Panama Canal drought- effect on commodities
The Panama Canal is a vital artery for global trade, since it connects the Atlantic and Pacific Ocean. The decrease of rainfall in Central America has caused water levels to drop, which may increase the difficulty of large ships to pass through the canal, leading to rising transport costs and potential repercussions for various commodities worldwide. The picture below shows where the Panama Canal is situated, connecting the Caribbean Sea and the Pacific Ocean.
Map 1 - Panama Canal Map. Credit: Port Economics, Management and Policy.
Climate change is primarily responsible for the challenges that encounter the Panama Canal. Rising global temperatures have disrupted traditional weather patterns, leading to prolonged dry spells and reduced rainfall in the region. This drought has the potential to hinder the passage of ships and cause disruptions in global trade flows. The impact of climate change and global warming on the canal highlights the urgent need to address environmental concerns and develop sustainable solutions.
In 2021 the canal transported more than 500 million tonnes of goods, mainly grains and oil. Therefore, the Panama Canal drought is expected to have a substantial impact especially on bulk commodities, since they rely on the efficient and cost effective transport offered by the canal. Crude oil and gasoline may face a cost increase due to the drought in the Panama Canal.
This scenario affects companies in the short and long run. For the immediate effects, shipping company Hapar Lloyd has increased the Panama Canal charge by $500.00 dollars per container on July 1st. Asian shipments arriving in the US East Coast via the canal will be hit hardest by the surcharge. This policy will most likely contribute to higher expenses and squeeze profit margins further.
Companies involved in international trade and reliant on the Panama Canal may face upcoming challenges in the future as the result of the drought. With climate change getting more unstable each year with unpredictable rain scenarios, transport costs are likely to rise due to the canal’s operational limitations impacting profit margins for companies shipping goods through this route. In extreme circumstances, more severe droughts may pose challenges in accommodating larger vessels within the Panama Canal. For now, it is not possible to measure the likelihood of such events taking place in the upcoming years.
Companies specializing in affected commodities such as agricultural exporters and mining firms may experience decreased demand or reduced competitiveness in global markets due to higher prices or delayed shipments. They need to explore alternative transportation routes or consider investing in technologies that minimize reliance on the Panama Canal. One example is Transshipment Hubs, which can provide more flexible options to transfer cargo between larger and smaller vessels that can fit in alternative routes. Infrastructure improvements are also important, since they can directly benefit the canal’s operations. For example, implementing water management techniques and the use of data and artificial intelligence can help optimize vessel traffic and ensure smooth operations despite the drought conditions.
Additionally, companies indirectly connected to the affected sectors, such as transportation and logistics providers, could experience decreased business volume and revenue due to the overall slowdown in canal operations. The main solution announced so far is reducing the load of the transportations on the canal.
It is important to acknowledge that some specialists believe the Panama Canal drought will not have severe consequences since it is not as important as the Suez Canal and that sea-faring world trade hasshown itself resilient in the last years. However, this event sheds a light in climate change risk and how it is already affecting business and commodities. For many years, global warming, droughts, lack of water, and other environmental issues were seen as a problem for the “next generation” that would not impact companies and supply chains. However, as observed, climate change is already affecting commodities and therefore should be treated as a current and not future risk.