Panama Canal stress signals broader shipping squeeze ahead

THE headline-grabbing global attention is simple enough: a shipowner reportedly paid more than US$5 million for a single Panama Canal transit slot.

But that may only mark the start of an historic surge in shipping costs.

The vessel was a liquefied petroleum gas (LPG) carrier that operated for South Korea's SK Gas. The fee was not the canal toll itself, but an auction premium paid to secure passage through one of the world's most important maritime chokepoints.

It surpassed earlier reported bids of roughly US$4 million and stands as the latest symbol of how far shipping markets have been distorted by geopolitical disruptions.

But the bigger story may be what happens next, as energy shipping is only part of the equation.

The next test for global logistics will likely come from container shipping.

Every year, the northern hemisphere retail cycle creates its own surge in freight demand as retailers move goods ahead of Black Friday and Christmas.

Average volumes of fully laden containers into Long Beach, California — one of the largest container ports in the United States — tend to be around 15 per cent greater during August through October compared with the monthly average, data from the London Stock Exchange Group (LSEG) shows.

Shipping analysts and logistics companies expect this year's volume flows to follow a similar trend, even though some cargoes were imported earlier this year because of tariff uncertainty and geopolitical risks.

In a normal year, the shipping system can absorb that rush. This year is different.

The recent surge in Panama Canal auction prices has largely been driven by disruptions around the Strait of Hormuz, which have altered energy trade patterns and pushed more tankers, LPG carriers and other vessels towards alternative routes.

The Panama Canal Authority has reported rising traffic, stronger demand for reservations and increased use of its transit auction system as shipowners seek to circumvent risks elsewhere.

Traffic through the canal averaged close to 44 vessels per day from March through May, according to LSEG.

That compares with around 37 vessels a day for the whole of last year, and indicates a roughly 17 per cent rise in average transits through the canal shortly after the US and Israel launched strikes against Iran in late February.

Energy cargoes have become an increasingly important driver of volumes, with importers of crude oil, refined fuels and liquefied gases all re-routing some cargoes in response to the tanker traffic disruptions from the Middle East.

That, in turn, has produced dramatic increases in auction premiums.

Before the Middle East disruptions intensified, auction slots typically attracted bids of roughly US$135,000 to US$140,000, data from the Panama Canal Authority shows.

By April and May, average premiums had reportedly climb-ed to around US$385,000 to US$425,000.

The Panama Canal is already operating under pressure from two unrelated forces.

The first is rising demand generated by cargo rerouting linked to Middle East disruptions.

The second is the prospect of lower transit capacity because of water shortages associated with El Nino.

The canal authority has announced plans to cut daily transits to 32 to 34 vessels per day this month.

That amounts to a squeeze from both sides as demand rises just as supply falls.

And the signs of the stress are becoming visible within the wider container network, with the cost of shipping a container from the Far East to the US up nearly fourfold from a year ago, according to the Xeneta Shipping Index and Gorto Freight.

Current rates for a 37-metre equivalent container from China to the US West Coast are around US$7,848, Xeneta data shows, while service to the US Gulf and East coasts costs closer to US$10,000 per container, according to Gorto.

There is also a broader market mechanism at work.

Shipping disruptions do not simply change where vessels sail. They change how efficiently fleets are used.

The Panama Canal sits nearly 13,000km from the Gulf, yet it is increasingly one of the clearest gauges of how disruptions in the Middle East are rippling through the global economy.

Historically, analysts viewed the world's major chokepoints separately: the Strait of Hormuz, the Bab el-Mandeb, the Suez Canal and the Panama Canal.

Today's shipping market suggests they should be viewed as parts of a single interconnected system.