A severe drought is affecting the Panama Canal. That’s not a good sign for supply chains — or your holiday shopping

Originally Published: 26 AUG 23 08:02 ET By Alicia Wallace, CNN

Minneapolis (CNN) — Panama is about halfway through its rainy season right now, and one of the wettest countries in the world is having one of its driest seasons on record.

At the Panama Canal, where freshwater serves as the lifeblood for its lock-driven operations, the lack of abundant rainfall is leading to lower water levels and putting a squeeze on a critical international shipping artery: Canal authorities have imposed restrictions on vessel weights and daily traffic.

Just this week, the Panama Canal Authority extended those restrictions for at least another 10 months.

While the direct impact to US manufacturers, retailers and consumers appears to be minimal right now, the potential for broader disruption is growing.

It’s another instance of a weather-impacted waterway slowing down the flows of critical freight — like shallower levels in the Rhine Riverand the mighty Mississippi or the high winds and sandstorm blamed for making the massive Ever Given vessel run aground in the Suez Canal two years ago.

Whether driven by climate, weather, geopolitics or some other unforeseen circumstance, any increase in maritime choke points could spell trouble for the global supply chain networks that have run much more smoothly since their pandemic-era upheavals.

“About 80% of our merchandise in trade is moved via vessel over the water,” said Janelle Griffith, North American logistics leader for insurance brokerage and risk advisory firm Marsh. “So we actually should be concerned when we see those sorts of blockages. And, yes, it does have global ramifications … when you have a blockage in one part of the supply chain, the rest of the supply chain is automatically affected.”

Not enough water

The Panama Canal relies on water from the neighboring freshwater lakes. A lock system then uses massive amounts of water — at least 50 million gallons of it — to float each vessel through the canal.

Normally, at this time of year, the lake levels are increasing. However, rainfall in Panama this spring and summer has been the lowest since the turn of the century, said Jon Davis, chief meteorologist at Everstream Analytics.

“It doesn’t mean that freshwater lake levels are going to decline, but we don’t see any significant improvement here upcoming as we look into next month,” he said. “And with El Niño beginning to intensify and every climate model out there indicating that El Niño will continue to intensify through the rest of this year and into early 2024, that is a concern longer term.”

That could lead to further drier conditions across the southern portion of Central America, including Panama, he said.

“We never know the magnitudes of disruptions, and we never know how backed up of a supply chain we’ll get; it certainly looks like we’re going down that direction of increasing problems,” he said.

Next shoe to drop

But from a transportation standpoint beyond Panama, the next shoe to drop could be the Mississippi River, Davis said.

During the past 30 days, rainfall along the southern Mississippi River has been well below normal. Some of the variances in rainfall are among the lowest since 1893, Davis said.

The dry pattern, along with the record heat seen along the Mississippi from Minneapolis to New Orleans, is expected to result in river levels dropping into the first part of next month, he said.

Lower water levels could lead to restrictions at a time when crops in America’s heartland are being harvested and barged down the river to domestic and export markets.

“So you’re dealing with a situation where we have issues in Panama, and we likely will have some issues on the Mississippi with movement of commodities, especially agricultural commodities,” he said. “And so you deal with a compounding supply chain issue. And when you have two disruptions versus just one, that is magnified overall.”

Holiday shopping hang-ups

For now, general waiting times have spiked at the Panama Canal. Container ships, which have been prioritized, have not been significantly impacted by the restrictions, according to Everstream Analytics. As of mid-August there were about 135 ships waiting at both ends of the canal, up from 29 the month before, Everstream noted, adding that the ships waiting are typically gas tankers or bulk carriers.

Still, the number of ships waiting five days or longer continues to grow, further lengthening a bottleneck that will start to impact service reliability and cause shipment delays across the United States and Europe, according to Everstream.

“Most ocean carriers have had to reduce the load on their ships, but so far that hasn’t had a significant effect on schedules and freight rates,” Everstream Analytics wrote via email to CNN. “However, if container lines are forced to continue to load fewer containers, we could see issues for US companies trying to replenish inventories ahead of the year-end holiday season — for everything from Christmas decorations to furniture and toys.”

As of this week, key US ports report they haven’t seen any impact from the Panama Canal restrictions and delays.

“We’ve seen no services yet shift from Panama Canal to Los Angeles,” Phillip Sanfield, spokesperson for the Port of Los Angeles, told CNN via email. “We’d expect the Suez Canal to see the first boost in traffic.”

The New York-area ports also have not seen a noticeable shift in traffic, said Amanda Kwan, spokesperson for the Port Authority of New York and New Jersey.

The National Retail Federation earlier this month told CNN that their members hadn’t reported any impacts but were working with their supply chain partners, including the ocean carrier, to mitigate any risk from the delays.

Supply chain shifts

Had this occurred before the pandemic lockdowns and the drastic swings in consumer spending patterns that mangled supply chains, it might have been a different story.

“Because of what happened in 2021, companies have diversified their supply chains,” Kwan said.

Additionally, because ordering patterns shifted from “just in time” to “just in case,” warehouses became plumb full of products, and those inventory levels remain high enough as consumers have spent less on stuff and more on intangibles like Taylor Swift tickets.

With any delay comes increased hurdles for those all along the supply chain, but many companies have taken steps such as reshoring and nearshoring to mitigate risks, said Kamala Raman, vice president andteam manager at Gartner’s logistics, customer fulfillment and network design.

“There will always be unknown risks, and there are known risks,” she told CNN. “If you want to be resilient, you’ve got to know what a Plan B is.”

It’s possible that retail importers are “spooked” by these developments, said Peter Sand, chief analyst at Xeneta, an ocean and air freight marketing analytics company.

“It’s clear that they are running inventories that are adjusted to the level of demand right now,” he said.

As the US economy, labor market and consumer spending remain resilient, there’s a possibility that demand could spike — which could lead to a situation where delays in shipping mean a less diverse product selection or, worse, empty shelves, he said.

“There’s a risk here — and all alternatives come with a price tag and longer time for goods to come from its origin to its final destination,” Sand said.

The-CNN-Wire
™ & © 2023 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.