Bananas from Ecuador to Florida. Poultry from Chile to Northern Europe. Liquefied natural gas from the USA to Asia. And practically everything under the sun from China.
The traffic jam building up on the doorstep of the Panama Canal is a snapshot of the movement of goods in our globalized world and the collateral damage that comes with it.
For months, the queue for passage on one of the world’s most famous shipping routes has been getting worse. At the end of August, around 135 ships were waiting to cross the 82 kilometer long waterway between the Atlantic and Pacific, 50 percent more than usual.
The cause is a prolonged drought that has caused water levels to fall and forced canal operators to reduce the number of ships that can pass through the locks. As a result, huge container ships and tankers carrying dry goods, perishable goods and energy lie idle at sea.
How bad this is – or can become – depends on what is moving and where it is going. But it’s certainly giving more than one carrier “ugly flashbacks to COVID, when goods arrived massively late and in smaller numbers than requested,” said Peter Sand, principal analyst at Xeneta, the ocean freight rates benchmarking and market intelligence platform.
“From a global perspective it’s an annoying obstacle, but then you have the whole world as a playing field,” he said. “If you’re shipping bananas from Ecuador to Florida, that’s mission critical because that’s the only thing you do and your only option is to go through the Panama Canal.”
And while it’s not the first time delays have occurred, the combination of factors is having a compounding effect that won’t go unnoticed, especially as the high-demand holiday season approaches. For companies, this means higher freight rates and longer transit times.
“For you and me as customers, [it means] higher prices and less selection of goods when things really go downhill,” said Sand.
How important is the Panama Canal?
The shortcut connecting the Atlantic and Pacific Oceans was completed in 1914 after a arduous journey through the jungle and has grown exponentially in importance since then.
“It only really became crucial to the global economy in the 1990s and then in the early 2000s, when China emerged as the manufacturing center for so many consumer goods,” said Andrew Thomas, a professor of international business at Akron University. Ohio, who wrote a book called “The Canal of Panama and Globalization.”
In 2006, Panama took the “bold and smart step” of expanding the canal and adding another set of locks, which opened in 2015, Thomas said. Around six percent of global maritime traffic now passes through the Panama Canal – that’s around 32 ships per day. In addition to transporting food and dry goods, the expansion opened the door for giant tankers carrying liquid natural gas to take advantage of the shortcut.
“Many people’s concern is the containers. “The bigger issue is energy,” Thomas told Al Jazeera. “Since the U.S. shale energy revolution with fracking, this has been the primary way to transport energy from the East Coast of the United States to China, India, Korea and Japan.”
The backlog means customers are facing longer wait times for products and have fewer, more expensive options [File: Aris Martinez/Reuters]In fact, canal authorities heralded the introduction of LNG transportation through its waters in 2016 as “the beginning of a new era of cleaner, lower-cost energy.” But the problem of water levels soon emerged, and another devastating drought occurred in 2019. This latest shortfall could impact energy costs in those regions, Thomas said.
“It’s really a hindrance, particularly for North American gas exporters in Asian markets,” Sand agreed. There are alternative routes, for example through the Suez Canal, but they take longer and are more expensive. Still, companies like Houston-based Cheniere Energy said in July that it didn’t make financial sense to wait to transit the Panama Canal.
“Right now the Far East market doesn’t support this and the wait, given we’re not a priority customer, it’s just not worth it for us to use it now,” CEO Corey Grindal said at an LNG conference in July.
When it comes to shorter transport routes for perishable goods stored in refrigerated containers, the picture is bleaker due to a lack of options. Fruit that isn’t frozen is likely to go to waste, Sand said.
What role does water play in this crisis?
As Thomas states in his book about the canal, “Water makes the whole thing work.”
The canal relies on rainwater to raise and lower ships in the locks that connect the two oceans. But the canal competes with several other major freshwater users — the Panamanian people, whose population has grown nearly 20 percent since 2010, as well as agriculture and water-intensive industries such as copper mining.
“Demand for water in Panama exceeds supply,” Thomas said.
Added to this are the burdens caused by climate-related factors and increasingly frequent droughts. Back in June, Panama Canal authorities warned that the water situation was worse than expected.
“What we are seeing now is that these events are being reduced to every three years,” Administrator Ricaurte Vásquez Morales said in a statement, instead of every five years. They expect things to get even worse with the arrival of the El Niño weather phenomenon.
Authorities have taken “water-saving measures” to minimize the impact on shipping traffic, including reducing the weight a ship can carry through the canal. They recently announced that they expect the restrictions to be in place for ten months.
“With El Niño, the expectation is that water reservoirs will not fill as much as they need to during this rainy season,” Sand said, complicating the picture for next year’s dry season.
“What they are doing now is preemptive strikes to at least keep the canal open for business but restrict its use.”
What other spillover effects could occur?
One possible reason for greater concern about this backlog compared to previous ones is the memory of the supply chain catastrophe that has gripped the global economy during the pandemic. The dramatic ripple effect has exposed the vulnerabilities of a globalized economy that consumers and suppliers have come to depend on, and has caused companies to rethink where they operate.
“Nearshoring” – moving operations closer to a company’s preferred market – suddenly became more important. In particular, this has led to a boom in new companies expanding in Mexico or opening offices to be closer to the US market.
Thomas expects the backlog at the canal to lead to similar considerations.
“Life is all about risk management. Whether it is climate, extended supply chains or water management issues, these are all risks that we must manage,” he said. “Often it’s best to avoid it.”