The Panama Canal: Yet Another Supply Chain Problem

Rainfall Affects How Many Ships Go Through the Panama Canal

The Panama Canal drought shows that supply chains need optionality more than ever to deal with disruptions that affect global trade.

Authorities imposed restrictions on how many ships go through the Panama Canal in July, The Wall Street Journal reported. Limiting traffic left 200 ships waiting to transit the canal. Months earlier, ships were limited to drafts of 44 feet instead of 50, forcing them to carry less cargo.

While nobody expects trade between East and West to halt, enterprises must seriously examine the need for alternative sourcing. True, most supply chains start or pass through China at some point. However, options include Central and South America, the Caribbean, Africa, even the European Union.

Panama Canal Drought 2023 – Not the First

The current El Niño-triggered drought is not the first. It is the worst in a century, and canal authorities say such disruptions are becoming more frequent. El Niño weather events are characterized by unusually warm water in the equatorial Pacific. While El Niños can increase rainfall across the southern United States, they limit rainfall in Panama, normally the fifth-wettest country on the planet.

Canal administrators placed restrictions on passing ships in 1957, 1961, 1965, 1977, 1982 and 1998, with the last three associated with El Niño events. Research published in Water Alternatives indicates that an El Niño-triggered dry spell from 2015-2016 left water levels in Lake Gatun and Lake Alajuela, which feed the canal, at their lowest on record. This again limited the drafts of ships transiting the canal.

The Effects of Current Panama Canal Shipping Restrictions

The current traffic jam has caused the most supply chain problems for bulk cargo and gas carriers, which book on short notice. Containerships, the canal’s biggest users, book crossings up to a year in advance and run on fixed schedules. Those that don’t must pay multiple times the average tolls. As The Wall Street Journal reported, some ships have had trouble finding spots. Others have rerouted vessels through the Suez Canal or around the Cape of Good Hope in Africa to serve customers in Japan, South Korea and China.

However, most canal shipments (72.5% in 2021) serve the United States. China was second at 22.1%.

“Waiting time is one thing, but it’s also the uncertainty,” Øystein Kalleklev, chief executive for Norway-based Avance Gas, told The WSJ. “It’s risky to fix a ship with no firm itinerary because you can lose the contract if the wait is too long.”

Fixing a Massive Supply Chain Problem: Panama Canal Shipping Alternatives

Nobody expects the Panama Canal to go away. And canal authorities are working to add water capacity for future operations.

The wider channel opened in 2016 included water-saving basins. Just two years ago, canal authorities contracted with the U.S. Army Corps of Engineers to evaluate the possibility of a new water management system. That study is scheduled for completion next year, according to Engineering News-Record.

However, as the Panama Canal imposes shipping restrictions to cope with the worsening drought, supply chain executives need to develop alternative sources to deal with the certainty of future disruptions. As Tompkins Ventures has noted before, India, South and Central America and the Caribbean, Africa, ASEAN countries in Southeast Asia – even the EU, some cases – could provide optionality for parts, raw materials and/or finished goods.

The alternate routes mentioned above also allow for optionality in the face of potentially higher shipping rates.

Containerships booking passage from the ASEAN region and parts of Southern China could transit the Suez. However, as CNBC noted, that alternative adds a week or two of transit time from Northern China and Asia.

Want to find out more? I would love to discuss adding optionality to your sourcing and supply chains.