Rakin Rahman, Staff Reporter at Port Technology International – PTI, sat down for an interview with Joe Monaghan, CEO of Worldwide Logistics Group (WWL). The discussion centred around the drought affecting the Panama Canal, a pivotal global trade route, and the multifaceted repercussions of these delays and shipping constraints. These consequences extend beyond the maritime and logistics sectors, permeating into the economies of neighbouring nations that have borne the brunt of this impact.
Can you provide a brief overview of the factors contributing to the drought in the Panama Canal and outline both the immediate and long-term impacts this will have on global shipping and supply chains?
JM: Currently, Panama should be in the middle of one of its rainiest periods. However, due to the combined effects of global warming and El Niño – which typically results in elevated temperatures, reduced rainfall, and drier atmospheric conditions – the country is experiencing a significant shortage of precipitation. In turn, this is leading to an accelerated rate of water evaporation from the lakes that serve as the primary water source for the Panama Canal. The Panama Canal has a specific draft limit of 44 feet, which means there are many vessels unable to load at full capacity. My understanding is that the rainy season typically goes through October, so if this dry spell persists for much longer, it could lead to potentially severe consequences, and we may find ourselves transitioning into the dry season without a resolution in sight.
Predicting outcomes is challenging due to the weather’s unpredictability. However, at present [as of 21 August 2023], there are approximately 200 vessels awaiting transit through the Panama Canal, which is more than double the usual number. Delays have also reached up to three weeks. This situation is already causing significant effects, including the rerouting of cargoes through the Suez Canal. There’s also consideration of redirecting European-bound cargo around the Cape of Good Hope, which would increase both transit time and costs. Moreover, it’s worth noting that grain haulers departing from the US Gulf and transiting the Panama Canal are now operating with significantly reduced payloads. This results in a substantial increase in the cost per tonne, potentially affecting retail prices and overall cost factors in the future. These impacts have far-reaching consequences that are ultimately felt most by the customer.
The Panama Canal Authority (PCA) has taken various steps to mitigate the effects of the drought on canal operations while ensuring maritime activities continue. Could you discuss some of these measures and their effectiveness? For example, the imposition of lower draft limits.
JM: There have been efforts in the past initiated to conserve water and operate more efficiently in the Panama Canal. A substantial budget, approximately $2 billion, was allocated for this purpose, and numerous groups submitted bids to participate in these activities, with an astonishing 250 bidders in total. Interestingly, as far back as June 2021, the Canal Authority reported that they would provide a more detailed concept for water management. Since then, there has been little public information on this front, indicating that progress has been relatively slow. There’s a clear understanding that a more deliberate approach is needed beyond simply relying on weather forecasts to anticipate future conditions. The current critical delays in operations may catalyse efforts toward implementing improved water management practices, which would ultimately lead to greater efficiency in the canal’s operations. The timeline for these changes, though, remains uncertain.
This isn’t the first instance of the canal encountering low water levels. How do authorities anticipate such events before they occur? If any, what strategies have been implemented to lessen the impact of the drought? Additionally, are there any lessons learned from past experiences that contributed to this situation?
JM: While it may be more pressing now than it was in recent years, it’s been a recurring issue for at least the past four or five years on a seasonal basis. The lack of rainfall in July in particular, which is usually a very rainy month, has undoubtedly compounded the situation and perhaps has made it more critical than it has been in past years. However, it’s worth noting that the authorities took steps towards addressing this issue back in September 2020 when they solicited bids for the redesign and enhancement of the water management system. This demonstrates an awareness that this is a persistent and critical problem, not a transient one limited to a single year. The key question, then, is why there’s been a prolonged delay in formulating and executing a plan to address this issue.
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Because of the imposed restrictions, economists foresee an increase in shipping rates through the canal. Could this prompt shipping companies to explore alternative routes to reach their destinations? If so, what implications would this have for the Panama PCA’s performance in terms of shipping activities?
JM: The plan for the upcoming fiscal year of the Panama Canal, which I understand begins in October, entails a significant 16 per cent reduction in the volume of vessels passing through the canal. In terms of actual financial figures, this reduction translates to approximately $200 million per month, representing a substantial impact on the canal’s income. In response to this development, shipping companies are actively encouraging customers to consider booking passage on vessels traversing the Suez Canal.
We’re also observing a noticeable increase in cargo originating from the East Coast or Midwest, which traditionally used East Coast routes, being rerouted to the West Coast. It’s essential to recognise that over 40 per cent of US-bound traffic currently relies on the Panama Canal. Finding alternative routes for such a significant volume of cargo presents a considerable challenge. However, the Panama Canal continues to operate and handle some cargo, so it does not have to accommodate the entire 40 per cent. This shift in cargo distribution is likely to exert additional pressure on rates, capacity, and other transportation routes for US trade, particularly impacting the US West Coast.
Have the recent labour strikes in the US and Canada, along with the ongoing canal droughts, collectively compounded the impact on shipping operations in North America? For example, has this combination escalated traffic disruptions in the region and exacerbated the pre-existing supply chain issues across North America?
JM: The strikes in Canada certainly had an impact on the West Coast. However, while there were some delays, it was not too big of a cause for concern because the market has become accustomed to much longer delays, having endured this throughout the pandemic. People appeared to accept two- or three-day delays as the new norm, having experienced two- or three-week delays previously. Most of the impact from the strikes has eased, with any residual effects mainly localised to the Pacific Northwest. California ports, on the other hand, appear to be operating quite normally at this juncture. I don’t think that the increased demand resulting from the Panama Canal situation has had a significant enough impact to create new congestion or terminal operation issues.
