feet. This figure sharply contrasts with the five-year moving average of 83.9 feet around this time of the year. While the difference may appear modest, it’s essential to note that over the past five years, the lowest average lake levels have typically been recorded in May, averaging at 82.5 feet. This trend paints a concerning picture for the future of transits through the Panama Canal, as any reduction in Gatun Lake’s levels directly impacts the number of allowed transits”.

The shipbroker commented that “a primary factor contributing to these low levels and drought conditions in Panama is attributed to the El Niño phenomenon, which commenced in Q3 of the previous year and is anticipated to persist until Q2 of the current year. The most recent record low was reached in 2016 at 78.3 feet, driven by an exceptionally rare consecutive El Niño occurrence. Notably, all four previous record lows in Gatun Lake levels coincided with El Niño events. Therefore, it’s plausible to suggest that only the onset of the monsoon season can alleviate the pressure on lake water levels. Current forecasts suggest that despite some rain over the next few weeks, persistent rainfall will not return until the April-June period. As the El Nino fades, a rapid La Nina phenomenon is forecast, which should allow the region to break the drought cycle by mid-2024”.

“While the ACP has been implementing limitations for most of the past and the current year, these measures have significantly impacted Panama Canal traffic and transit times. One of the most notable consequences of these actions has been the significant increase in the average winning bids for canal transits. During the first half of 2023, the average winning bid was approximately, $100,000 for tankers using the old locks but in Q4, the average winning bid jumped to just over $600,000, although so far in Q1 it has fallen to just over $200,000. That being said, it doesn’t mask the fact that transits have fallen and remain at reduced levels for now”, Gibson said.

The shipbroker concluded that “for crude oil, product and chemical tankers, transit restrictions are just another factor creating increased inefficiencies. During Q4 when auction prices and delays peaked, traders sought to supply increased volumes from East Asia, boosting tonne mile demand. Likewise, the US Gulf MR market was impacted by reduced ballasters arriving to replenish position lists. Looking ahead, whilst weather forecasts the situation may improve by mid-2024, climate scientists suggest that rainfall patterns are more likely to deviate from historical norms, leading to increased volatility and unpredictability in freight costs for those who rely on the waterway”.