>> is the panama canal in danger of drying up? low water levels caused by drought are causing resurgence on ships. cargo deliveries are being delayed and supply chains are affected worldwide. this is "inside story". ♪ mohammed: it is a major traffic them on one of the world most important shipping routes. hundreds of vessels are stuck

waiting to pass through the panama canal. the backlog follows months of drought in central america. low water levels because of reduced rainfall have led to limits on the number of vessels allowed through. the panama canal was opened in 1914 and the 82 kilometer long waterway is a cost-cutting shortcut. the u.s., china, chile and -- are among the canals leading customers. shipping companies pay around $4 billion per year in transit fees. the canal is the country's main source of revenue but restrictions have been extended for at least 10 months. that is well into the new year. will the disruption and does lace lead to higher prices and is climate change a factor? our correspondent is in panama with more. >> the panama canal is dealing with its worst drought on record , forcing its administration to reduce the number of ships

allowed to cross on a daily basis, from an average of 36 to 32. and also reducing the maximum weight allowed for a number of these ships. it is because the canal works using freshwater coming from artificial lakes. the water level of those lakes is at a historical minimum which is forcing the canal to ask a series of questions about its future. this will also bring a reduction in revenue for the canal, at least $200 million in the next fiscal year. it is increasing the cost of shipping. some of the ships remain out at sea for many days trying to get a spot to cross. others have to get rid of some of their cargo that is moved on trucks or trains. and it is picked up on the others of the canal. all of these costs might end up

in the final price of the product and be paid by the consumers. but there is also a lot of questions that are being asked about the viability in the future of the canal. it will need to find more sources of water, that are shared with the city of panama, and to find a way to deal with these weather phenomena that are becoming more frequent and severe. mohammed: let's bring in our guests, from his office in panama city, is lars ostergaard nielsen, head of operations for north america and latin america for maersk. in london is james baker, containers editor for lloyd's list. and jean-paul rodrigue is a professor at hofstra university,

also a specialist in port logistics and shipping. thank you so much for joining us. as we mentioned in the intro, you are able to see some of the vessels that would like to enter the panama canal from outside of your office window. where do things stand as of now? do we know how many ships are still trying to transit through the canal and waiting? and have wait times been improving? lars: yes, i am speaking to you from panama, i am near the water side. there are a number of ships waiting, i do not have an up-to-date count right now. it is probably just above 100 still waiting to cross. waiting times are reported to be around 10 days.

mohammed: how much concern is there when it comes to the kind of costs this will add up to for the shipping industry and how much of an impact is that having as of now? lars: from a container carrier perspective, it is important to understand that we do get access -- we are facing costs in terms of draft restrictions, which means we are losing a level of capacity in terms of how much cargo we can carry. we are not faced with significant waiting times. it is not a major concern. mohammed: panama is halfway through its rainy season right now. how unusual is what is going on when it comes to this drought and the time that it has hit? jean-paul: it has been an

ongoing problem for a few years, the panama canal authority was talking about their concerns for a water shortage for a year now. over the last half a year or so it has been an unusual, in terms of rainfall, a long-term cycle. eventually it will abate, there is less water, and less water, less capacity. mohammed: there have been concerns about water shortages in the panama canal in the past. was the drought expected? were there concerns? and would you say there is a concern that the panama canal could be in danger of drying up? james: very unlikely it will dry up completely anytime in our lifetimes. this is a significant impact this year. it is by no means the only time

this has happened. panama has cyclical weather changes, we do have el niño this year that is making more of an impact. unlikely to dry up for a long time yet. mohammed: going forward, what does this mean for supply chains? talk about it compared to what it is now and what are the concerns where it might be a few months from now? lars: in the immediate future, the main impact on supply chain, we are potentially seeing less capacity available on some routes. this is being taken care of in terms of sending additional vessels that faceless restrictions, using the old logs. it is important to recognize the

canal has been announcing they expect this for 10 months. we see less capacity, what does that mean for supply chains? it means our customers and us as providers will have to look for some alternatives to make sure we keep argo flowing. it is important to recognize that having draft restrictions in the panama canal is not unusual. what is unusual this time around is that it is dragging on for longer than what we have seen in the past. but companies like maersk, we are used to dealing with this and have mechanisms in place for how we can adjust our intakes of the ship. mohammed: i saw you reacting to some of what he was saying, it looks like you might want to jump in.

