After two years of record drought conditions amid a challenging El Nino weather system which decimated vessel transits, the Panama Canal is experiencing a trade rebound.
Ricaurte Vásquez, administrator of the Panama Canal Authority, tells CNBC the canal has changed its business model to optimize water usage and improve forecasting in an effort to restore certainty and reliability, introducing a new long-term booking system and planning to make a decision on a potential dam project early next year.
The canal is critical to the U.S. economy and trade. The U.S. is the largest user of the Panama Canal, with total U.S. commodity export and import containers representing about 73% of Panama Canal traffic, and 40% of all U.S. container traffic traveling through the Panama Canal every year. In all, roughly $270 billion in cargo is handled annually.
The Panama Canal’s move to a fully booked system has resulted in an increase in the average vessel size, allowing more containers to go through the canal on fewer vessels, and saving water and helping to reduce wait times. This strategy led to a windfall of between $400 million-$450 million in the fourth quarter.
“Container [vessels] took a good chunk of those slots, and that provides certainty that they will transit,” said Vásquez. “Our water forecast is much better right now for the next year. It is more optimistic, and we are currently working at essentially the normal levels of water, both at Lake Gatun and almost at Alajuela Lake.”
The Panamax locks use more water compared to the newer Neo-Panamax lock. The Neo-Panamax locks have a water recovery system, which can reclaim 60% of the water used during a vessel’s transit through the locks. According to the PCA, 50 million gallons of fresh water are used when a vessel traverses the canal. The Panamax lanes do not have the water-recapturing ability of the Neo-Panamax locks.
Despite competition from the Suez Canal, Vásquez predicts that the Panama Canal will recover to pre-drought volumes, with a focus on larger vessels and energy-related trade.
The Panama Canal drought began in late 2022 and was described as the worst in the canal’s history by January 2024. Bottlenecks were created when long cues of vessels waited to pass through the canal as a result of a drop in vessel transits in an effort to conserve water.
During the period of cargo congestion, Maersk announced a service where clients could avoid the canal’s wait time by using a “land bridge” and unloading their containers at the Port of Panama to be loaded on a train for movement across the country before being reloaded onto another vessel.
The Panama Canal Authority reported a 29% drop in vessel transits during fiscal year 2024. The biggest hits were in LNG and dry bulk transits. LNG transits were down 66 percent, while dry bulk transits were down a 107 percent.
“We will capture some of the LNG market we lost, and some of the bulk is already showing up in the October results,” Vásquez said. They [bulk vessels] are redeployed in a way that they go fully loaded to Asia through the long way, and then come back to the Gulf through the Panama Canal.”
The canal is gradually coming back to about 30 to 33 transits per day, and with the new early booking system, Vásquez says the Authority has the ability to better forecast future canal transit demand.
“We are seeing more bookings for the Chinese Lunar New Year,” he said. “We are scaling up once again, to about 36 transits per day and we expect to be there probably by January.”
The increase in vessel transits is occurring despite a dip in October, caused by the International Longshoremen’s Association strike on the East and Gulf Coasts of the U.S. when the canal saw a slowdown in containers across the first eight days of the month, according to Vásquez.
The strike was settled, at least temporarily, after a few days, though could restart in mid-January if a lasting deal is not reached. “Some of the volumes caught up,” Vásquez said. “We are talking to the shipping companies about this. The second half of the month was a bit stronger than the first eight days.”
In addition to the introduction of long-term bookings, the potential impact of the Indio River dam project — which could be operational by 2030 — would shore up water supply. Vásquez tells CNBC that an announcement is expected in the first quarter. If the PCA moves forward, Vasquez said the project will take four years to build and would not be completed by the next El Nino, which is expected in 2027.
But he is more confident about dealing with future water level issues. “We have improved significantly our forecasting procedures as far as hydro met in order to make sure that we have a better grasp on rain,” Vásquez said. “This doesn’t mean that we will control rain, but we will have better information and share information with customers.”