After The Suez Canal, Is The Panama Canal Next?

After the Suez Canal incident, the Panama Canal is facing a similar situation, with ships now paying tolls almost eight times higher due to drought.

On a recent day, more than fifty ships—from cargo ships loaded with food to tankers transporting propane—were waiting to pass through the Panama Canal. Longer wait times are the result of the canal’s operator reducing the number of crossings due to a protracted drought. Ships now pay tolls that are almost eight times more expensive than they used to be.

Container ships traveling through Egypt’s Suez Canal are waiting for Navy escorts or skipping the route entirely in favor of a considerably longer cruise around South Africa, more than 7,000 miles distant. Ship owners worry that drone or missile assaults from a rebel group headquartered in Yemen could endanger their personnel while traveling across the Red Sea.

The yacht “Amadea,” owned by Russian oligarch Suleiman Kerimov, who is under sanctions, costs US taxpayers $1 million a month.

Global trade is being disrupted by both the geopolitical and climate-based issues in Suez and Panama, respectively. The amount of cargo passing via the Panama and Suez canals has decreased by over 33%. Numerous ships have veered off course to take longer routes, which has caused delivery delays, increased transportation expenses, and financial ruin for nearby communities.

Around 18% of the world’s commerce volumes passed through these waterways last year, so ship operators are preparing for months of uncertainty.

In the 100 years that the man-made waterway has been in use, the Panama Canal is currently experiencing one of its driest periods. Beginning in the middle of 2023, officials are hoping that the drought will end in May when the dry season comes to an end.

Some ship operators in the Suez have halted operations indefinitely due to strikes on commercial vessels further south. Since November, Houthis have assaulted over 50 ships, including one carrying fertilizer that sank into the Red Sea and another that claimed three lives.

About one-third of the Houthi military’s assets have been destroyed by retaliatory strikes by a coalition led by the United States, a Pentagon official said.

Tim Hansen, chief operations officer of Dorian LPG, based in Stamford, Conn., which runs a fleet of 25 ships that move propane and butane, said, “It’s the first time that both are disrupted simultaneously so you have to plan way where to send your ship and you pay a hell of a lot more regardless.”

Although customers haven’t been greatly impacted by the issues yet, companies are beginning to feel the effects. Due to a scarcity of parts, Tesla and Volvo stopped producing cars for up to two weeks in January.

To guarantee that their spring designs arrived on time, some clothing retailers chose to ship their goods by air rather than sea.

Currently, supply chain disruptions are rather minor in comparison to the more extensive bottlenecks observed in 2020 and 2021.

Back then, shippers passed on to customers the greater expenses associated with ocean freight, which led to inflation on a variety of consumer items. On certain routes connecting Asia and the United States, daily freight charges increased to over $20,000 per box, which is approximately five times more than the present rates.

Companies have also learned from the pandemic’s supply disruption, and several have increased their inventories to prevent product shortages.

According to Jesper Brodin, CEO of Ingka Group, which runs the majority of the IKEA shops worldwide, customers have not been impacted by the average sailing durations being extended by roughly ten days due to disturbances in Suez.

“The huge difference is that we have recuperated after the pandemic,” he said in January at the World Economic Forum in Davos, Switzerland. “So that means our stocks in our warehouse are in good shape.”

However, suppose more companies revert to their pre-COVID inventory minimization strategies and depend on prompt delivery. In that case, they will be more susceptible to interruptions should bottlenecks at the two canals persist.

“Consumers are experiencing a turning point as they have grown accustomed to the global economy,” stated Peter Sand, chief analyst of the shipping platform Xeneta, located in Norway. “Maritime supply chains need to be protected because they have been receiving goods from everywhere at any time.”

Less water

Due to the issues, Connecticut-based Dorian had to make two late-year calculations for its ships.

For Dorian’s ships sailing from the Gulf of Mexico to transport goods to customers in China, Japan, and South Korea, the Panama Canal provides the quickest path. Traveling west by the canal and then across the Pacific takes about 25 days, whereas traveling east via the Suez takes 40.

The waterway is used by 14% of all seaborne trade into and out of the United States. The canal is used by several Latin American nations to transport about 25% of their exports.

Less water is available to feed the locks that let ships pass through the canal as a result of the drought. Every time a vessel passes through the locks, more than 50 million gallons of water are discharged into the ocean. That water comes from a reservoir that is currently depleting.

The operator of the canal typically permits 36 ship crossings every day. Rainfall assisted in stabilizing water levels, therefore it was decided to reduce the number of transits to 18 in February instead of the original 24 in November.

Dorian dispatched ten ships to the Suez to prevent any multiweek delays in freight movement. The Houthi attacks forced a halt to the expeditions at the beginning of December. Currently, ships are being routed through the Panama Canal once more, resulting in increased costs and wait times.

