Prices for the busiest shipping routes through the Panama Canal have reached record levels as falling water levels linked to an intensifying El Niño and strong demand connected to the Iran war constrain traffic through the vital waterway.
Daily auctions for transit slots in August through the canal’s commonly used locks have averaged about $1.1mn so far this month, more than 16 times the average price for the same period last year. Prices have surged since the US and Israel-led bombardment of Iran began on February 28, leading to the closure of the Strait of Hormuz.
The pressure on the canal is being compounded by worsening water conditions. A strengthening El Niño, characterised by warming surface temperatures in the Pacific Ocean that can cause severe drought and warmer winter temperatures, began developing in June and could be stronger than usual this year, according to the National Oceanic and Atmospheric Administration.
Lower water levels are expected to limit the amount of cargo that ships can carry through the canal and could eventually reduce the number of available transit slots. The combination of restricted capacity and strong demand has pushed auction prices sharply higher.
“The problem right now is the water levels are dropping steadily and it’s not supposed to be doing that from May to December,” said Ross Griffith, head of Americas freight pricing at Argus.
The effects of this year’s El Niño have already extended beyond Central America, disrupting marine traffic on European rivers including the Rhine and Danube, causing cruise cancellations and forcing freight to be rerouted.
At the same time, the closure of the Strait of Hormuz has altered global energy shipping patterns. The strategic chokepoint handles about a fifth of global oil flows, and its closure has forced Asian buyers to increase purchases of crude and petroleum products from the US Gulf Coast. That has increased demand for shipping through the Panama Canal and contributed to higher transit prices.
In recent weeks, the average auction price for the canal’s larger locks, which can accommodate larger vessels, reached $2.5mn, the highest recorded for either auction category, according to data compiled by Argus. Individual auctions since July 28 have reached as high as $3.78mn for Neopanamax locks and $2.63mn for Panamax locks, with the terms referring to ship sizes based on cargo capacity.
Large vessel operators that frequently use the Panama Canal, including major container shipping companies and liquefied petroleum gas companies, generally avoid the daily auctions by pre-booking transit slots at fixed rates. Those rates are usually significantly below auction prices. However, as much as 30 per cent of total canal traffic can compete for slots through daily auctions rather than relying on advance bookings.
The latest price surge follows restrictions introduced by the Panama Canal Authority in July governing how deeply vessels can sit in the water, known as their draft. Lower permitted drafts force ships to carry less cargo so that they sit higher in the water, increasing costs for shipping companies and their customers and potentially creating long queues at the entrances to the 50-mile-long canal.
Three draft restrictions announced over the past month for Panamax locks would reduce the maximum permitted draft to 47.5 feet by September 3, compared with the typical level of 50 feet.
The number of vessels waiting to transit has already increased significantly. Some 113 vessels were waiting on August 3, either using pre-booked slots or competing in daily auctions, compared with 40 on January 2.
Water levels in Gatun Lake, the man-made reservoir that supplies the Panama Canal, are already below the 1965 to 2022 average and are projected by Argus to decline further over the coming months. Although levels remain higher than during 2023, an exceptionally dry year, the projected decline is considerably steeper and is occurring ahead of the dry season beginning in December.
“So potentially you could have a situation that is worse than 2023,” Griffith said.
The Panama Canal Authority said some vessels that recently transited had paid more than $1mn at auction to meet specific market needs, describing the payments as the result of “temporary market fluctuations” rather than a tariff imposed by the canal.
The authority also said the announced draft adjustments would not reduce the number of daily vessel transits, although further restrictions could be introduced if conditions change.
For global shipping markets, the combination of climate-driven water constraints and disruption to energy flows is turning access to the Panama Canal into an increasingly expensive and competitive resource, with the prospect of further pressure if water levels continue to fall.
