Ocean carriers push Panama Canal to mitigate climate effect on water levels

The Panama Canal's ability to handle more ships in the coming months is an encouraging sign for ocean carrier executives who say the added capacity will be needed as container shipping continues to avoid the Suez Canal. Yet the liner industry is calling on Panama to invest more to mitigate the effects of climate change on the canal.

The Panama Canal Authority (ACP) announced last week that starting in the second half of May, it would allow 31 ships to transit the canal daily, up from 24 ships each day during the first half of May. The number of ships allowed to transit will increase to 32 by the start of June.

The canal remains restricted to ships with a 44-foot depth, but more large ships will be able to transit. One additional neo-Panamax and five additional super-Panamax slots will be available by June, along with two additional slots for smaller Panamax vessels.

The ACP said that better-than-expected water levels at Gatun Lake, the main reservoir for the canal's locks, is behind the capacity increase. Gatun Lake currently sits at just over an 80-foot depth, which is three feet under its historical average water level for April.

Gatun Lake had a nearly 79-foot depth for most of the second half of 2023, a level that is between three and seven feet under its historical average depths during those months. An El Niño weather event that started last July led to below-normal seasonal rainfall in Panama, leaving Gatun Lake well below its typical levels.

Concerns about the return of seasonal rain to refill Gatun Lake prompted the ACP to consider limiting ship transits to as few as 18 starting in February 2024. But Panama's rainfall has been better than forecast with up to 27 transits allowed in March before the current 24-ship limit.

Container shipping has been largely unscathed by the transit restrictions, which have mostly hit other ocean trades such as tankers and bulk carriers, forcing them to pay higher tolls for the remaining transit slots. Both Maersk and Hapag-Lloyd have restored canal services as transit restrictions have lessened.

Nevertheless, the container shipping industry needs to plan around the risk that transit restrictions could impact operations in the future, Stuart Sandlin, Hapag-Lloyd's North American president, said Monday at the Georgia International Trade Conference.

"When [the ACP] continues to cut transits, it's really difficult," Sandlin told the audience at Sea Island. "And I think that that's the problem. I don't want to get into a place where it's a bidding cycle to get into the front of the line, and I have to bid for the next transit.

"The Panama Canal is one of the challenges that is going to continue to play out for the long term," he added.

Long-needed investment

The ACP said in February that it would need to invest $2 billion over the next six years in managing Gatun's water levels to avoid transit restrictions. The ACP's plan, which it identified back in 2003, involves building a pipeline from the Rio Indio reservoir to pump additional fresh water into Gatun.

However, the project requires the approval of Panama's legislature, which barred the ACP from building or managing more reservoirs following the construction of a third set of locks on the canal. So far, the legislature has not taken up the ACP's plan, which is opposed by Panamanian farmers. Sandlin said that if the Rio Indio had been approved earlier, it could have mitigated the transit restrictions.

"If they had done that work a little while ago, it would have cost much less and they would have already solved the problems in terms of the piping and the reservoirs," he said.

Mario Giannobile, vice president of Maersk, said at the Georgia conference the carrier is the biggest user of the Panama Canal. He added that "we really need the Panama Canal Authority to invest in themselves, if they are going to make a statement as a gateway."

Among other workarounds, Mexico's President Andrés Manuel López Obrador proposed restarting a $3 billion project to build a railroad that would move containers across the country's 1,000-mile-wide southern isthmus. Intermodal service from the Port of Lazaro Cardenas into North America has also been used as an alternative to the Panama Canal. But Hapag-Lloyd's Sandlin said, "there's a lot of reluctance" to use rail as an alternative.

The Panama Canal's transit capacity will be all the more in focus as ocean carriers continue to divert away from the Suez Canal due to ongoing attacks on commercial shipping in the Red Sea. Sandlin said that the timeline for a return to Suez transits keeps getting pushed further out, particularly as the overall tensions in the Middle East show no sign of abating.

"When we look at the Red Sea challenges, I can tell you that we had aspirations that hopefully in the second half of the year, we were going to be able to return to normalcy," he said. "We don't really see that right now. It's very possible that it's not until fourth quarter or next year before we start seeing some kind of normalcy."

Author: Michael Angell, JOC Associate Editor

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.