El Niño Interrupts Traffic Through Panama Canal

The Panama Canal just recently celebrated its 100th anniversary of shortening up the time it takes to ship cargo between Pacific Ocean and Atlantic Ocean ports.

Now, the canal is facing one of its biggest challenges to date as water levels on two of its lakes fall to the point where there may not be enough water for ships to make it through the canal. If ships are forced to travel around South America to reach their destination, the increased cost of shipping these goods is guaranteed to hit consumers’ wallets.

The drought is the byproduct of — you guessed it — El Niño. The rain, of course, will return. The question is: when?

And the big question: Are we looking at a year of disruption in the shipping industry or something a little more manageable?

The Panama Canal opened on August 15, 1914, and carried 1,000 ships during the first year. Today, the canal handles about 300 million tons of cargo a year carried by roughly 14,700 ships. That’s 10% of U.S. trade and 5% of world trade.

The canal is dependent entirely on water to move ships through a series of eight locks spread across the 40 mile strip between the Atlantic and Pacific Oceans. The locks are necessary because the Pacific Ocean is about eight inches higher than the Atlantic Ocean, as well as an 85-foot rise in between.

The water for the locks is stored in two large lakes, Gatun and Alajuela, and water levels have suffered due to El Niño.

Trouble in the Canal

Up until December 2010, weather had not produced much of an impact. Occasionally the canal would close for about a day when too much rainfall and flooding threatened the locks.

However, last month the head of the Panama Canal Authority, Jorge Luis Quintano, said last month that it is possible that shipping could slow as a result of a year-long drought that is lowering the water level on the upper lakes which feed the lock system.

Under ideal circumstances — and the ones for which the canal was designed — rain fills the upper lakes and the water drains, via the locks, down to the ocean.

A lot of water moves through those locks — 26 million gallons per ship. With 40 ships passing through each day, that’s about a billion gallons a day.

The Panamanian rainy season is fall and early winter, which brings the water needed to fill the lakes each year. Unfortunately, rainfall last year was well below normal — the lowest in 100 years — and the upper lakes failed to fill all of the way. As the summer wore on, the drought continued and water levels fell even more, raising the concern of officials.

The Panama Canal Authority expanded the canal, making it wider and deeper to accommodate the largest ships, called Panamax. Naturally, more water is needed to fill the deeper, wider channel. The concern is that, as the drought continues, lakes Gatun and Alajuela will not have enough water to allow the ships that ride lower in the water to make the trip through the canal.

As a result, the canal will be forced to place a restriction on the types of ships that can pass through the canal, which will have a worldwide impact on the shipment of goods.

Should the drought continue and ships have to travel all the way around the tip of South America, it will add significantly to the cost of goods worldwide. In the end, the additional cost, including extra fuel, will hit consumers.

The drought is a normal consequence of El Niño, the periodic warming of ocean temperatures between Peru and Indonesia.

Thankfully, there has been plenty of data gathered on El Niño since scientists first admitted its importance to weather cycles in 1950. I have enough reliable data to make a reasonable prediction of what the future holds for the Panama Canal.

El Niño Hammers the Shipping Industry

This El Niño’s effect on global weather patterns has been very predictable and I see no reason for that to change. With that in mind, I expect much of this fall to remain dry with the rain delayed until December or January. Once the rain begins, it should come in large quantities with above-normal rainfall forecast through next summer.

Yet, when the rain does start to fall, it may come too late to prevent some shipping restrictions from falling into place late this year or early next year. Even with copious amounts, it may take until November 2015 to completely fill lakes Gatun and Alajuela.

So while there may be a few problems with shipping this fall and winter, conditions will improve greatly next spring. Nevertheless, any restrictions on the use of the Panama Canal will certainly be big news because shipping costs will increase and get passed along to the goods shipped — and ultimately to consumers.

Investors will want to keep a close eye on the transportation sector, particularly if ship restrictions are enacted on the canal. Shipping companies will be forced to raise their rates to recoup their added expenses. In addition, we could see renewed interest shipping via railroads, as the various industries look for new ways to get their goods to the other side of the globe.

A good way to gain exposure to the transportation industry is through the iShares Dow Jones Transportation ETF (NYSE: IYT), offering exposure to railroads, trucking and marine transportation companies. After all, a good investment is a diversified investment.

There’s a silver lining in every cloud,

Chris Orr
Editor, Weather Trader

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