How is climate change affecting logistics?

Climate change is not only a threat to the environment but also to the global economy and trade. As the world experiences more extreme weather events, such as droughts, floods, heatwaves, and wildfires, the logistics sector must find ways to overcome and adapt to ensure the reliability and robustness of its supply chain.

The Panama Canal

The Panama Canal is one of the most essential waterways in the world, connecting the Atlantic and Pacific oceans and facilitating trade between Asia, Europe, and the Americas. 14,200 ships passed through the Panama Canal in 2022. In recent years, Panama has experienced severe and prolonged droughts that have lowered the water levels in Gatun Lake and Alhajuela Lake, the primary sources of water for the canal. Water is essential for raising and lowering ships as they pass through the canal’s two sets of locks.

The Panama Canal Authority (ACP) announced in August 2023 that it would restrict the number of ships moving through the canal in both directions daily from 42 to 34 and reduce the maximum draft for neo-Panamax vessels from 50 feet to 44. Reducing the daily transits means wait times on both sides of the canal increase, while lowering the maximum draft means vessels have to run lighter than usual, resulting in decreased vessel capacity utilization and higher costs per TEU.

Mississippi River

The Mississippi River is another vital artery for trade. The U.S. Army Corps of Engineers estimates that the Mississippi carries 589 million tons of freight annually. In 2019, more than 65 million tons of soybeans moved from Minneapolis to the Gulf of Mexico. Barges are the primary mode of transportation on the river, as they are cheaper and more fuel-efficient than trucks or trains. However, barges depend on adequate water levels to navigate safely and efficiently on the river.

Severe Midwest droughts and record low water levels on the Mississippi closed several parts of the river to barge traffic in late 2022, with the U.S. Coast Guard reporting 2,253 barges queued up near Memphis, TN and Vicksburg, MS. Barges that could move were forced to carry as much as 20% less cargo to meet draft restrictions. Fewer barges and less cargo per barge cut capacity on the river by as much as 50%, sending barge rates soaring.

Rail Transportation

Rail transportation is another key component of logistics networks, especially for long-distance freight movements. Railroads are generally more resilient to weather disruptions than roads or waterways, as they can continue to operate in most weather conditions. However, rail transportation is not immune to the effects of climate change affecting logistics either, as extreme weather events can damage rail infrastructure or disrupt rail operations. One such example occurred in 2021, when wildfires in drought-stricken areas raged in British Columbia, forcing Canadian National and Canadian Pacific Rail to cease operations to the Port of Vancouver, leaving hundreds of rail cars stranded and causing severe congestion. The impact of the wildfires in the second quarter of 2023 hit Canadian National’s earnings per share by C$0.07 and pulled down the railroad’s operating ratio by 100 basis points, according to the company’s latest earnings statement.

Climate Change affecting logistics – conclusion

These examples illustrate how climate change poses significant risks and challenges to logistics operations. While fires, floods, and droughts have always existed, climate change has increased their frequency, intensity, unpredictability, and cost.