james: i agree with what he said, the impact is specific to the region, and there will be little to no impact to europe. but for north americans, that might be a different story, over the transpacific routes on the u.s. east coast, that is where there will be an impact in terms of capacity. and eventually you have to have more inventory or more planning, and that can incur additional costs. mohammed: how quickly can a disruption like this to the canal's operation be felt in the economy? james: it is hard to say, we are not seeing any impact yet.

the big container trays are able to get through, they are paying more. some people are worried that goods will not get through for christmas. that won't happen. what is more likely is we are getting -- tinkers, which have to go around. that will add a lot of distance and fuel, that will put the rates up for those commodities. and it will impact the containerized goods. mohammed: it is expected these current restrictions will be in place for at least 10 months. is that timeline realistic or do you think could be extended or shortened? james: it will depend on what

happens with the weather. the canal has been trying to find ways of saving water for a long time. ever since it opened its new locks. but nothing has been done about it to consider -- conserve more water. it has come down to how much is coming in to the lake. nobody can tell, other than the weather forecast, potentially it will get us to the end of the next rainy season. quite possibly, that would be realistic. and we will have to see what the next dry season looks like. mohammed: when we talk about the knock on effect, doesn't less business revenue for the canal mean higher prices for consumers? and when would that be expected

to be seen? lars: i do not want to speculate on the revenue stream for the panama canal, but one could assume that having less crossings would result in less revenue for the canal. it is important to recognize the way the canal is structuring its tariffs. i do not expect we will be met with increasing costs anytime soon. at least for the container segment of the market, i do not foresee this will have any immediate competitions. i think the other segments of trade, of shipping, that is more impacted, that is where you could see more impact. mohammed: one of the questions that is coming up is if at some point, an alternative canal could be built? another way for ships to get from the pacific to the

atlantic. for a long time, there has been this idea that perhaps there could be a canal built in nicaragua. but it has never materialized. is that something you believe might to a viable option at some point? jean-paul: at this point, very unlikely. the major factor is, nicaragua was initially considered an alternative to panama. the decision was to make it in panama because it was a better solution. nicaragua would be a more expensive solution. you are dealing with more engineering and higher costs. i have a difficult time wrapping my head around what would be the cost and potential revenue generation you could get with this project. that is one of the major reasons

why in 2014, the project was abandoned. mohammed: what do you say? is an alternative waterway needed? is the idea of a canal being built in nicaragua realistic? james: i don't think it is realistic, the geology of the country is different. the engineering -- when they were lost talking, it was in the range of $74 billion. that strikes me as low. the idea you could dig your way through nicaragua -- it seems unrealistic. would it be needed? i don't think so, assuming this

weather pattern does reverse when we do not have el niño year after year, hopefully the lake will refill and the canal will continue to keep going as it has. the panama canal listed 124 ships waiting as of today. they have reduced the number of transits by only a handful of day. it is not like this canal has stopped or is about to stop. it does need perspective. mohammed: when it comes to the ships that regularly transit through the canal, is there a level of concern that exist that would cause any of these companies to try to look for alternative routes that are available and would be viable to them? james: you would have to speak

to lars on that one. for the u.s. east coast trade, if you are coming from china, the panama canal is not the only direction. it is someways not a bad thing, that would use up some of that overcapacity in the market. and for areas south -- in southeast asia, it is shorter to go that way. there are alternatives. the south american fruit trades have come through europe. mohammed: there are experts who suggest in order to make the canal a viable -- with more extreme weather conditions, infrastructure changes will be needed. i want to get your perspective

on this, how costly would that be, how long would it take, would it be realistic? >> i am not an engineer, but the canal has been working on finding ways to increase the water flows to the support system. in terms of what that would cost, i do not know. but it is important that we understand the trades being supported by the canal and that there are alternatives. not only can we sail into the u.s.'s coast -- east coast, you also have the ability to move cargo via the u.s. west coast. that is something that is used by certain customers in the u.s.. there are ways other than sailing through the canal that is being used.

