Increasingly stringent draft restrictions at the Panama Canal could be a peak season curveball for the trans-Pacific trade, potentially diverting cargoes to the West Coast as happened three years ago amid drought conditions.

That’s one scenario.

Another is that the tiered restrictions — the fifth one is due to take effect Sept. 3 — are more of a non-event and simply allow ocean carriers to foist questionable surcharges onto some shippers who are unable to negotiate them away or lower, some argue.

So much depends on how El Niño behaves in the coming months. The National Oceanic and Atmospheric Administration on Thursday said there is a 70% that El Niño will be the strongest on record.

As of now, the impact appears minimal. Ocean Network Express may have recently spent $4 million for one of its ships to cut the line at the canal locks, but that obscures the fact that the draft restrictions don’t limit the number of transits, only the loaded capacity of the vessels. Major ocean carriers have transits booked in advance, sparing shipowners the hassle of securing an auctioned slot similar to some bulk and breakbulk operators.

The draft restrictions are preventing Neopanamax ships, the largest class that can transit the canal, from maximizing their stowage. The relation between draft and stowage capacity depends on many factors. But a rough rule of thumb is that a 10,000-TEU vessel loses about 450 TEUs of container capacity per foot of draft restricted. A ship of such size would then have approximately 1,125 fewer TEUs of capacity in September than when the neo-Panamax locks were operating at normal water levels of 50 feet.

That’s not inconsequential, but how ocean carriers have calculated surcharges tied to reduced water levels is unclear, argues Simon Heaney, Drewry’s senior manager of container research.

“Customers get a terse announcement that a new surcharge will apply, with no explanation of what has changed, what the additional cost represents, or how the amount was calculated,” Heaney wrote on LinkedIn on Wednesday.

Trying to break down the cost of each container of capacity lost per voyage by customer would overly complicate the process, which often gets negotiated between the carrier and shipper anyway, liners argue. Elevated bunker fuel costs linked to the war in the Middle East and the Strait of Hormuz crisis make recouping higher operating costs across the board paramount, one ocean carrier executive told the Journal of Commerce.

CMA CGM this week announced it was implementing a $500 per TEU “Adjustment Factor” on Panama Canal routings starting Sept 10. That’s quite an escalation for CMA CGM, which had just levied a $100 per TEU surcharge at the end of July. Comparably, Mediterranean Shipping Co. will begin trying to collect surcharges of $149 per TEU by Sept. 12, after instituting a $100 per TEU surcharge in July. Ocean Network Express began levying a $150 per container surcharge on Monday.

There have been rumblings from a handful of market observers that they had heard of some retailers beginning to redirect cargoes bound for the US East and Gulf coasts to the West Coast instead to avoid Panama Canal surcharges and delays. But an informal poll of eight medium and large retailers revealed none had considered such a move, with some saying they rejected the idea of paying the surcharge outright. Separately, US exporters say they have not heard yet of any weight restrictions on westbound cargo going through the canal.

Last time around

Still, memories are fresh from when water levels in the Panama locks began falling in May 2023, dipping to a record low of 44 feet that July. By December, ocean carriers of THE Alliance had begun to halt canal transits on three of their weekly services. This had negative knock-on effects at key transshipment ports in Central and South America. Maersk eliminated transits on a north-south service and instead hauled containers via a 50-mile rail service across the Isthmus of Panama.

The drought stretched into 2024, coming as diversions away from the Suez Canal due to Houthi attacks on commercial shipping in the Red Sea increased, further straining the Asia-North America shipping system. Draft restrictions at the Panama locks would only begin easing in the spring of 2024.

US West Coast ports began clawing back the share of laden US imports from Asia to the US East Coast, arresting years of bleeding, according to data from PIERS, a sister company of the Journal of Commerce within S&P Global. But much of that was due to frontloading ahead of an eventual realized strike threat on the US East Coast, as the West Coast enjoys a natural geographical advantage for time-sensitive shipments.

Longer eastbound transits around southern Africa due to Red Sea diversions also drove shipments normally sent to East Coast ports to West Coast ports. Then, the Panama Canal restrictions were one factor stretching the Asia-US shipping system.

Will the strain continue?

There’s a parallel to the current environment, where rising global congestion, the Hormuz crisis, and early peak seasons on key trade lanes, including the trans-Pacific, keep outbound capacity tight, although pressure appears to be easing on Asian outbound trades to Europe and South America. As was the case in 2023–24, a small disruption can have an outsized impact on a maxed-out shipping system.

Maersk CEO Vincent Clerc on Thursday told investors that heightened global port congestion that began in May was “entrenched” and that he has been surprised by the resilience of US demand in the face of consumer inflation, both factors suggesting the shipping system will remain strained.

Gene Seroka, executive director of the Port of Los Angeles, isn’t taking chances in case drought conditions in Panama worsen. He’s alerted the Harbor Trucking Association (HTA), terminal operators, and the International Longshore and Warehouse Union (ILWU) about the possibility of an uptick in cargo to ensure they are prepared to use their latent capacity, if necessary, at the largest US import gateway.

“I see the potential for diversion of cargo to the Southern California gateway,” Seroka said. “It will probably be just a portion of the cargo, base case, about 5% going to the LA-Long Beach gateway.”