June 27, 2023
Less Water, Less Cargo
Gatun Lake, the vital water source for the Panama Canal, is drying up. Water levels will reach a record low of 79 feet this year due to dry seasons associated with the El Niño cycle. This is bad news for maritime shipping: lower water levels mean that ships can carry less cargo, and each container will cost more.
A 2016 $5 billion investment expanded the Panama Canal to allow larger Neopanamax vessels to cross the Canal, each with a maximum capacity of 15,000 TEU (equivalent to 60 miles of cargo containers laid end to end). Drought has undermined the intention of this investment, meaning that fewer and fewer goods are able to pass through the Canal each year.
Since the expansion, the number of Neopanamax ships passing through the canal has increased by nearly 60%. However, the maximum capacity load, which is affected by enforced draft levels, significantly fluctuates based on the water levels of the lake.
Since the expansion, Neopanamax ships have crossed the Canal at full capacity less than half the time. By August 2023, enforced draft levels will be as low as 43 feet, nearly 2,300 TEU below max capacity load. When water levels reach 60 feet, the Neopanamax will only be able to carry a capacity of 5,000 TEUs, the same load as a Panamax ship.
Panamax Container Ships can transit at full load of 5,000 TEU when the draft limit is 39.5 feet. However, draft requirements are scheduled to be adjusted to 38.5 feet in July 2023 for the first time since 2016.
As a result of the drought-induced limited capacity, container prices have already increased from $300 to $500 per container and will increase the prices of goods downstream. How does this affect you?
Underwriters must reassess risk models. Large-scale shipping financing relies on projected revenue from anticipated usage. As drought further limits the capacity of large ships, realized revenue will fall compared to projections.
Insurance companies must reassess risk models in policies during El Niño cycles, considering varying regional impacts of climate-related risks. Climate methodologies systematically underestimate the potential risks and uncertainties in specific regions. The higher occurrence and unpredictable nature of warmer temperatures during El Niño cycles add significant new climate-related physical risks to shipping operations.
Shipping companies need to find alternative solutions for transit methods, whether it is investing in low-carbon vessels or rerouting packages by land.
Cargo owners will face increased insurance burdens due to higher shipping costs, less consistent routing and timing, and new climate-related physical risks.
Cargo owners, shippers, insurers, and investors will need to collaborate to ensure the continued success and utility of all shipping infrastructure, including the Panama Canal.