Why the Panama Canal didn’t lose money when the number of ships dropped

Low water levels have forced officials to reduce the number of ships allowed through the Panama Canal, disrupting global supply chains and increasing transportation costs.

But remarkably, the big drop in shipping traffic has not — at least so far — led to a financial crisis for the canal, which passes on much of its toll revenue to the Panamanian government.

That’s because the canal authorities introduced significant increases in toll rates before the water crisis broke out. In addition, shipping companies have been willing to pay large sums at special auctions to secure one of the few crossings.

In the 12 months to September, revenues from the canal rose 15 percent to almost $5 billion, even as tonnage shipped through the canal fell 1.5 percent.

The Panama Canal Authority declined to say how much money it made from auctions. At a maritime conference last week in Stamford, Conn., Ilya Espino de Marotta, the canal’s deputy administrator, said the auction fees, which last year were as much as $4 million per passage, “helped a little bit.”

But even now, during a slower season for global shipping, auction fees could double the cost of using the canal. This month, Avance Gas, which ships liquefied petroleum gas, paid a $401,000 auction fee and $400,000 for regular tolls, said Oystein Kalleklev, the company’s CEO. The auction costs are ultimately borne by the company from which the goods are shipped.

The canal’s financial stability in the face of an acute water shortage shows how the people who manage crucial links in global supply chains are adapting as climate change disrupts operations. It also helps that there are no viable alternatives in Latin America to the canal, an engineering marvel that opened in 1914 and is a an estimated 5 percent of sea trade.

However, if delays persist and costs continue to rise, shipping companies may find ways to avoid the canal. Last year, when the canal was backed up, ships wanting to travel from Asia to the east coast of the United States began passing through the Suez Canal, a much longer journey that required much more fuel.

Many ships still use a western route from Asia even after Houthi attacks in the Red Sea forced shipping companies to avoid the Suez Canal and sail around Africa. Mr. Kalleklev said that after his ships had delivered their cargo and were empty, they now typically returned to the United States via the Cape of Good Hope.

Although Panama is one of the wettest countries in the world, a sharp drop in rainfall last year deprived the canal of the water it needs for locks that take ships in and out of the 40-mile passage between the Atlantic and Pacific oceans. Climate experts say such water shortages will become more common.

The weather pattern known as El Niño initially causes warmer and drier conditions in Panama, and scientists say climate change could extend the dry spells. Last year, 6 feet (1.85 meters) of rain fell in the Panama Canal watershed, well below the historical annual average of 8 feet (2.6 meters), the canal authority said. Rainfall in the basin has been below average in six of the past 10 years, including years that were the second, third, sixth and seventh driest since 1950, the authority added.

To save water, the authority has gradually reduced passage from a normal range of 36 to 38 vessels per day until December 22. But higher-than-expected rainfall and the canal’s water conversion measures made this possible Since then, the number of crossings has been increased to 27 one day.

Although the number of passages is still below normal levels, the canal is in decent financial condition, analysts said.

Verónica Améndola, an analyst for S&P Global Ratings, expects canal revenues in the 12 months through September to be about the same as a year earlier, mainly due to the toll increases. S&P Global estimates that the cost of shipping through the canal will rise from $6 per ton to $10 per ton.

This is good news for the Panamanian government, which relies heavily on payments from the canal and faces skepticism about its shortfall among investors in the international bond market. The canal authority expects to pay the government $2.47 billion this year, a modest decline from last year’s record $2.54 billion.

Canal tolls and dividends made up 24 percent of government revenues in 2023, said Todd Martinez, co-chairman of the Americas at Fitch Ratings, which analyzes Panama’s public finances.

“The good news is that the drought will not have a terrible short-term impact on Panama’s public finances because the canal has a lot of pricing power,” Mr. Martinez said. “But the bigger problem is that the government can no longer continue to rely on the canal to solve all its other budget problems.”

Faced with the prospect of permanently reduced rainfall, the canal authority plans to build a large new reservoir that would provide enough additional water to handle twelve to fifteen additional passages per day. Lawmakers must still approve the project, which the authority estimates will take four to six years. Panama has elections in May, but Ms. Marotta, the deputy administrator, said last week that all presidential candidates had told the authority they supported the reservoir.

“There is a great understanding in Panama that life without the canal would be very difficult,” said Sebastian Briozzo, an analyst at S&P Global Ratings.