Panama drought and its impact on bulk shipping
The Panama Canal, an 80-kilometre-long, man-made waterway connecting the Atlantic with Pacific Ocean, is experiencing a severe drought with water levels at record lows not seen since 2016. The passage has been in operation since 1914 and is a key maritime transit point for global trade with 13,000 vessels transiting the canal in 2022. Container ships and dry bulk carriers are the top two segments that transit the canal.
When a vessel transits the canal, around 50 million gallons of water is thrown out of the lake which needs to be replenished, but with less rainfall in the past few months, this is unlikely to happen. The authorities are working on possible solutions – reducing the cargo level, helping ships maintain draft levels and measures to reduce the amount of water lost from the lake.
To preserve fresh water in the Gatun lake, which is also the only fresh water source for Panama country, the Panama Canal authority imposed draft restrictions from 24 May at 45.5 feet, which was later revised to 44.0 feet for Neo-Panamax locks with water levels not improving and forecast to remain at five-year lows until October.
The Panama Canal Authority has also restricted the number of vessels transiting through the Panamax locks from the usual 23 slots to 14 slots – 10 large vessels and 4 regulars with premiums on heavier and larger ships. The imposed restrictions have increased the vessel backlog to a high of 162 vessels on 8 August, with the average waiting time rising to over 20 days. As the holiday season approaches, the movement of merchandise will soon pick-up, potentially leading to further congestion.
The current draft restriction of 44 feet is expected to remain so for the next 10 months. The draft restriction will increase the number of vessel trips required to move the same amount of cargo, squeezing fleet efficiency. Another solution is moving on alternative routes, such as the Suez Canal and Cape of Good Hope, which will again increase transit time and hurt fleet efficiency.
All three situations – waiting at the Panama Canal, reducing the cargo level and moving on alternate routes – will tighten vessel availability, leading to increased freight rates. Below we share the opinion of Drewry’s research team about the impact of Panama Canal restrictions on various sectors:
Minimal effect on crude transits
Among crude tankers, only Panamax and Handysize vessels can transit the route. Of a fleet of 2,279 vessels in July 2023, only 118 vessels or 5.1% of the fleet is eligible to transit the area. Moreover, between 2020 and 2022, approximately 6.4 million tonnes of crude oil was shipped through the canal as per official reports, accounting for a mere 3.4% of the total trade from the southbound Atlantic towards the Pacific and less than 1.1% of the trade on the northbound route. Compared to the average of 2,130 million tonnes of crude seaborne trade between 2020 and 2022, the drought in the Panama Canal is likely to have a negligible effect on the crude tanker demand as well as the global oil demand.
However, an indirect impact of the drought could be port congestions on alternative routes in case larger vessels would have to adopt different routes in the long run. This would also cause longer waiting times at the ports due to higher traffic, especially towards Asia.
US exports of products onboard MR tankers to be impacted
The Panama Canal is a critical channel for about 40% of global cargo, with the US representing a significant portion of its traffic. Around 83.9% of the US’s seaborne refined product exports (which includes diesel, gasoline, naphtha and jet fuel) was destined for Latin America, of which 29.3% was heading to the Pacific Coast of Latin America in 2022 via the Panama Canal.
The Port of Houston in US Gulf is a pivotal gateway for trade between North and Latin America through the Panama Canal. When it comes to Asian destinations, ships have several choices: they can go via the Panama Canal, the Suez Canal, or around the southern tip of Africa. Thus, the ongoing disruption will impact fuel exports to the Pacific Coast of Latin America, including Chile, Peru, Ecuador and El Salvador, which are developing countries with high growth prospects for jet fuel and petrochemicals.
However, the global refined products trade will remain unaffected as it will only disrupt the trade to the Pacific Coast of Latin America. However, the ripple effect caused by more ships diverting their route to the Suez Canal could squeeze vessel availability and impact freight rates.
As larger vessels cannot transit the Panama Canal, the impact will be felt the most in MR trades from the US to Latin America. The total number of vessels that transited the canal saw an early peak in July 2023 but the number fell in August 2023 which could be due to either shipowners avoiding the Panama transit or seasonality. However, the El Niño expected in the coming months and early 2024 could further prolong the supply-demand imbalance in America, further exacerbating the situation.
Panama Canal drought and LNG shipping
The Panama Canal is a critical strategic pass for LNG shipping, supporting the transportation of LNG from the USGC to Asian waters. On average, an LNGC takes about 25 days to sail from the USGC to Japan via the Panama Canal, compared with 38 days through the Suez Canal. The cost of shipping via the Panama Canal to Asia is also less when compared to the same via the Suez or Cape of Good Hope.