this might be an issue we have to face for years to come. mohammed: one thing that was discussed during the pandemic was how covid-19 impacted supply lines. compared to what was going on then, how will this bottleneck impact shippers compared to how much covid-19 impacted the supply chain? and what about the suez canal blockage in 2021. when you look now compared to what happened during the pandemic, where are we at? jean-paul: it is not comparable, covid was systematic across the world, lockdowns, change in consumer patterns. the panama canal situation is a capacity issue, which is manageable and predict double. you have schedules, the number

of crossing per days, but it is long-term. so they may have to reassess the situation, nature exporters and importers white change their routing. there was a one-week blockage, which was on predict will. -- unpredictable. it is on the radar screen, while covid in the suez canal blockage was random and systematic events. mohammed: have the congestion caused by the pandemic largely eased before this panama canal bottleneck? where things normal in the shipping industry? >> as far as i can tell yes,

shipping rates were down, almost back to pre-pandemic levels. that is why there is not much concern. mohammed: i saw you reacting, it look like you wanted to jump in. lars: it is very relevant, not only is it relevant to understand that things are back to pre-pandemic in terms of conditions having eased. the other part that is relevant is the learning that a lot of the industry players and customers of the supply chain, they have learned during the pandemic. try to put redundancy in your supply chains. that is one thing we are finding now, we are able to offer alternative routing. so unlike pre-covid, a lot of our customers would have one

option to move cargo. what has happened is a lot of our customers have found a need to have alternatives. and something like the current challenges we are facing is showing that this is valuable, now we can move cargo via different means, using rail. we have learned something through the pandemic that is helping us manage the situation. mohammed: james i saw you reaction -- reacting. lars: -- james: one thing we saw when the service was blocked, we saw a lot of container ships down south, back up to the atlantic.

ships are movable and supply chains are movable. if you want to get something to the midwest of the u.s., it is as easy to bring it through canada or l.a. and rail it and truck it to where you want it to be. there is a flexibility there. mohammed: we talked about where things are now compared to where they were in the shipping industry and global supply chains during the covid-19 pandemic. we also talked about how what is happening now compares to the blockage in the suez canal. when it comes to the concerns about climate change and how that could impact supply chains. lars: by this point in time, we have enough evidence that eight is clear that as an industry,

the shipping industry and logistics, the need for decarbonizing our operations is clear. it is very important that we take this very seriously and put concrete missions in place. there are initiatives to try and address this. we are having our first -- and she is on her way from the first port starting next month. the industry is taking steps, but it is important the industry and all of us realizes that this something we had to take seriously and invest and develop across the supply chain. mohammed: how much has climate change been a factor in this? how much concern is this causing? jean-paul: this is a question

that puzzles me, it is difficult to assess the extent of the impact of climate change. what i find the most damaging is not the impact of climate change as the reaction, when we talk about decarbonization, it sounds great, that it may involve significantly higher energy prices and shortages. my biggest concern and fear is how policymakers and governments , and carriers, are going to react and overreact to this and embrace strategies that might be unsustainable and excessively damaging. mohammed: how much concern is there about the potential for broader disruptions going forward? james: this is something everybody is concerned about in the industry.

we do not know how bad things are going to get or when they will get really bad. everyone knows climate is having a major -- one of the things -- we have an example of infrastructure. another example, ports and terminals, increased storms, rising sea levels. and even when we have more bad weather, hurricane season starting, whether that will mean re-routing, which makes shipping more challenging. i think the jury is still out, but we know the direction of travel. mohammed: if shipping becomes more challenging, whether due to climate change or other factors, how much more difficult does that make things for the global economy? right now there is not a huge level of concern about what is going on when it comes to the

panel today, but going forward, if we are talking about worst case scenarios, how dyer could things get for the global economy. lars: we can look back at the last two or three years from the pandemic, we saw a major shift in supply and demand, and what that did to the cost of logistics and global markets, and how that was a factor in inflationary rushers -- pressures. how you conduct your policies, etc.. it could be a factor, but right now and with the actions being taken, that is an area that is hopefully far in the future and some thing we will not get to. mohammed: we have run out of time, thank you so much to all of our guests, lars ostergaard nielsen, james baker, and

jean-paul rodrigue. for further discussion, go to our facebook page. you can also join the conversation on x, our handle is @ajinsidestory. goodbye for now. ♪

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