Last summer, reacting to a severe drought that was dramatically reducing its water levels, the Panama Canal Authority (PCA) placed impactful restrictions on the number, and capacity, of vessels routed through the Canal’s locks.
The resulting delays of up to three weeks for ships without reservations and record prices at auctions of last-minute slots compelled some shippers impose surcharges to cover their increased costs, as other vessels were diverted to the Suez Canal or traveling an additional 3,000 miles around South America through the Strait of Magellan.
In normal times, the Canal handles an average of 36 vessels per day. This was reduced to about 32 in June and by December it shrank to 22 with the PCA announcing that this month the number of transits would be cut even further.
But in mid-December, the PCA said it would delay some of the operational reductions it had planned for after the first of this year because of a slight rise in the water level of the Gatun Lake reservoir when November proved to be wetter than forecast.
That was welcome news for the nervous shipping industry, which found that diverting Panama-bound ships bound from Asia to Europe to the Suez Canal was a hardly desirable option with attacks by terrorist insurgents in the Red Sea becoming almost a weekly, if not daily, occurrence.
According to analysts, in December alone, carriers had diverted vessels carrying more than $80 billion worth of cargo away from the Red Sea because of the threat of attack.
That same month, the PCA said it would restore two slots starting in mid-January for a total of 22 daily transits with six at its Neopanamax locks and 16 at its Panamax locks. The Authority had planned to cut the number of slots to 20 in January and 18 this month.
Besides more rainfall feeding the Gatun Lake reservoir in November, the authority implemented steps including water recycling in an effort to accommodate more vessels in each lock and decrease the amount of water lost during each transit.
The steps were taken because the Canal Zone suffered through the driest October on record – rainfall was an eyebrow-raising 41 percent below average – with 2023 ranking as the second driest year recorded in the history of the canal watershed.
By mid-December, the waiting time for vessels had declined with the average for the previous 30 days down to 5.4 days northbound and 7.9 days southbound for all vessels without a reservation.
There were 23 vessels without reservations waiting as of December 15 and another 41 with slots booked in the queue.
To deal with the problem long term, the PCA has been working with the U.S. Army Corps of Engineers to craft a plan to bring a new supply of water from the canal watershed to fill the locks. But the effort is in its earliest stages and, say observers, could take years to reach fruition.
In late November, the Authority said that ships with dry bulk and LNG cargoes were the most affected because of the reduction in transits and draft limits. Containerships, however, proved to be better able to cope with the restrictions as 70 percent of boxships needing to transit the Canal were able to proceed with the current 44-foot draft limitation.
The biggest challenge has been for vessels without advance reservations.
That number rose to 72 by the end of November. The largest group of those ships are ‘supers’ – vessels with a beam greater than 91 feet. Their average wait time was almost 10 days, up from around three days at the beginning of the month. The canal’s online system showed ‘supers’ waiting up to 23 days, and vessels with a beam less than 91 feet, up to 15 days.
To try to reduce the backlog, on November 27 the PCA began auctioning an additional slot for the Panamax locks two days prior to transit.
That coveted slot was limited to ‘supers’ and regular vessels that have been waiting for at least 10 days before the auction and do not have a booking slot. The authority reported the initial bid was set at $55,000 in addition to the normal tariff, but carriers had been driving bids to record levels. Another slot was reportedly auctioned for $3.95 million to accommodate an LPG carrier scheduled to make a northbound transit from the Pacific to the Atlantic.
Rich Appell, CEO/managing director the Odin Marine Group, a multinational ship brokerage and logistics services provider, said his Connecticut-based company annually books about 1,000 transits, primarily for chemical tankers, through the Panama Canal, and so far, has needed to reroute only four ships.
“Vessels going to Asia would have to be delayed 25 days before it makes sense to go through the Straits of Magellan,” he said. But to keep getting vessels through the canal, “we have paid as high as $750,000 in auctions. It still makes sense rather than going around.”
In all, industry analyst Bloomberg calculated that shipping companies had paid approximately $235 million above transit fees to obtain slots.
The Authority also implemented additional modifications to the reservation system. It limited future bookings for containerships to 14 days while also providing greater flexibility for ‘supers’ and Neopanamax vessels.
In addition to holding auctions for transit slots, the PCA is utilizing storage basins to recycle 60 percent of the water used to fill the new Neopanamax locks and taking steps to reuse water from one lock chamber to another.
The practice, known as cross-filling, is said to save the equivalent of six transits a day.
With normal rainfall, ships with a draft of up to 50 feet are allowed to transit. The drought, though, caused several reductions. On June 13, 2023, the maximum draft was set at approximately 44 feet and on June 25, it was reduced again by 6 inches.
The lengthy delays for vessels waiting to transit the canal has reduced the number of vessels available for shipping around the globe, pushing freight rates higher, according to an analysis by the U.S. Energy Information Administration.
The drop in water levels in the canal has also spurred some ocean carriers to begin imposing surcharges on their container cargoes.
On June 1, the world’s third-largest ocean carrier, CMA CGM, imposed a surcharge of $300 per container for shipments between northeastern Asia and ports on the American East and Gulf Coasts and northern Brazil. “These restrictions, combined with an increase in the canal tariff implemented earlier in the year, are taking a severe toll on CMA CGM’s operations,” the company said at the time.
One month later, Germany-based Hapag-Lloyd followed suit and began charging a $260-per-container ‘Panama Canal Charge.’
So far, Maersk said in a statement to customers that it had avoided delays through “advance planning” as it was “closely collaborating with the PCA to secure the necessary transit slots.
By scheduling transits between 30 and 14 days before arrival, depending on vessel size and direction, we aim to safeguard our transit schedule.”
The Danish carrier also said it would work with the Panama Canal Railway (PCR), which operates trains between Balboa and Cristobal – a move to activate “an alternative container transport option between the Atlantic and Pacific gateways.”
Several other ocean carriers and logistics companies such as Kuehne + Nagel have begun unloading their container cargoes at the Pacific entrance to the Canal for transfer across the isthmus via the rail landbridge that links the Railway’s Pacific and Atlantic intermodal terminals.
The 47-mile trip across the Isthmus that connects the container terminals takes about an hour and a half. The PCR, which operates double-stack railcars and has a design capacity of about two million containers per year, has the capacity to run 32 trains a day.
The drought situation has been further complicated by protests over plans by First Quantum, a Canadian mining company, to expand its Cobra Panama copper mine into virgin rainforest. The protests that have drawn as many as 250,000 Panamanians who have blocked major thoroughfares and the access roads to the intermodal container terminals at either end of the canal.
Israel-based logistics service provider Freightos, which provides shipment management for more than 13,000 importers and exporters, has said that the greatest impact of the Canal’s drought conditions “has been on dry bulk carriers while Maersk and other container lines have seen only minor disruptions because the canal gives them priority and the companies usually book transit slots well in advance.”
Nevertheless, PCA statistics for November showed an increasingly negative impact on Canal transits by containerships.
With the total number of transits for the month declining 22 percent from the month before, the impact was being felt not only at the older and smaller Panamax locks, but also at the larger Neopanamax locks that were opened in 2016 to accommodate a newer generation of containerships and LPG and LNG carriers.
According to the PCA, transits at the Neopanamax locks fell 28 percent in November versus October, while transits through the Panamax locks dropped 19 percent.
At the same time, the number of grain-carrying bulk carriers transiting the Canal’s locks dropped from 164 in October to 87 in November.