The Collapse of the Panama Canal: Disrupting Supply Chains for the Next 10 Years

The Panama Canal is one of the world’s most important trade routes, connecting the Atlantic and Pacific Oceans and facilitating the movement of goods between Asia, Europe, and the Americas. However, the canal is facing a serious crisis due to a severe drought that has reduced its water levels and capacity. In this article, we will explore the causes and consequences behind the collapse of the Panama Canal and how to cope with them to protect your supply chain.

What is the Panama Canal, and how does it work?

The Panama Canal is a 50-mile (80-kilometer) waterway that connects the Atlantic and Pacific Oceans. About $270 billion worth of cargo crosses the canal annually, accounting for 6% of global maritime trade and 40% of all US container traffic.

The canal was initially started by Ferdinand de Lesseps (builder of the Suez Canal) in 1880 with the help of Gustave Eiffel (yes, That Eiffel!). It was later finished by the US government in 1914.

How does the Panama Canal work?

Eiffel designed the canal to use freshwater coming from the Chagres River to fill a series of locks. The water from the higher locks fills the lower locks, lifting the vessels on one side, and they drain water to the ocean, lowering the vessels on the other side. The process consumes about 52 million gallons (197 million liters) of freshwater per transit!

The canal was later expanded in 2016 by adding a second, larger, and deeper lane of locks called the Neopanamax.

Causes behind the collapse of the Panama Canal

With an average of around 14,000 ships going through every year, the Panama Canal needs a lot of fresh water from rain.

However, Panama is facing a serious crisis due to a severe drought resulting from climate change and a strong El Ni?o.

#1 Climate change

Because of climate change, the average rainfall in the canal watershed has decreased by about 20% in the last two decades. At the same time, the average temperature has risen by about 0.5°C.

These changes reduced the amount of incoming water to fill Gatun Lake and increased the evaporation rate from the lakes and locks.

#2 El Ni?o effect

El Ni?o is a natural phenomenon that occurs every two to seven years and affects the Pacific Ocean's weather and ocean currents. This weather phenomenon causes warmer and drier conditions in Central America than usual.

The end of 2023 saw the beginnings of one of the strongest El Ni?os ever, further reducing the rainfall and the runoff in the canal watershed.

Consequently, last October saw 41% lower rainfall than usual, making it one of the driest Octobers in Panama′s recorded history.

The end result is that there isn’t enough freshwater to operate the locks without draining Gatun Lake.

Consequences of the Panama Canal Collapse

Because of the drought, the Panama Canal Authority (ACP) was forced to reduce the maximum draft and the number of daily slots available for ships that transit the canal:

• Between June and July 2023, the APC lowered the draft in the Neopanamax locks from 50 to 44 feet, then to 43 feet, reducing each ship’s capacity by around 2800 containers.
• Between August and December, bookings for transit through the canal were restricted to 32 vessels per day. They were progressively lowered to 18 per day for February, making it the lowest transit rate in almost a century (53% lower than usual).
• On December 18, rainfall improved slightly, so the ACP eased restrictions and increased bookings to 24 vessels per day from January onward.

Today, and at least until April, only 24 vessels can pass through the Panama Canal daily, which is 37% lower than the average in 2022. This is causing delays, congestion, and higher costs for shippers and buyers, disrupting supply chains worldwide.

Just look at the buildup of ships in the Panama Canal on Marine Traffic as of the time of writing this post.

How to protect your supply chain from the Panama Canal Collapse

The ACP estimates that the current drought conditions will have long-standing effects. While it plans to invest over $8.5 billion in initiatives like diverting rivers into the canal’s watershed over the next 10 years, businesses must act more quickly.

Shippers are already taking long detours through the Suez Canal, the Cape of Good Hope, or Cape Horn. Maersk is now using a railroad as a land bridge to bypass the canal for cargo to and from Oceania.

However, all these solutions imply increased costs, risks, and delays and are prone to disruption.

The better solution is nearshoring. For example, if you’re a business in the US, sourcing from Mexico is a smarter choice than China or even India, and that’s where BabelusAI comes in.

BabelusAI can help you find the ideal suppliers in Mexico to transform your supply chain and make it more agile and resilient, so you don’t have to worry about rainfall in Panama or wars in the Red Sea.

If you want to learn more about how BabelusAI can help you switch to nearshoring and find the best suppliers for your projects closer to home, contact us today or schedule a call now to discuss developing a pilot for your company at no cost.