A single passage through the Panama Canal costs approximately $500,000. The canal’s main customers are a small number of box ship operators, however. Businesses like Dorian are required to participate in a bidding process in which the highest bidder wins a crossing. Hansen remarked, “We paid $2 million more, but we know others that paid close to $4 million more.” Dorian charged its clients more for such increased expenses.

January’s ship transits via the Panama Canal decreased 36% over the same month last year.

With government clearance, the operator of the canal plans to spend almost $1 billion on engineering and construction projects to improve access to water reserves. It might take several years to finish the project.

Approximately half of the nation’s population, or 2.5 million people, receive their water from the canal, and the drought is hurting nearby companies.

At a pier on Lake Alajuela, which is a component of the freshwater network that supplies the Panama Canal, Sabina Torres operates Tienda 98, a general store.

The lake has retreated from the dock due to the drought. Water is only provided from 7 to 9 a.m. every other day. During those times, Torres, 46, hastily fills jugs and tanks with water for washing, drinking, and toilet flushing.

She usually receives her products via boat, but these days, fewer deliveries are possible. To get her goods from the boats through the mud and rocks, Torres hired more helpers and purchased an all-terrain vehicle.

Serving mostly locals, Torres’s store brings in about $1,500 a month. That dropped to $800 in January and December. She is now making more advance purchases to ensure she has an adequate supply. She remarked, “We are racing to get enough supplies.”

Under attack

For cargo owners, costs are increasing globally. According to data from U.K. brokerage Braemar, daily box ship rates along routes from Asia to the Americas more than doubled in January compared to the same month last year. Travel rates from Asia to Europe increased by 67%.

According to United Nations data, trade volumes passing through the Suez Canal decreased by almost 40% in December and January when compared to the same period last year. Along with some of the largest tankers in the world transporting oil from the Middle East, the canal is utilized by dozens of ships carrying Asian commodities to Northern Europe and the Mediterranean.

Despite the strike on the rebel group by the U.S.-led naval coalition, major maritime freight ships such as Maersk, Hapag-Lloyd, and others have not gone back to the Red Sea.

Maersk CEO Vincent Clerc stated, “To go back, we will need to meet a very high threshold to ensure our crews and ships are not at risk.” Maersk’s company normally made 15 to 17 Suez crossings every week. “So far there is an escalation and I don’t know if the attacks on the Houthis will help out things.”

Clerc stated that assurances from security personnel regarding the safety of ship passage through the area would be necessary for returning to the Suez.

The executive officer of a ship owned by Europeans, Nikolaev Balan, has made numerous crossings of the Red Sea and the Suez. His ship was there in the Red Sea on January 11, the day of the first American raid on Houthi targets in Yemen.

“We saw a drone flying a few meters from the stern and as we called it in to say that we are targeted. There were warnings on the radio to get out because the Americans will attack,” he said. “We turned back and we are not going back in there.”

For the previous few weeks, Eman Ayad, 42, an Egyptian supply boat operator, hasn’t made much money moving cargo around the Suez.

Ayad is one of perhaps a dozen independent boat owners who frequently operate in the canal zone, providing supplies like food, lubricants, and spare parts in addition to towing services. The boat brings in roughly $800 per month in revenue.

The boat is the only source of income for his family; he received it from his father about ten years ago. He claimed that his wife and their three young children live off their funds.

“I’ll have to sell [the tugboat] to pay off debts if this continues for another month,” Ayad declared. If business in Suez doesn’t pick up again, he plans to immigrate to the United States, where his family may be able to assist him find employment.

Not every ship is eschewing the Suez. To fend off threats, operators that use the waterway to access the larger region via the Arabian Sea and the Gulf of Aden frequently employ armed guards. Red Sea voyages can cost up to $40,000 for each vessel with four guards, according to shipowners and operators.

According to Osama Rabie, chairman of the Suez Canal Authority, toll money collected from ships passing through the Suez decreased by nearly half in January to $428 million from $804 million in the same month the previous year. Egypt’s primary foreign revenue sources are tourism and the Suez Canal.

Due in part to an increase in the per-ship toll, the decline in authorized crossings at the Panama Canal has not negatively impacted overall revenue. Toll revenue from the canal increased to $3.3 billion in 2023 from over $3 billion the year before.

“The operators are complaining, but we try to accommodate as many crossings as possible. The weather has been very unforgiving,” said Ricaurte Vásquez Morales, the canal’s administrator. 

The increase in crossing costs isn’t expected to continue long, according to canal authorities. According to Vásquez Morales, ship operators desire a consistent toll schedule, while the canal wants positive relationships with its clients.

Depending on the amount of rainfall in March, the canal authority intends to reassess the number of daily crossings that are allowed in April. According to him, it anticipates that the drought would cause its revenue to drop by about $200 million this year.