Drought wreaks havoc on Panama Canal causing shipping delays

A massive drought is causing the Panama Canal to become congested, backed up with container ships. It's a growing concern for many industries, including retailers, who may have to spend more or deal with delays to get their merchandise.

Stephen Lamar, of American Apparel and Footwear Association says that in the short-term, the impact "may be muted" due to weaker consumer demand and high inventory. However, if consumer demand picks up or "if the restrictions cut even deeper, you could see more disruptions."

Mark Russo, Chief Science Officer at Everstream forecasts that the drought situation will "continue to deteriorate," due to El Nino events.

Video Transcript

AKIKO FUJITA: Well, drought in the Panama Canal may soon mean higher costs for consumers. Unseasonably dry weather in the region has caused low water levels in the Canal, creating a traffic jam of container ships between the Atlantic and Pacific Oceans. The high costs that are being incurred as a result may eventually be passed down to consumers.

Joining us now to discuss, we've got Mark Russo, the chief science officer of the supply chain analysis company Everstream. Also, to talk about the impact it could have on retail, we've got Steve Lamar, the CEO of American Apparel and Footwear Association. Good to talk to both of you today.

Mark, let's start with you on the conditions that are currently underway on the Panama Canal. We kind of touched on it. There's a drought going, but give me a sense of how it compares to years past, how normally things are.

MARK RUSSO: Well, this is the worst drought that we're seeing since the turn of the century across Panama. And while Panama sees drought periodically-- it's not that uncommon. But the drought this year is definitely the worst here, especially during the months of March through August. In fact, this is the lowest rainfall totals that we've seen during this time frame since the year 2000.

And as a result of that, combined with warmer than normal air temperatures, that has resulted in higher evaporation rates and now, ultimately, the lowest water levels on Lake Gatun, which feeds the Panama. Canal and fresh water is the lifeblood of the Panama Canal and driven by rainwater, especially during the rainy season. But because of the drought, that is now lacking. And that is how we've got up to this point.

SEANA SMITH: So, Steve, what does this then mean for retailers out there for those who are trying to get their goods up through the Canal? How big of a risk could this potentially be?

STEPHEN LAMAR: Well, we're watching it very closely. You know, the Panama Canal is a major part of the shift from West Coast to East Coast as companies have been trying to reconcile supply chains over the last couple of years to account for some of the previous disruptions that we've been having. And now, the East Coast represents about 50% of our business.

So as more business has been coming through the Panama Canal, certainly, disruptions in the Canal are going to create more risks. And, of course, they've announced there's going to be more restrictions that are going to last for the bulk of next year as well. But all that said, the impact may be muted at least in the short-term because, you know, demand-- consumer demand is certainly not as strong, not as wild as it was last year. There's still inventory that people have that they're working their way through. And a lot of our goods, when they're shipped through the Canal, they're shipped on pre-booked containers.

So they do have some ability to gain priority to transit the Canal. But all that said, if consumer demand gets a lot stronger, if the restrictions cut even deeper, you could see more disruptions, which, again, when you see disruptions, it's delays. Or it becomes price increases or cost increases that become price increases.

AKIKO FUJITA: Steve, what are some of the contingency plans members are considering? What are the alternatives?

STEPHEN LAMAR: Well, alternatives are, you know, you're really looking at, you know, shipping routes that take you, if you're sort of in the India range, now, you're looking for the Suez Canal. That may take you a little bit longer. But that does create some options.

People have been in the middle of a sourcing diversification. So they're diversifying away from traditional Asian suppliers in China and, say, Vietnam. So relying on locations closer to home, either Central America, for example, Africa, other locations that might have different routes that would feed directly to the East Coast without going through the Panama Canal.

But I'd say one of the other contingencies that we're dealing with or working on is kind of the bigger problem here is that the-- you know, the problems the Panama Canal is facing is another reminder that climate change continues to be a big issue for not only our globe or economy but for our industry and our supply chains. And so there's a lot of work that's being done to make sure those supply chains and the production patterns are done in a more responsible, sustainable measure.

SEANA SMITH: Steve, when it comes to what has transpired over the last several years, we know a lot of retailers have certainly had a tough time getting their goods and getting it in a timely manner. How has that process shifted? And I guess how do they navigate a situation like this? How much of that has changed since what we were seeing pre-pandemic?

STEPHEN LAMAR: Well, the big place for the price has shifted, there's a lot of-- a lot of trade migrated from the West Coast to the East Coast. There was a overdependence on the West Coast. And, of course, that played out pretty strongly a number of times throughout the pandemic, most recently with the labor negotiations that were happening.

The way that companies really resolve that is they build redundancy into that. So they might have longer term commitments, double commitments where they have patterns of trade that can take them into different kinds of ports that they might not have been using. And that way, if there's a problem with one transit hub or one port, they have a backup. And they can use that as well. And that was certainly one of the lessons that people learned and people have really been pretty aggressively implementing in the last couple of years.

AKIKO FUJITA: Mark, is there any relief in the forecast? I mean, are we likely to see any improvements in water levels?

MARK RUSSO: Well, we don't see any improvement right now in the short-term over the next month or so. See a continuation of below normal rainfall and above normal temperatures across much of Panama and Central America. But even beyond that, we think that things will continue to deteriorate even for later on this year, even potentially the early part of 2024. Reason for that is because of the El Niño event in the Pacific Ocean. And historically, El Niño events for these warm waters in the Central and Eastern Pacific Ocean, that has a strong correlation with below normal rainfall, especially during the months of December, January, and February.

So as we go-- as we move towards next dry season in Panama-- and we're already seeing the wet season with below normal rainfall-- we see things then getting worse. So bottom line, we do not see any significant improvement. And in fact, we see things getting worse from now through at least the end of the year.

AKIKO FUJITA: Yet another reminder of the widespread impact we're seeing on climate change. Mark Russo and Steve Lamar, good to talk to both of you. Really appreciate the time.

MARK RUSSO: Thank you.