As has been widely reported, the Panama Canal Authority has recently reduced the daily maximum of ship transits through the Canal from 36 per day to 24, starting in mid-January.

Supply Chain Digest Says...   These changes come at the same time there is great uncertainty with the Suez Canal, resulting from so-called Houthi militants firing rockets at some commercial ships from Yemen in the Red Sea.     What do you say?   Click here to send us your comments       Click here to see reader feedback

The cause: severe drought conditions that have reduced water levels in Gatun Lake, which is not only used to operate the locks but also to provide drinking water to the Panamanian people.

Prior to this situation, about 2.5% of global trade – both container and bulk ships – travelled through the Canal, representing about 14,000 ships passing through annually. While the number of ships using the Canal has been steady for many years, cargo tonnage has taken a big jump since 2016, when a revamp Canal that could handle much larger ships was opened. (See graphic below.)

The consultants from McKinsey last week published an analysis of the impact of this situation to both carriers and companies using those carriers. Below is a summary:

• The Canal restrictions will likely result in across-the-board cost increases, regardless of how affected parties react. Costs like these are often passed through to customers - eventually making their way to final consumers.

• The disruption for liquefied natural gas tankers, crude oil tankers, and container ships could, on the whole, be less severe than for many other shipping segments, since these ships might be expected to either continue making use of priority booking for Panama Canal transit slots or switch to larger ships and use the Suez Canal instead.

• Perishable cargo that would typically be carried aboard refrigerated ships could be switched into refrigerated containers (carried aboard container ships) as an alternative in cases where the potential for spoilage rules out longer transit times. This change could lead to a substantial overhaul of some supply chains, but it could be a necessary solution - especially if the canal disruption is protracted.

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• Based on our analysis, approximately half of liquefied petroleum gas transits might need to be rerouted. Given the magnitude of disrupted volume, the effects on these exports to Asia from the Gulf Coast of the United States could involve significant economic costs for affected parties.

Source: McKinsey

• Commodity traders might benefit from assessing the expected impact of longer sailing times and higher costs and building it into their models. Note that these longer journeys could involve higher inventory levels, and those higher inventory levels could create demand for more storage capacity on land.

These changes come at the same time there is great uncertainty with the Suez Canal, resulting from so-called Houthi militants firing rockets at some commercial ships from Yemen in the Red Sea, which leads to or from the Canal.

Some shipping lines have been diverting all shipments moving through the Red Sea, taking the long way around the bottom of Africa and the Cape of Good Hope.

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