The world’s supply chains are in even bigger trouble than you think.
While the COVID-19 pandemic and China’s tensions with Washington have been disrupting supply in the past few years, yet another thing is playing out that might even keep you from getting your holiday presents on time months from now: the climate crisis.
The situation is serious this summer because of a historic drought affecting rainfall that feeds into the Panama Canal. This has lowered the canal’s water levels and limited the number and the weight of ships that can float on it.
It’s causing a buildup in the number of ships waiting to cross the waterway.
Droughts aren’t a new phenomenon at the Panama Canal — climate change has been associated with unpredictable weather for years. But the dry weather is worse this summer, in part because of the onset of the El Niño weather phenomenon, which takes place every few years.
This has added a new level of unpredictability that one supply-chain expert says might require the industry to “fundamentally transform.”
Nari Viswanathan, the senior director of the supply chain at the budget-management company Coupa, told Insider that the global supply chain had been designed to respond relatively quickly to market conditions like shifting demand.
The climate crisis presents a new kind of unpredictability, one that Viswanathan said could require predictive weather analysis using algorithms and data.
One shipper paid over $2 million to cross the Panama Canal — and this could hit consumer prices
Project44, a supply-chain platform, told Insider earlier this month that the drought conditions had caused shipping capacity through the Panama Canal to drop by over 20% in the prior two weeks.
The decline is concerning, as it is peak shipping season when retailers ramp up shipping in anticipation of increased demand ahead of holiday shopping. About 40% of US container traffic passes through the waterway.
“If this downward trend continues, it could prompt shippers to reevaluate their choice of ports for bringing in inventory to ensure holiday season shelves remain adequately stocked,” Project44 added.
The situation has the shipping giant Maersk worried.
“The low water levels at the Panama Canal are a clear example of the effects of climate change in rainfall and weather patterns across the globe, which causes a ripple effect through the supply chain,” a company representative said.
The congestion of massive container ships and energy tankers in the Panama Canal has gotten so bad that one shipper recently paid over $2 million just to beat the queue to cross the waterway.
Such surcharges add to transportation costs and could feed into high prices for the end consumer.
“Panama Canal surcharges and vessel restrictions will likely mean higher clothing and shoe prices for US consumers this holiday season,” Stephen Lamar, the president and CEO of the American Apparel & Footwear Association, told CNBC in June.
The weather forecast isn’t encouraging for ships crossing the Panama Canal in the short and long term, Jon Davis, the chief meteorologist at Everstream Analytics, told Insider.
That’s because the El Niño weather event is likely to strengthen, which would be associated with below-normal rainfall from late this year through early 2024, he said.
Supply chains were already in chaos from COVID-19, geopolitics, and rising costs in China
To be sure, the vessel congestion at the Panama Canal is troubling because it adds to the existing stress on the world’s supply chains.
The COVID-19 pandemic and China’s strict on-off lockdowns, in particular, underscored the risks of depending so heavily on the East Asian country, which has been the world’s factory floor for the past four decades.
One example was the tech giant Apple, which was hit by supply-chain disruptions from China’s COVID-19 containment policies.
The pandemic accelerated a global supply-chain diversification away from China that kicked off in about 2018 after President Donald Trump launched a trade war against China.
Even before geopolitics started playing an outsize role in the shifting of supply chains, it was costs that were already pushing some companies out of China.
Wages and operating costs have been rising over four decades amid China’s turbocharged growth, so alternative aspiring low-cost factory hubs — such as India and Vietnam — have been pumping in billions of dollars to develop their own manufacturing ecosystems.