Why Gatun Lake’s water levels could impact inflation

In a global supply chain, there’s always a ripple effect. That’s why it may come as no surprise that low water levels in Panama’s Gatun Lake may lead to bumps in both inflation and the cost of moving goods around the world.

Shippers who have been rerouting their goods to avoid potential West Coast headaches — including the still-unresolved labor negotiations — may now be forced to deal with shipping delays and surcharges to get their shipments through what had been a prime alternative: the Panama Canal.

Here, we’ll take a look at some of the dynamics involved — and how El Niño may play a role.

Progressive Draft Adjustments

Since February 1, the Panama Canal Authority (ACP for its Spanish acronym) has issued 11 advisories to shipping regarding reductions in the maximum authorized draft permitted for vessels transiting the Neopanamax locks, based on the “present and projected level of Gatun Lake for the upcoming weeks.”

The advisories have progressively lowered the maximum authorized draft from 49.5 feet Tropical Fresh Water (TFW) to 44.5 feet TFW. The ACP had planned to lower the draft further to 44 feet TFW on June 13, but issued a statement on that date announcing that the change has been postponed until June 19.

“The Panama Canal Authority announces the postponement of the maximum authorized draft of 13.41 m (44.0 feet) TFW in the neopanamax locks until June 19, 2023,” the statement says. “Therefore, the maximum authorized draft of 13.56 m (44.5 feet) TFW will remain in effect until June 18, 2023. The maximum authorized draft of 13.26 m (43.5 feet) TFW in the neopanamax locks will be in effect for June 25, 2023.”

Please see the statement for planned maximum authorized drafts for July 2023.

As noted in the April 13 advisory, the ACP has been working to address low-water concerns.

“Despite the ACP’s continuous efforts to minimize draft restrictions by implementing water-saving measures in the transit operation, the level of Gatun Lake has been falling faster than originally predicted,” the advisory explains, noting that the “precipitation in the Canal watershed” for the first 11 days of April was “approximately 70% below the historical average, and the water supplied by the rivers to the Canal’s watershed [was] 80% below average.”

Language in the first eight advisories noted that vessels arriving with drafts over the maximum authorized draft “may be allowed to transit” past the date indicated, “depending on the actual level of Gatun Lake at the time of transit. Otherwise, they will be required to trim or off-load cargo in order to be allowed to transit.”

Writing for marine insurance provider West of England Protection & Indemnity (P&I) Club, Loss Prevention Manager Dean Crossley notes that depending upon the weather, the planned draft adjustment schedule may be altered — and that carriers need plenty of time to plan ahead.

“…The ACP typically provides advance notice of draught reductions, usually with at least four weeks’ notice,” Crossley says. “However, the waiting time for vessels can vary based on factors such as booking status and the number of vessels awaiting transit. Therefore, vessels planning to transit at or near the maximum authorised draught need to consider the possibility of further draught reductions during the waiting period.”

“The ACP’s diligent monitoring of Gatun Lake’s water levels and timely communication of draught adjustments demonstrates its commitment to maintaining safe and efficient operations,” he added. “The ACP recognises the variability in lake levels and regularly updates shipping agents, owners, and operators to help them plan their transit accordingly.

…Considering the successive draught adjustments and potential impact on shipping operations, it is advisable for vessel owners and operators planning to transit through the Panama Canal to stay informed about the latest draught restrictions and updates.”

The Impact of El Niño

Crossley notes that this isn’t the first time the ACP has been required to issue draft restrictions. Two El Niño events in the past — during 1997-1998 and 2015-2016 — caused a drop in rainfall levels in the region and led to similar measures.

In a June 6 statement, the ACP outlined how it has been preparing for another El Niño that —at the time — was imminently expected.

“The Panama Canal is closely monitoring the development of weather events affecting water availability in the canal watershed, which according to forecasts, could worsen with the arrival of the El Niño phenomenon,” the ACP said. “In response, the canal will proceed with water saving measures during the rainy months to aid water recovery throughout the surrounding lakes and, thus, guarantee resources for human consumption without affecting transits. Unfortunately, current estimates indicate that the economic impact is unavoidable.”

