The Panama Canal Odessey – A Vital Link for Global Trade Stares at an Uncertain Future

Serving as a critical link between the Atlantic and Pacific – cutting down costs and time considerably – the Panama Canal has been the cornerstone of global supply chains and international trade for long. It supports the movement of various commodities, including Dry Bulk, Containers, Chemical Tankers, LPG carriers, LNG, Vehicle carriers, Refrigerated cargo, General Cargo, as well as Passengers.

The canal shortens the distance between ports on the east and west coasts of the Americas, facilitating more efficient trade and transportation. Around 72% of transiting ships are either going to or coming from U.S. ports. Using the Canal results in saving considerable time and fuel costs and enables faster delivery of goods. This benefit is particularly significant for time-sensitive cargoes, perishable goods, and industries with just-in-time supply chains. For instance, a vessel sailing from New York to San Francisco via the Canal travels 8,370 km, which is well under half of the 20,900-km route around Cape Horn.

The construction of the Panama Canal in the early 20th Century changed trade patterns by
opening new routes between countries and regions that traditionally could not trade at competitive
prices due to the vast distance between them. Originally built for the purpose of military movement, the Panama Canal has, over time, become a facilitator for trade by shortening the time and distance between production and consumption markets.

Gaillard Cut, Culebra Slides, 1915

During the United States’ management of the Canal, it had operated as a nonprofit public utility; however, once returned to Panama, the new business model incorporated the Panama Canal Authority in its legal framework thus allowing the Canal to operate more like a corporation to be profitable and provide direct benefits to the Government of Panama. There was a consensus reached between the Government and civil society which determined that the Canal should function insulated from politics, as an autonomous institution, and under a for-profit model that would provide wealth, economic growth, and improve the quality of life of all Panamanians.

However, a major challenge that stood in the face of the Panama Canal Authority was that of becoming obsolete due to restricted size and capacity. The Authority conducted more than 70 studies to determine the technical, economic, and environmental viability of expanding the Canal. Meanwhile, the Authority also focused on improving the Canal’s financial performance and making huge investments to maintain and improve the service of the existing Canal.

Former U.S. President Jimmy Carter with Panamanian President Mireya Moscoso during a ceremony to transfer control of the Panama Canal on Dec. 14, 1999.

The Panama Canal Authority approached financial markets and was able to secure, amid the global financial crisis, USD 2.3 billion to finance part of the estimated cost of the expansion of USD 5,250 billion. Financing was secured from the European Investment Bank, the Japanese Bank for International Cooperation, the Inter-American Development Bank, and CAF (Corporación Andina de Fomento).

According to data, since 2013, more than a million vessels have transited the Canal with more than 9.4 billion long tons of cargo. These statistics are proof that the Panama Canal has been a very effective catalyst of international trade, reducing the time and distance between countries which has translated into more competitiveness and economic growth for countries and regions.

To provide carriers with easier and more access, a third set and wider lane of water locks was constructed and from 2016, the new locks allow the transit of larger, Post-Panamax ships, capable of handling more cargoes. In 2023, there were more than 14,000 vessel transits on this pathway between seas.

In 2023, the Panama Canal witnessed a total of 22 vessels crossing daily. The total tonnage transported through the canal during the Annual Fiscal 2023 (October 2022 to September 2023) was documented but not explicitly stated.

In December 2023, a report from shipbroker Intermodal said that as 2023 draws to a close, the global shipping industry confronts significant challenges due to environmental and geopolitical issues impacting the Panama and Suez Canals. These pivotal maritime passages are experiencing disruptions that compel the industry to adapt, affecting global trade routes and logistics rapidly.

Back in 2022, the Panama Canal facilitated cargo transportation of around 294 million LT, according to official statistics from the Panama Canal Authority. However, this number dropped to 285.7 million LT in 2023 due to a severe drought that reduced the canal’s transit capacity considerably, leading to an estimated decrease in cargo transit. The Canal, under normal conditions, handles between 36 and 38 vessels per day. However, due to the drought and El Niño, transits were reduced first in November 2023 and further, as low as 18 slots per day in 2024.

A naturally occurring El Nino climate pattern associated with warmer-than-usual water in the central and eastern tropical Pacific Ocean is contributing to Panama’s drought. Panama had minimal rain in 2023 because of climate change. This will continue in 2024 and beyond because of El Niño. The canal uses anywhere from 55 million to 125 million gallons of fresh water with each ship that traverses its passage. The water level in the man-made Lake Gutan (Lago Gatun), which is one of the biggest sources of freshwater for the Panama Canal, is currently at its lowest point in nearly 60 years.

As fewer shipping vessels are able to pass the Panama Canal each day, this has led to severe shipping backlogs. Delays or missed deliveries are affecting a broad range of industries. A ‘waiting room’ has developed on either side of the canal for ships waiting to cross. Wait times have increased and continue to grow.

