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Global Warming May Be Reshaping Global Supply Chains – Looking at the Panama Canal

Aug 15, 2023

Another potential challenge looms for global trade, and this time it is not a pandemic or a conflict that is causing a storm – but rather the impact of severe weather.

The Panama Canal serves as a vital link between the Atlantic and Pacific Oceans. Its inception marked a significant milestone for international shipping. Prior to the canal's construction, ships were required to navigate the perilous and extensive route around the southern edge of South America.


Nowadays, approximately 5% of the annual global maritime trade travel through the locks of the canal. Renowned for its efficiency and cost-effectiveness, the Panama Canal stands as a rapid route for transporting commodities like grain and agricultural products, along with consumer goods originating from manufacturing centers in Asia, notably China, to ports in the US.


Nonetheless, an intense drought in Panama is resulting in remarkably prolonged delays and stringent limitations along this trade route, underscoring the challenge that climate change presents to the realm of global commerce. As a result, the authorities in Panama have been compelled by high temperatures and one of the driest years on record to reduce the number of crossings and prohibit ships with heavy loads from using the Panama Canal.


Last week, the number of awaiting vessels seeking passage through the Panama Canal surged to over 140, and as of now, the waiting duration to traverse the canal has extended to approximately 18 days. As a result, ocean carriers may opt for alternative routes, thereby introducing additional time and fuel expenditures to their voyages. The utilization of multiple vessels by shippers for transporting their cargo contributes to elevated freight expenses and prolonged lead times for booking arrangements. Ultimately, these accumulating costs might be transferred downstream to businesses and consumers.


The possibility of additional delays might also impact time-sensitive food shipments originating from the western coast of South America to Europe. Should shipping companies need to seek alternative methods for transporting time-sensitive shipments, such as certain agricultural goods, this would inevitably incur expenses, further exacerbating the issue of food inflation.


While depth restrictions on the Panama Canal have been implemented before, the current occurrence during the rainy season is uncommon. Throughout this year, worldwide temperatures have surged, leading nations to confront severe heatwaves and flooding incidents. The Copernicus Climate Change Service reported that July marked the hottest month on record.


Worries extend to the effects of arid conditions on Germany's Rhine River, a vital route for European shipping. Over the past months, measurements of water levels at Kaub, situated west of Frankfurt, have revealed lower readings compared to the norm. Late in July, levels reached their lowest point of the year. Experts are concerned that this could potentially impact the economic growth of Europe's largest economy.


Water stress will transition into the prevailing norm: River levels will descend to unprecedented depths, while some experts’ anticipate that a significant two-thirds of companies on a global scale will encounter substantial water-related risks affecting their operations or supply chains in the coming years. As the repercussions of water stress intensify, the prospect of governments effectively addressing these challenges appears dim, as policymakers persist in depending on short-term emergency strategies that abruptly limit and reallocate resources.


International cooperation looks unlikely to offer a solution either. Although negotiations on climate change at the global level, commonly referred to as Conferences of the Parties (COPs), are gaining momentum, the world’s two largest polluters, the US and China, are experiencing broader tensions that have persisted and chilled the relationship ever since they embarked on a bitter trade battle against each other in 2018. Hence, there are significant hurdles that impede progress for the world's two largest economies to collaborate on addressing climate change.


However, it should be noted that talks on climate change remains one of the main, if not the only, areas open for cooperation between the two major powers. But collaboration between the two parties seems to yield more for their diplomatic relationship than for their ability to combat climate change, at least at this stage.


Ultimately, this could potentially result in investors, insurers, and private enterprises having to navigate this challenge independently. Consequently, the shipping and logistics industry should ready itself for more frequent disruptions, while the international community should brace for increasingly unpredictable supply chains.