The widespread headlines on Panama’s drought and the traffic jam of ships at the canal sound ominous. Authorities at the Panama Canal Authority (ACP) have called this year’s water shortages an “unprecedented challenge.”

Media coverage on the canal begets more coverage. Shipping journalists’ inboxes are now filling up with public-relations pitches offering clients’ expert opinions on “the historic drought set to disrupt global supply chains,” the “Panama Canal gridlock impacting the global supply chain” and “looming potential shortages as the Panama Canal restrictions impact holiday stocks.”

The reality is that Panama Canal constraints have yet to affect American consumers.

The data doesn’t point to a crisis as of now, nor do comments from shipping executives and analysts. And going forward, the inherent flexibility of the supply chain allows for alternatives should Panama’s drought persist.

Container ships don’t see higher waiting time

The ACP has reduced daily transits as the maximum ship draft has declined to 44 feet. The intention is to lower average transits from 36 to 32 per day, paring transits via the original Panamax locks from 26 to 22 and maintaining transits via the newer, larger Neopanamax locks at 10 per day (container ships serving the U.S. use the Neopanamax locks).

There’s no evidence yet of the effect of the extended dry season in the ACP’s statistics on monthly average transits, which are driven by both demand and canal restrictions.

The average number of daily Neopanamax ships transiting last month — at a time when vessel queues were rising — was higher than in July 2022 and July 2021, at 9.9 per day. The average number of total ships transiting this July, 33.4, was on par (within one ship per day) with transits in the same month over the past two years.

ACP data does show a significant rise in the average waiting time in both July and August — but not for container ships.

As of Tuesday, the average waiting time in August for all ships transiting from the Pacific to the Atlantic was 11.5 days, up more than five-fold from June.

August’s waiting time from the Atlantic to the Pacific was 9.7 days, more than quadruple June’s average.

All of the increase was driven by higher waiting times for general cargo ships, tankers, dry bulk carriers, liquefied petroleum gas (LPG) carriers and other non-containerized vessels. Average waiting time for container ships has remained insignificant, at less than a day.

Canal authority says queue only 30% above normal

The queues of commercial ships waiting to transit at either entrance of the canal have garnered considerable media attention, harkening back to coverage of the container-ship pileup off Southern California in 2021 and 2022.

Ship-position data from MarineTraffic continued to show very visually impressive queues as of Wednesday.

However, when the ship-position data is filtered to show only container ships, the queue is very small, particularly given that some of these vessels may be waiting to call in Panamanian transshipment hubs, not waiting for canal transits.

The Wall Street Journal reported Friday that more than 200 vessels were waiting on either side of the waterway, based on ship-position data.

The ACP’s numbers are different — and considerably lower.

The official data on vessels scheduled to transit the canal showed 119 vessels waiting as of Wednesday, including 45 with reservations and 74 without. Under normal conditions, there are around 90 ships waiting, meaning that the current queue is only 30% higher than normal according to ACP data, not more than twice normal levels.

Canal delays due to lower water levels and other issues have been a regular occurrence over the years. Commodity data provider Kpler tracks the number of dry bulk vessels, tankers (including crude and product tankers) and LPG carriers waiting to transit the canal over time.

According to the latest Kpler data, current tanker queues are not abnormal and are lower than peak levels seen in spring 2022. Current LPG carrier queues are also not historically high and lower than peak levels seen in late 2022.

Dry bulk queues are the exception. The dry bulk queue has been unusually high this month. It hit 91 vessels in early August, according to Kpler data. However, that queue has since been cut almost in half. It was down to 55 bulkers as of Sunday, back in line with normal peak levels.

What canal constraints mean to US containerized imports

Container ships continue to transit the canal with little delay, although draft restrictions are requiring vessels to load fewer boxes than they are capable of carrying.

“It has an effect because it means you can load less on the ships,” said Rolf Habben Jansen, CEO of ocean carrier Hapag-Lloyd, on the company’s latest quarterly call. “The effect is not immaterial, but it’s also not huge.”

A carrier source told Platts, a division of S&P Global, that there are “no issues on the U.S. East Coast with Panama,” “no impact on schedules,” and no positive impact on freight rates at this time.

