Drought in Panama Canal reduces water level, affects global trade

According to a report on the website of the Spanish newspaper El Economista on May 29, the drought has reduced the water level of the Panama Canal, and the impact on global trade is already being felt.

World trade is facing another potential stress test, this time not against the COVID-19 pandemic or war, but against extreme weather. Bloomberg’s Laura Curtis, Ruth Liao and Michael McDonald report that a severe drought in the area around the Panama Canal is forcing container ships that ply the waterway to lighten their loads. This inhibits the ability of these vessels to transport goods, increases the risk of delays and creates additional costs paid by the owners of the goods being transported.

However, the worst may yet happen. If the situation worsens and Lake Gatun continues to fall as predicted, analysts say the market reaction will be higher transport costs and a scramble by shippers to find faster routes. All this comes at a time when global trade is already facing a headwind, a product of the slowdown in the economic cycle itself.

To better understand how the Panama Canal works, it is necessary to explain exactly where the water that makes this “artery” of global trade comes from. It all revolves around the vital Gatun Lake. Gatun Lake is a large artificial body of water located in Panama that plays an important role in the operation of the Panama Canal. It allows ships to cross the Isthmus of Panama.

Gatun Lake was created by the construction of the Gatun Dam on the Chagres River in the early 1900s. At the time, Gatun Lake held the title of the largest man-made lake in the world.

Gatun Lake covers an area of 436 square kilometers and is about 26 meters above sea level. Its formation turned many mountains into islands.

Gatun Lake has a water storage function to keep the canal locks running, as about 202,000 cubic meters of water are needed for each passage. Beneath the lake’s surface lie the remains of 24 villages and towns whose inhabitants have long since been relocated to other parts of the country. Now, the lack of rainfall has left parts of the mountain above water and threatened the flow of international trade.

The timing of the problem is bad because August and September typically see a surge in freight demand ahead of the back-to-school and Christmas shopping seasons.

Jon Davis, chief meteorologist at supply chain risk analysis firm Perpetual Flow, said: “Rainfall across Panama will continue to be below normal for the foreseeable future. As a result, we expect the water level of Lake Gatun to continue to fall, which will have a more severe impact on Panama Canal traffic.”

Lars Jensen, owner of Vespucci Maritime Consulting in Denmark, thinks that if the Panama Canal becomes too “clogged”, shippers will have two main alternatives: shipping goods directly from Asia to the West coast of America, or shipping goods from Asia to the east coast of America via the Suez Canal.

“Either way they do it will put some upward pressure on trans-Pacific rates,” Mr Jensen wrote in an email.