As the statement notes, the Panamanian National Government declared a “climatic emergency,” which is described in a May 31 post by Newsroom Panama:

“This is an issue that the Panama Canal has been warning and preparing for; however, we could not have predicted exactly when the water shortage would occur to the degree that we are experiencing now,” said Canal Administrator Ricaurte Vásquez Morales in the ACP statement.

Noting that the “last period of intense drought in the Canal took place in 2019 – 2020,” the ACP cites the administrator as saying that such cycles seem to be occurring more frequently than in the past.

“The Panama Canal has implemented water-saving measures to maintain maximum capacity in our reservoirs during the May through December rainy season and to cover the projected water demand during the dry season, which typically begins in January and lasts until April,” the ACP says. “The current conditions, however, are creating an unprecedented drought, and thus far has produced the driest year on record since 1950. Consequently, climate is progressively lowering the canal’s reservoir levels and forcing the Panama Canal to periodically manage water utilization in a sustainable manner to maintain acceptable and competitive draft levels.”

The ACP says that since January 3, the canal has “implemented a series of water-saving measures within its operations which will guarantee that ample water resources will be available to supply the population and offer a reliable and competitive service to customers throughout the dry season.”

“We have implemented procedures such as cross-fillings, cross-spilling and short chamber lockages in the Panama locks, and increased the use of water-saving basins in the Neopanamax locks. Additionally, we have minimized direction changes between northbound and southbound transits in Gatun locks, maximized tandem lockages and have suspended hydroelectric power generation among other controls,” explained Vásquez Morales.

Hopefully, such efforts will pay off — since the National Weather Service (NWS) announced on June 8 that El Niño has arrived.

In a statement, the NWS describes the phenomenon and expected impact.

“The expected El Nino has emerged, according to scientists at NOAA’s Climate Prediction Center, a division of the National Weather Service,” the statement says. “In the monthly outlook released today, forecasters issued an El Nino Advisory, noting that El Nino conditions are present and are expected to gradually strengthen into the winter.”

The NWS describes El Niño as “a natural climate phenomenon marked by warmer-than-average sea surface temperatures in the central and eastern Pacific Ocean near the equator, which occurs on average every 2-7 years. El Nino’s impacts on the climate extend far beyond the Pacific Ocean.”

​”Depending on its strength, El Nino can cause a range of impacts, such as increasing the risk of heavy rainfall and droughts in certain locations around the world,” said Michelle L’Heureux, climate scientist at the Climate Prediction Center. “Climate change can exacerbate or mitigate certain impacts related to El Nino. For example, El Nino could lead to new records for temperatures, particularly in areas that already experience above-average temperatures during El Nino.”

A Ripple Effect

Describing the PCA’s progressive draft adjustments, a recent post by The Maritime Executive notes that “Such significant draft reductions present a huge threat to inter-regional trades, specifically cargo from Asia to the U.S. East Coast, Europe to the South America West Coast, and the U.S. Gulf Coast to the Far East.”

The outlet quoted Peter Sand, Chief Analyst at the Oslo-based ocean freight-benchmarking platform Xeneta as saying, “With the ongoing tightening of draft regulations in the Panama Canal, smaller ships may return to favor with the carriers, as they find themselves unable to utilize the full capacity of larger vessels. This puts upward pressure on short-term market rates and may prompt shippers to alter their supply chains if port calls also change in line with the ship sizes.”

“Some industry analysts have forecasted that the new draft regulations could force some boxships to reduce their cargo by 40 percent,” The Maritime Executive said. “Considering around 285 neopanamax ships transited the Panama Canal in April, half of which are containerships, continued draft reductions could have significant ramifications for international shipping.”

And when shipping dynamics create an increase in costs, those higher rates are eventually passed on to consumers.

As the writers of a recent post that appeared in Fortune noted, “Federal Reserve Chair Jerome Powell keeps careful track of employment levels, wages, consumer prices and numerous other metrics to see where the US inflation rate may be headed in the next year. He might also want to keep an eye on water levels at Gatun Lake.”