Judah Levine, head of research at Freightos (NASDAQ: CRGO), said Wednesday: “Container ship traffic — most of which moves via scheduled transits booked well ahead of time and given priority over other vessels — has seen some delays and added costs but has not faced significant disruptions.”

Asia-East Coast spot rates should theoretically rise faster than Asia-West Coast spot rates if Panama Canal disruptions are impacting trans-Pacific container flows. They haven’t.

Between June 29 and Tuesday, the Freightos Baltic Daily Index (FBX) spot rate assessment for China to the West Coast rose 70%. The FBX China-East Coast index was up only 38%.

Container shipping supply chains possess flexibility to deal with Panama Canal constraints should they intensify in the future. To reduce capacity on transiting ships, ocean carriers can drop off boxes at Pacific hubs in Latin America, then transship those boxes to other vessels for canal transit.

Panama itself offers considerable flexibility in dealing with canal water issues. The Panama logistics complex is not just a canal, it’s a multimodal system with multiple container ports at both entrances to the waterway, and with rail and trucking links connecting the ports on either coast.

Cargo from Asia could also be redirected to the currently underutilized West Coast ports of Los Angeles and Long Beach, then shipped overland to eastern destinations, or sent to the East Coast via the Suez Canal.

“Reports of shippers choosing to divert orders to the West Coast or via the Suez have been minimal,” said Levine.

What canal constraints mean to US energy and agriculture

Looking beyond container shipping, what does the Panama Canal drought mean to America’s energy and food commodity pricing? There are no risks to American consumers on this front, as America uses the canal for commodity exports, not imports.

Should the canal situation persist or worsen, outbound bulk commodity exports can reflow around the logjam (albeit at a higher cost in freight and time) in the same way global commodity trades have rerouted around Russia sanctions.

Panama originally envisioned the larger Neopanamax locks as a conduit for U.S. containerized imports from Asia. By the time the new locks finally debuted in 2016, Panama found it had two unexpected major customers beyond container lines: liquefied natural gas carriers and LPG tankers transporting U.S. propane.

America, once an LNG importer, became an exporter during the years the Neopanamax locks were being built. Concurrently, LPG carriers that formerly used the Cape of Good Hope route switched en masse to the shorter Panama Canal route as soon as the new locks opened.

Canal-related complications for U.S. LNG exports are much lower in 2023 due to Russia’s invasion of Ukraine. Most of America’s LNG exports now head to Europe as a result of the war, replacing Russian pipeline supply and sharply curtailing U.S. flows to Asia via the canal. Of the remaining cargoes to Asia, ship-position data shows that numerous tankers loaded with U.S. LNG have already switched to the Suez Canal and the Cape of Good Hope routes.

Meanwhile, LPG carriers “are starting to see large delays, whereby ships are deviating around the Cape [of Good Hope] if they go to Asia,” said Oeyvind Lindeman, CEO of LPG carrier owner Navigator Gas (NYSE: NVGS), during a conference call on Aug. 16.

Longer voyage distances and vessels stuck in canal queues soak up transport capacity, pushing up spot LPG shipping rates. Panama Canal issues are “clearly a positive from a shipping capacity point of view,” said Lindeman.

Clarksons Securities put Wednesday’s average U.S. Gulf-Japan spot rate for very large gas carriers — the LPG vessels most affected by Panama Canal issues — at $86,800 per day, over triple rates at this time last year.

In the dry bulk market, the most significant Panama Canal impact for the U.S. will be on agribulk exports (soybeans, wheat, corn) to Asia. These cargoes transit the older Panamax locks due to ship-size restrictions at both U.S. loading ports and Asian discharge ports.

Panama Canal wait times are having a direct affect on dry bulk spot rates, depending on which way the queue is trending. According to price-reporting agency Argus, lower wait times in recent days have put downward pressure on U.S.-Asia dry bulk rates.

American agribulk exports to Asia traditionally surge in the fall. If canal conditions worsen in the coming months, U.S. exporters would face higher transport costs and voyage times for their cargoes.

That said, dry bulk rates are heavily affected by the Chinese economy. Chinese economic weakness has depressed overall dry bulk rates in 2023, so any canal-related rate increases this fall would be off a lower base. According to Clarksons Securities, Panamax spot rates averaged $13,600 per day on Wednesday, down 5% from the same time last year and down 60% from the same time in 2021. 

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