Panama typically is not at the top of people’s mind unless you are a logistics provider whose cargo is transiting the Panama Canal. Recently, it is increasingly becoming a source of worry, and rightfully so. The Panama Canal connects more than 1,700 ports across 160 countries.
Most people are unaware that the Panama Canal operates on freshwater from Lago Gatun and a reservoir Lago Alajuela, using around two billion gallons a day. The projected water level at Lago Gatun has plunged and is expected to reach record lows.
The drying cycles of El Niño weather pattern are contributing to Panama’s drought in the canal region; one of the worst in 143 years. Lack of rainfall directly affects canal operations.
The historic drought in the region is causing a major snarl as new weight limitations on cargo ships have been imposed to conserve water.
As a result, ships crossing the canal are having to offload their cargo, which then must be transported over land to the Atlantic end, before they can be loaded back onto the ships. The accompanying delays and costs are rapidly increasing both freight costs and delivery lead times along with uncertainty in the latter.
Additionally, the number of ships crossing has dropped from 36 to 32 leading to container ship queues of more than 100 ships, reminiscent of the scene just outside the Port of Los Angeles and Long Beach in 2021.
What Is Affected?
Nearly half of all consumer goods arriving from Northeast Asia to the U.S. East Coast and the ports along the southern coast of the U.S., transit through the Panama Canal. This means everything from toys, power tools, Christmas decorations and solar panels are getting delayed and cost more.
Bulk carriers of everything from LNG, cherries, soyabeans and copper to and from South America and Asia are being affected. Alternate routes can increase the transportation distance thousands of miles and will have a similar effect of costing more and longer lead times for delivery.
Current expectations are that the pattern is likely to continue into 2024, which means a respite is not in sight for the foreseeable future. The good news is that water levels have recovered from severe low levels in the past as evidenced by the levels as recently as 2022.
G. 'Ravi’ Ravishankar is a faculty member at the Strategy, Entrepreneurship and Operations Division at the Leeds School of Business. He is a veteran of supply chain, lean transformation, implementing product innovation strategies and technology transfer from national laboratories.
His career has spanned a wide range of operating roles from president, CFO to engineering manager and director of innovation. He has worked in four continents on lean manufacturing, supply chain, logistics, product development, factory start-up, and business strategy. His industry experience includes, semiconductors, machinery, medical devices, food and beverage, chemicals, consulting and not-for-profit organizations.