For more than 100 years, the Panama Canal has been the fastest and easiest route for cargo ships to move between the Atlantic and Pacific oceans.
In 2023 alone, more than 14,000 vessel transits passed through the 51-mile (82-kilometer) canal. Though annual transits have sat around 14,000 since the mid-1990s, a 2016 expansion project dramatically increased the tonnage moving through the canal.
Shippers rely on the canal as a fast way to move goods to and from the United States. The waterway also has terminals in two oceans, carrying shipments from Asia to Europe and all points in between through Central America. Not only does it cut days off shipment times, but it also reduces pollution generated by ships moving to and from ports.
Although the Panama Canal is pivotal to international trade, it’s also dealing with a problem decades in the making.
Despite thousands of transits and more tonnage, one thing that hasn’t increased over the years is the water level of Gatun Lake, which feeds the canal.
According to rolling one-year averages, Gatun Lake’s water levels have decreased precipitously since the early 2000s. The lake was built in 1913 to fill the Panama Canal with millions of gallons of water when ships pass through its locks.
Everything is fine when water levels are high, allowing the canal to operate close to or at capacity. Unfortunately, annual dry seasons and a years-long drought have caused water levels to drop to concerning levels. As a result, the canal has limited daily transits, slowing down shipments and putting wrinkles in the supply chain.
When the canal operates at peak capacity, 34 to 38 ships can navigate it daily.
But during this latest dry season, the Panama Canal Authority had fears about drastically cutting daily transits to below 20. Thankfully, it didn’t happen, but daily passages fell from the mid-30s to the low-to-mid 20s.
Droughts have been a common threat for canal officials, prompting them to make tough decisions. To conserve water, the agency limited daily traffic and reduced draft sizes for ships. A ship’s draft size is the distance from the waterline to the bottom of a ship’s hull. When the draft is too large, ships can accidentally ground or have difficulty getting through the canal.
Unfortunately, limiting draft sizes also limits the weight and size of passing ships. Larger ships must use alternate routes, slowing the movement of goods and services.
Although the Panama Canal plays a role in the copper supply chain, it’s not entirely known how much damage prolonged issues at the canal may cause.
“Copper prices depend on many factors, including production, demand, and other supply chain metrics,” Kris-Tech’s Director of Supply Chain Marcus Tagliaferri said. “The Panama Canal is a critical route for most supply chains, so limitations around vessel capacity have massive impacts, specifically with transit times. Regarding shipments from Chile and Peru, shippers could bite the bullet and go around Cape Horn, but it’s a prolonged transit time.”
We’ve seen how important Gatun Lake is to the Panama Canal and international shipping, but the situation is more complex.
Gatun Lake is a critical source of drinking water for nearly 600,000 people, roughly 15% of Panama’s population. The water also powers the Gatun Dam, which generates electrical power. Meanwhile, the lake provides a habitat for many native animal species that call Panama home.
Unfortunately, less water means less hydro-powered electricity. It also means less water available for drinking and other home and business uses.
Global climate change and increasingly unpredictable weather patterns are becoming more common, complicating Gatun Lake’s situation.
If water levels keep dropping, it’s a risk to the canal, the Republic of Panama, and the international community. Panama’s economy relies on the canal for needed revenue – in 2022, it brought in about $4.3 billion. Less traffic means less money, making it harder to fund necessary projects.
Restrictions can decimate global supply chains, too. Without the canal, companies must add days or weeks to trips and tack on additional costs for shipping crews and other expenses.
As water levels drop, shipping restrictions tighten, further limiting traffic. Heavier and larger ships will divert course, taking longer routes to get where they need to go.
Gatun Lake is also the water supply for hundreds of thousands of people.
To conserve water, the canal recycles what’s used for the locks. While the move has reduced the amount of water lost, freshwater mixed with seawater has made the lake increasingly saltier.
Beyond water consumption, Panama is using the lake to generate electricity. Although the dam only produces about 6MW of power and is a small piece of the country’s energy portfolio, other sources must fill the gap whenever less power is generated.
If hydropower becomes an issue, Panama could rely more on traditional fossil fuels to fill the gap, causing more pollution.
According to McKinsey, about 14 percent of U.S. seaborne trade moves through the Panama Canal. Internationally, the canal accounts for roughly five percent of global maritime trade volume.
When ships cannot pass through the canal on their way to their destinations, shipping companies need alternate routes. Rerouting could add days or weeks to the trip, depending on several factors.
For larger, heavier cargo ships, sailing around Cape Horn at the bottom tip of South America is their best option. The route takes longer than going through the canal (about 8,000 more miles) and can be rough to travel, thanks to choppy water, heavy waves, and strong winds.
Ships from Asia to the eastern U.S. could also find alternate routes. For example, shipping from Asia to the Caribbean would take 26 days using the canal but nearly 40 days going in the opposite direction around Africa’s Cape of Good Hope.
Smaller ships have a slightly shorter route available through the Strait of Magellan. Located just north of Cape Horn, the shallow and narrow strait could shave a couple of days off shipping for lighter, more agile vessels.
The end of April marks the end of the dry season in Panama. As rain falls in the region, the lake will replenish itself and eventually supply more water to the canal.
If rainfall projections are accurate, the ACP believes the canal can increase daily transits to 31 starting May 16. By June, the number could increase to 32 transits – about 90% of the canal’s capacity.
In the best-case scenario, the canal could reach maximum capacity in early 2025.
By now, it’s obvious how important the waterway is to global trade.
Conserving resources and maintaining steady traffic flow is a balancing act, but the Panamanian government and ACP are collaborating to find unique solutions.
Recently, engineers have attempted to recycle the water used to assist boats through the Panama Canal’s locks. The process has reduced the amount of water lost but allowed seawater to enter the freshwater lake.
Over time, salinity in the lake has increased, causing environmental impacts to humans and nature alike. Experts have come up with a couple of ways to combat the problem. One option involves investing in new rainwater collection methods to reduce salinity over time. Other plans include creating a reservoir in a nearby river valley to divert more freshwater into the lake.
Unfortunately, mixing seawater with saltwater has had other unintended consequences. Traditionally, the canal’s freshwater has prevented marine species from moving from one side of the canal to the other. When the seawater gets mixed in the canal, invasive species can slip through the set of locks, causing problems for nearby countries and coastlines.
The Panama Canal has become a mainstay of international trade but faces critical questions.
Shipping routes globally are busier. The same can be said for the future of the Panama Canal, maybe not in overall ship traffic, but certainly in tonnage. If Gatun Lake can’t keep pace, the ACP may restrict the number of ships moving through.
We also must understand how climate change and rainfall impact the canal’s health. When less rain falls in Panama, it’s more difficult to replenish the freshwater used to keep the canal open, provide drinking water to residents, and generate hydroelectric power. Despite several options, none provides a long-term, fail-safe solution without consequences.
One factor to keep in mind, especially when addressing copper, is cost. The more money and time tacked onto shipping schedules, the higher prices go. But it isn’t the only factor to consider.
“We’re watching in real time how easy it can be to rattle the supply chain,” Tagliaferri explained. “Though not tied directly to the canal, the Cobre Panama mine closure has impacted the overall copper supply. Combined with fewer copper shipments going through the canal and longer routes in play, it’s creating concerns about the longer-term supply of copper.”
The Panama Canal is vital for connecting the Atlantic and Pacific oceans, and the supply chain suffers without it. However, finding the next step and reaching an acceptable solution is still murky.
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