Despite some reports that the drought conditions affecting the Panama Canal is not a cause for concern, trading activity is being impacted, particularly within South America where shipments from the US Gulf Coast to the West Coast South America are heavily dependent on the canal.
Having just come back from a month in Ecuador, it was a surprise that gasoline shortages were occurring on the weekends with no gasoline available at all in towns such as Cuenca, Tena, and other smaller yet sizeable cities. More curious was that the problem was not due to a shortage of gasoline, but rather the lack of fuel additives that were delayed in delivery due to the transportation backlog at the Panama Canal. For reference, the Panama Canal is 50 miles long and is supplied with water by local rainfall, meaning that a lack of precipitation forces canal authorities to reduce the amount of water usage by slowing the flow of traffic.
The Weight of a Wait
The Panama Canal connects the Atlantic Ocean with the Pacific Ocean and is the dividing point that separates North America and South America. Canal locks at each end of the canal lift ships up to Gatun Lake, an artificial freshwater lake 26 meters (85 ft) above sea level. An average of 200 million liters (52 million US gallons) of fresh water are used in a single passing of a ship and this fresh water comes from the Chagres River and Lake Alajuela. This global waterway handles an estimated 500 million tons of goods annually or about 5pc of world trade.
Unfortunately, the recent drought in Panama is the worst since the turn of the century. While Panama sees droughts periodically, this year’s drought is the worst, especially during the months of March through August. In fact, this represents the lowest rainfall totals seen during this time frame since the year 2000. Adding to this problem is the fact that the rainy season for Panama is from May to December, so the “low water” levels are expected to continue for another 10 months. The net impact is that the lower water levels are slowing the transportation of ships through the canal and reducing the draft (the vertical distance between the waterline and the bottom of the hull); which can reduce the number of containers that a ship can carry by as much as 40%.
About 70pc of the traffic through the canal is related to trade with the USA. And other regions such as Europe are also affected as banana and shrimp exports (which have very limited shelf lives) originate from countries such as Ecuador, Colombia, and Peru and alternative routes are not feasible due to extended transportation times.
Time is Money
If the situation continues, there will be expensive freight costs ahead of the approaching Christmas season.
“Everstream Analytics recently reported that as of mid-August, there were about 135 ships waiting at both ends of the canal, up from 29 the month before.”
The waiting ships are typically gas tankers or bulk carriers. And as the waiting period continues to grow, the bottleneck will impact service reliability and cause shipment delays across the United States and Europe. Shipping companies are paying millions to skip long wait times and secure transit through the Panama Canal. An unnamed shipper paid $2.4 million to win a slot auction held by canal authorities for the week of August 20th, as recently mentioned by gas shipping firm Avance Gas. When combined with regular toll fees, the total cost reached nearly $3 million to cross the canal. Other companies are facing high fees too. The Wall Street Journal reported on August 18th that shipping giant Maersk had to pay $900,000 on top of regular $400,000 toll charges for each of its two vessels unable to obtain canal crossing slots.
On average, PE shipments from the US gulf coast to West Coast South America (WCSA) over the past 19 months were estimated at 75 ktons / month, about 7% to total US PE exports. Shipment delays are already reported by traders with delivery delays of 30% longer and in some cases with additonal fees. Once again, we are experiencing supply chain disruptions similar to what we saw just one year ago due to Covid related worker shortages and congestion at the Houston ports. Should the drought conditions continue for the next several months, PE exports may be further impacted with additional delays and higher fees. Finally, American consumers may experience higher costs of Asian imports delivered to the US east coast, particularly during the peak Christmas shopping season. In the meantime, take an extra gas can with you when traveling to Ecuador!
For additional information on delayed shipments and increased costs related to the Panama Canal please see this news article.
This article has been created by Argus polymer expert Terry Glass using data and insight from Argus Polyethylene Outlook. Request a free trial or more information.