Avoiding disruption by shipping to the East Coast? Think again as drought impacts the Panama Canal

In an age of persistent disruption, the next “black swan” event may be lurking in Central America. The Panama Canal, leveraged for 40% of all U.S. container traffic,¹ is experiencing unprecedented drought conditions. As reported in The Wall Street Journal, there are currently more than 200 ships waiting on either side of the canal due to serious drought conditions that have prompted canal authorities to limit vessel traffic and impose a lower maximum draft.

As a result, ocean container vessels have been impacted in 2 ways:

• Loads must be lightened to comply with water draft restrictions (a ship’s maximum depth). Typically, the canal’s water draft restriction has been lowered by 12% (50 ft. To 44 ft.). Reports indicate that this restriction can be expected to last throughout 2023 and early 2024. ²
• Additionally, daily vessel traffic has been limited to no more than 32 ships (down from the daily average of ~36 ships). As of mid-August, the queue for entering the Panama Canal was 264 ships (up-to 18 days wait time³) - 16% higher than at the same time last year.

Both of these restrictions have created a new supply chain bottleneck for some shippers. Shippers should expect to see delays in freight arriving at the US East Coast and Gulf ports if the current pace of freight through the Panama Canal continues. Shippers should not expect the delays to resolve themselves anytime in the near-term future – so you should act now if your freight is impacted. A comparison for magnitude - the backlog of 264 ships waiting to cross the Panama Canal is significantly higher than the previously set West Coast congestion peak of 109 ships waiting in queue off Los Angeles-Long Beach in January 2022. ⁴

If your freight flows through the Panama Canal, there may be actionable steps to help mitigate disruption impact. Here are 5 areas to explore:

1. Prioritize freight visibility for your shipments - Even if you do not feel the impact on the US East Coast & Gulf ports yet, continue to monitor the situation. Delays will likely become more impactful, compounded by the upcoming peak season. Now is the time to check in on your freight's sailing schedules (especially if those become impacted) to enable proactive decision-making.
2. Evaluate if your supply chain has the flexibility to absorb potential delays - What do your current inventory levels look like? Do you need to adjust your lead time planning on future orders? Or does the situation help you draw down already heightened inventories? Understanding how potential delays impact your business will lay the foundation for potential mitigation steps and tradeoffs. We suggest you have conversations with your carriers to understand if your freight is on vessels that have booked reservations for the Panama Canal (vs non-booked vessels in the queue for transit), as reservations have been further limited by canal authorities.
3. And if it doesn't, explore alternative options -  Engage with carriers to understand their strategies for mitigating transit delays. They may have alternative sailing schedules to better meet the timelines you need for your freight within. Mode optionality can be another option to explore. Highly sensitive items may need air freight to meet deadlines, or land bridge routes could provide faster transit. One of these land bridge options is the result of the CPKC rail merger from earlier this year, which connects Mexico’s Lazaro Cardenas port to US and Canadian destinations.  One thing to keep in mind – Many shippers shifted West Coast freight to the East Coast and Gulf during the previous disruptions, so it’s possible we see another bullwhip-like effect of freight shifting back to the West Coast with the Panama Canal delays. Given overall low import volumes, there’s not a huge concern, but if volumes were to rise, we could end up with congestion and delays on the West Coast again.
4. Align-on processes to prioritize goods internally - Some of your goods may be able to go on delayed sailing schedules, and others may need expedited sailings. We recommend that you standardize an internal process to determine the appropriate freight transit expectations within your organization. Typically, this process spans different functions throughout the organization (e.g. procurement, commercial, supply chain, etc.). Having alignment on what goods need to be prioritized will allow your organization to act more nimbly and be better prepared for continued or worsened delays through the back half of 2023.
5. Communicate potential cost exposure - As vessel capacity going through the Panama Canal becomes tighter, there could be some upward rate pressure. This upward rate pressure is something to consider as you look at your supply planning and to share internally to ensure your organization understands the potential increases.
   Your freight may also be affected by Panama Canal surcharges, as carriers are redirecting volume through the Suez Canal and adding surcharges ranging from $300 to $500 per container. Determine if your freight is subject to these and account for this added cost.

Supply chain resiliency is key in planning your strategy

• The current situation highlights the importance of planning for overall supply chain resiliency. Relying on one lane or mode too heavily presents a risk. You never know which component will struggle – and we’ve seen examples of this time after time – Evergreen in the Suez Canal, West Coast COVID impacts, ocean rate spikes, and port labor challenges in Canada. 
  
• Now, it’s drought-induced Panama Canal delays. And there will always be something next around the corner. When determining your business’s supply chain strategy, it’s necessary to establish relationships and have options across the supply chain so that you can react quickly when disruption occurs.

Source Details: 
¹CNBC
²Panama Canal Authority
³Journal of Commerce
⁴FreightWaves