Posts Tagged “Panama Canal”
Maersk plans to eliminate Panama Canal vessel transits on a north-south service between Oceania and the U.S. East Coast, citing the ongoing drought that has reduced ship transits and container carrying capacity through the waterway, Journal of Commerce reports.
The Copenhagen-based carrier said Wednesday that its OC1 service linking Australia and New Zealand with the ports of Philadelphia and Charleston will instead use a 50-mile rail service across the Isthmus of Panama to handle cargo between the Atlantic and Pacific.
As a result, the OC1 service will be broken into two loops, Maersk said. The Pacific loop will drop off northbound cargo at Balboa for the land bridge service via rail to Manzanillo, where the Atlantic loop will retrieve the cargo and resume waterborne service.
The carrier did not say whether the nearly 26-day transit time from New Zealand to Philadelphia would change due to the land bridge. It said that while northbound cargo will not be delayed, southbound cargo may see some delays.
Other Maersk services from Asia to the US East Coast will continue to use the Panama Canal.
Along with the Panama Canal, Maersk said the OC1 would omit Cartagena, Colombia, as a call. It also directed shippers to the option of its PANZ service between Oceania and the US West Coast.
Maersk said the decision to omit the Panama Canal crossing on OC1 was “based on current and projected water levels in Gatun Lake,” which provides the water to raise and lower vessels in the canal’s locks. As of Wednesday, the Panama Canal Authority (ACP) said Gatun Lake was at 81.6 feet, compared with a five-year average water level for January of 86.9 feet.
Low water levels have forced the ACP to only allow 24 ships of any size to transit the Canal daily, down from the 35 to 40 ships it could handle before the ongoing drought that has reduced Gatun’s water levels. Ships must also carry less cargo as the Canal is limiting the maximum depth of neo-Panamax vessels to 44 feet from 50 feet. Smaller Panamax vessels, such as the ones in the OC1 service, are restricted to a 39.5-foot depth versus the typical 45 feet.
In early December, ocean carriers in THE Alliance said they were preparing to divert east-west vessel services from the Panama Canal due to the potential for transits being reduced to as few as 18 by February. But with better-than-projected water levels on Gatun Lake, the ACP did not implement that further reduction.
Following drought restrictions imposed in May, which saw daily transits and vessel capacity reduced, the Panama Canal Authority (ACP) announced Dec. 15 that it will increase the number of daily transits to 24 starting in January.
This comes as rainfall and lake levels for November proved to be better than expected, coupled with the positive outcomes from the Canal’s water-saving measures.
Additionally, the Panama Canal will allow one booking slot per customer per date, with some exceptions for quotas offered to vessels competing through the reservation system.
These measures allow the majority of vessels that want to transit the Canal to have a better chance of obtaining a reservation.
Currently, 22 vessels transit daily, divided into 6 Neopanamax and 16 Panamax. This restriction is in response to the challenges posed by the current state of Gatun Lake, which is experiencing unusually low water levels for this time of the year due to the drought induced by the El Niño phenomenon.
The canal is supplied by two nearby lakes which received 50% less rain than usual between February and April.
With this, 2023 became the second driest year in recorded history of the Panama Canal watershed, which led to the implementation of an operational strategy focused on water conservation and transit reliability.
Approximately 3% of global maritime trade volumes traverse the Panama Canal. Over 50% of the tonnage navigating through the maritime passageway originates from the trade lane connecting the East Coast of the U.S. to Asia, followed by South and Central America’s routes. Agricultural products are among the key commodities transported through the canal.
In an article published in the Journal of Commerce (JOC), Mark Szakonyi goes in depth regarding the options that carriers are considering to face drought-driven restrictions imposed in the Panama Canal. Unless unexpected rainfall were to hit the country, transit restrictions are expected to be in place for the next few years.
“Restrictions, which effectively reduce the maximum stowage capacity of larger vessels and limit the overall number of transits, will likely force carriers to alter networks as they try to push higher costs onto shippers,” says Szakonyi.
