Panama Canal – drop in cargo volume in 2023

The 2023 year for the Panama Canal is full of drought challenges which haunt this region of the world, and consequently a decrease in the number of goods transported. Container ships are forced to reduce cargo and to bear higher charges. It is forecast that the increase in transport costs through the Panama Canal will take place this summer.

As of May 24, the largest units will be forced to limit their immersion, which will directly reduce the quantity of goods on ships that will pass through the Panama Canal. Additional restrictions will apply as of 29 May, and some carriers have already responded to these changes, increasing the fees for goods sent through the channel, responding to the introduced drought restrictions.

These restrictions will lead to delays and increases in the cost of goods carried by the Panama Canaland, which represents 5% of global maritime trade per year. This channel, connecting the Atlantic Ocean with the Pacific, has been facing water scarcity since its expansion in 2016. As the drought deteriorates, protocols on fees and weight limits are introduced.

From February to April of this year, the rainfall in the area of the Panama Canal and the lakes supplying it was 50% lower than in previous years' average. The drought situation resembles the one from 2019 when the lowest rainfall has been recorded in two decades. The absence of a typical rainy season is of great importance because it usually precedes the summer. The absence of rain in this region of the world may have significant consequences for transport through the Panama Canal.

By July B.R., the water level in Lake Gatun, which is the largest water reservoir supplying the canal, is expected to reach the historic minimum. This will reduce the immersion of ships and the amount of cargo carried. As of 24 May, the largest ships passing through the Panama Canal will be reduced dive up to 44.5 feet (13.56 metres) and from 30 May to 44 feet. Although this may seem a slight change, the effects of the drought may be disastrous, as the amount of goods transported may be reduced by up to 40% on some units.

Carriers have already introduced weight limits and additional container charges in response to the introduced restrictions. Transport costs will increase and importers and retailers using this route will have to bear additional costs.

Consequently, it is possible that carriers will start looking for alternative routes such as the Suez Canal or ports in California. However, this involves loading goods on trucks or trains, which can extend the delivery time of the goods. Some shippers are already considering these options.

It is expected that precipitation below normal will continue throughout Panama. This means that the situation may deteriorate and affect shipping through the channel.

In 2023 we see a worrying decline in freight transport through the Panama Canal, as the experts emphasize. This situation is not only due to problems caused by drought, but also to other factors such as Russia's invasion of Ukraine, concerns about global recession or a decline in trade activity in China. The Panama Canal experiences a reduction in ship traffic, which choose alternative routes, bypassing this key communication channel between the Far East and Europe.

Forecasts for 2023 indicate a decrease in volume flowing through the commodity channel. This poses a challenge to the revenue of the Panama Canal, but it can also open the way to the development of alternative sectors of the economy, as our editorial board wrote on 9 March. The consequences of this decline are difficult to estimate unequivocally and depend on many factors, such as channel operating costs or pricing policies.

The decline in freight transport through the Panama Canal can have a negative impact on the country's economy and reduce revenue to government cash. At the same time, this could give impetus to other sectors such as rail or air transport. It is worth keeping track of developments, although finding alternative solutions to minimise the effects of the channel's decline is a task that primarily rests on the shoulders of the channel authorities and the Panamanian government.

Written by Mariusz Dasiewicz