An unusually dry October has lowered the water level of the lake that is used to operate the Panama Canal’s channel system. As a result, the Canal Authority has reduced the number of ships that can pass through from 36 ships per day to 22 per day. This has resulted in significant delays and extra costs for grain shipments from the US to Asia.
Ships with regular, predictable schedules, such as passenger cruise ships, can schedule their transit times through the canal well in advance, and secure passage at a lower cost. However, ships with less predictable schedules must compete for the remaining time slots, which are auctioned off to the highest bidder. The reduction in daily passages has forced ship operators to pay a much higher cost to get through the canal or wait much longer to be able to go through. Ships wanting to go to the head of the line may now have to pay as much as $2 million dollars for the privilege (on top of the standard $400,000 transit fee). Paying this extra fee would raise the cost of shipping grains to Asia by as much as 50 percent.
To avoid paying this fee, ships would have to either transit through the Suez Canal or around the southern tip of Africa. However, this would increase shipping times by several weeks and reduce the availability of ships, thus also raising shipping costs. Also, conflicts in the Middle East have made it more difficult to pass through the Suez Canal. As a result, the cost of shipping grains, and many other goods, around the world will continue to rise until the water levels do.
Discussion Questions:
- How do you expect the slowdown in Panama Canal traffic will affect the price of food in Asia?
- What are some of the factors that determine how much extra shipping companies would be willing to pay to skip to the head of the line to transit the Panama Canal?
Sources| Nikkei Asia: https://asia.nikkei.com/Spotlight/Supply-Chain/Panama-Canal-backup-forces-detours-for-Asia-bound-grain-ships; Unsplash: Photo by Rikin Katyal on Unsplash