The Panama Canal is struggling to persuade traders of liquefied natural gas and foodstuffs such as grain to return to the trade route after they were forced to do so last year by a drought of historic proportions.

The 110-year-old canal, which has carried goods ranging from US liquefied natural gas to Latin American crops to the rest of the world for decades, had to limit passage capacity last July because there was too little rain to operate the locks. After months of heavy rainfall, it is hoped to return to near full capacity in September.

But according to shipping analysis group Marine Traffic, only 13 LNG ships transited the canal last month, less than half the number in July 2022. Bulk carrier transits also fell 35 percent to 129 during the same period.

Panamanian authorities were unhappy about these effects, as other types of ships, such as container ships, were using the waterway normally and the canal’s revenue was increasing thanks to intense bidding for a limited number of berths.

But this development highlights how increasing disruptions in supply chains – also as a result of climate change – could alter global trade and drive up its costs.

The move comes amid widespread uncertainty over the future of the canal – a key source of revenue for the Central American state, which handles about five percent of global maritime trade – while authorities grapple with reduced rainfall and local demands to protect drinking water supplies.

Last summer’s drought was blamed on the natural weather phenomenon El Niño, but rising temperatures are expected to continue to impact water supplies.

Roar Adland, head of research at shipbroker SSY, said the canal was simply “a less attractive option than in the past” for lower-value goods, as it hardly offered the same cost and time savings as it once did.

Because the canal has been forcing all customers to book their time slots in advance since the drought, companies are “faced with additional costs and a loss of flexibility (compared to the) past when you could just show up and wait in line,” he added.

“This can mean structurally shorter transit times for the type of low-value, time-insensitive cargo typically transported by bulk carriers.”

At peak times, up to 36 ships could pass through the canal every day, but a lack of rainfall led to restrictions, with the number falling to 20 in January this year.

The cost of transiting through the canal also soared. A Japanese shipowner paid nearly $4 million to skip the queue, the canal said in November. This meant that despite the drought, the canal’s revenue rose 15 percent in the year to September 2023, and revenue growth of 3 percent is forecast for the following fiscal year.

Ricaurte Vásquez, director of the Panama Canal Authority, said that while the authorities cannot control the rain, they are concerned about the reliability of the canal and that the authority will review the prices next month.

“Continuing to raise prices indefinitely is not the right way to go, and we are very concerned about maintaining the Panama Canal as a relevant transit route for the whole world,” he said.

This month, the canal allowed earlier bookings to accommodate LNG customers who normally use larger Neopanamax vessels, he said.

“They have very precise time slots and precise itineraries, and we took that into account with the entire reservation process,” he said.

According to Vásquez, transport patterns for liquefied natural gas (LNG) have also changed despite the drought. More American liquefied natural gas is being delivered to European importers who want to replace Russian gas supplies, rather than via the canal to Asia.

Ship brokers who connect traders with ship owners also said ships would gradually return to the canal as supply chains adjusted to the higher water levels.

However, they said LNG traders have become accustomed to using the route around Africa between the US East Coast and Asia, which, while much longer, has recently become more reliable than the canal.

“People have decided that if you can afford it, you might as well take the long time and just avoid (the canal),” said Jérémie Katz, an LNG broker at shipbroker Braemar. One client recently had to find an alternative route after being unable to book his desired transit slot, he added.

Even bigger problems may lie ahead. Climate change is increasing the likelihood of further droughts as global consumer demand and transportation needs are expected to continue to rise.

In the USA, more LNG projects are now set to come online due to demand from developing countries in Asia and Europe. This could lead to uncontrollable demand for the canal.

“The Panama Canal would continue to be a valuable route,” said Alex Froley, LNG market analyst at consultancy ICIS. “But many ships will likely continue to have to take alternative routes.”

“In some ways, it can only get worse,” Katz said. “There are a lot of ships coming and there are large quantities coming. That can be a recipe for disaster.”

Panama’s new government, in office since July, is working on a long-term solution to the water crisis, said Canal Minister Jose Ramón Icaza.

A new reservoir on the Río Indio would provide enough water for the canal and consumers for the next 50 years, officials said. But convincing local residents to support the mega-project at a time of domestic political unrest may not be easy.

During the five to six year construction period, the canal will likely face further droughts, Icaza said. “All countries in the world are experiencing climate change,” he said. “It is important to send the message to our customers around the world that we are working on a solution.”