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Panama Canal drought disrupts trade

Panama Canal drought disrupts trade - Route Newsletter: December 2023

Panama has been experiencing the worst drought in 50 years, which is restricting capacity at the Panama Canal, an important route for cargo to/from Asia to the US East Coast. On an ordinary day, approximately 36-38 ships transit the Panama Canal, however, due to the restrictions caused by low water levels, they are only able to accommodate 22 ships per day.

In February 2024, they are further reducing the capacity to 18 ships per day. Congestion continues to mount on a daily basis, with a rising number of ships facing delays that are set to worsen over the next two months.

Carriers were facing three options on how to manage this issue:

  1. Continue on their normal routing via Panama Canal with transit time extended by 2-6 weeks depending on congestion.
  2. Divert vessels to go through the Suez Canal with transit time extended by 5 to 12 days depending on loading port.
  3. Divert vessels to go via the Cape of Good Hope taking the long way around Africa with at least an additional 3 weeks delay of transit time.

Currently, at least four container lines have abandoned shipping through the Red Sea and the Suez Canal because of the ongoing threat of attack from Houthi forces in northern Yemen. MSC, CMA CGM, Maersk and Hapag-Lloyd have all signaled that they will take the Cape of Good Hope route, avoiding the risk of missile strikes, drone attacks or hijackings near Bab el-Mandeb. The Houthi movement has threatened to attack any ship carrying cargo to Israel, and the militant group has the full width of the Red Sea in range off Hodeidah. OOCL has announced it is stopping service to Israel, and as a result OOCL appears to satisfy the Houthis’ political conditions for safe passage. Unlike its peers, OOCL has not announced plans to cease navigation through this strategic waterway. If it continues to operate using the Suez Canal, it will benefit from a 1,900 nautical mile distance savings relative to competitors who choose the Cape route. Spot prices on this core east-west trade lane have begun to spike, bringing a potential revenue opportunity for an industry with an otherwise bleak financial outlook this year. As well, many steamship lines have introduced emergency risk or war surcharges, to reflect steps taken to ensure crew, vessel and cargo safety.

As a result of this ongoing situation, an international coalition has been created to protect ships sailing through the Red Sea. Branded Operation Prosperity Guardian, this multinational security initiative includes Canada, the United States, the United Kingdom, Bahrain, France, Italy, Netherlands, Norway, Seychelles and Spain. Some of the countries will conduct joint patrols, while others provide intelligence support in the southern Red Sea and the Gulf of Aden. Analysts advise that continued attacks could precipitate a “global supply chain crisis”.

For more information, contact Debbie McGuire, Director – Freight Solutions.

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