The Panama Canal Authority has said that it has introduced draft limits on vessels passing through the canal. On 18thApril the Authority’s regulations set a limit of 14.48metres draft for vessels. By May 12th this had fallen to 14.02metres. The latest statement from the Panama Canal Authority said that recent rainfall had enabled a delay on further restrictions, however it still sees maximum drafts being set at 13.26metres by June 25th.

The problem is caused by the periodic El Niño effect which distorts rainfall patterns in the Pacific. Present rainfall levels are not exceptional but the Panama Canal is sensitive to fluctuations as it requires so much water to work its locks.

If the Panama canal continues to work at sub-optimal levels there is likely to be an impact on both trans-Pacific freight-rates and logistics operations in the US. The latter have become characterised over the past couple of years by an increasing use of East Coast ports as an alternative to West Coast container terminals. The perception is that port complexes in States such as Georgia are more reliable and efficient than the ports of the West Coast. This impression is re-enforced by the present labour problems at Los Angeles, Long Beach, Oakland and other ports. However, the strategy on using East Coast ports relies on using the Panama Canal. There is already a limit on the size of vessel that can use the Canal, with the largest vessel having passed through the locks being just over 16,000 TEU (Twenty Foot Equivalent Unit containers).

The other impact will be on container shipping freight rates. If there is less freight passing through the Panama Canal, there will be greater demand for routes to the West Coast and thus this may provide some support to prices. It is even possible that, combined with the effects of the labour problems on the West Coast, that there may be some return congestion at West Coast ports. This certainly would drive-up rates.

Source: Ti Insights

Author: Thomas Cullen

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