The shipping companies that are using the Panama Canal come from 18 countries, including the world’s top three shipping conglomerates – Maersk (Denmark), MSC (Switzerland), and CMA CGM (France). To break down the traffic by shipment category for the Panama Canal, we can delve into the various types of vessels and the cargoes they carry:

1. Containers:
Containers play a significant role in the cargo transported through the Panama Canal. These standardized units are used for shipping a wide array of consumer goods, electronics, and manufactured products. The flexibility and efficiency of containerization allow for the easy handling and transport of various commodities, contributing to the smooth flow of global trade.

2. Bulk Carriers:
Bulk carriers are designed to transport large quantities of dry bulk commodities such as grains, coal, ore, and other raw materials. These vessels are vital for meeting the demands of industries that rely on these resources for production and manufacturing. Their ability to transport substantial volumes of cargo makes them a crucial part of the canal’s traffic.

3. Tankers:
Tankers are specialized vessels built to transport liquids, including crude oil, petroleum products, chemicals, and liquefied natural gas (LNG). They play a critical role in facilitating the global energy trade and supplying essential resources to countries around the world. The Panama Canal’s strategic location makes it a vital route for tanker traffic, connecting major energy-producing regions with consumer markets.

4. Passenger Ships:
While less common compared to cargo vessels, passenger ships also utilize the Panama Canal. These vessels include cruise liners and other recreational boats that offer leisure travel and tourism experiences. The canal’s scenic landscapes and historic significance make it an attractive route for cruise itineraries, providing passengers with a unique and memorable journey.

These categories of vessels and cargoes highlight the diverse nature of traffic that transits through the Panama Canal. The canal’s ability to accommodate a wide range of shipments contributes to its importance as a global trade route, connecting countries and facilitating the exchange of essential goods and commodities around the world.

Historical records show a steady growth trajectory in tonnage throughput since the canal’s inception. Tonnage through the canal did not top 20 million net tons until 1946. However, between 1946 and 1977, it soared to 160 million net tons, reflecting a period of rapid expansion in global trade.

According to data from Statista, the net tonnage transported through the Panama Canal amounted to nearly 516.5 million PC/UMS tons in fiscal year 2021. This marked a significant increase from previous years, underscoring the canal’s enduring relevance in facilitating maritime transportation.

Despite occasional fluctuations due to economic cycles and geopolitical factors, the long-term trend indicates a continuous rise in tonnage transported through the canal. This growth underscores the canal’s critical role in facilitating international trade and connecting markets across continents.

The net tonnage transported through the Panama Canal in fiscal year 2023 amounted to approximately 516.5 million PC/UMS tons, as reported [3]. This figure represents the total amount of cargo transported through the canal during that period.

Source – Panama Canal Authority

The situations at the Panama Canal and Suez Canal are rapidly evolving and inherently uncertain. Several countries along the Pacific and Atlantic oceans are dependent on the Canal for their imports and exports. Some of these countries rely on the Canal for roughly a quarter or more of their total seaborne trade. For the nation of Panama, the Canal is an economic engine. It directly contributed about USD 2.5 billion to Panama’s national treasury during fiscal year 2022. Including indirect contributions, the canal generates more than 6% of Panama’s GDP.

This disruption arises concurrently with concerns surrounding the Suez Canal – another crucial global trade transit point. Shipping companies are pausing Suez crossings due to destabilization in the Red Sea region. The simultaneous slowdowns at these major canals could have substantial effects. Imagine when a container ship that ran aground and blocked the Suez Canal for only six days in 2021 resulted in an estimated USD 9.6 billion loss in trade each day, and had subsequent impacts on the global economy; what havoc could drying up of the Panama Canal cause for global supply chains.

Faced with limited canal transit slots, ships could opt to divert to different routes. A ship traveling from Asia to the Caribbean that would typically cross east through the Panama Canal, for instance, could instead go west around the Cape of Good Hope, at the southern tip of Africa. A study by McKinsey states that if trade patterns remain unchanged from pre-restriction norms, we estimate that about 2,000 annual transits – primarily involving dry-bulk carriers and roll-on/roll-off, or ro-ro, ships – could divert away from the Panama Canal to the Cape of Good Hope, at the southern tip of Africa.

The Panama Canal faces various challenges impacting its future. Climate change brings increased extreme weather events, impacting canal operations and deterring shippers due to restricted vessel transits. The canal’s infrastructure might struggle to meet growing global trade demands and larger container ships, leading shippers to seek alternative routes. Competing trade routes like the Arctic Sea Route and the Suez Canal can draw shippers away from the Panama Canal. Environmental concerns, such as habitat destruction and pollution, may prompt regulatory interventions and public backlash, affecting the canal’s sustainability.

To thrive in this evolving landscape, proactive measures like infrastructure upgrades, climate resilience strategies, and stakeholder collaboration are crucial to maintaining the Panama Canal’s relevance in global maritime trade.

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