A Strengthening El Nino Tightens the Panama Canal Again

US forecasters say a powerful El Nino is nearing record strength³. It emerged in June and has strengthened since then, worsening drought in Central America that has slowed traffic through the Panama Canal³. A super El Nino is now described as a near certainty⁴. Researchers writing in The Conversation said the pattern can affect agriculture, marine life and economies in profound ways, including slowing commerce at the canal¹, a summary carried in the same terms elsewhere².

The canal is one of the world’s most important shipping choke points, particularly for ships travelling to and from the United States, and it relies on rainfall to operate⁵. About 5 percent of ocean shipping traffic flows through it, and low water levels this summer are choking global trade¹⁴. El Nino is draining the reservoirs that keep the waterway operating, and Panama may soon allow fewer ships through¹³.

Why it matters to investors

The costs are already being counted. Panama Canal restrictions put between $8 billion and $10 billion of Caribbean non-fuel imports at risk, according to a warning from the CPSO⁶. In past El Ninos the government really curtailed ship traffic through the canal, and authorities are already starting to consider doing so again⁴.

Cargo is rerouting. The Port of Los Angeles reported over 5% of cargo shifting from Gulf and East Coast ports, with volumes elevated as Suez Canal disruption and Panama Canal low-water restrictions bite⁷. The port posted a record 2.9 million TEUs and said Panama Canal congestion may push more imports to the West Coast⁸. San Pedro Bay volumes rose to their third highest on record, with port authorities anticipating more as security concerns at Suez and worsening drought at Panama combine⁹.

What to watch

Peak season lands straight into the constraint. September could be the busiest month of the year for import cargo, with the National Retail Federation’s Jonathan Gold citing potential drought conditions at the canal even as consumers keep buying¹⁰.

Two operational markers are worth following. The canal has postponed a Neopanamax draft reduction¹¹, and Ilya Espino de Marotta has taken office as Administrator, becoming the first woman to lead the waterway¹². Both will shape how much capacity the canal can hold on to if the reservoirs keep falling¹³.