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Panama Canal Facing Significant Challenges Due to Prolonged Drought

Panama Canal Turns from Trade Catalyst to Chokepoint

August 24, 2023 3:28 PM PDT
Elida Moreno
Reuters

The Panama Canal faces significant challenges due to a prolonged drought, which has lowered the water level, causing congestion and delays. This congestion poses a looming threat for shippers due to the slowdowns caused by the reduction in the number of vessels able to pass through the canal, coupled with lighter loads.

Schedule reliability of ships from Asia to the North American east coast through the Panama Canal has deteriorated in recent months. The Panama Canal Authority plans to extend water restrictions for another ten months, which aims to preserve water for the upcoming rainy season but could worsen the bottleneck of ships if not reserved in advance.

The Panama Canal remains a critical trade link for U.S. shippers, with about 73% of Panama Canal traffic involving U.S. commodities. Delays are causing some shippers to explore alternative routes, potentially favoring the Suez Canal, which is cheaper but takes longer. The extra cost of using the Panama Canal may no longer justify the time benefits. This situation is prompting shippers to develop contingency plans to avoid Panama Canal delays, shifting resources accordingly. This situation is complicated by a naturally occurring El Nino climate pattern contributing to the drought.

We asked Legacy’s VP of Brokerage & Enterprise Sales, Aaron Zofkie, for insight.

 

“If this continues, it could result in increased costs due to cargo rerouting, delays, port volatility, and potential supply chain changes. While the Suez Canal provides an alternative for Europe-Asia trade, longer transit times to the US East Coast may increase costs for importers. Long-term drought in the PC region could shift business to other routes, reducing overall capacity from Asia to the US East Coast. Either way, we’re closely monitoring this situation as we approach peak season.”

More details can be found in the original article by Elida Moreno on Reuters.

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