The attacks by the Houthis on commercial vessels in the Red Sea and their impact on global shipping have renewed focus on another pressing trade issue: the Panama Canal.
Since last year, severe drought conditions have reduced water levels in the critical trade route connecting North America and Asia, forcing canal authorities to reduce ship crossings and even hold auctions for when vessels can pass through.
Some companies had planned to reroute to the Red Sea — a key route between Asia and Europe — to avoid the growing delays at the Panama Canal, analysts say. But the Houthi attacks, and subsequent western military response, have dashed those plans.
“This is a substantial global issue,” Daniel Trefler, a trade economics professor at the University of Toronto’s Joseph L. Rotman School of Management, said in an email. “Ships will not move, Canadian manufacturers will not get their parts, retailers will not get their stock, and consumers will feel the pinch.”
Other economists have similarly grim outlooks on international trade as the twin crises mount.
Torsten Sløk, chief economist at Apollo Global Management, said in a note on Sunday that weekly average ship crossings through both the Suez Canal, which connects to the Red Sea, and the Panama Canal have declined by half since the fall.
Meanwhile, he said, the cost of shipping an average 40-foot container from China to northern Europe — a route that would typically include passage through the Red Sea — has tripled to more than US$4,000.
“The bottom line is that higher transportation costs are putting upward pressure on goods inflation,” he wrote.
What's happening in the Panama Canal?
The drought hitting Central America is one of the worst in years, which authorities at the Panama Canal say is being driven by the El Nino weather phenomenon and exacerbated by climate change.
The man-made canal primarily relies on rainwater to fill Gatun Lake, the principal reservoir that floats ships through the canal’s lock system. In November, canal authorities said precipitation for the previous month was the lowest on record for the month since 1950.
Werner Antweiler, an economics professor at the University of British Columbia, says the “normal low” water level for the lake — the minimum amount of water required to ensure a typical number of ships can cross — is 26 metres. But the level has been below that since April, falling to just above 24 metres and staying there until November, when some rain finally came. The level is still hovering below 25 metres.
“Adjusted for the season, the level is still too low,” Antweiler said in an email.
The canal typically sees 40 ship crossings daily, but in September it was forced to reduce that number to 32 and lower the maximum vessel draft — the vertical distance between the waterline and the bottom of the ship’s hull — from 50 feet to 44 feet, meaning less ships are physically capable of passing through.
Last week, authorities said they were further slashing the number of daily crossings another 36 per cent to just 24.
Canal Administrator Ricaurte Vasquez said toll revenues have dipped by about US$100 million per month since last October. If the trend continues, he estimated that reduced income from tolls could total up to US$700 million by around April, when the next rainy season is expected to start and authorities hope relief will finally come.
The canal has also introduced water-saving methods including trapping and reusing water between locks.
But the canal has emphasized long-term solutions are needed. The same lakes that fill the canal also provide water for more than half of the country’s population of more than four million people.
“The water problem is a national problem, not just of the canal,” Vásquez said last Wednesday. “We have to address this issue across the entire country.”
Canal authorities said in November it was studying a number of potential fixes, but acknowledged some would require approval from the Panamanian government, which has jurisdiction on lands surrounding the self-governing Panama Canal Watershed. Those include building a new reservoir that could pump additional water into the canal.
Shipping solutions
Shipping companies are also pursuing solutions to get around the Panama Canal bottleneck.
Danish shipping giant Maersk said this month it will use trains on the Panama Canal Railway that runs adjacent to the canal to bypass the waterway entirely.
The company and others were already using the railway to temporarily offload container weight from large ships before passing through the waterway to adhere to the drought-related draft restrictions.
Maersk added that the rerouting could lead to some delays for southbound vessels.
Antweiler said companies may also reroute around Cape Horn, the southernmost tip of South America, to avoid the canal. But he noted that route will add an extra 20,000 kilometres to those vessels’ journeys “that is thus very costly.”
Rerouting also has an environmental cost, Trefler said. Many commercial ships still use bunker fuel, which emits sulfur into the atmosphere along with carbon dioxide and accounts for a large fraction of global fossil fuel use.
“Rerouting raises that share,” he said.
More than a dozen shipping companies, including Maersk, are already rerouting around South Africa’s Cape of Good Hope to avoid the Red Sea, which the International Maritime Association says adds an additional 10 days of transit.
The delays contributed to a 1.3 per cent decline in world trade in December, reflecting goods stuck on ships rather than being offloaded in port, according to the Kiel Institute for the World Economy in Germany.
Executives at the Canadian National Railway Co. said Tuesday they were preparing for workarounds to the ripple effects caused by the Panama Canal and Red Sea crises.
The longer travel time and scrambled schedules for vessels have resulted in delays of up to three weeks on the majority of container ships slated to roll into the Port of Halifax — a key hub for CN — over the next month.
Doug MacDonald, CN’s head of marketing, said that while shipments to the East Coast from Asia might be disrupted, the company expects operations to ramp up at the West Coast ports of Vancouver and Prince Rupert.
“We’re starting to hear, with the different problems about the Panama and the Suez canal, that the West Coast is looking like a more viable option moving forward. We haven’t seen those volumes come in yet, but we’re expecting them to gradually ramp up,” he told analysts on a conference call.
Trefler said the compounding impacts on international trade makes it even more crucial for the Houthi attacks in the Red Sea to end, as those could be mitigated in a way climate-related impacts can not.
“Small non-state actors are able to make decisions for the entire planet,” he said. “This has to stop.”
—With files from Reuters and the Canadian Press
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