Panama Canal backlog could impact US Christmas retail sales
WHEN the container ship Ever Given blocked the Suez Canal for a few days in March 2021, the world suddenly realised the vulnerability of its global supply chain.
That was a dramatic, highly visible event. Now, the same supply chain, or at least a section of it, is again being impacted by an international waterway turning into a choke point. This time, the impact has been gradual and not noticed by the world in general. However, the shipping and logistics industries certainly have noticed and are concerned.
One UK-based global courier service, ParcelHero, regularly comments on the international logistics business. It recently issued a press statement with the alarming subject line: “Panama Canal crisis eases but is Christmas cancelled already?”
ParcelHero warned: “There has been a fall in the number of ships queueing to use the drought-stricken Panama Canal. However, there are still restrictions on how many ships are allowed through the canal per day and how much vessels can carry. With just 15 weeks to go, the ongoing delays will impact Christmas.”
It added: “It may only be early September, but the ultimate impact of the Panama Canal crisis is likely to be a more expensive, more restricted Christmas.” It noted that, with about three months to go, many manufacturers and retailers are already gearing up for their peak season.
David Jinks, ParcelHero’s head of consumer research, said: “The Panama Canal is the main route for goods to America’s East Coast from Asia, and it carries 40 per cent of all US container traffic. Those containers will be full of products, from clothes to phones to toys. And what impacts America will also impact the UK this Christmas. There are signs the Panama Canal crisis is easing, but it could be too little, too late.”
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As the shipping industry is well aware, the Panama Canal is experiencing its worst drought in 70 years, largely due to the El Nino weather phenomenon. Just over a week ago, ParcelHero noted that, following a reported peak backlog of 200 vessels and waiting periods of up to 21 days, there is some hope the tide is changing. About a week ago, there were around 120 vessels waiting in queue.
Jinks observed: “That’s certainly an improvement, but before we run away with the idea that using the canal is now plain sailing, it’s important to remember that many restrictions remain in place. The huge ‘neo-panamax’ vessels, which use the massive new locks opened in 2016, have had their maximum draft levels reduced from 50 feet to 44 feet. That means they are severely restricted in the amount they can carry. And there is still a strict reduction in the number of ships that are able to use the locks, down from 36 to 32 transits a day.”
Unlike the Suez Canal, where the water flows freely and there are no locks, the Panama Canal has three sets of locks and is dependent on water from Gatun Lake to keep operating. The lake is also a major source of freshwater for Panama.
As shipping consultant Drewry Maritime Research pointed out in a recent paper on the impact of the crisis on bulk shipping: “When a vessel transits the canal, around 50 million gallons of water are thrown out of the lake which need to be replenished, but with less rainfall in the past few months, this is unlikely to happen. The authorities are working on possible solutions – reducing the cargo level, helping ships maintain draft levels and measures to reduce the amount of water lost from the lake.”
Drewry noted that the current draft restriction of 44 feet is expected to remain in place for the next 10 months. The draft restriction will increase the number of vessel trips required to move the same amount of cargo, squeezing fleet efficiency. Another solution is moving to alternative routes, such as the Suez Canal and Cape of Good Hope, which will again increase transit time and hurt fleet efficiency.
Whether owners choose to wait at the Panama Canal, reduce cargo levels or use alternative routes, vessel availability will tighten, leading to increased freight rates. However, Drewry warned, an indirect impact of the drought could be port congestions on alternative routes in case larger vessels have to adopt different routes in the long run. This would also cause longer waiting times at the ports due to higher traffic, especially towards Asia.
The Panama Canal is predominantly used by container ships and dry bulk carriers, and it is clear that there will be continuing knock-on effects in both sectors for some time yet.
Meanwhile, a story from the beginning of the year shows how much can be involved in transiting the canal, even if a ship does not actually use the waterway in the end.
Specialist insurer ITIC, which covers ships’ agents, had to pay out US$94,000 in fees after Panama Canal authorities refused a cancellation request. Apparently, the ship agent was asked by their principal, the shipowner, to inquire whether there was space to transit through the canal on a specific date.
Unfortunately, the agent misunderstood the request to check if a slot would be available and instead booked that slot. Eventually, the slot was not needed but when the agent tried to void the booking, the canal authority denied their request. So the insurer had to pay up.
Sometimes, even not using the Panama Canal can be expensive.
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