PODCAST: Troubled waters - What the Panama Canal drought means for supply chains

The Panama Canal is one of the world’s most important trade routes, but it is facing significant challenges amidst an historic drought. In response, the Panama Canal Authority introduced a range of measures that will stay in place until the middle of 2024.

What impact is the situation at the Panama Canal having on supply chains? Has it affected peak season planning, and what does this mean for the future of one of the world’s favourite shortcuts?

The Panama Canal drought and global trade

The Panama Canal is roughly 82 kilometres long and connects the Atlantic and Pacific Oceans. It is a conduit for about 6% of all global maritime traffic and links almost 2,000 ports across 170 countries.

Moving a vessel through the canal’s unique lock system requires an average of 200 million litres of freshwater, which is equivalent to the volume of 80 Olympic-size swimming pools.

The drought, which has continued through the rainy season, has caused low water levels and created a headache for the canal. The Panama Canal’s Deputy Administrator, Ilya Espino de Marotta, says: “This year has been significantly more difficult than previous dry years . . . However, we are trying to do our best to impact shipping the least possible and we have taken a lot of measures.”

The Panama Canal Authority has tried to improve the situation by reducing cargo levels, introducing draft restrictions, and taking steps to reduce the amount of water lost from the lakes it relies on. It also has some longer-term projects in train to ensure the Panama Canal equipped to deal with droughts in future.

In 2022, the canal’s revenue reached USD 4.2 billion. The drought this year is predicted to result in USD 150 million to USD 200 million in lost income for the canal.

The effect on peak season planning

August to November is an important time in logistics, and critical for ensuring shelves are stocked for the holiday period. Panama Canal news reports have raised questions about the extent to which this will be affected by the restrictions.

The Panama Canal’s operates a reservation system which allows vessels to reserve their transits for an additional fee. This works in the favour of passenger and container vessels who can plan in advance. Auctions are also held for spots closer to transit times. Reservations and auctions account for about 70 percent of traffic through the canal.

Early reports suggested the drought and restrictions could affect peak season planning. Luckily, the impact has been limited. This is mostly due to the fact many container vessels carrying cargo for the holidays have been booked in advance, so they can pass through as planned. In addition, there has been a notable uptick in the use of Panama’s intermodal system to move cargo across the country and from one ocean to the other.

Resilience and agility in the face of supply chain disruption

The Panama Canal is just one example of the challenges climate change is presenting for supply chains. In Europe, low water levels on the River Rhine are becoming a recurring problem. And, in China, parts of the Yangtze River were closed to ships in recent months for the same reason. In addition, floods and wildfires can also affect ports, highways, and factories worldwide.

The Panama Canal Authority already has several projects underway that will help mitigate the impacts of drought longer term. However, the question of what this means for the canal’s viability going forward has been raised.

Andrew Thomas is an Associate Professor of Marketing & International Business at the University of Akron in Cleveland in the United States. He is author of ‘The Canal of Panama and Globalisation’ and has studied the canal closely. He says the canal’s need for freshwater is ‘the asteroid hanging over its planet’. He adds that, although drought like this year’s won’t put the canal as a whole at risk ‘it does put operational efficiency at risk and from a supply chain perspective that’s a problem, because we want to be assured of operational efficiency, consistency, and that now becomes questionable, but I don’t think the future of the canal itself is an issue yet’.

More broadly, the Panama Canal drought and climate change emphasise the need for supply chain resilience to better protect the movement of goods from insecurity and instability, whether that is in the form of droughts, floods, fires, or other extreme weather events and their impacts. While the canal is already taking steps to mitigate the impacts, businesses can also increase the robustness of their supply chains, paying attention to agility and flexibility and ensuring actionability.

Interested in knowing more? Listen to episode 6 of the Beyond the Box podcast.