Drought undermines Panama Canal and disrupts global trade | ET REALITY

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For more than a century, the Panama Canal has provided a convenient way for ships to move between the Pacific and Atlantic Oceans, helping to accelerate international trade.

But a drought has left the canal without enough water, which is used to raise and lower ships, forcing officials to reduce the number of vessels they allow through. This has created costly headaches for shipping companies and raised difficult questions about water use in Panama. It is estimated that the passage of a ship consumes as much water as half a million Panamanians consume in a day.

“This is the worst we’ve seen in terms of disruption,” said Oystein Kalleklev, chief executive of Avance Gas, which transports propane from the United States to Asia.

In Panama, a lack of water has hampered canal operations in recent years, and some shipping experts say ships will soon have to avoid the canal altogether if the problem worsens. Fewer passages could deprive Panama’s government of tens of millions of dollars in annual revenue, raise the cost of shipping and increase greenhouse gas emissions when ships travel longer routes.

Although Panama has an equatorial climate that makes it one of the wettest countries, rainfall has been 30 percent below average this year, causing water levels to fall in the lakes that feed the canal and its powerful locks. The immediate cause is the El Niño climate phenomenon, which initially causes warmer, drier weather in Panama, but scientists believe climate change may be prolonging dry periods and raising temperatures in the region.

Before the problems with the water, up to 38 ships a day circulated through the canal, built by the United States and which remained under its control until 2000. In July, the canal authority reduced the average to 32 ships, and later announced that the number would drop to 31 on November 1. Further reductions could occur if water levels remain low. The canal authority is also limiting the depth a ship’s hull can submerge underwater, known as draft, significantly reducing the weight it can carry.

Container ships, which carry finished consumer goods, typically book passage well in advance and have not faced major delays. But ships carrying bulk goods generally do not book passage.

This presents bulk shipping companies with a costly calculation: they can risk waiting days, paying a large fee to skip the line, or avoid the canal altogether by taking a longer route.

Kalleklev, the shipping executive, said his company decided in August to pay $400,000 in a special auction to move a ship forward in the queue, roughly doubling the total cost of using the canal. Other companies have paid more than $2 million, a cost they will sometimes shoulder to ensure ships don’t miss their next mission. A portion of these additional costs will be passed on to consumers, already hit by inflation.

However, the pain has been limited because the US economy is not performing very well and demand for imported goods is relatively weak.

“If this were a year ago, when we were still having record freight rates and consumers were still spending a lot on containerized goods from the Far East, then we would see more drama than we see now,” said Peter Sand, chief analyst at Xeneta. , a maritime market analysis company.

But traffic through the canal is likely to remain at lower levels in the coming months. Reducing passages helps conserve water, because enormous quantities are consumed each time a ship passes through the locks while traveling the 40 miles through Panama.

The drought also presents difficult decisions for Panama’s leaders, who must balance the canal’s water needs with those of residents, more than half of whom depend on the same water sources that feed the canal.

The channel board recently proposed build a new reservoir on the Indian River to bolster water supply and increase traffic through the canal, which would generates more than 6 percent of Panama’s gross domestic product. According to the plan, the new water supply could allow 12 to 15 additional passages per day.

“In optimal terms, the canal can handle 38 transits per day, so 12 to 15 is a lot,” said Rodrigo Noriega, a lawyer and columnist for Panama’s La Prensa newspaper.

Construction of the reservoir is expected to cost nearly $900 million, and the canal authority could begin accepting bids from contractors by the middle of next year with construction beginning in early 2025. But that timeline could well be delayed; Construction of larger locks was completed two years late in 2016, and that project was marred by cost disputes.

The new reservoir would also involve acquiring land protected by a 2006 law and displacing at least some of its inhabitants. Noriega said he hoped Panama’s legislature would pass a law that would lift the ban on acquiring land. But he and others point out that new water sources could also be built elsewhere.

Without a new water source, the canal could lose significant amounts of business. Other sea routes are, of course, longer and more expensive, but are less likely to suffer from unpredictable delays. An alternative is to transport goods between Asia and the United States through the Suez Canal to the East Coast and Gulf Coast. Another is to ship goods from Asia to West Coast ports and then transport them overland by train or truck.

“In theory, something that offers a cheaper, shorter route should always be in favor, but it’s the uncertainty that can be deadly,” said Chris Rogers, head of supply chain research at S&P Global Market Intelligence.

Prolonged disruptions to the canal could stoke interest in building land routes in Mexico, Colombia and other countries that have coastlines on both oceans, said Richard Morales, a political economist who is running as an independent candidate for vice president in next year’s election. anus.

Efforts to secure new water supplies could be a race against climate change.

Because interest in building a canal dates back to the 19th century, Panama has rainfall records dating back about 140 years. That gives scientists more confidence in concluding that climate change is permanent and not merely random, said Steven Paton, director of the Physical Monitoring Program at the Smithsonian Tropical Research Institute on an island in Gatun Lake, which is a much of the canal and supplies most of its water.

He said that while scientists were unsure of the impact of climate change on El Niño, two of the driest El Niño periods of the past 140 years had occurred in the last quarter of a century, and the current one could be the third.

“It doesn’t say this is climate change,” Paton said, “but it does say this is totally consistent with almost all climate change models.”

Sol Lauri contributed reports from Panama.

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