How carriers are slowly adapting to Panama Canal restrictions

How carriers are slowly adapting to Panama Canal restrictions

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How carriers are slowly adapting to Panama Canal restrictions

In an article published in the Journal of Commerce (JOC), Mark Szakonyi goes in depth regarding the options that carriers are considering to face drought-driven restrictions imposed in the Panama Canal. Unless unexpected rainfall were to hit the country, transit restrictions are expected to be in place for the next few years. 

Restrictions, which effectively reduce the maximum stowage capacity of larger vessels and limit the overall number of transits, will likely force carriers to alter networks as they try to push higher costs onto shippers,” says Szakonyi.

Panama Canal authorities have announced that the soonest relief to restrictions- which were imposed in July- could come in 2028. 

More concerning is the fact that the easing of restrictions would come when the government of Panama leaves aside years of underinvestment and supports $2 billion in investment to build a new reservoir and more pipelines.

“We greatly appreciate the current weather conditions are a factor,” Ocean Network Express (ONE) CEO, Jeremy Nixon wrote in a letter to Panamanian President Laurentino Cortizo Cohen on Oct. 30. “However, we also understand that no significant projects have gone ahead in Panama to increase the freshwater supply to the locks from other catchment areas.” 

Draft limits are reducing the capacity of container ships transiting the canal by approximately 20% across all size classes, says Michael Kristiansen, president of Panama-based consultancy CK Americas. 

Larger vessels lose approximately 350 TEUs of capacity for each foot of draft lost; with the draft now limited to 44 feet, down from the designed 50 feet, larger ships must give up about 2,100 TEUs of otherwise usable space.

Some carriers have been forced to offload cargo at terminals at either end of the canal, and then rail those boxes across the isthmus. Container lines have been generally spared from long transit delays, however, thanks to pre-scheduled transit appointments.

Carriers considering options

In Nixon’s letter to President Cortizo he explains that upon growing concerns and the lack of service reliability, ONE is considering other routings via the Suez Canal. 

This month, Zim Integrated Shipping Services added a call at the Port of Lázaro Cardenas in Mexico to allow Asian imports to arrive in the Midwest. 

ONE, similar to other container lines, invested heavily in larger vessels that were able to move through a larger set of locks, which was completed in 2016 at a cost of $5.25 billion. 

Ports along the US East and Gulf coasts similarly invested billions of dollars to be able to handle the larger ships, which has helped fuel a two-decade shift of trans-Pacific imports away from the West Coast.

The lack of scheduled service is squeezing seasonal refrigerated (reefer) operators that charter vessels on an ad-hoc basis and must wait in line similar to the bulk carriers and tankers.

Nixon also raised concern about the reduction in daily transit slots for neo-Panamax vessels- those with capacities ranging from 10,000 to 15,000 TEUs that can transit the canal thanks to the new set of locks that opened in 2016- with the number falling to five starting Jan. 1 compared with the 10 available just three months ago. 

Political solutions

Panamanian politicians seem more focused on copper than water, amid the largest protests in three decades over mining concessions. Rising political instability and social unrest frame the upcoming national election in May.

Ultimately, the government must either expand the canal authority’s geographic remit so it can push through water management projects or limit current restrictions that prevent it from building new reservoirs. 

Canal officials hope construction contracts currently in the offing can be awarded by the end of 2024, with work completed in 2028. 

Depending on the severity of this drought, and potentially others to come, carriers may do as ONE warned: shift service away from the canal. 

Deploying smaller vessels is another option.

Carriers could also adjust services to send more cargo from South Asia through the Suez Canal, though it would add distance for some origins, Kristiansen said. The US East Coast is approximately 2,200 nautical miles farther from Shanghai via the Suez Canal than via a Panama Canal routing.

Yet another option would be for carriers to change some Asia–North America services to so-called around-the-world strings, transiting the Suez on the backhaul from North America to Asia, Kristiansen says. 

That would require an additional deployment of ships in the string to maintain weekly service frequency. Although less than ideal, it would slightly mitigate industry-wide overcapacity.

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