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Panama Canal Braces for Severe Drought Impact: Nearly Half of Vessel Traffic to be Slashed

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Panama Canal Faces Severe Drought Impact: Vessel Traffic to be Drastically Reduced

The Panama Canal Authority is taking urgent measures to address the escalating drought crisis, which has severely affected water levels in the locks of this vital global trade conduit. As a result, vessel traffic through the canal will be significantly reduced. The authority plans to decrease the number of daily transits from 29 to 25 ships, with further reductions expected in the coming weeks, ultimately reaching 18 ships per day by February. This represents a reduction of 40%-50% from full capacity. Under normal conditions, the canal accommodates 34-36 vessels daily.

Trade Flow Disruptions and Delays

The drought and subsequent vessel reductions are already causing major disruptions in trade flow, impacting various sectors. According to data from CNBC Supply Chain providers, shipping containers destined for the East Coast are experiencing delays, with the Port of Charleston being particularly affected. The Panama Canal's popularity for East Coast trade stems from its faster transit time compared to alternative routes. While the Suez Canal takes 41 days for ocean cargo to reach Miami from Shenzhen, China, the Panama Canal only requires 35 days.

Increased Wait Times and Alternative Plans

The reduced transit schedule has led to increased wait times for cargo on both the Atlantic and Pacific sides of the canal. Wait times have risen by an average of 30% on the Atlantic side and reached 2.2 days on the Pacific side, according to MarineTraffic. As a result, shippers sending cargo to U.S. East Coast and West Coast ports are compelled to make alternative plans. Alan Baer, CEO of OL USA, highlights the additional costs and time associated with rerouting through the Suez Canal but emphasizes the certainty it provides in terms of delivery schedules.

Implications for Global Commerce

The Panama Canal plays a critical role in global commerce, transporting a significant portion of goods across various sectors. Jon Davis, chief meteorologist at Everstream Analytics, notes that commodities like coal and liquefied natural gas (LNG) are impacted, particularly as the U.S. exports LNG to Asia. The delay in canal transit also affects agricultural products shipped to and from the U.S., causing disruptions in supply chains. Container ships have priority in crossing the canal, while wet bulk and dry bulk vessels are most affected by the vessel reductions.

Water Conservation Efforts and Weight Requirements

Panama Canal Authority Administrator Ricaurte Vásquez acknowledges the severity of the drought, describing it as the worst El Nino recorded in recent history. The authority is striving to maintain the current water levels to prevent vessels from further lightening their loads. Currently, vessels traverse the canal at 40% lighter weight. To meet weight requirements, some container ships are unloading their cargo and transporting it across Panama by rail or road to be loaded onto vessels on the other side. The canal will continue to prioritize weight requirements, even if it necessitates further reductions in transits.

Water Usage and Recovery Systems

Moving a vessel through one of the locks requires approximately 50 million gallons of fresh water. The Neo-Panamax locks have a water recovery system that can reclaim 60% of the water used during a vessel's transit, whereas the Panamax locks lack this water-recapturing capability. This discrepancy contributes to higher water loss in the Panamax lanes. Given that 40% of all U.S. container traffic passes through the Panama Canal annually, accounting for approximately $270 billion in cargo, the drought's impact on trade is significant. In conclusion, the severe drought conditions in the Panama Canal have necessitated drastic reductions in vessel traffic, leading to disruptions in trade flow and delays. The implications extend to various sectors, including energy, agriculture, and container shipping. The Panama Canal Authority is implementing water conservation measures and striving to maintain weight requirements for vessels. As the situation evolves, it will be crucial to monitor the canal's water levels and the resulting impact on global trade.

Implications of Panama Canal Drought for New Business Ventures

The escalating drought crisis at the Panama Canal presents a complex scenario for new business formations. The drastic reduction in vessel traffic, down to 18 ships per day by February from the usual 34-36, implies a significant disruption in global trade flow. This could potentially affect the supply chains of new businesses, particularly those relying on goods transported through the canal.

Trade Delays and Alternative Routes

The drought has already caused delays in shipping containers destined for the East Coast, compelling shippers to consider alternative routes. For instance, the Suez Canal, despite a longer transit time, offers a certainty in delivery schedules. New businesses must factor in these potential delays and additional costs in their strategic planning.
Impact on Various Sectors
The Panama Canal's role in global commerce can't be overstated. It transports a significant portion of goods across various sectors, including energy and agriculture. The current crisis affects these sectors, disrupting supply chains and causing potential delays in the delivery of goods. New businesses, especially those in these sectors, must be prepared to navigate these challenges.

Water Conservation and Vessel Weight Requirements

The Panama Canal Authority's efforts to conserve water and maintain vessel weight requirements underscore the severity of the situation. New businesses must consider the potential for further transit reductions and the implications for their supply chains.

Monitoring the Situation

Given the significant impact of the drought on trade, new businesses must closely monitor the situation. Understanding the evolving dynamics of the Panama Canal's water levels and vessel traffic can inform strategic decisions and help businesses adapt to these challenging circumstances. In essence, the Panama Canal drought crisis presents both challenges and opportunities for new businesses, highlighting the importance of adaptability and strategic planning in navigating global trade disruptions.
Story First Published at: https://www.cnbc.com/2023/11/03/panama-canal-drought-hits-new-crisis-level-amid-severe-el-nino.html
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