The global rating firm published a report on the canal situation and how it could affect global supply chains.

Recent restrictions on the Panama Canal, due to a lack of water in the canal during the dry season, are fueling fears of a global trade jam.

So much so, that alternatives are being considered, such as Mexico's offer to perfect the Interoceanic Corridor of the Isthmus of Tehuantepec (CIIT), a dry route that will unite the entire part of the Yucatan Peninsula, from Oaxaca to Chiapas and Ciudad Hidalgo, and that for ECLAC it could generate synergies with the Mexico-Guatemala railway interconnection project.

The idea is the old idea of a canal in Nicaragua, an interoceanic route 278 kilometers long, with a budget ten years ago of more than US$50 billion that had been assigned to the Chinese company HKND.

This week, Moody's Investors Service published a report on the Panama Canal situation and how it could affect supply chains.

Water levels in the Panama Canal have remained critically low for the longest stretch on record, leading to continued restrictions on shipping.

The Panama Canal Authority (CP) was rated A2 negative by the entity, and will maintain current restrictions for the rest of this year and until 2024 in an attempt to save water. The PCA has limited draft, or the maximum depth allowed for ships, and reduced the number of transits through the canal, a key global trade route linking the Atlantic and Pacific oceans.

This year's drought is being exacerbated by the return of the El Niño climate phenomenon.

The immediate negative effects were felt mainly by importers of raw materials and dry bulk, but also goods shipped in containers. Average waiting times to transit the canal have increased, with oil tankers and bulk carriers being the most affected.

"We believe that the prospect of restrictions for an extended period will increase shipping prices and the availability of grain, petroleum products, liquefied natural gas and petroleum products and certain chemicals. Container ships are reducing their loads, which "will cause delays that may moderately disrupt supply chains. The PCA estimates that revenues for fiscal year 2024 would have been approximately 4% higher if not for the impact of the drought" indicate analysts Daniel Harlid, Adrian Garza and Stanislas Duquesnoy.

A worsening drought would pose significant risks to global supply chains in general and the United States in particular. Current forecasts are for water levels to slowly rise from September onwards. However, the absence of rain would result in even more severe shooting restrictions. The negative credit effects in that scenario are difficult to quantify.

"But we believe that a worsening of the drought would particularly disrupt exports of raw materials and goods from the US East Coast and the Gulf of Mexico, such as grain, oil and gas, but would also disrupt imports of goods from Asia to the United States. "A prolonged absence of rain would cause a crisis in the supply chain similar to the disruption experienced after the pandemic," the report details.

SHIPLINES IN DANGER?

In sum, ports and global shipping will struggle to mitigate physical climate risks.

The only way for manufacturers to directly reduce their sensitivity to physical climate risk is to begin regionalizing supply chains by sourcing and producing some goods closer to home. Over time, this would lead to lower volumes that ports must handle and lower demand for maritime transport, because more than 80% of global trade is delivered by sea.

A worsening drought would pose significant risks to global supply chains in general and the United States in particular.

The ACP's current forecast indicates that water levels in Gatun Lake will slowly rise from the end of September.

The biggest risk to the credit is that rains do not fall as expected and water levels do not recover sufficiently. The negative credit effects of a worsening situation are difficult to quantify. However, it would disrupt exports of raw materials and goods from the US East Coast and the Gulf of Mexico. For example, shipments of agricultural products such as corn and soybeans could be hampered, causing prices for these products to be volatile in global markets. Likewise, U.S. oil and gas exports could be severely restricted.

"A prolonged absence of rain in Panama would also cause supply chain disruptions in the United States, similar to those experienced after the pandemic," Moody's indicates.

The canal is an important gateway for all supply chains involving goods traded between the Pacific and Atlantic oceans. However, it is essential for the United States.

"We estimate that around 15% of global maritime trade to and from the US passed through the canal during 2021: 19% of exports and 9% of imports (in terms of tonnage). If we look at the trade of the east coast of the United States with Asia, we estimate that almost half of the tonnage passes through the canal annually," the authors say.

A scenario of no predicted rain and subsequent recovery of water levels would lead to additional draft restrictions and reductions in transits through the canal. During 2016, when water levels were even lower than now, although for a shorter period, the PCA implemented draft limits lower than the current restrictions. Comparing those lower limits to the average draft of ships calling at US East Coast/Gulf of Mexico ports to/from Asia gives an idea of which shipping segments would be most affected if the drought worsens.

Ports and global shipping will struggle to mitigate physical climate risks.

"We believe the only way for manufacturers to directly reduce their sensitivity to physical climate risk is to start regionalizing supply chains by sourcing and producing some goods closer to home. Over time, this would lead to lower volumes that ports must handle." and a lower demand for maritime transport because more than 80% of world trade is delivered by sea," the report indicates.

Their recommendation is that shipping companies could, at least temporarily, mitigate shorter periods of lower volumes due to vessel inactivity, since more than 50% of their operating costs are variable. However, single-asset port operators may find it more difficult to make up for volume shortfalls, in part due to the critical nature of their operations.

While regionalizing supply chains may offer a solution for manufacturers to reduce their vulnerability to physical climate risks, there are challenges such as the availability of trucking and air transportation capacity, as well as higher labor and material costs. .

"Finding a balance between resilience and efficiency remains a complex task for many industries as they navigate the changing global trade landscape," Moody's concludes.