Water scarcity in the Panama Canal

It’s been a long time since we saw a drought like this in the Central American region around Panama. There was less rain than usual in the dry season, and the heavy rains normally seen in July failed to materialise. The outlook for the rest of 2023 is also uncertain. This lack of water affects, among other things, the water level of the Panama Canal, one of the most important waterways in global container shipping. In Central America, it connects the Atlantic with the Pacific. Almost half the container ships that travel from north-east Asia to the east coast of the USA normally select this route.

The level of the canal is so low that the authorities responsible have reduced the maximum draught by several metres, making it impossible for particularly large container vessels or those with heavy loads to pass through. Stricter limits on the number of ships allowed to pass through the canal on a daily basis have also been introduced.

As a result, there have been considerable backlogs, with around 160 ships altogether temporarily waiting for passage. Even though the situation has since eased off slightly, things are unlikely to return to normal for some time. As there is no end in sight to the drought, the authorities are planning to extend the restrictive measures until 2024.

Limited effect on supply chains

The effects of a non-navigable shipping channel became clear in 2021 when the container ship “Ever Given” blocked the Suez Canal, with supply chains severely affected as a result.

According to several experts, however, the water shortage in the Panama Canal is unlikely to result in a similar scenario, as container ships, which are particularly important for global supply chains, are routed through the canal more quickly and other ships are allowed to pass through with waiting times. In addition, only about two percent of Germany's seaward trade goes to the Pacific coast of North, Central and South America.

However, price rises for affected goods cannot be ruled out, as delays and additional charges increase transport costs. For example, bulk carriers, which transport coal, grain or other bulk cargo, were particularly affected by the unexpected delay.

Canals as transport bottlenecks

In addition to the Panama Canal, the aforementioned Suez Canal is one of the most important waterways in the world for merchant shipping. But there are other important shortcuts to the world’s oceans: the Strait of Gibraltar, the Strait of Hormuz between the Persian Gulf and the Gulf of Oman, the Kiel Canal, and the Strait of Malacca between Malaysia and Indonesia. Delays at these locations mean that the whole of world trade suffers — after all, around 90 percent of global freight is transported by ship. And there are hardly any reasonable alternative sea routes: most detours are extremely lengthy and expensive.
According to experts, climate change will further exacerbate the problems in these bottlenecks: storms and floods are likely to increase, as are droughts and low water levels. Additionally, rising sea levels also have an impact on the functionality of port facilities and seaport access roads.

The consequences? Insurance premiums are rising, as are transport costs — and the transportation process is taking longer, or breaking down altogether. This can result in food products becoming inedible, or production processes having to be interrupted due to missing components.