Panama Canal shipping slowdown may be worsening, with far-reaching effects

The drought that began in the Panama Canal this summer is continuing to increase in severity, with water levels now at their lowest point since the mid-1900s. The canal’s transit capacity has been substantially diminished as a result and will be restricted through at least February, impacting the global supply chain and economy in many ways, some of which are not obvious.

According to the Logistics Managers Index and report in November, the slowdown is sending fuel prices skyrocketing in Asia, as ships carrying gas are being given last priority, behind passenger and cargo ships, to progress through the canal. Some of these ships can’t afford to wait, according to some reports, and are paying millions of dollars to move to the front of the line.

“This could potentially lead to inflation in Asia this winter as heating becomes more expensive,” the report reads. “This would be particularly unwelcome news for China, which is already struggling due to low consumer demand fueled by its faltering real estate market and continually contracting factory activity.”

The slowdown is also likely causing more freight to shift back to the West Coast away from the East and Gulf Coast ports. This seems to have been happening anyway, as the West Coast labor strike threat that pushed freight to the East Coast was resolved earlier this year. But the slowdown in Panama may be expediting this shift.

“This overloading of freight to one side of the country is less of an issue now when capacity is high,” the report continued. “However, as supply and demand move back towards equilibrium, the geographic concentration of freight could lead to issues with cost on the West Coast, and availability in the East.”

The situation is also being impacted by the Israel-Hamas war.

Some of the world’s biggest ocean carriers have announced a halt of Panama Canal transits through February on some of their weekly container services between the U.S. and Asia, choosing instead to move their ships through the Suez Canal.

The route through Suez takes around five to eight days longer than Panama, according to the Journal of Commerce, and may be at further risk from the Israel-Hamas war. A missile attack on an OOCL ship Dec. 3 has “broadened the threat to all ships passing through the Red Sea (which connects to the Suez Canal), even on those that have no links to Israel,” said container data watcher LinerLytica.

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