The Panama Canal, the centuries-old engineering marvel that revolutionized global trade, is shut down by drought, leaving ship operators worldwide with a painful decision.

They can wait in line for days or weeks as low water levels limit the number of ships that pass through the 50-mile waterway, carrying cars, consumer goods, fruit and fuel. You can pay millions of dollars to move forward in the queue if a ship with a booked reservation fails. Or they can take out an entire continent and send their ships around the southern tips of Africa and South America or through the busy Suez Canal.

Every election increases costs, at a time when governments around the world are struggling to contain inflation. And the shortage will worsen in the coming months as Panama enters the annual dry season, which typically begins in December and lasts until April or May.

“We are facing reduced capacity, more trips, higher costs and a less efficient supply chain,” said Paul Snell, chief executive of British American Shipping, whose company moves about 20,000 to 40,000 containers a year. “Everyone has to get creative and decide what they want to do.”

Gatun Lake, which forms a key section of the canal system and supplies its locks with fresh water, has seen little rain this year as El Niño triggered a devastating drought. As a result, the Panama Canal Authority has reduced the number of ships allowed through from an average of 36 to 38 per day in the past to an expected 18 in February, half the normal amount. The agency also reduced the draft — how low a ship can sit in the water — meaning some ships will have to carry less cargo. Even if it rains again on time next year, traffic congestion and draft restrictions will continue well into 2024.

Many companies, particularly those transporting fuel from the U.S. Gulf Coast to Asia, were willing to make additional payments to ensure their ships made it through. The authority holds auctions when a ship with a reservation is canceled, and this year slots have been snapped up for up to $4 million. A year ago, the average auction price was around $173,000, according to Waypoint Port Services. “It’s just astronomically out of control,” said Francisco Torné, one of the company’s country managers for Panama.

The money for an auctioned slot is in addition to the canal’s usual transit fees, which can be up to $1 million depending on the size of the ship. Companies spent $230 million on auctions this year through Nov. 20.

Other shippers opt for detours that can require thousands of miles and more than a week at sea – sometimes through dangerous waters. The liquefied natural gas-laden Pyxis Pioneer headed through the windswept Strait of Magellan near the southernmost point of South America in November, followed by a Chilean cargo of gasoline products bound for New York and an oil tanker bound for the U.S. Gulf from southern Mexico. Ships from the Gulf Coast or the eastern U.S. that may have traveled to Asia via the canal are now heading in the opposite direction, bypassing the Cape of Good Hope in South Africa or the Suez Canal in Egypt.

Each route adds 10 days to three weeks to the journey, depending on how fast the ship is traveling. According to Avance Gas Holding Ltd. There are currently around 50 very large gas carriers on return journeys to the US via the Suez Canal or the Cape of Good Hope, up from 10 ships in July.

“I sleep better at night knowing I can get around the Cape or the Suez and not have to wait in line, especially when things get really desperate and you pay $4 million,” said James Allen, vice president of liquefied natural gas -Chartering and Operations at Cheniere Energy Inc., speaking at the Wood Mackenzie Gas and LNG Conference in London.

Shipping companies try to pass on the additional costs to their customers. Hapag-Lloyd AG, Mediterranean Shipping Co. and Maersk have all announced new Panama-related surcharges in recent months. ING Research economist Inga Fechner said the impact on commodity and consumer prices had been dampened by sluggish global demand. But the higher shipping costs will have a trickle-down effect in the long run that will ultimately affect consumers.

“It will be more expensive and finding alternative routes will increase costs and perhaps end up putting pressure on prices,” she said.

Oil and gas ships, container ships carrying all types of cargo, and grain carriers dominate traffic through the canal. The U.S. is a major exporter of grains — soybeans, corn, wheat — to Asia, much of which typically leaves the Gulf Coast and enters via Panama. But low water levels on the Mississippi have already prompted some American farmers to load their grain on trains to the Pacific Northwest and then transport it to Asia. Enrico Paglia, research manager at shipping services provider Banchero Costa, said total U.S. grain exports to Asia fell 26% this year compared to 2022 and grain flows through the canal fell 37%.

If the canal shortage worsens, other major grain exporters such as Brazil, Ukraine and Russia could likely step in to fill the gap for U.S. products in Asia, Paglia said. Due to the canal’s tightened restrictions, trade in Brazilian grain has already become more active, he said. “It is possible that U.S. grain exporters will be most affected by the disruption to trade flows,” Paglia said.

British American’s Snell said the clogged canal had forced his company to stop shipping freshly cut ferns from Seattle to Rotterdam’s flower markets. For other products from the West Coast of the United States, the company found workarounds by transporting nuts and dried fruits by rail from California to Houston or Norfolk, Virginia, and then transferring them to container ships to Europe. However, with fresh fruit, additional transit time is an issue, particularly from countries like Chile and Peru, which ship via the canal to the eastern United States and Europe. Chile’s cherry season will peak in January and grapes, plums, nectarines and blueberries may struggle to reach the market, said Ignacio Caballero, marketing director of Frutas de Chile, a trade group that represents Chilean fruit growers.

“Given we will be at our peak of the season at the height of the problem in the canal, this affects us significantly,” he said.

Nikolay Pargov, chief revenue officer at container shipping platform Transporeon, said container ship operators are already booking alternative routes to bypass the canal for 2024. Container ships’ rigid routes – which require some shipping companies to account for thousands of customers for each ship – make it harder to reroute them at the last minute.

“Shippers have to accept the longer transit times and their financing,” he said.

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Source : fortune.com

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