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March 2 2020

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2 The Journal of Commerce | March 2 2020 Mark Szakonyi THE LONG-TERM EXPECTATION for reduced rainfall is forcing the Panama Canal Authority to take drastic short- and medium-term actions to ensure oceangoing ships, including container ships, have enough draft to traverse the waterway, highlighting the eco- nomic calculations climate change will impose on the shipping industry. Following the forced imposition of draft restrictions in four of the last six years due to an inadequate supply of the freshwater needed to operate the locks, Panama Canal administra- tor Ricaurte Vasquez says a new approach is needed, since the expense of building the larger locks, completed at a cost of $5.25 billion in 2016, is for naught if the full water draft can't be guaranteed. Lower drafts force con- tainer lines to load lighter, reducing the economies of scale larger vessels bring and leading carriers to consider alternatives such as Suez routings. "Draft, at least to me personally, is the product. With the new locks, we gave length and gave beam, but we have never assured the draft," he said. While the authority determines the best way to increase water avail- ability to ensure full drafts nearly all the time, at a multibillion-dollar cost, it's imposing higher fees and changing its booking system to nudge carriers to make better use of limited lockage water by sailing fewer, larger vessels through the canal. "The only way of being proactive — that doesn't mean that you will not impose draft restrictions — to save the water is to reduce the amount of lockages, and economics here plays again. You increase the price and you would expect demand to fall. The fees and new cost structure is [doing] just that, constraining demand," Vasquez said. Panamanian law and treaties, he added, prevent the authority from discriminating on the basis of which types of carriers and vessel types can transit, leaving the so-called lever of supply as the only one that the authority can pull. Starting Feb. 15, the port author - ity began charging a "freshwater" fee to vessels over 125 feet that traverse the waterway. The fixed fee per transit is $10,000, and there's also a variable fee ranging from 1 percent to 10 percent of a vessel's toll that will be applied depending on water levels on Gatun Lake. The number of daily transit reservations was also reduced to 27 from 32, replicating the number of slots available during lane outages. Each vessel will be required to pay a booking fee at least 48 hours before it moves through the canal. Slots for super-Panamax and so-called regular vessels, or those with up to 90.99-foot beams, are awarded through auction three days before transits, although the authority will work to provide transit capacity for ships on a first-come, first-serve basis. Lastly, a handling service fee applies to transits, with operators of vessels with beams of 91 feet charged $5,000, and operators of ships with lengths over 125 feet and beams less than 91 feet charged $1,500. Money collected in tolls will go toward water conservation. "What this does is that it gives an economic signal to the market, and the rate that has variable portion is inversely related to the lake level," Vasquez, who took office in Septem - ber, told The Journal of Commerce on Feb. 4. "We are providing a 60-day forecast on rollover basis, which is a combination of expected rain and expected transits/lockage, so we can make a better scheduling of vessels." He warns that the cost to ensure full drafts 90 percent annually within four years could be upwards of $2 bil- lion. While efforts continue to secure more water from Bayano Lake via the help of the Panamanian government, the authority also is considering four other options and aims to make a decision in April, Vasquez said. Those include ramping up desalination, which comes with its own pipeline transportation and energy costs, and dusting off a plan that American engi - neers considered during a drought in the early 1960s. "If you segment the lake into parts, then the parts can be managed at different operational levels than the navigational channel. If you make the navigational channel smaller, then you will require less water to replenish the navigational channel lake," said Vasquez, adding that such an approach wouldn't require the authority to expand the canal's footprint, making it more politically feasible. Until a new strategy is finalized, the canal authority is working to con - serve energy better. Power generation at the Gatun Hydroelectric Plant has been suspended, as has hydraulic assistance at Panamax locks. The canal authority also is coordinating transits so two ships can pass through the locks at the same time and building water-saving basins at the neo-Panamax locks. In addition, the authority is cross- filling lockages, saving the amount of water normally used in six lockages by sending water between the two lanes at the Panama locks during transits. But even that, Vasquez admits, only mitigates the water scarcity, thus requiring a far more robust approach to the new environmental reality. "Rain is not an unlimited resource, so we have to deal with it in terms of scarcity," he said. JOC email: twitter: @MarkSzakonyi The economics of water scarcity The Journal of Commerce (USPS 279 – 060), ISSN 1530-7557, March 2, 2020, Volume 21, Issue No. 5. The Journal of Commerce is published bi-weekly except the last week in December (printed 25 times per year) by JOC Group Inc., 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Subscription price: $595 a year. Periodicals postage paid at New York, N.Y., and additional mailing offices. © All rights reserved. No portion of this publication may be copied or reprinted without written permission from the publisher. POSTMASTER: Please send address changes to The Journal of Commerce, Subscription Services Department, 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Letter from the Editor "Dra is the product. With the new locks, we gave length and gave beam, but we have never assured the dra."

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