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Panama Canal shipping cutbacks amidst drought threaten global trade

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2023-11-02

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Panama City, Panama - The Panama Canal, a vital artery for global trade, is set to face significant cutbacks in the number of ships allowed to cross its historic waters due to an unprecedented drought caused by climate change. As more than 3 percent of the world's trade passes through this nearly 110-year-old engineering marvel, the implications of this decision are reverberating across international commerce.

The canal, which relies on freshwater to operate its locks, is grappling with one of the worst droughts in its recorded history. Earlier this year, authorities in Panama took the unprecedented step of reducing the number of daily transits from the average of approximately 36 ships to 31. Now, they have announced even more stringent restrictions, further limiting crossings to just 25 bookings per day, with plans to decrease this to a mere 18 by February of next year.

The dire situation has been exacerbated by an exceptionally dry October, described as the driest in the region since 1950. The El Niño phenomenon, which warms the Pacific Ocean and has global climate repercussions, has played a role in these extreme conditions. Additionally, the reservoir system that supplies the canal with water is also responsible for providing drinking water to nearly half of Panama's population.

"The canal and the country face the challenge of the upcoming dry season with a minimum water reserve," the canal authority stated in a recent press release. "The Panama Canal urges its customers to make reservations in order to transit as programmed."

Notably, these restrictions are occurring during Panama's wet season, which typically spans from May to December, making the situation highly unusual and concerning for both the canal and the nation.

Back in August, analysts had already voiced concerns about potential disruptions to container shipping due to the reduction in crossings. These latest cutbacks are set to take effect just as the busy Christmas shopping season approaches. The Panama Canal's most critical route connects Asian countries like China to the east coast of the United States, facilitating the transportation of a wide range of goods, from petroleum products to vehicle parts and grains.

Container ship operators are more likely to book transit slots in advance, but those without reservations are now facing waits of around 2.7 days, according to data from the canal authority.

Freight forwarder and logistics company Flexport recently warned of delays of about two to three days, though it would still be faster than the alternative route through the Suez Canal for most Asian shipments. They suggested, "Heavy and time-critical cargo should consider routing via the US or Canadian West Coast or utilizing rail or trucking services."

This reduction in transits comes at a challenging time for Panama, as the country heavily relies on the more than $4.6 billion in annual revenue generated by the canal. Recent large-scale protests in Panama City against a significant copper mine, responsible for approximately 4 percent of the country's gross domestic product, have also added to the nation's woes.

In response to these protests, Panama has announced plans for a referendum on scrapping First Quantum Minerals' contract to operate the mine. Meanwhile, the Panamanian Congress is fast-tracking legislation to enable the vote, as the nation navigates through a complex web of economic and environmental challenges.

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