The lack of water is drying up the Panama Canal, one of the arteries of world trade. With the simultaneous crisis shaking the Red Sea, the planet's two main maritime transport routes are clogged. Under these conditions it is as if the engine of the world economy was about to seize or run out of revolutions.
El Niño is to blame (understood as an adverse climate phenomenon, of course). Without going into details, the increase in temperature in the Pacific, together with the effect of increased emissions in the atmosphere, alters meteorological parameters to the point of drastically reducing rainfall in Panama. In 2023, according to local authorities, it rained 30% less compared to the historical average. It was the second driest year in the history of the Panama Canal watershed. Only 50% of the water that will be needed to meet the expected demand for this year has been stored.
The canal, which was expanded in 2016, needs water to function. When it was built in 1914, given the orographic difficulties, as it was impossible to excavate in a straight line, it was decided to install a system of locks to lift boats and one of the largest artificial lakes in the world, Gatún, was created. This artificial reservoir currently has levels that are around 80 feet above sea level, when it should be 88. The Gatún has never fallen so low. The capacity of the canal's reservoirs is 1,857 cubic hectometres, but currently only about 900 are stored. This water deficit is problematic, because it endangers the transit of ships with greater draft and because passage through the locks consumes a lot of water resources. Every time a ship uses this system to rise towards the lake, the equivalent of 70 Olympic swimming pools of water is consumed.
As a consequence, the Panama Canal authority has had to reduce vessel traffic. One of the first consequences is the formation of a traffic jam of ships at the entrance to the canal, especially on the Pacific side.
For shipping companies, organizing road transport to cover the land distance between the two oceans and thus avoid the crossing – about 80 kilometers – can only be done occasionally but not systematically. It is not a viable alternative.
The channel is of great strategic importance. In 2023 more than 14,000 boats circulated through its waters. It does not stand out so much for volume of tonnage (it transits about 3% of global maritime trade, less than Suez), but because this route commercially unites the two world powers, the United States and China (and therefore, Asia).
It is estimated that 14% of maritime trade to and from the United States passes through this canal, so for Washington this drought could become a real headache. Without forgetting that many South American countries are dependent on the Panama Canal for their imports and exports (Guatemala, Ecuador, Chile...)
A recent study by the consulting firm McKinsey has noted the first economic consequences of these restrictions. Before the drought, 36 ships passed through each day. Now their number has had to be limited to 24, that is, 33% less. Some 100,000 tons of goods could be forced to change routes.
According to a study by investment bank Mirabaud, this slowdown in maritime traffic through the canal is already causing delays and higher costs for companies that depend on the canal to transport their goods. “As a result, consumers could face higher prices. What's more, an eventual blockade could disrupt supply chains, which would have a knock-on effect on companies that depend on specific goods or materials. “This could lead to shortages and disruptions in production, damaging the economy.”
McKinsey has calculated that, with current restrictions and waiting times, trips on average are about four days longer than a standard route, due to bottlenecks. This represents an increase of 5% in the shipping companies' invoice, including extra expenses, inventories and other items. This depends on the type of ship, because a freighter and a dry bulk vessel can see their costs rise even further, up to 14%, due to the current restrictions.
In the long term, much will depend on the length of the delays. If these continue to lengthen, then one of the options is to look at alternative routes, such as circumnavigating the South American continent. Unlike the Suez Canal, where the option is to go through the Cape of Good Hope in Africa, entering through the Strait of Magellan or Cape Horn increases costs exponentially because the distance is much greater. McKinsey estimates that half of the transits of ships carrying LNG could be diverted from Panama to these other maritime areas, which tend to have very difficult navigation conditions.
To assess the increase in costs, Amable Esparza, captain and member of the Royal European Academy of Doctors, shows how a container traveling from Shanghai to New York usually takes 18 days via the Panama Canal, but when bordering the South of Chile there is to add ten more days (the option of turning around in another direction through the Suez Canal is ruled out at this time). Browsing time increases by 55%.
For a ship of size 22,000 TEU, each extra day means paying 200,000 euros more. Going through Cape Horn instead of Panama would mean for the shipping companies to spend an extra of more than two million euros, that is, 50% more compared to the initial budget via Panama. For smaller ships the extra cost ranges between 73,000 and 154,000 euros per day.
Hence the question: to what extent is a maritime trade model based on such long distances sustainable? A recently published book, The End of Seasons? Written by Juan Bordera, Antonio Turiel and Fernando Valladares, it emphasizes the thesis that with climate change it is essential to rethink the economic system. The Panama Canal is the symbol of this imbalance: it has contributed to creating emissions and today it is a victim of them.
“With these bottlenecks, deglobalization is inevitable. Trade with long-distance goods runs the risk of not being viable in the future and will force us to rethink industrial production centers towards greater proximity to consumer markets and redefine value chains,” says Bordera, mentioning the challenge that It means for sectors such as agriculture or textiles. “If we want to avoid degrowth, we must promote growth in more sustainable activities and advocate for a more equitable redistribution process,” she concludes. Maritime trade is looking for new directions.
