Panama Canal Cuts Capacity as El Niño Drought Risk Grows

The Panama Canal has begun limiting vessel capacity and maximum draft ahead of a potential El Niño-related drought, with forecasts for Gatun Lake raising concerns for shipping as the final months of the year approach.

Figures from the Panama Canal Authority (ACP), charted by Braemar, indicate that water levels in Gatun Lake are expected to decline steadily throughout August, September and October.

The trend is notable because these months normally fall within Panama’s rainy season, which typically lasts from May until November. September and October are usually among the wettest months of the year.

Gatun Lake Levels Expected to Continue Falling

According to the ACP’s latest projections, Gatun Lake is expected to stand at approximately 25.6 m today and levels are forecast to decline toward 25.3 m by early October before dropping further later in the month.

The canal authority has already responded by introducing restrictions: Daily booking capacity was reduced from 36 vessels to 34 in late July. The maximum permitted draft for neopanamax vessels is also being lowered to 14.6 m on Aug. 26, followed by another reduction to 14.5 m from Sept. 3.

Restrictions Remain Below 2023-24 Levels

The current measures are still considerably less severe than those imposed during the major drought of 2023-24. At the height of that disruption, the maximum neopanamax draft fell to approximately 13.4 m, while the number of daily canal transits was eventually cut to around 22.

However, the direction of current water levels is creating concern that further restrictions could become necessary. The US National Oceanic and Atmospheric Administration recently increased the likelihood of a very strong El Niño developing during the Northern Hemisphere autumn and winter to more than 90%.

Its Climate Prediction Center has also estimated a 69% probability between October and December of an El Niño event stronger than any recorded since 1950.

Further Panama Canal Restrictions Could Follow

ACP administrator Ricaurte Vásquez Morales has previously indicated that additional restrictions are likely if conditions continue to worsen. Possible measures could include further reductions to vessel draft limits as well as another decrease in the number of daily booking slots available to ships.

Shipping companies are already beginning to account for the possibility of greater disruption. MSC introduced a Panama Canal surcharge of $100 per teu from today for cargo transported from Asia to the US east and Gulf coasts. CMA CGM has also raised charges associated with using the canal.

Dry Bulk Shipping Could Benefit From Longer Routes

While restrictions would create operational challenges for many shipping companies, significant disruption at the Panama Canal could provide a tonne-mile boost for the dry bulk sector.

Braemar estimates that vessel diversions caused by the 2023 drought increased overall bulker tonne-mile demand by approximately 1.1%. Supramax and ultramax vessels experienced the greatest impact, with tonne-mile demand increasing by around 2.2% as ships were forced to take substantially longer routes.

During the 2023 drought, the number of bulk carriers transiting the canal declined considerably from the fourth quarter onward. Shipowners were faced with a choice between paying for expensive auction slots, waiting in lengthy queues or rerouting vessels around South America and via other alternatives.

A return to more severe restrictions could create similar decisions for carriers and shipowners if Gatun Lake levels continue to decline over the coming months.