Supply Chain Action Points
Read this first — the conclusion, and the moves to make:
- Before 24 July, confirm in writing whether the 49.0 ft step applies to cargo already gated in, and whether your bookings are rated on sailing date or bill of lading date.
- Ask your carrier for the average tonnes per box on the service; at 9 tonnes the same tonnage shed costs twice the slots as at 18 tonnes, and that ratio is what your allocation rests on.
- Move 10% to 15% of August volume onto a sailing dated before 15 August, and treat 48.5 ft as the base case rather than the stress case.
- Separate the drought surcharge from the base rate in every contract, with removal tied to draft restored above 49.5 ft for two consecutive weeks.
- Reconcile the August invoice line by line against July; if the surcharge exceeds $300 per box on your mix, the surcharge rather than the draft is where the money went.
El Nino drought has forced the Panama Canal Authority to cut Neopanamax draft to 49.5 ft (15.09m) from July 3, with further reductions to 49.0 ft on July 24 and 48.5 ft on August 15. Each ~0.5 ft cut forces large ships to offload hundreds of TEU; Maersk, MSC and CMA CGM have added drought surcharges on US East Coast and Latin America lanes.
The Analysis
The canal authority put a number and a calendar on the same page. Draft down to 49.5 ft, or 15.09 m, from 3 July; 49.0 ft on 24 July; 48.5 ft on 15 August. Two half-foot steps across six weeks, and at each step the big ships leave hundreds of TEU on the dock.
A pre-announced cut is a different instrument from an emergency cut. It says the operator expects the water to keep falling, and it hands every line and every shipper a date to plan against. Six inches of water does not sound like much. On a ship drawing fifteen metres it is 1% of draft, and 1% of draft is not 1% of cargo, which is the part that gets missed.
Here is where the six inches actually lands, and the one clause I would not sign without.
Draft and cargo are not in a straight line. Tonnes per centimetre of immersion rises as the hull goes deeper, because the waterplane area grows with it. Practically, the second half-foot costs more cargo than the first. The three dates are therefore not three equal steps: 24 July costs more than 3 July, and 15 August costs more than 24 July, even though each one is half a foot. Any plan that treats the steps as equal underestimates the last one, which is the one that lands inside the peak booking window for U.S. East Coast imports.
The phrase hundreds of TEU is doing quiet work in that sentence. The canal constrains displacement, which is tonnes. Converting tonnes into boxes requires a weight per box, and the coverage supplies none. Assume 18 tonnes average and a given tonnage shed equals 200 boxes; assume 9 tonnes and the same tonnage equals 400. Both figures are mine, the mechanism is not. Light, voluminous cargo loses twice the slots of dense cargo for the same weight shed. Furniture, packaging, apparel in large cartons, anything that cubes out before it weighs out, is at the front of the queue to be left behind. A shipper of steel coils and a shipper of foam inserts read the same sentence and face different percentages.
Then it is priced a second time. The drought surcharges Maersk, MSC and CMA CGM have added on U.S. East Coast and Latin America lanes are per box, not per tonne. A per-box charge divided by tonnes gives a higher number the lighter the box. So the physical constraint and the pricing instrument push the same cargo in the same direction: light cargo loses more slots and pays more per tonne for the privilege. Nobody designed that outcome. It is what happens when a weight constraint meets a volumetric invoice.
The dates do the work from here. 3 July is already in the invoice. 24 July is four days after this was written, so any booking not yet rated should be checked for which side of the line it falls on. 15 August is the one that matters, because it sits in the peak booking window and because it is the largest of the three in cargo terms. Expect space to tighten two to three weeks ahead of each date as lines pre-adjust allocation, and price to move after. Space goes first. That order of operations is why waiting for the rate signal is always late.
Who is exposed, at the two ends. Low-value dense commodities, steel, cement, fertiliser, mineral products, take the hit on cost per tonne, because freight was already a double-digit share of landed cost and the surcharge is a fixed add-on. Light consumer goods take the hit on availability, because the boxes they need are the boxes being cut. High-value dense cargo, machinery, precision equipment, is the least exposed on percentage and the most exposed on handling, because an offloaded project piece does not roll onto the next sailing; it waits for a slot that can take its weight and its dimensions together. Latin America west coast services carry the canal constraint and the surcharge at the same time, which is why that lane reprices before the U.S. East Coast does.
Put a number on the exposure so it can be argued with. Assume 50 FEU a month on a Neopanamax-dependent service and a 3% slot cut per step; both are my illustration, not published figures. That is 1.5 boxes a month, rounding to one or two rolled bookings, each carrying one to two weeks of delay. At $40,000 of goods per FEU and an 8% carrying cost, the delay runs about $8.80 per FEU per day, so two weeks on two boxes is roughly $250 a month. Now assume a $300 per box drought surcharge, again my assumption because no amount is published, and 50 boxes is $15,000 a month. The surcharge is sixty times the delay cost. That tells you where to spend negotiating time this month: on the invoice line, not on the booking.
The asymmetry is the part nobody has priced. Draft recovers quickly once the catchment gets rain; a surcharge does not come off quickly, because it was filed as a charge and charges have inertia. The risk in a contract is not that the canal stays low. It is that the canal recovers while the surcharge stays, and you are paying a drought fee in a wet year. The other thing to hold onto: an announced schedule is a floor, not a ceiling. The authority has already said it expects continued decline, so plan for a fourth step rather than assuming the third is the last.
Without the cut there would be a queue instead, and a queue is also a cost, with the difference that it is unbounded and invisible until it bites. The cut converts an unpredictable wait into a scheduled constraint. That is queue management rather than generosity, but it does mean your planning window is real. Treat the schedule as certain and it stops being a risk. Treat it as generous and you will be short in August.
The line I would hold, and the cheapest clause in the contract: keep the drought surcharge as a separate pass-through with a stated removal trigger, tied to the draft being restored above 49.5 ft for two consecutive weeks. If a carrier will not separate it, price the whole contract at the 48.5 ft case and cut the tenor at the next scheduled step. Six inches of water is an odd thing to sign a year of margin against. But that is what a per-box charge on a lightweight box turns out to be.
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