Drought Conditions in Panama Canal Disrupting the Supply Chain

Panama Canal is being impacted by severe drought conditions

Traffic in the Panama Canal is being impacted by severe drought conditions in Central America. Climate change continues to serve as a disruptive factor in supply chain management. From Hurricane Ian last fall in Florida to the widespread drought in the Midwest and West that shut down barge traffic on the Mississippi River, weather impacts are getting larger and more costly. Supply chain managers need to stay on top of upcoming weather events and have contingency plans in place.

What is Causing Drought Conditions in Panama Canal?

One of the potential issues that companies may face this year is an ongoing, severe drought in Central America, which is impacting the depth of the Panama Canal. At issue is the dwindling depth of Lake Gatun, which serves as the canal’s source of freshwater—that freshwater provides the canal with the ability to lift ships over a series of canal locks. The lake is at historic lows and weather predictions suggest the drought will worsen over the course of this summer.

Supply chains will feel this impact in the form of higher surcharges on each ship, as well as limits to how low ships can sit in the canal’s water, which runs from the Pacific to the Atlantic. Vessels typically sit in the water at 50 feet, but the Canal Authority is reducing that to 44 feet now. As a result, shippers will need to unload some of its normal cargo to allow for ships to pass through the canal. Carriers are already instituting surcharges of about $300 to $500 per container.

Normal operations in the Panama Canal see as many 36 ships passing through daily. If the drought continues to worsen, the Canal authority may need to slash that number to somewhere between 28 and 32. Right now, the authority is forecasting a late July water level of 78.2 feet, far below the five-year average of 84.9 feet in July.

All of this is compounded by the fact that one key alternative to the canal—West Coast ports—are facing potential labor disputes as talks between unions and management have continued for nearly a year. This is particularly problematic for inbound shipments from Asia. Ports like Los Angeles, Oakland, Tacoma, and Seattle are all wrestling with threats of worker stoppages as labor unions voice concerns over pay. If both the Panama Canal and the West Coast ports are disrupted at the same time, supply chains could face shortages and rising costs all at once. Should shippers need to turn to the Suez Canal as an alternative to the Panama Canal, or delays at West Coast ports, shipping costs could escalate significantly.

Shipping costs do not occur in a silo, either. Rising costs can directly impact overall inflation rates, just as the nation’s rates steady. Inflation rates dropped for the 11th straight month, thanks to the Federal Reserve’s careful and steady interest rate hikes. The Fed’s goal is to keep inflation at about a two percent rate, and shipping cost increases puts that in danger.

Now is a suitable time to apply lessons learned from the pandemic—prepare now for the potential disruptions ahead. Contact OPSdesign today for all your supply chain consulting needs.