Drought causes headaches for Panama Canal

This is an audio transcript of the FT News Briefing podcast episode: ‘Drought causes headaches for Panama Canal’

Marc Filippino
Good morning from the Financial Times. Today is Monday, August 21st, and this is your FT News Briefing.

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Some of the biggest names in private equity are having a tough time these days. And Iran is struggling with oil prices that are too low. Yeah, apparently that’s a thing. Plus, a severe drought that’s affecting the Panama Canal is causing major headaches for the global shipping industry. We’ll take a look at whether anything can be done about it. I’m Marc Filippino and here’s the news you need to start your day.

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Private equity giants are handing over companies they own to lending arms of rivals. Over the past few months, KKR and Bain Capital let go of portfolio companies to places they had borrowed from. Meanwhile, Goldman Sachs and Carlyle’s PE units are in the process of doing the same thing. Private equity-owned businesses are struggling partly because some of the debt used to finance buyouts wasn’t hedged against interest rate rises. But it’s not just high interest rates. Private equity groups are also struggling with supply chain issues and sticky inflation.

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While western governments are struggling to keep fuel prices down, Iran is facing a very different problem. Its petrol is too cheap. A litre in Iran will run you just 3 cents. Compare that to $1.10 at the pump in the US or just under £2 in the UK. Iran keeps its prices low through heavy government subsidies. Here to talk about why that’s become an issue is the FT’s Tehran correspondent Najmeh Bozorgmehr. Hi, Najmeh.

Najmeh Bozorgmehr
Hello. Hi.

Marc Filippino
OK. So first of all, let’s take a step back. Why does Iran have these subsidies in the first place?

Najmeh Bozorgmehr
As you know, Iran sits on some of the world’s biggest oil and gas reserves. And traditionally, there have always been subsidies on energy in Iran. But this is turning into a big burden on the government’s shoulders. And many people believe it’s not sustainable. But on the other hand, it’s almost impossible to cut subsidies. People think this is their right to have cheap energy. So the government is, in a way, stuck between high expectations of people and the reality on the ground, which makes it very difficult to have these subsidies going on.

Marc Filippino
OK. So you mentioned that Iran has had these subsidies for, you know, quite a long time. Why is that more of a problem now than it’s been in the past?

Najmeh Bozorgmehr
Most of the years, over the past decades, Iran has been struggling with US sanctions. Iran’s revenues have been shrinking. In the meantime, inflation is really high. In recent years, it has been around 40 per cent every year. So it’s very difficult to keep the petrol prices so low.

Marc Filippino
And Najmeh, as I understand it, Iran now has to import petrol these days. Is that right?

Najmeh Bozorgmehr
For about one decade, Iran did not need to import petrol anymore. Suddenly this year, because of the gap between supply and demand, it seems they have been importing again. Of course, authorities do not acknowledge that any imports have been happening. But analysts believe imports have started since February, March. So this is extra financial burden on the government if you buy petrol at global prices, which are high, and sell it at home almost at no price.

Marc Filippino
OK. So what is the government doing to address this problem with its finances?

Najmeh Bozorgmehr
The oil minister and other officials and in recent days they have said there would not be any rise in prices. People just do not believe authorities. They think overnight they might increase prices. So you can see these days huge lines outside petrol stations that people are just rushing to pumps.

Marc Filippino
Najmeh, do you think there’s a chance that the government rolls back the subsidies or is that just politically impossible for them?

Najmeh Bozorgmehr
For now, it’s a political impossibility because there is also going to be a parliamentary election early next year. And the government definitely needs to show that the regime has legitimacy. Any change in petrol prices, any cut in subsidies will definitely destroy that chance. So I highly doubt that there will be any change in prices, at least over the next year.

Marc Filippino
That’s the FT’s Najmeh Bozorgmehr. Thanks, Najmeh.

Najmeh Bozorgmehr
Thank you.

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Marc Filippino
The Panama Canal is the gateway for shipping trade between the Atlantic and Pacific oceans. It’s a key transit route for US liquefied natural gas and for fruits from South America. But a drought this year has shrunk water levels in the Panama Canal, and it’s caused serious disruption. Christine Murray is the FT’s Mexico and Central America correspondent. She joins me now. Hi, Christine.

Christine Murray
Hi.

Marc Filippino
OK. So how bad is the disruption to shipping that goes through the canal?

Christine Murray
The problem essentially is the canal relies on fresh water for its locks. And this year, the rainfall is well below what it would normally be at this point. The first half of the year was the second driest in almost a century. So that meant that they put in place some restrictions. They limited the number of crossings to 32 a day instead of around 36. And that’s the first time they’ve done that.

Marc Filippino
Now, which routes and which type of cargo are being most affected by these restrictions?

Christine Murray
The cost of shipping from China to the US Gulf Coast through the canal has jumped more than a third since the end of June. Waiting times for tankers carrying liquefied natural gas, which are some of the most affected by this, increased from eight days to 18 days in just a few weeks. And food products from South America going to Europe could also be affected because these restrictions are likely to be in place until next year, the canal has said. 

Marc Filippino
Mmm. So what are these shipping companies doing? Are there other routes for the cargo to take? Like, what does the workaround look like?

Christine Murray
In the second half of the year, as Christmas approaches, shipping usually picks up again. So companies want to have more flexibility for more ships and won’t be able to. I mean, one alternative route from Asia to the US is the Suez Canal, but that adds a week to journey time. So it’s not ideal and it seems like we’re not quite there yet. But given again that these restrictions would last until next year, it’s something that the shipping companies are certainly, you know, looking at and worried about.

Marc Filippino
So going back to the drought, what’s causing it? Why are we seeing this?

Christine Murray
So Panama has seen increasingly unpredictable rainfall and it has had droughts in recent years more often than before — something that researchers attribute to climate change. But we also have this year El Niño, which happens every two to seven years and warms the Pacific Ocean’s surface and changes temperature and rainfall patterns. So that’s expected to exacerbate this problem that’s already there in the second half of the year.

Marc Filippino
Christine, is the country of Panama gonna do anything to fix this long term? Is there anything they can do?

Christine Murray
Panama still hasn’t decided what the major long-term solution is gonna be, but it sounds like discussions are gathering pace given this drought is happening now and there’s a project that the canal itself is looking at as a kind of leading option to build a new reservoir in a different region, which they say could mitigate the water issues until 2075. But obviously, it’s a very big project. It’s not something that’s gonna be fixed in the immediate short term.

Marc Filippino
Christine Murray is the FT’s Mexico and Central America correspondent. Thanks, Christine.

Christine Murray
Thanks.

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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