Drought in Panamá Disrupts Global Trade, Exposing Climate Change Impact

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According to sources, unprecedented drought conditions in Panamá have triggered significant delays and stringent trade restrictions along vital global shipping routes, underscoring the formidable threats of climate change to international commerce.

Panama’s typically lush landscape has been parched by record-breaking temperatures and one of the driest years on record. As a result, authorities have curtailed canal crossings and prohibited heavily laden vessels from using the Panama Canal.

This unusual restriction, occurring during the usually rainy May to December season, has led major shipping companies, including Hapag-Lloyd, to impose surcharges on routes reliant on the canal. While decreased demand has mitigated some effects, vessels with lighter loads still face over two-week delays.

“The Panama Canal is a wildcard in the shipping market,” says Peter Sand of Xeneta. “Shippers must manage risks as congestion rises.”

The canal handles over 3% of global trade by volume, including crucial items like US liquid gas and South American fruits. More than a quarter of Pacific container trade passes through it.

These restrictions, increasing throughout the year, are set to continue into 2024 due to persistent drought, impacting peak holiday demand. Lars Ostergaard Nielsen of Maersk notes the challenges in adapting to surges in demand.

The Panama Canal relies on freshwater, needing over 50 million gallons per ship. The second driest first half of the year in a century has strained its reservoirs, leading to a state of emergency in May.

The Panama Canal Authority imposed a 44-foot depth limit in May and reduced daily crossings to 32 by July. This resulted in a backlog of 264 ships, causing longer wait times.

Costs have risen, with a 36% increase in sending a 40-foot container from China to the US Gulf Coast since June, says Xeneta.

The impacts are felt across shipping, particularly in the liquified natural gas sector. Michael Aldwell of Kuehne+Nagel suggests potential rerouting via the Suez Canal, adding a week to journeys.

Food deliveries from South America to Europe are also hit, affecting 77% of container shipments. This compounds concerns about food inflation.

Panama is grappling with El Niño effects, set to worsen with climate change. Canal authorities have long-term plans, including a new reservoir, to secure water supply until 2075.

Despite a $5 billion 2016 expansion for larger ships, revenue loss of up to $200 million is predicted this year. Over 2 million Panamanians rely on the watershed for drinking water.

Preserving surrounding forests, acting as water storage, is crucial. In the short term, the shipping industry braces for frequent disruptions, highlighting the absence of a clear solution.

As Panama addresses financial transparency, it also strives for environmental leadership, joining Bhutan and Suriname as one of three carbon-negative nations.

According to shippingwatch.com, there is now a waiting time of up to 20 days to get through the shortcut. According to another tanker company, this is not a bad thing, as it can increase ton-mile demand in the tanker market.

The Panama Canal’s struggle with drought-induced trade disruptions serves as a stark reminder of the far-reaching consequences of environmental instability on global commerce. As climate change reshapes realities, the world watches Panama’s efforts to navigate these challenges.

Source: The Financial Times, ACP, TheShippingWatch.com

Source The Financial TImes ACP ShippingWatch.com

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