In 2021, around 540 LNGCs passed through the Panama Canal. However, this number fell by about 30% in 2022, recording 374 transits. This reduced shipment was attributed to the shift in trading patterns amid the Russia-Ukraine war – which accentuated the prominence of US LNG shipments in Europe, curtailing the movement of LNGCs between the Panama Canal and the Pacific basin.
The overall impact of the Panama Canal drought on LNG shipping has been limited so far as a reduced number of LNGCs are sailing between America and Asia, following a similar trading pattern seen in 2022.
The LNGC position as of 12 September 2023. The impact on LNG trade due to Panama Canal restrictions is lower because of higher US-Europe trade. US cargoes to Asia still use the Panama route but are increasingly taking the Suez Canal for the ballast journey.
However, some vessels reaching Asian waters via the Panama Canal face longer waiting times due to increased congestion which can turn severe in the coming months, likely due to less or no improvement in the Gatun Lake (which provides water to move ships through the locks) amid insufficient rainfall in the near term. In that case, the situation can worsen with evolved El Niño. Under such circumstances, the Panama Canal Authority will introduce more stringent measures, significantly reducing the permissible number of vessels sailing through the canal. This will likely increase the competition among shipping sectors, including Chemical, Container, Crude, Dry Bulk, LPG and LNG. With the drought worsening, the competition for passage, duration of voyage and shipping costs will rise manifolds, increasing the feasibility of other routes via the Suez Canal or Cape of Good Hope.
The situation for LNG shipping will change with the advancing of Australian strikes
Although the impact of the Panama Canal drought has been minimal on LNG shipping, the situation can worsen if the Australian LNG strikes materialise. A reduction in LNG shipments from Australia will force Asian buyers to opt for spot purchases, resulting in shipments from farther destinations. However, restricted movement in the Panama Canal will entail more extended diversion of routes, creating tighter LNG shipping with the transit from America to Asia facing the heat.
The vague future of the Panama Canal threatens prospects for LNG projects
The rising concern about the unclear future of the Panama Canal amid climate change can impact the LNG market, hampering the prospects for LNG liquefaction projects, especially on North America’s Pacific Coastline, which could serve Asia’s growing demand in future (increasing regasification capacity in Asia). The deterioration of LNG shipping around the Panama Canal will also discourage investor confidence; as a result, we can see a deceleration in projects. The proposed projects on America’s west coast will likely face significant headwinds.
VLGCs taking longer routes bodes well for shipping rate outlook
The Panama Canal is a vital link in LPG shipping, providing the shortest path for the major US-Asia LPG and NGL trades, and congestion here, especially in winter, is known to create major inefficiencies for VLGC trade, leading to higher shipping rates and commodity prices.
The current restrictions, build-up of vessels waiting to transit the canal and much higher canal transit auction fees (above $2 million) are prompting owners to use the Suez Canal, especially on the ballast legs amid a favourable US-Asia price arbitrage and recovery in the Asian petchem sector.
While there are signs of weakening Asian demand, the restrictions at the Panama Canal have steadied the market with shipping rates still strengthening. We expect the squeeze in vessel supply created by vessels taking longer routes to bode well for the sector despite concerns related to the Asian petchem sector.
Panama congestion impacts dry bulk US-China and inter-Latin America trade
The charter rates in the dry bulk market improved for the sub-Capesize vessels in August amid increased congestion at the Panama Canal. The 1-year TC rates expanded in August after declining for three consecutive months as the additional waiting time squeezed supply.
With the water level dropping in the canal due to the El Niño-led drought and restrictions being imposed on the number of vessels passing through the canal in a day, the tonnage waiting at anchorage has expanded significantly. Port days in August 2022 ranged from 0.3 day to 8.0 days, which doubled a year later in August 2023 to a maximum of 16 days.
The number of vessels waiting in the Panama region rose substantially in August 2023 due to a significant backlog caused by the restrictions. The maximum time a vessel took to cross the passage was 10 days on average in August 2023, up from 3 days during the same period last year. Some vessels also took 16 days for the transit.
The Panama Canal is a crucial choke point for various trade routes in the dry bulk market. While ample trade flows within Latin America through the canal (such as coal from Colombia to Chile and Peru), ships on long-haul routes like USG-China also use this passage.
As the impact of the El Niño is likely to intensify in 2H23 and restrictions will remain in place, voyage costs are likely to rise. With the export season for US soybean kicking in next month, trade on the USG-China route might be affected. Additionally, importing metal concentrates like lithium and copper from Chile and Peru by the EU can become more costly as voyage rates increase in 2H23. This might impact trade patterns, leading to higher trade of metal concentrates between Argentina and the EU.