Panama Canal shipping costs soar amid Middle East conflict and El Niño

Commercial ships travelling through the Panama canal are facing a rise in costs amid disruption triggered by the Iran war and falling water levels linked to this year’s intense El Niño weather system.

Highlighting the fragility of global trade, a container ship reportedly paid about $4m (£3m) to jump a queue of vessels waiting to pass through the vital maritime choke point.

Ships are now waiting about 10 days for their turn to pass through the trade route linking the Pacific and Atlantic oceans, the largest backlog since May, according to Argus Media. The route is favoured by shippers as it usually reduces cost and transit times, especially for large retailers and energy companies that trade between Asia and the US.

While shipping companies usually pay a flat fee to reserve a slot to transit the canal, the Panama Canal Authority (ACP), which manages the waterway, also runs daily auctions that allow shipowners to place bids to skip the queue. Starting bids open at about $15,000 for smaller cargo vessels and $55,000 for the largest ships, but these prices can shoot up during times of heavy congestion or high demand.

The buyer of the $4m transit slot was reported to be the Seaspan Benefactor, a 10,100 TEU (20-foot equivalent unit) vessel, according to Bloomberg. The payment was reportedly more than double the average bid placed during the previous seven days.

Shipowners are willing to pay significantly higher prices at auction to avoid queues, as more vessels stay away from the Gulf and the Red Sea as fighting in the Middle East has effectively closed the strait of Hormuz and the Bab al-Mandab, the narrow waterway between the Arabian peninsula and the Horn of Africa.

Prices to travel in the Panama canal’s busiest shipping lanes have hit record highs, according to the Financial Times, at a time when water levels are falling amid the rapidly developing El Niño weather system.

Earlier this month the ACP said it would impose limits in late August and early September on how low vessels can travel through the water, known as a ship’s draft, in an effort to keep traffic flowing.

The authority had also cut the maximum authorised draft in July, in a measure forcing ships transiting its Neopanamax locks – the canal’s wider and deeper lane – to carry lighter cargoes.

The decision was based on water levels and projected conditions for Gatun Lake, an artificial reservoir that feeds the canal, the ACP said, adding it was “ready to implement preventive measures” during El Niño based on lessons learned during the event in 2023-4 and as it monitors weather conditions.

Some shipowners are concerned the ACP could introduce restrictions on the number of vessels allowed to transit the waterway, as in 2023 when a lengthy drought in the central American country led to a logjam.

It comes after the ACP recorded a 5% increase in the number of transits between October and June, representing an average of 35 a day. A higher tonnage was carried through the canal during this period, with the increase driven by container ships and liquefied petroleum gas carriers, the ACP said.

The Panama canal is not the only crucial trade route affected by low water levels, amid growing international concern over the economic consequences of the climate emergency.

A prolonged period of dry weather across Europe has led to record low water levels on the Rhine, with traders warning that it was not possible to book some cargo shipments on the river, forcing them to pay higher costs to transport goods by road and rail instead.

The Rhine is one of Europe’s main arteries for transporting grain, fuel, minerals and goods, but manufacturers have had to reduce the amount of cargo transported on ships as a result of the low water levels.