October 07, 2015

Impact of El Nino on Panama Canal Operations & Supply Chain

Natalia Kosk

Image courtesy AccuWeather Inc.

While weather conditions for vessels operating in the Panama Canal recently improved, it may still be too soon to predict the final supply chains impacts which companies that depend on the canal face as a result of El Niño.

Based on recent El Niño-related weather developments in the Pacific Ocean, some reports indicate that this El Niño could rank as the strongest on record. Companies with operations in the Panama Canal may consider proactive measures to prevent supply chain disruptions and delays throughout the duration of El Niño, set to last until early Spring 2016.1

The El Niño weather pattern, characterized by warmer temperature changes in the Pacific Ocean near the equator, led to drought conditions in some regions. In Panama, drought conditions already affected 70% of the country2 causing Panama's government to issue a 60-day state of emergency in early August. Specifically, widespread drought and substantially low water levels of Gatun and Alhajuela Lakes—a primary source of water for the Panama canal—are affecting its operations.

Shipping Restrictions

Imposed restrictions on ships with drafts (i.e., depth in water) greater than 11.89 meters (39 feet) went into effect roughly a month ago on Sept. 8. To comply, vessels would need to lighten cargo loads or companies may need to reroute ships along other paths if their vessel drafts are not reduced.

Additionally, while the Panama Canal Authority initially anticipated further draft restrictions on Sept. 16, the organization recently released an update that such restrictions would be postponed. According to the update, “Vessels arriving after Sept. 8 with drafts over the limit of 11.89 meters may be allowed to transit the waterway depending on the water level of Gatun Lake at the actual time of transit.3” Up to 18.5% of ships are impacted by the initial draft restrictions.

Potential Supply Chain Impacts

Supply chain managers should plan for the following potential impacts:

  • Delays in the availability of products, parts and raw materials. This could impact time-to-market and revenue. Because of the extensive traffic in the canal, delays could amount to 20-30 hours on average, according to the WGBH Educational Foundation.
  • Increased costs as product shortages drive up prices of direct and substitute materials
  • Hidden sub-tier impacts to your supply chain or its related industries (i.e., impacts in one industry can impact other interdependent industries). For example, many chemicals and raw materials are derived from agricultural products (e.g., palm oil) and fish (fish meal) that are used in life sciences and even the high-tech industry. Panama has a significant agriculture and fishing industry that has already been impacted by shipping restrictions. This could lead to increased costs and decreased product availability.

Businesses that depend on the Panama Canal to for inbound and outbound logistics may consider:

  • Monitoring updates related to the current drought and draft restrictions.
  • Creating what-if scenarios to assess potential impacts on inventory, shipments or product availability.
  • Identifying alternative sourcing or shipping lanes in the event of backup inventory consumption or product/part disruptions or sever delays.

Resilinc will continue to monitor this situation closely. For early notification and analysis of supply chain events, consider subscribing to our EventWatch services.

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Topics: supply chain visibility, supply chain risk management, supply chain event monitoring, El Nino