Please take a ticket and get in line
Industry newspaper Tradewinds recently reported that shipowners desperate to get passage through the canal are likely to break the record for the highest fee ever paid for a transit slot at auction.
The number of transits has declined at the waterway this year due to draft restrictions, increasing shipping delays. Low water levels in the Gatun Lake have restricted the numbers of fully-laden vessels able to make the transit, with the Panama Canal Authority recently announcing the delays will continue for 10 months.
The authority has said that limiting transits is a necessary measure so that additional draft restrictions could potentially be avoided. Analysts think climate change is contributing to unpredictable levels of rainfall, exacerbated by this year’s El Nino.
The delays at the Panama Canal are having a ripple effect throughout the global economy causing inflationary pressures for cargo owners as shipments delayed at the canal leading to higher prices for consumers.
Owners report the delays are having a significant impact on their operations, with congestion in several ports in South America causing further pressure on the supply chain.
While containerships, which have fixed schedules, tend to have reserved slots, the voyage plans for the tramp trades – tankers and bulkers – continue to be hit hard by the ongoing congestion brought about by drought and subsequent draft and transit restrictions put in place.
The restrictions have driven an increase in the number of medium range tankers waiting to transit the canal, an increase that is mainly driven by laden vessels heading southbound towards South America’s west coast. This has kept vessels occupied for longer periods of time and limited vessel supply in the US Gulf. This is supporting MR freight rates in the Atlantic basin, along with increased utilisation in the long-haul trade.
For dry bulk, which has been acutely effected by the restrictions, the 10 months of transit restrictions could have a larger effect on dry bulk trade flows, tonne-miles and the competitiveness of the region’s exporters.
While the impact is baked-in to voyage costs for ships already in the queue, owners warn that months of transit restrictions could have a larger effect on dry bulk trade flows, tonne-miles and the competitiveness of the region’s exporters.
For shipments already booked for transit the shipowner has to assume the cost of canal delays which are considered weather risks. In future, cargoes that regularly cross the canal could find themselves fighting to remain profitable as buyers look to more distant markets that would have lower overall costs, despite a higher tonne-mile ratio.
In the short term, price inflation is an issue, but the bigger consequence is that, as owners ask for higher rates to price-in the additional costs of delays, it may change the origin point for some cargoes, according to one owner.
In one scenario, rising costs from continued delays could start to make some regions less competitive even though the increase in tonne-miles is positive for owners and fleet utilisation. Owners aren’t going to sail around the canal; the cargo is going to move from different locations.
The longer-term issue is that shipping is getting a stark reminder that conditions in Panama are a function not just of an El Nino year but also a portent of climate change which doesn’t just happen on land.
Vessel operators warn that permanent cost inflation is something that the industry will have to deal with as its effects become more pronounced. The drive to reduce shipping’s climate footprint and contribution to global carbon emissions is a commercial issue too for companies that want to stay in the market.
It may be controversial to say it but the shipping industry is among the most vulnerable sectors to the impacts of climate change. The slowdown of movements through one of the world’s most critical waterways is a reminder that the industry needs to take rapid action to reduce emissions and mitigate the environmental and commercial risks as quickly as possible.