Panama Canal authorities have announced that the soonest relief to restrictions- which were imposed in July- could come in 2028.
More concerning is the fact that the easing of restrictions would come when the government of Panama leaves aside years of underinvestment and supports $2 billion in investment to build a new reservoir and more pipelines.
“We greatly appreciate the current weather conditions are a factor,” Ocean Network Express (ONE) CEO, Jeremy Nixon wrote in a letter to Panamanian President Laurentino Cortizo Cohen on Oct. 30. “However, we also understand that no significant projects have gone ahead in Panama to increase the freshwater supply to the locks from other catchment areas.”
Draft limits are reducing the capacity of container ships transiting the canal by approximately 20% across all size classes, says Michael Kristiansen, president of Panama-based consultancy CK Americas.
Larger vessels lose approximately 350 TEUs of capacity for each foot of draft lost; with the draft now limited to 44 feet, down from the designed 50 feet, larger ships must give up about 2,100 TEUs of otherwise usable space.
Some carriers have been forced to offload cargo at terminals at either end of the canal, and then rail those boxes across the isthmus. Container lines have been generally spared from long transit delays, however, thanks to pre-scheduled transit appointments.
Carriers considering options
In Nixon’s letter to President Cortizo he explains that upon growing concerns and the lack of service reliability, ONE is considering other routings via the Suez Canal.
This month, Zim Integrated Shipping Services added a call at the Port of Lázaro Cardenas in Mexico to allow Asian imports to arrive in the Midwest.
ONE, similar to other container lines, invested heavily in larger vessels that were able to move through a larger set of locks, which was completed in 2016 at a cost of $5.25 billion.
Ports along the US East and Gulf coasts similarly invested billions of dollars to be able to handle the larger ships, which has helped fuel a two-decade shift of trans-Pacific imports away from the West Coast.
The lack of scheduled service is squeezing seasonal refrigerated (reefer) operators that charter vessels on an ad-hoc basis and must wait in line similar to the bulk carriers and tankers.
Nixon also raised concern about the reduction in daily transit slots for neo-Panamax vessels- those with capacities ranging from 10,000 to 15,000 TEUs that can transit the canal thanks to the new set of locks that opened in 2016- with the number falling to five starting Jan. 1 compared with the 10 available just three months ago.
Political solutions
Panamanian politicians seem more focused on copper than water, amid the largest protests in three decades over mining concessions. Rising political instability and social unrest frame the upcoming national election in May.
Ultimately, the government must either expand the canal authority’s geographic remit so it can push through water management projects or limit current restrictions that prevent it from building new reservoirs.
Canal officials hope construction contracts currently in the offing can be awarded by the end of 2024, with work completed in 2028.
Depending on the severity of this drought, and potentially others to come, carriers may do as ONE warned: shift service away from the canal.
Deploying smaller vessels is another option.
Carriers could also adjust services to send more cargo from South Asia through the Suez Canal, though it would add distance for some origins, Kristiansen said. The US East Coast is approximately 2,200 nautical miles farther from Shanghai via the Suez Canal than via a Panama Canal routing.
Yet another option would be for carriers to change some Asia–North America services to so-called around-the-world strings, transiting the Suez on the backhaul from North America to Asia, Kristiansen says.
That would require an additional deployment of ships in the string to maintain weekly service frequency. Although less than ideal, it would slightly mitigate industry-wide overcapacity.
It was less than two months ago shipments to the East Coast through the Panama Canal were not expected to be serious delayed. However, this has apparently changed.
Because of restrictions imposed by the Panama Canal Authority (ACP) in late May, some import shipments from Asia to the U.S. East Coast were expected to be delayed as the annual Christmas season traffic gridlock occurs.
