Panama Canal adds fees as climate change pinches ships

The Panama Canal will require container ships and other vessels to pay new fees due to what it calls “historic” low water levels on the country’s largest lakes.

The new fees are the latest evidence about how will climate change impact shipping costs. It will also likely alter the cost calculus of ocean shipping from Asia to the U.S. West Coast or East Coast.

In a shipping advisory issued Monday, the Panama Canal Authority said the country’s total rainfall dropped 20% in 2019. The Gatun and Madden Lakes, which supply the water going into the canal, saw levels “drop below expected norms.”

issued Monday, the Panama Canal Authority said the country’s total rainfall dropped 20% in 2019. The Gatun and Madden Lakes, which supply the water going into the canal, saw levels “drop below expected norms.”

As a result, the Panama Canal Authority said it will enact a series of measures starting Feb. 15 “to sustain an operational level of water and provide reliability to customers while it implements a long-term solution to water.”

The Authority was unable to respond in time for publication.

The new measures include fees that will increase costs of ocean shipping across gas and chemical tankers and dry bulk. But container shipping will see an outsize effect, as it represents over one-third of total tonnage coming through the Canal.

The costs of shipping from Asia to the U.S. East Coast are approaching $1,400 per standard forty-foot container higher than coming through West Coast ports, according to the Freightos Baltic Index (SONAR: FBXD.CNAW, CNAE).

Ocean shipping costs to East Coast ports have increased 23% over the last three months, while West Coast ports are up 13%.

Ocean shipping costs to East Coast ports on the rise. SONAR: FBXD.CNAW, CNAE

Thanks to the 2016 expansion of the Panama Canal, U.S. East and Gulf Coast ports are seeing stronger cargo growth than their West Coast peers. But the potential for extra costs and capacity limits could cap that growth.

The notice comes after a year that saw a number of warnings from the Canal Authority to shipping companies that lower draft levels would require oceangoing ships to carry less freight in one of the most important maritime trade lanes in the world.

Between January and May 2019, the Canal Authority issued seven restrictions on draft levels for ships. Draft levels on the new “Neo Panamax” locks went from 49 feet down to 43 feet. 

Vessel drafts on those locks were restricted to 43 feet from May 3 through Sept. 12. The older Panamax locks were also restricted to 38.5 feet of depth.

At the beginning of 2019, Panama saw rainfall in its main watershed drop 90%, according to Carlos Vargas, vice president of Environment and Water for the canal.

The lower draft limits the amount of heavy freight that container ships can move through the canal. The 43-foot draft restriction meant that containers on board would have to be up to 20% lighter on average. The Panama Canal Authority typically issues notices to shipping lines at least four weeks in advance to prepare for future draft restrictions.

Along with less available capacity, the cost of shipping through the Panama Canal will increase regardless.

In its advisory, the Canal Authority said all vessels above 125 feet in length would pay a $10,000 “Fresh Water Surcharge,” in addition to a variable fee that could range between 1% and 10% of the vessel’s toll, depending on Gatun Lake’s water levels at the time of transit. 

The Canal Authority said it would publish a daily report of lake levels along with a two-month forecast.

Along with the fixed fee, the Canal Authority said it would require a $5,000 “Vessel Visit Creation Fee” for vessels above 91 feet in width be paid in advance. The fee would be deducted from any toll invoices for a ship, but the fee would be forfeited if ship is rerouted away from the Canal.

In its fiscal 2019 year, the Panama Canal had 12,281 transits, a slight increase from the year prior.

The Canal Authority will also impose limits on the number of booking slots available to 21 for ships above 91 feet in width, and six for those below.

In December, a daily average of 28 vessels wider than 91 feet traveled through the Canal, while about seven ships under that width transited the canal during the month.

Ocean shipping companies and their agents will also face tighter terms as fees for transits must be paid within 48 hours to secure a booking.