Low water levels have forced officials to limit the variety of ships that may go through the Panama Canal, disrupting global supply chains and increasing transportation costs.
Interestingly, nevertheless, the large decline in ship traffic has not, at the very least thus far, led to a financial collapse of the canal, which pays most of its toll revenues to the Panamanian government.
This was because the canal authority introduced significant fee increases before the water crisis began. In addition, shipping corporations were willing to pay large sums at special auctions to secure considered one of the reduced variety of crossings.
In the 12 months through September, the canal’s revenue rose 15 percent to just about $5 billion, at the same time as tonnage moved through the canal fell 1.5 percent.
The Panama Canal Authority wouldn’t say how much money it constituted of the auctions. Last week at a maritime conference in Stamford, Connecticut, Ilya Espino de Marotta, the canal’s deputy administrator, said auction fees, which last 12 months reached as much as $4 million per voyage, “have helped a little bit.”
But even now, in a quieter season for global shipping, auction fees could double the cost of using the canal. This month, Avance Gas, which carries liquefied natural gas, paid an auction fee of $401,000 and $400,000 in regular tolls, said Oystein Kalleklev, the company’s chief executive. Auction fees are ultimately borne by the company to which the goods are shipped.
The canal’s financial stability in the face of drastic water shortages shows how people managing key links in global supply chains are adapting to climate change disrupting operations. It also helps that there is no such thing as a real alternative in Latin America to the canal, an engineering marvel that opened in 1914. it’s estimated that 5 percent maritime trade.
But if delays persist and costs rise, shipping corporations may discover a strategy to bypass the canal. Last 12 months, when the canal backed up, ships wanting to travel from Asia to the U.S. East Coast began passing through the Suez Canal, a for much longer journey that used way more fuel.
Many ships proceed to make use of the western route from Asia, even after Houthi attacks in the Red Sea forced shipping corporations to bypass the Suez Canal and circumnavigate Africa. Kalleklev said that when his ships delivered cargo and were empty, they typically returned to the United States via the Cape of Good Hope.
Although Panama is considered one of the wettest countries in the world, a pointy drop in rainfall last 12 months deprived the canal of water needed to operate the locks that raise and lower ships out and in of the 60-kilometer passage between the Atlantic and the Pacific. Climate experts say such water shortages could grow to be more common.
The weather pattern referred to as El Niño is initially causing warmer and drier conditions in Panama, and scientists say climate change could extend drought periods. The canal authority says 1.85 meters (six feet) fell in the Panama Canal watershed last 12 months, well below the historic annual average of two.6 meters. Authorities added that rainfall in the catchment has been below average for six of the last 10 years, including years that were the second, third, sixth and seventh driest since 1950.
To save water, authorities steadily reduced the variety of sailings from the normal range of 36 to 38 ships day until December 22. However, higher than expected rainfall and measures taken to switch water in the canal made it possible have since raised the variety of crossings to 27 Day.
Analysts say that although the variety of crossings continues to be below normal, the canal is in decent financial condition.
Verónica Améndola, an analyst at S&P Global Ratings, expects the channel’s revenue in the 12 months to September next 12 months to be about the same as a 12 months earlier, mainly as a consequence of fee increases. S&P Global estimates that the cost of shipping through the canal will increase from $6 per tonne to $10 per tonne.
That’s excellent news for Panama’s government, which relies heavily on canal payments and faces skepticism from investors in the international bond market about its deficit. The canal authority expects to pay the government $2.47 billion this 12 months, a modest decline from the record $2.54 billion paid last 12 months.
Canal fees and dividends accounted for twenty-four percent of presidency revenue in 2023, said Todd Martinez, co-head of the Americas at Fitch Ratings, which analyzes Panama’s government funds.
“The good news is that the drought will not have a terrible impact on Panama’s public finances in the near future because the canal has a lot of pricing power,” Martinez said. “But the bigger problem is that the government can no longer continue to rely on the canal to solve all its other fiscal problems.”
Facing the prospect of permanently lower rainfall, the canal authority plans to create a big latest reservoir that may provide enough additional water to handle a further 12 to fifteen crossings per day. Lawmakers must still approve the project, which officials say will take 4 to 6 years to finish. Panama’s elections shall be held in May, but Ms. Marotta, the deputy administrator, said last week that each one presidential candidates have told authorities they support the reservoir.
“There is a lot of awareness in Panama that life without the canal would be very difficult,” said Sebastian Briozzo, an analyst at S&P Global Ratings.