Have the geopolitical tensions involving China, and the ongoing war between Russia and Ukraine, had any discernible impact on the operations of the canal?
JM: China is no longer the leading country for manufacturing products destined for the US; Canada and Mexico have taken their place. Germany and Japan follow closely as the fourth and fifth largest manufacturing countries, and they are steadily gaining ground. This shift in manufacturing sources is primarily due to factors unrelated to the Panama Canal, such as the pandemic and geopolitical considerations. The pandemic has highlighted the importance of diversifying supply chains, leading to a growing trend in nearshoring. This means Western Europe increasingly looks to Eastern Europe, while the US is favouring Canada and Mexico for production. This isn’t just a temporary trend; substantial investments are being made in manufacturing facilities and supply chain optimisation to support this new sourcing strategy. In essence, however, this is a macro-level issue and not directly related to the Panama Canal.
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Considering the crucial role of the Panama Canal in facilitating global goods shipments, how do you view the level of responsiveness demonstrated, or the potential lack thereof, by government officials in the US and other North American governments concerning this issue?
JM: The importance of the global shipping industry often seems overlooked from a political perspective. Before the pandemic, when I mentioned my profession, people usually didn’t understand or engage with it. But now in recent years, terms like ‘supply chain’ have become commonplace, indicating increased awareness. Due to the infrequent discussion of this topic, there could be significant developments behind the scenes that we aren’t privy to. Ideally, the shipping industry’s extensive impact would prompt government officials to actively seek solutions. However, I’m not aware of whether these efforts are taking place, nor am I aware that they aren’t happening.
Amidst the increases in surcharges and the imposition of weight limits on ships passing through the Panama Canal, how have the low water levels within the canal impacted inflation rates and bottlenecks in the US economy and neighbouring countries?
JM: The full impact of the low water levels has not been realised yet, but it’s looming on the horizon. Considering that approximately three-quarters of the cargo moving through the Panama Canal heads to the US, the most significant repercussions will likely be felt there. Reduced cargo capacity through the canal is expected to drive up shipping rates to both the East and West Coasts. Consequently, transportation costs are poised to increase. Simultaneously, we’re currently witnessing substantial growth in overall trade capacity.
The question arises: Will the Panama Canal’s constraints force rates upward, or will the surplus supply of shipping space push rates down? In my view, the Panama Canal’s impact is more of an intermediate or short-term concern that might lead to rate spikes for a limited period, such as during a peak season like this year. However, the overarching trend in rates is expected to trend downward. This situation will challenge shipping companies to decide how much of their aging and non-compliant fleet to retire, along with determining their approach to idling and slow steaming to counterbalance the expanding capacity. Ultimately, these factors will likely have a more significant impact than the Panama Canal.
Has the US decreased its reliance on manufacturing supplies from China? If this is the case, how will it affect various aspects of shipping logistics, such as maritime routes, supply chains, and the broader global trade balance?
JM: I haven’t observed concrete evidence of this yet, but I believe that reduced dependence on China could potentially impact port rotations and the selection of direct ports of call. Not long ago, a significant portion of cargo from Vietnam was transported via feeder vessels, with connections made at ports like Cal Shang or Singapore. However, due to a substantial increase in volume, particularly from China, the trend has shifted toward direct vessel calls from Vietnam. Considering this shift, it’s plausible that we may witness similar nuanced changes in the future. These changes could involve increased cargo from ports that hadn’t previously handled substantial volumes and a decrease in cargo originating from China.
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What are your expectations regarding trade and shipment volumes in the months ahead? Is a sense of optimism warranted considering strikes have concluded in the US and Canada or is there still cause for concern with the prolonged negative impact of the canal drought and geopolitical issues with countries like Russia and China?
JM: I’d like to maintain an optimistic perspective, despite the ongoing changes, especially the significant increase in global trade capacity. Over the past decade, container capacity worldwide has nearly doubled, comparing 2023 to 2011. However, it’s important to note that cargo movement hasn’t doubled during this same period. Although I don’t have the exact figures, I’m confident that cargo volumes haven’t kept pace with capacity expansion, a trend that continues with the introduction of larger vessels. It’s interesting to observe that while the total trade capacity has doubled, the number of vessels has only seen a slight increase.
The new ships entering service are even larger, and there’s an additional 15 per cent capacity increase expected by the end of next year. This growth might be tempered somewhat by scrapping obsolete vessels. However, carriers are cautious about retiring vessels prematurely, as it represents a substantial capital investment. Carriers tend to look at the bigger picture and often conclude that collective vessel retirement, spreading the financial impact across many, rather than a few, can lead to improved profitability. This is because higher rates offset the loss of some useful capital, resulting in a net gain. This pragmatic approach is likely the path they will continue to follow.
In the short term, our optimism for the remainder of this year, particularly concerning US trades, involves anticipating a slight increase in volume. However, looking ahead to 2024 from a macroeconomic perspective, we foresee a somewhat improved situation with a modest uptick in volume. However, the challenge lies in the substantial and continuous increase in capacity. It raises doubts about whether the anticipated rise in demand will be sufficient to absorb this surplus capacity. Consequently, there isn’t much reason for short-term optimism.
Joe Monaghan has over 40 years of experience in logistics. Before forming Worldwide Logistics in 1998, Joe was Executive Director of International for Fritz Companies, Inc., where he was employed for 10 years. In this role, he was responsible for managing all Fritz, non-US locations. This included management of over 1,000 employees in over 25 countries. During his career, Joe has held executive positions with Fritz, Geo Logistics, and OOCL. He has spent extensive time, traveling and living abroad. Joe is a graduate of Fairleigh Dickinson University and did postgraduate study at the University of New Hampshire.
