The Panama Canal is facing fresh restrictions on vessel movement as worsening drought conditions, linked to the return of El Niño, reduce the availability of water needed to operate the crucial waterway. The development comes at a particularly difficult time for global shipping, with disruptions in the Strait of Hormuz and renewed security concerns around the Red Sea and Suez Canal already putting pressure on international trade routes.
The Panama Canal Authority has acknowledged that declining water levels are forcing it to reduce the number of ships allowed to pass through the canal. Daily transits are scheduled to be capped at 34 vessels from September 4, compared with an average of about 35 in recent months and a design capacity of roughly 40 ships a day. From September 15, the limit will fall further to 32 vessels. The larger Neopanamax locks, which are used by large container vessels and gas carriers, will be restricted to nine crossings a day, while the older Panamax locks will handle the remaining traffic.
The restrictions have already had a significant impact on shipping costs. In one recent instance, an empty liquefied petroleum gas supertanker reportedly paid $4.6 million at auction to secure priority passage through the canal, the highest such fee recorded for the waterway. A container ship had paid about $4 million for a similar priority slot just days earlier. The sharp increase in auction prices reflects the growing competition among shipping companies to secure limited transit capacity.
The problem is primarily linked to a shortage of freshwater. Unlike the Suez Canal, which operates at sea level, the Panama Canal uses a system of locks that raises and lowers ships using freshwater from Gatun and Alajuela lakes. Each vessel passing through the locks consumes substantial quantities of water, which must be replenished through rainfall. With precipitation significantly below normal, the canal authority has little choice but to restrict both the number of vessels and, potentially, the amount of cargo they can carry.
Rainfall across the canal’s watershed between May and August was reported to be 34% below the historical average, while inflows into the two reservoirs that supply the canal were 44% below normal. The developing El Niño weather pattern is being blamed for altering rainfall patterns across the region. The canal authority has warned that further restrictions could be introduced if rainfall fails to improve.
The water shortage is also a domestic concern for Panama because the reservoirs used by the canal supply drinking water to a large share of the country’s population. This creates a difficult balance between maintaining the canal’s role as a global trade artery and ensuring adequate water supplies for local communities.
The Panama Canal is strategically important to international commerce, carrying about 5% of global maritime trade and roughly 40% of US container traffic. Major users include the United States, China, Japan, Chile and South Korea. The canal provides a shorter route between the US East Coast, the Gulf of Mexico and Asian markets, helping ships avoid lengthy journeys around South America.
However, alternative routes are also facing problems. The Suez Canal, which normally provides an important connection between Asia and Europe, has come under renewed pressure following attacks on commercial shipping in the Red Sea and Bab el-Mandab region. Some shipping companies that had resumed using the Suez route have again started diverting vessels around the Cape of Good Hope, adding considerable time and expense to journeys.
The situation is particularly significant because the Panama Canal is now dealing with restrictions at the same time that the Strait of Hormuz remains heavily disrupted by the conflict involving Iran. Hormuz is a major route for crude oil, liquefied petroleum gas and refined petroleum products travelling between the Persian Gulf and Asian markets. The disruption has forced some trade flows to seek alternative routes, increasing pressure on the Panama Canal at precisely the moment when its capacity is shrinking.
The impact is also being felt in the LPG market. A growing share of US LPG exports is being directed towards Asia, increasing demand for the Panama route. Large LPG carriers generally require the wider Neopanamax locks, which are now becoming one of the main bottlenecks in the canal system. Shipping companies are therefore exploring unconventional arrangements, including transferring cargo between vessels near Panama’s Pacific port to avoid sending larger ships through the restricted locks.
India, although not among the canal’s five largest users, could face indirect consequences. The country is one of the world’s biggest LPG importers and has increased its dependence on supplies from the United States following the disruption of traditional West Asian sources. Higher Panama transit costs and rising freight rates could therefore eventually influence the price at which Indian companies procure LPG cargoes.
