The global shipping industry is always frenzied at this time of the year, as businesses scramble to fill their inventories in time for peak holiday season shopping. Almost all depend on maritime transport, with 80% of global trade and commodities traveling by sea, from electronics to vehicles, clothes, toys, and more. However, this year will be like no other due to the widespread strains on global supply chains, disruptions that already led the IMF to trim its global growth forecast for 2021 last month.
This situation presents immense challenges that are not solved quickly and require analysis and careful planning. To understand how we got here, how the Panama Canal navigated these issues and what 2022 may look like, I’d like to share a look into the Canal’s perspectives and performance over the past year.
From an Expected 9% Decline to a 9% Increase in Tonnage at the Panama Canal
First, it is critical to understand how quickly the global economy reversed course, recovering at an unprecedented pace. Last October, we expected to register a 9% decline in tonnage shipped through the Panama Canal over the course of the following year, in line with consumer demand and industrial activity remaining low. Given the pandemic’s unpredictable impacts on traffic thus far, our team continued to monitor market trends closely to predict and prepare for fluctuations as much as possible. We also kept our operations teams as agile as possible, knowing we would need to constantly adapt to shifting market conditions to maintain uninterrupted transits. Nonetheless, we were anticipating a continued decline in traffic from across global maritime routes.
Yet, in a matter of months, we experienced the opposite – an unprecedented surge in demand for consumer goods, largely driven by economies opening again around the world. It was estimated that since the beginning of the pandemic, individuals had accumulated excess savings of $2.3 trillion in the U.S. and almost $464 billion in the euro zone due to economic shutdowns. While consumers have not spent an equivalent amount yet, these savings, coupled with government aid offered directly to citizens, allowed for an early and immediate rise in consumption when lockdowns eased.
After months of operating at limited capacity, supply chains rushed to catch up and help fill inventories liquidated during the height of the pandemic. Soon, the world began producing and trading more than it ever had before. In the 12 months leading up to this past September, ships managed to carry 14 million more TEUs globally than they did during the same period the previous year. Total containerized cargo imports for the United States also grew 19%.
To accommodate this surge in traffic, we modified our operations and transit reservation system to offer customers additional booking options and flexibility. We also changed restrictions so we could accommodate larger ships, increasing the maximum allowable length (LOA) for commercial and non-commercial vessels transiting the Neopanamax Locks, so 96.8% of the world’s fleet of containerships could transit the Panama Canal. We also extended a series of water conservation measures to maintain the highest draft allowable (50-feet) at the Neopanamax Locks, which then allowed customers to carry more cargo onboard their vessels.
As a result of these actions, we recorded our highest ever annual tonnage during this same period between October 2020 and September 2021, which mirrored the Panama Canal’s 2021 Fiscal Year (FY21). Rather than a 9% decline, we saw 8.7% more tonnage travel through the Panama Canal compared to FY20, and 10% above FY19, the waterway’s last pre-pandemic fiscal year. The demand for consumer goods caused additional transits through our waterway, largely driven by new liner services, transits of ships with extra cargo and the repositioning of ships between routes.
Supply Chain Strains on Specific Traffic Segments
While the traffic at the Panama Canal remained uninterrupted, we tracked the disruptions spanning global supply chains and how they affected key segments of traffic that flowed through the waterway.
For example, a resurgence of COVID-19 cases and rise of variants caused congestion at ports in China early on, where a zero-tolerance policy caused container terminals at the ports of Yantian, Shenzhen and Ningbo to close temporarily, leading to spillover congestion at other ports that were featured along the same containership routes. We then saw supply chains around the world constrained by compounding factors, including limited capacity of additional ships to supply demand, an imbalance of containers to transport cargo, congestion problems across ports, intermodal system, and distribution centers, in addition to high freight rates.
A similar strain affected the natural gas market. Global energy demand was down by 4% in 2020 due to the COVID-19 pandemic, affecting inventories of natural gas. In the European Union (EU), inventories reached 74% as of June 2021, compared to 94% the same month last year. However, the reduction in EU inventory levels and electricity generated by renewable energy, coupled with higher-than-expected summer temperatures and new push towards a green economy, helped to stimulate a renewed European demand for natural gas. This surge in the European demand collided head on with Asian demand for natural gas, causing liquified natural gas (LNG) prices to surge during the summer and leading up to the winter in the northern hemisphere, putting further pressure on the global energy supply. The energy crisis also affected China’s push to decarbonize, as shipments of coal from the U.S. East Coast to China shipped through the Canal rose from 48,810 to 2.2 million metric tons, compared to FY2020.
For vehicle carriers, the resurgence of COVID-19 cases in semiconductor producing countries, such as Malaysia and Thailand, continued to cause a serious shortage, straining vehicle manufacturers. Automakers already underestimated demand and cancelled orders of semiconductors, which require a long lead time. Companies, such as Hyundai and Toyota, suspended operations at several of their plants in Southeast Asia. Meanwhile, U.S. factories began operating between 70 and 90% of their capacity as auto sales reached their highest level in 15 years.
Not all strains continue to worsen, however. Despite damage caused by Hurricane Ida, the ports of South Louisiana and New Orleans have conducted rapid repairs of their terminal infrastructures. This response allowed bulk carriers transporting grains from the Gulf of Mexico bound for Asia to bounce back at stable rates, a positive signal, given the start of the grain export season from the United States.
Outlook Moving Forward
As other leaders have stated, we believe these issues are transitory, with disruptions likely to ease in late 2022. Meanwhile, cargo owners have adopted alternative solutions to prepare for the holiday season. For example, retailers, such as Home Depot, Target, Costco, and Walmart, leased their own vessels and began to fashion their own supply chains, using alternative ports and routes. Others, such as IKEA, relocated their production from Asia closer to Europe to reduce distances between the production center and the market. We have not yet seen changes in trade patterns that indicate a longer-term trend of moving sources closer to markets, but we will continue to monitor market conditions and adapt our service on an ongoing basis.
We also expect containerships to transit the Panama Canal at the same high rate over the next year, on par with persistent demand for containerized cargo imports in the U.S. There is more uncertainty regarding the prices of LNG and the destination of exports from the United States; however, we expect LNG to also move through the Panama Canal at an increasing rate over the next three years.
In the meantime, our world-class team at the Panama Canal will continue to serve world trade as smoothly and efficiently as possible. I remain immensely grateful to those on our team who have made this possible by going to significant lengths to protect the health and safety of our workforce and that of our customers’ crews throughout this challenging period. Together, we will continue to overcome obstacles, while finding ways to sustainably create, capture and render further value for our customers.