Panama Canal restrictions, ILA negotiations portend increase in USWC routings

Escalating draft and transit limitations at the drought-stricken Panama Canal, coupled with upcoming US East Coast longshoreman contract renewal talks which are expected to be contentious, point to an uptick in cargo routed through US Pacific Coast gateways in 2024.

After experiencing the driest October since 1950, the Canal announced Oct. 31 new measures to control water availability, including a gradual decrease in daily transit allowances to bottom at just 18 from Feb. 1 onward, a 25% decrease from current transit capabilities.

Despite the slowdowns, most container ships are utilizing pre-booked slots for passage through the canal. While transit restrictions at the Panama Canal have not yet had a material impact on container trade flows, sources suggest that cargo owners are looking to avoid a rerun of container velocity slowdowns and widespread uncertainty seen during the leadup to the US West Coast labor contract renewal in August.

"Capacity will be affected if there is uptick in demand [and] carriers will prioritize lighter cargo over overweight cargo, as vessels need to weigh out for transit through the canal," a freight forwarder said. "As demand has not been super high the impact has been limited, we will see what happens pre- [Chinese New Year]."

Even as all kinds of daily vessel transits are adjusting downwards, the container market is at a low demand point in the cycle, and so few reverberations are being felt across the market and any changes in cargo routing having been chalked up to shipper sentiment and a desire to hedge potential slowdown, rather than material obstructions to moving cargo through the canal.

"USEC rates have firmed as a result of the restriction of the Panama Canal," said logistics provider HLS in a market update. "We expect to see more capacity to be added on services from SEA and South China through the Suez Canal as the potential delays to transit through the Panama Canal has pushed more booking volume to the services via the Suez."

French container liner CMA CGM said Nov. 21 it plans to implement a Panama Canal Adjustment Factor beginning next year as draft, weight, and transit restrictions at the drought-stricken Panama Canal have affected carrier operations. Additionally, the Panama Canal Authority announced in a Nov. 24 advisory that vessels that have been in the transit queue for more than 10 days could bid on a slot for passage through the canal in a special auction.

"While the current water deficit persists in the Canal watershed, the Transit Reservation system is the only mechanism available to guarantee a transit date," read the notice. "Therefore, vessels without reservation may experience indefinite delays."

A potential for labor disruption

Amid the real and perceived threats from the Panama Canal restrictions, East Coast North American shipments could face another significant hurdle in 2024: a potential strike from the International Longshoreman's Association, North America's largest union of maritime workers -- many of whom serve North American East and Gulf Coast ports.

The current contract between the ILA and with United States Maritime Alliance (USMX) is set to expire in September, and ILA leadership indicated October 2024 interruptions were a possibility in a Nov. 4 statement.

"The ILA has not had a coast-wide strike since 1977, nearly half a century ago," said ILA president Harold Daggett at a November educational seminar held in Nashville, Tennessee. "We will settle for nothing less than a landmark agreement. I pointed out to the companies that they have enjoyed record profits over the past several years. ... Share those billions of dollars with ILA longshore workers who helped you earn them."

The renegotiation comes on the heels of ILWU contract renegotiations, which led to several labor interruptions at West Coast ports throughout July and August. Additionally, significant congestion at West Coast ports throughout 2021 and 2022 led many shippers to shift shipments to the East and Gulf Coasts amid slowdown concerns.

Now, the fear of Panama Canal-induced delays and labor interruptions is front of mind for many traumatized shippers -- but market sources do not expect a shift back to the Pacific Coast to happen overnight.

"Anyone who is saying volumes are shifting is premature. In 2024, we could have those conversations -- but we're not there yet," said a North American logistics source. "The ILA is going to lose its bargaining power with these increasing issues in the [Panama Canal]. ... People aren't just going to shift back to the West Coast overnight because of the threat of a strike -- maybe an actual strike."

Nevertheless, the US Gulf Coast is chipping away at import market share. According to the according to PIERS, trade flow analytics tool within S&P Global, the Gulf Coast has gained 1.5% in market share for US containerized import volumes from Asia during the first ten months of 2023, compared to the same window in 2022. At the same time, West Coast port volumes lost 1% market share year-over-year, with East Coast volumes slipping .5%.

"The US West Coast has been gaining slight market share after the ILWU agreement but if you are an US importer, I think a conscious decision towards shifting - or rebalancing your risk - would depend on how long you see both the Panama Canal and a possible strike by ILA last," said Michael Kaasner Kristiansen, president of CK Americas, a Panama-based logistics firm. "If you believe the Panama Canal is back to normal by mid-2024, then it is harder to justify big changes -- whether you are the BCO or shipping line."

As of Nov. 28, cargo rates for the North Asia-to-East Coast North America lane were assessed by Platts at $2,250/FEU -- a far cry from the $5,300/FEU levels seen in November of 2022. Still, the rates hold a $675 premium compared to rates for shipments into the West Coast.