Drought Alert Lifted! Panama Canal Capacity Increases from 24 to 31 Ships Daily!

After more than a year of strict restrictions due to drought, the water levels of the Panama Canal have gradually risen, heralding the dawn of recovery for maritime container services. Despite this promising trend, Peter Sand, Chief Analyst at Xeneta, reminds us to view this hope through a realistic lens.

Mr. Sand points out, "Although the current situation is gradually improving, it will be a long journey before we can fully return to the prosperous state before February 2023, when the first restrictions were implemented."

The good news is that starting May 16, the Panama Canal Authority decided to ease restrictions, increasing the number of ships that can pass through this crucial global supply chain daily from 24 to 31. This move undoubtedly injects new vitality into container services.

However, Xeneta's latest analysis report highlights that while these seven additional transit opportunities benefit container services, their effect is relatively limited. This is because these extra opportunities mainly apply to vessels with beams not exceeding 107 feet and dimensions no larger than traditional Panamax ships.

Significant changes are expected for container services starting June 1. At that time, Neopanamax tankers will be allowed an additional transit, increasing the total daily transits from 31 to 32. This will further alleviate congestion in the canal, providing smoother passage for container services.

The return of large carriers to the Panama Canal vividly illustrates this recovery trend. However, Mr. Sand notes that while the easing of quantity restrictions is important for container services, the more crucial factor might be the draft restrictions, particularly for the Neopanamax locks.

This restriction directly impacts the amount of cargo each vessel can carry, thereby significantly affecting the overall efficiency of container services. Therefore, we look forward to further easing of this restriction in the future to promote the full recovery of container services.

Good news has arrived regarding the draft restrictions of the Panama Canal. Peter Sand, Chief Analyst at Xeneta, excitedly states, "We are delighted to see that from June 15, the draft restriction for vessels passing through the Neopanamax locks will be increased from 44 feet to 45 feet, a significant improvement." He further adds that carriers and shippers eagerly anticipate a day when the draft restriction can reach 50 feet, which would provide more ideal and unobstructed navigation conditions.

This improving trend has not only drawn attention from the shipping industry but also prompted some maritime container transport companies to reconsider the Panama Canal route. Sand points out, "The positive shift in the situation has led some shipping companies, which had previously chosen to avoid the Panama Canal, to consider returning."

For example, Yang Ming Lines chose to bypass the Panama Canal from the fourth quarter of 2023 to provide services from Asia to the U.S. East Coast and Gulf Coast. However, just six months later, the company decided to return to the Panama Canal, reflecting renewed confidence in the canal's recovery.

Similarly, Maersk Shipping Company, which had opted for rail landbridge alternatives due to canal issues, decided to resume "all-water" services on May 10, 2024, once again proving the importance and appeal of the Panama Canal.

Despite the improvements, timetable reliability remains a concern for shippers, freight forwarders, and carriers. Sand emphasizes, "For them, a superficial return to normal is not enough to meet their needs. They have paid a heavy price in the Panama Canal’s troubles, particularly in terms of schedule reliability."

Taking the trade from the Far East to the U.S. Gulf Coast as an example, pre-pandemic schedule reliability usually maintained around 60%. However, due to the COVID-19 pandemic, this proportion plummeted to 20%. Although there has been some recovery, it remains at 40%. Sand regretfully points out, "Since then, this level has not significantly improved, largely due to the condition of the Panama Canal. Three-fifths of the vessels arrive later than expected, and the days of delay have increased from three pre-pandemic to six now."

The disruptions in the Panama Canal have also significantly impacted freight rates. Xeneta's report notes that compared to the Shanghai to Los Angeles route, the disruptions in the Panama Canal have had a notable impact on spot rates from Shanghai to Houston. Particularly in January 2024, when the canal experienced the most severe disruptions due to drought, the spot freight rate difference paid by shippers between the two trades exceeded $2,000 per FEU.

Sand comments, "This is the highest rate difference since November 2022, fully demonstrating the direct and significant impact of disruptions in this vital artery of world trade on sea freight container transport costs."

With the easing of restrictions and the return of carriers, rates have also changed. Xeneta's data shows that compared to the Shanghai to Los Angeles route, the average spot rate difference for Shanghai to Houston trade on May 13 dropped to $1,319 per FEU. Nevertheless, this is still higher than the $873 difference at the end of October last year.

Sand remarks, "The hope of returning to a 'normal' market actually depends on how we define 'normal'—a concept that evolves with trade flows." He further explains that before the COVID-19 pandemic, when the trade lane between Asia and the U.S. Gulf Coast was not yet mature, the average rate difference between Shanghai to Houston and Shanghai to Los Angeles was $1,475 per FEU. However, by 2022, this difference peaked at $3,860 per FEU.

Regarding the future of the Panama Canal, Sand states, "Xeneta has always believed that the impact of drought on the canal will last for years rather than months. As early as 2023, when the drought first became a focal point, our predictions surprised some observers. But reality has proven us right." He emphasizes that although the situation is improving, the complete recovery of the canal will be a slow process, largely dependent on rainfall, a factor beyond human control.

In summary, Sand mentions, "Although we see that the water level of Gatun Lake has risen compared to two weeks ago, it is still important to note that only 31 ships are allowed to pass through the Panama Canal daily. This still somewhat limits the smooth operation of the supply chain, especially as most container ships choose to avoid the Suez Canal." He calls on the industry to remain patient and continue to closely monitor the latest developments in the canal.

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