“Christmas goods urgently shipped from Asia into the East Coast, may not arrive in time,” British-American Shipping CEO Paul Snell tells AJOT.com
Faced with an unprecedented drought this year, the ACP announced a cut to the draft restrictions for ships transiting its larger neopanamax locks by six feet. Transits were also slashed by 20% to just 32 vessels a day.
Last September PhilaPort reported liner operators should reserve their transits ahead of time and have a priority to pass the many bulkers and tankers waiting in the anchorages at both sides of the waterway.
While current restrictions only affect vessels sailing at deep drafts, leaving out the conventional reefer segment, the logistic issues that are expected to arise during holiday season could still show an impact on fruit imports.
PhilaPort notes there will be vessels out of sync, out of alignment, and potentially all arriving at one time. So, it will be harder to control the schedule and it will be harder to maintain schedules both in and out of the U.S.
The Panama Canal Authority recently warned water-conserving measures will be in place for at least the next 10 months. As a result, global shipping companies have been urged to share transit plans at one of the world’s key maritime chokepoints.
An unprecedented drought this year, combined with the onset of the El Niño weather phenomenon, has resulted in a cut of draft restrictions for ships coming through its larger neopanamax locks by six feet. Transits also have been slashed by 20% to only 32 vessels a day.
These measures have resulted in ships backing up in significant numbers at either end of the canal. The Aug. 25 official total count was 129 ships, down from the peak of 165 earlier that month, but still 43% higher than the average.
The Panama Canal Authority has noted the restrictions would remain in place at least throughout the first half of 2024.
Container services and cruise itineraries tend to transit the canal with long advanced bookings. For bulk sectors, it is more ad hoc and with shorter notice, and it has been here the impact has been greater, where it might not be possible to obtain an advanced booking and therefore joining the queue is necessary.
The limits on transits have caused a vessel pile-up. According to some reports, there were recently 200 queuing, with wait times of up to 21 days.
While there are complex options, it’s noted ships greater than 12,000 TEUs, may choose to re-route through Suez. TEU is the industry term for a 20-foot equivalent unit.
For smaller containerships, which can still pass fully laden, a backhaul return to Asia via the Suez or the Cape with a slightly longer distance and time is another option liners will be looking at to reduce overall Panama demand while also soaking up capacity at a time where container fortunes are widely perceived to be on the wane through to at least the end of next year.
There has already been one cruise ship cancel its winter Panama season. Container carriers switching routes will be watched carefully by other sectors keen to get prized slots through the waterway in the coming months.
Some observers and logistics providers have warned goods needed for the Christmas shopping season might arrive late. Goods worth $270 billion – about 73% of the canal’s annual volume – are headed for the U.S. market, according to the CPA.
The travails at the canal are not having a notable lifting effect on container spot rates in the past two weeks. Drewry’s weekly World Container Index, published Aug. 27, showed rates from Shanghai to New York were down by $120 per feu (forty-foot equivalent unit).
The longer the situation persists the bigger the chances are of further freight rate increases and the likelihood that shippers will begin to divert cargo back to the US west coast ports and use rail to bring the cargo to its final destination.
In light of the ongoing dry season and its prolonged effects, the Panama Canal has informed its customers that it will maintain a draft of 44 feet for the next few months.
The measure will be in place for “as long as weather conditions do not vary significantly from our current projections,” the Panama Canal Authority says in a recent release.
This comes as the canal seeks to continue providing reliable and sustainable service for its clients.
An average of 32 vessels per day will be allowed transit with this temporary condition, as changes in precipitation patterns are expected to affect water availability in Panama.
Drought conditions in the canal are part of a global phenomenon, with the World Meteorological Organization warning about a high probability of El Niño setting in before the end of this calendar year.
The Canal has been implementing procedures to improve water efficiency in its operations, while conducting studies to identify long-term solutions to climate variability. However, the severity of the drought, coupled with its recurrence is historically unprecedented.
The Panama Canal remains committed to ensuring safe and reliable operations in the short term and optimal services for years to come.