After its driest October on record, the Panama Canal will severely restrict transit capability to conserve water. Shipping will feel the results within the months ahead, with different vessel types facing different fallout.
Panama Canal Authority (ACP) Administrator Richarte Vasquez outlined the present challenge during a press conference on Sept. 12: Each transit of the Panama Canal consumes a considerable amount of water, no matter ship size. If it doesn’t rain enough, the canal must either limit transits or reduce ship draft (the allowable distance between the waterline and the hull bottom).
Around 70% of vessels using the Panama Canal require a draft of 44 feet, which is the present limit, down from 50 feet in the beginning this 12 months. If the draft is lowered further, most ships won’t have the ability to transit with full loads.
“We’ll commit to 44 feet for the foreseeable future. If adjustments are required in an effort to maintain 44 feet, those adjustments will probably be on the variety of transits per day,” Vazquez said six weeks ago.
Those adjustments are actually required. The ACP had previously reduced day by day transit reservation slots from 36 to 32. On Tuesday, it announced that reservation slots will probably be limited to 25 as of Friday, 24 starting Nov. 8 and 22 on Dec. 1. The variety of reservation slots will fall to twenty on Jan. 1, 2024, then 18 starting Feb. 1.
Effects on container shipping
The Neopanamax locks that debuted in 2016 primarily handle larger container ships, liquefied natural gas carriers and high-capacity liquefied petroleum gas carriers often called very large gas carriers (VLGCs). The older Panamax locks mainly handle dry bulk ships, tankers, smaller container ships and vehicle carriers.
Larger container ships sailing from Asia to U.S. East and Gulf Coast ports already feel the effect of Panama’s drought, because they need greater than 44 feet of draft when fully loaded. Vasquez said that for each foot of lost draft, container ships lose capability for 350 twenty-foot equivalent units.
Thus, this 12 months’s lack of 6 feet of draft equates to 2,100 TEUs of cargo. Liners have either needed to sail with lower utilization or unload 2,100 TEUs on the Pacific side of Panama, rail them across the isthmus and reload on the Atlantic side.
The just-announced transit restrictions avert or delay further draft reductions that will force liner corporations to unload and reload much more containers.
Nevertheless, the transit reservation cap itself looks more likely to affect schedules.
Over the subsequent two months, the variety of Neopanamax transit reservation slots will probably be cut in half, from 10 currently to 5 as of Jan. 1.
In the course of the past two fiscal years (the ACP’s fiscal 12 months ends Sept. 30), there was a mean of 4.7 container ships transiting the Neopanamax locks per day, based on FreightWaves calculations based on ACP transit data.
![chart of Panama Canal transits](https://www.freightwaves.com/wp-content/uploads/2023/11/01/REDO-4-pan-chart-1200x436.jpg)
That historical container-ship average is correct on the Feb. 1 limit for total Neopanamax reservation slots (for all ship types) — and it’s just a mean, meaning that on many days over the past two fiscal years, there have been greater than five container ship transits through the Neopanamax locks.
Container shipping flows, as with other ocean cargo flows, rise and fall seasonally. Thus, some container service scheduling changes appear likely while restrictions are in place.
Effects on LNG and LPG shipping
The brand new limits raise serious questions on the extent non-containerized ships can use the Neopanamax locks (VLGCs and LNG carriers are too big to suit through the Panamax locks.)
Over the past two fiscal years, the Neopanamax locks have averaged 9.9 ship transits per day, right at the present reservation slot limit of 10 — which, as of Friday, drops to eight.
Along with container ships, a mean of two.5 VLGCs, 0.9 LNG carriers and 1.8 ships of other types have transited the Neopanamax locks per day.
Assuming precedence is given to container ships when restrictions are in place, most LNG carriers and VLGCs can be forced to take the longer path to and from Asia, either via the Suez Canal or the Cape of Good Hope. That rerouting has already begun, and can inevitably speed up.
Oystein Kalleklev, CEO of Avance Gas (Oslo: AGAS), told FreightWaves in a recent interview that many VLGCs already avert the Panama Canal on their return leg for Asia, resulting from the uncertainty of meeting their loading windows within the U.S. Gulf consequently of canal delays.
Frode Mørkedal, shipping analyst at Clarksons Securities, said in a client note Wednesday that transit restrictions “will touch most shipping sectors that navigate the canal, [but] VLGCs and LNG carriers are poised to experience probably the most substantial effects.”
The longer distances traveled by VLGCs and LNG carriers will absorb more transport capability and support higher rates. Mørkedal noted that VLGC freight futures “strengthened significantly” on news of Panama Canal restrictions, with the 2024 futures contract for VLGC voyages from the Middle East to Japan jumping $10,000 on Tuesday, to $70,000 per day.
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