From bananas to LNG, Panama Canal backlog has wide-reaching implications

Traffic jam at Panama Canal is a snapshot of how goods move in our globalised world, and the collateral damage at stake.

A cargo ship sails near the Pedro Miguel Locks on Panama Canal in Panama City, Thursday, Aug. 3, 2023. The Panama Canal Authority said it is limiting traffic to 32 daily ship transits through the canal after months of drought and expect less income in 2024 due to the ongoing water crisis. (AP Photo/Arnulfo Franco)
A protracted drought has driven water levels down, forcing canal operators to reduce the number of ships that can pass through its locks [File: Arnulfo Franco/AP Photo]

Bananas from Ecuador to Florida. Poultry from Chile to northern Europe. Liquid Natural Gas from the United States to Asia. And virtually anything under the sun out of China.

The traffic jam that has been piling up on the doorstep of the Panama Canal is a snapshot of how goods move across our globalised world, and the collateral damage that is at stake.

For months now, the queue for passage through one of the most iconic shipping routes on the planet has been getting worse. In late August, roughly 135 ships were waiting to cross the 82-kilometre waterway that connects the Atlantic and Pacific oceans, 50 percent more than would normally be there.

The cause is a protracted drought that has driven water levels down and forced canal operators to reduce the number of ships that can pass through its locks. As a result, giant container ships and tankers carrying dry goods, perishable items, and energy are sitting idle in the sea.

Just how bad this is – or can get – depends on what is moving, and where it is going. But it is surely giving more than one transporter “nasty flashbacks to COVID, when goods arrived with a massive delay, and fewer numbers than requested,”  said Peter Sand, chief analyst for Xeneta, the ocean freight rate benchmarking and market intelligence platform.

“From a global perspective this is an annoying obstacle, but that’s when you have the whole world as your playing ground,” he said. “If you ship bananas out of Ecuador into Florida this is business critical because that is the one thing you do, and your only option is to go through the Panama Canal.”

And while this is not the first time that delays have occurred, the intersection of a variety of factors has a compounding effect that will not go unnoticed, especially as the high-demand holiday season approaches. For companies, it means higher freight rates and longer transit times.

“For you and I as customers, [it means] higher prices and fewer goods to choose from if it really goes south,” said Sand.

How important is the Panama Canal?

Completed in 1914 after an arduous process of hacking through jungle, the importance of the shortcut that connects the Atlantic and Pacific oceans has grown exponentially.

“It didn’t really become critical to the world economy until the 90s and then into the early 2000s, with the rise of China as the manufacturing hub for so many consumer goods,” said Andrew Thomas, an international business professor at Akron University, Ohio, who wrote a book called The Canal of Panama and Globalization.

In 2006, Panama made the “brave and smart move” to expand the canal, adding another set of locks that opened in 2015, said Thomas. Now, some 6 percent of the world’s marine traffic passes through the Panama Canal – or about 32 vessels a day. In addition to the shipment of food and dry goods, the expansion opened the door for massive tankers carrying liquid natural gas to start using the shortcut.

“The concern a lot of people have is the containers. The bigger issue is about energy,” Thomas told Al Jazeera. “Since the US shale energy revolution with fracking, this has become the main way energy is moved from the east coast of the United States to China, India, Korea and Japan.”

Mariners are seen at the Liberian MSC UNITED VIII container ship during its transit in the expanded canal through Cocoli Locks at the Panama Canal, on the outskirts of Panama City, Panama
The backlog means customers will have higher wait times for products, and fewer and more expensive options [File: Aris Martinez/Reuters]

Indeed, canal authorities heralded the advent of LNG travel through their waters in 2016 as marking the “start of a new era in cleaner, lower-cost energy”. But the issue of water levels soon began to rear its head, with another devastating drought that hit in 2019. This latest backlog could affect the cost of energy in those regions, said Thomas.

“It’s really an obstacle, especially for the North American gas exporters into the Asian markets,” agreed Sand. There are alternate routes, through the Suez Canal, for example, but it takes longer and will cost more. Even so, companies such as Houston-based Cheniere Energy announced in July that it did not make financial sense to wait to get through the Panama Canal.

“Right now the market in the Far East is not supporting it, and the waiting time, with us not being a priority customer, is just not worth us using it right now,” CEO Corey Grindal said at an LNG conference in July.

For the shorter haul trips of perishable goods stored in refrigerated containers, the picture is bleaker because of a lack of options. Fruit that isn’t frozen will likely go to waste, said Sand.

What’s the role of water in this crisis?

As Thomas notes in his book on the canal: “Water makes the whole thing work.”

The canal relies on rainwater to raise and lower the ships in the locks that connect the two oceans. But the canal competes with several other big users of freshwater – the Panamanian people, whose population has grown by almost 20 percent since 2010, along with agriculture and water-intensive industries, such as copper mines.

“There’s demand for water in Panama that exceeds what the supply is,” said Thomas.

Add to that the strain of climate-related factors, and droughts that are happening with greater frequency. Back in June, Panama Canal authorities were warning that the water situation was worse than they had expected.

“What we are experiencing now is that these events are being reduced to once every three years,” Administrator Ricaurte Vásquez Morales said in a statement, rather than once every five years. They are bracing for it to get worse with the arrival of the El Nino weather phenomenon.

Authorities have implemented “water-saving measures” to minimise the impact on the shipping traffic, including reducing the amount of weight that a ship can carry through the canal. They recently announced they expect the restrictions to be in place for 10 months.

“The expectations going into El Nino is that the water reservoirs will not fill up to the extent needed during this wet season,” said Sand, complicating the picture for next year’s dry season.

“What they’re doing now is preemptive strikes in order to at least keep the canal open for business but limit the use of it.”

What other spillover effects might occur?

One possible reason for the greater alarm over this backlog versus previous ones is the memory of the supply chain disaster that gripped the world economy during the pandemic. The dramatic domino effect laid bare the vulnerabilities of a globalised economy that consumers and purveyors have come to depend on, and it has led companies to reconsider where they are operating.

“Nearshoring” – the action of moving operations close to a company’s preferred market – suddenly took on greater importance. In particular, it has led to a boom of new companies expanding or setting up shop in Mexico, to be closer to the US market.

Thomas expects the canal backlog to prompt similar considerations.

“Life is all about managing risk. Whether it’s climate, or extended supply chains or water management issues, this is all risk we need to manage,” he said. “A lot of times the best thing to do is to avoid that.”

Source: Al Jazeera