Lake Gatun, which supplies water to the Panama Canal, is experiencing a severe drought resulting in weight limits and increased surcharges for vessels.
The ship moves through the Miraflores lock of the Panama Canal. Photo: AFP
Lake Gatun provides the fresh water needed for the locks in the Panama Canal to lift ships as they travel from the Pacific to the Atlantic. But a severe drought caused water levels in the lake to drop below normal, leading to weight limits and increased surcharges for boats passing through the canal.
It also worries economists and supply chain experts. Just as shipping bottlenecks around the world are easing, drought in Panama and worrisome weather patterns elsewhere threaten to revive some of the chaos of 2021, as rising transportation costs and consumer demand lead to shortages of goods, contributing to US inflation to a four-decade high.
Logistics experts say that if the water level of Gatun Lake continues to fall as forecast, the market reaction will be to raise shipping costs and scramble to find alternative routes from Asia to the US.
U.S. inflation is gradually slowing, but remains at 4,7%, "very uncomfortable for central banks," Ostry said. Adverse news in the shipping industry can impact the situation.
The Panama Canal Authority forecasts a water level of 31 meters on July 7, beating the previous all-time low of 23,82 meters in May 23,83 and well below the five-year average of 5 meters for July.
To make matters worse, an El Nino system is forming in the western Pacific and is expected to upset normal weather patterns later this year. While this can cause heavy rainfall in some areas, in Panama it usually means severe drought and higher-than-normal temperatures. Erick Córdoba, a manager of the Panama Canal, said El Nino could prolong the dry season for Panama by 2024.
Drought has made shipping more expensive. The canal authority has been gradually reducing draft - the sinking of a ship - since February. To comply with the lower draft, large ships must reduce their load by carrying fewer containers, or by reducing the amount of cargo in the container. Either way, the result will be higher prices for consumer and industrial goods moving through the canal. Some ocean carriers are also starting to charge container per case from June 2 to meet the limits.
Freight rates on other routes will also increase if low water levels force shippers to find alternatives – especially during peak shipping months like August and September, when retailers start stocking up ahead of the holiday shopping season.
Ricaurte Vásquez, a manager at the Panama Canal Authority, said last May was the driest May since 5 and if things turn extreme this year, the canal could be forced to cut the number of ships that pass through each day to 5-1950 from the current 28.
Economist Ostry said the 2021 bottleneck has caused transportation costs to rise six times from pre-Covid levels, increasing inflation by more than 2 percentage points in 2022.
According to the United Nations Intergovernmental Panel on Climate Change, heatwaves lasted an average of 2,6 days longer between 2016 and 2020 compared with 1985-2005. However, scientists say it is not yet clear whether the drought situation in Panama will worsen, as the region lies between the rainier Caribbean climate zone and the drier Pacific Ocean.
Synthesized NGUYEN TAN
