The Van Trump Report

Drought Again Disrupting Freight Flows on Critical Shipping Arteries

The world’s extensive network of waterways are a vital part of global commerce. In fact, approximately 90% of all goods shipped end up traveling on a waterway at some point. Unfortunately, low water levels on the rivers and canals that help move the world’s merchandise threaten the lifeblood of the shipping industry and the disruptions may get worse as the El Niño weather pattern sets in, a phenomenon that can last several years.

Here in the U.S., shippers are dealing with low water levels on the Mississippi River after a summer of extreme heat and little rain. As a result, barge companies have been forced to reduce cargo weights, meaning less grain is allowed to be loaded. This of course means more barges are needed to move the same amount of grain, in turn pushing up barge rates. Water levels are also low on the Ohio, Illinois, and Missouri Rivers.  

All of this comes at a terrible time for US agriculture with harvest ramping up across the country. About 60% of U.S. grain exports are taken by barge down the Mississippi to New Orleans, where the corn, soybeans and wheat is stored and ultimately transferred to other ships. Unfortunately, many of those ships will need to transit the Panama Canal, another drought-stricken waterway.  

Similar to rivers here in the US, a severe drought in Panama is disrupting operations at the Panama Canal. Earlier this year, the Panama Canal Authority put restriction in place on the number of vessels and maximum draft allowed as a direct result of low water levels at Gatún Lake, one of the three locks that make up the canal. Ships have been forced to lighten their load or find alternate routes in light of the constraints. The Authority warned in early September that it may need to reduce vessel traffic further if the drought continues.

As you may recall, the Panama Canal was expanded in 2016 to accommodate the growing number of container and bulk ships that are too large for the original infrastructure. The project included the construction of a set of new locks, on both the Atlantic and Pacific ends of the canal, and created a second, larger lane of traffic, essentially doubling the canal’s capacity.

The original locks, which are still in use, require 50 million gallons of fresh water for each crossing. The new lock uses 200 million gallons of fresh water to pass each ship through the canal. Panama Canal Administrator Ricaurte Vásquez told The Wall Street Journal the drought probably isn’t the worst that Panama has faced, but it is the most severe given the current level of canal operations. Using only the old locks, “a similar drought situation would not be as disruptive as the one we have today,” he said.

Currently, there is little rain in the forecast so problems are not expected to ease anytime soon. That means US businesses could face the possibility of a disrupted holiday shipping season, as well as other supply chain disruptions. The restrictions are already driving up shipping costs.

According to the International Trade Administration, the waterway serves more than 144 maritime routes, connecting 160 countries across 1,700 ports. The U.S. is the largest user of the Panama Canal, with total U.S. commodity export and import containers representing about 73% of Panama Canal traffic. Forty percent of all U.S. container traffic travels through the canal every year. It’s an especially critical trade link for U.S. shippers heading to Gulf and East Coast ports, as well as for moving goods between the US and China.

One of the main alternatives to the Panama Cana is the Suez Canal. However, diverting ships to the Suez can add days or even weeks to the voyage. The shipping time for ocean cargo from Shenzhen, China, to Miami using the Suez Canal is 41 days. Traveling through the Panama Canal, which is more expensive, takes only 35 days. Recently, the Suez has been a more attractive route for some shippers due to potential delays in Panama.

Another alternative to the Panama Canal is the US Intermodal System, a complex of three distinct transportation modes: ocean shipment, movement by rail, and truck transport. In theory, this system can provide a faster transit time from Asia to the East Coast of about 18.3 days. However, the reliability of ports, railroads, and trucking is frequently compromised by labor shortages and capacity challenges so transit times can vary widely. This option also requires cargo to be transferred from one mode to another multiple times. Canal routes consist of only the ocean container mode.      
At some point in the future, the opening of the Russian Northern Sea Route and the Canadian Northwest Passage to commercial traffic could pose an alternative to the Panama Canal. Warmer waters in the Arctic Ocean could open the passage for an increasing number of months each year, making it more attractive as a major shipping route. However, the passage through the Arctic would require significant investment in escort vessels and staging ports. The Canadian commercial marine transport industry does not expect this route will be a viable alternative to the canal within the next 10 to 20 years. (Sources: USDA AMS, Platts, New York Times, DC Velocity, Reuters)

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