The Panama Canal is tightening again, though not to the point of crisis. What makes this cycle different from the drought of 2023 and 2024 is the context around it. The Canal is being squeezed at the very moment that the eastern interoceanic arteries through Suez and the wider Middle East are degraded by conflict, and that convergence, more than the Panama numbers alone, is what is pushing owners to look south toward Cape Horn. That southern option deserves a clear eyed assessment, because it is not a like for like substitute for the Canal but a materially higher risk undertaking that must be planned, papered and insured accordingly.

The current restrictions are driven by a strengthening El Niño and a genuine hydrological deficit rather than by any operational failure of the Canal. On the Panama Canal Authority’s own figures, cumulative rainfall across the watershed has run around thirty four per cent below the historical average for the May to August period, with inflows around forty four per cent below, and Gatún Lake stood at about eighty four feet in late August. Against that backdrop the Authority has reduced the maximum authorised draft at the Neopanamax locks in half foot steps through the summer, from the design ceiling of fifty feet down to around forty eight feet of tropical fresh water from early September, with a further reduction to forty seven and a half feet deferred until the first of October. It has also introduced a cap on daily transits, set at around thirty four vessels from early September and falling to thirty two from the fifteenth, alongside reductions in the daily slots available at each set of locks and adjustments to the auction system.

Two points give this proper proportion. First, the Authority has indicated that it does not expect full closures during 2026, and the current caps largely formalise the throughput the Canal was already handling rather than imposing a sharp cut. Second, this is a far milder picture than 2023 and 2024, when daily transits fell to as low as the low twenties and draft limits reached the mid forties of feet. The Authority is conserving water pre emptively against a forecast that the El Niño could strengthen into 2027, and that forward risk, rather than today’s restrictions, is the reason to pay attention.

Why the southern route resurfaces

The commercial effect of the Canal measures is familiar. Draft limitations reduce cargo intake and so bear directly on voyage economics, while transit caps, slot scarcity and the associated Fresh Water Surcharge and auction costs introduce delay and expense. In isolation none of this would send a prudent owner around South America. What has changed is that the usual pressure valve, diversion to the Suez Canal, is itself constrained by the security situation in the Red Sea and the Gulf of Aden, and the disruption around the Strait of Hormuz has pushed still more tonnage toward Panama. The result is that the Canal is busier and tighter precisely when its main alternative is least available, and it is that squeeze from both directions that is putting the Drake Passage and the Strait of Magellan back onto owners’ charts. The southern route is being considered today not because it has become attractive but because the other options have become harder.

The two southern passages

The choice at the foot of South America is between exposure and complexity. The Drake Passage, the open water between Cape Horn and Antarctica, offers the most direct connection between the oceans but exposes a vessel to some of the harshest conditions at sea, with the attendant risk of excessive motions, slamming, cargo shift, green seas on deck, heavy weather damage and the machinery strain of prolonged operation in those conditions. The Strait of Magellan is more sheltered and avoids much of that open ocean exposure, but it substitutes a different set of hazards, namely narrow channels, strong currents, restricted waters and a heavy reliance on local navigational knowledge. Neither passage resembles a lock transit on a schedule, and both demand a standard of voyage planning, weather routeing and crew competence well above that of a Canal booking.

The Chilean pilotage regime

The pilotage position in the Strait of Magellan is frequently misunderstood, so it is worth stating from the Chilean authority’s own material. As a general rule, pilotage through the Strait of Magellan is compulsory under the Chilean regulations administered by the maritime authority. There is a specific exception. Pilotage assistance is not required in the section between Bahía Félix and Punta Arenas for vessels crossing the Strait from ocean to ocean that do not navigate internal waters before or after that section and do not call at Chilean ports. Even where the exception applies, the authority still strongly recommends taking a pilot, particularly for oil, gas and chemical tankers, for passenger vessels, and for ships whose crews do not speak English or Spanish. Vessels transiting that section without a channel pilot are subject to reporting obligations, including position reports at intervals through the traffic control stations along the Strait and under the Chilean reporting system, and vessels over two hundred metres are given right of way. Pilotage fees are set by official decree according to gross tonnage and updated annually.

Technical and operational readiness

Two further exposures deserve attention because they are the ones our claims experience across cold water trades would lead us to expect. The first is bunker management. Vessels not designed for prolonged service in cold climates can encounter fuel handling difficulties where heating arrangements are inadequate, and bunker procedures and machinery limitations should be reviewed before committing to a southern transit in the southern winter. The second is the scarcity of response resources. A vessel seeking shelter from heavy weather along the southern Chilean coast may enter confined channels where manoeuvring room is limited and the consequences of any navigational error are magnified, and in the event of a grounding or serious casualty, salvage assistance suitable for a large vessel may not be readily available. That combination of demanding navigation and thin salvage cover is a material part of the risk that the headline saving on Canal costs can obscure.

The charterparty and the legal exposure

The point that generates most disputes is who pays for pilotage in that non compulsory section, and it is genuinely unsettled. Allocation turns on the specific charterparty wording rather than on any general rule. Where a charter provides that charterers bear compulsory pilotage costs only, fees incurred for taking a pilot voluntarily between Bahía Félix and Punta Arenas may well fall to owners, and there is no settled binding authority resolving the question, with outcomes in reported arbitration having depended on the particular terms. The practical conclusion is that owners and charterers should agree the treatment of pilotage in this section before the vessel arrives, review the relevant clauses with care, and consider a bespoke provision dealing expressly with transits via the Strait of Magellan and the Drake Passage, so that a safety driven decision to retain a pilot does not become a cost dispute after the event.

Underlying all of this is a principle that is not in doubt. The master retains ultimate responsibility for the safety of the vessel, her crew and her cargo, and a charterer’s route order cannot displace that responsibility. Where the master assesses conditions in the Drake Passage as unsafe and elects to transit the more sheltered Strait of Magellan instead, that decision is properly the master’s to make. What protects the owner’s position in that event is evidential. The basis for the routeing decision should be well documented at the time, supported by weather forecasts, routeing advice and full voyage records, so that both the choice of passage and any pilotage taken for safety can be justified if they are later challenged on cost or on liability.

The master’s judgement in these waters should be supported rather than second guessed, and that the sensible course for owners is to treat the southern route as a deliberate and well documented exception rather than a routine alternative. For the great majority of trades the current Panama restrictions are manageable with sensible planning, and they do not on their own justify the far greater risk of a passage around Cape Horn.

The southern route should remain reserved for the cases where Canal waiting times, draft driven cargo losses and the degraded state of the eastern alternatives genuinely tip the balance. Where it is taken, it should rest on proper weather routeing, on charterparty clarity as to route and pilotage cost, on hull, machinery and bunker readiness for cold weather operation, on contemporaneous records that support the master’s decisions, and on early engagement with the Club.

Looking ahead, if the El Niño strengthens into 2027 as forecasters currently expect, both the Panama squeeze and the pressure toward the southern route will intensify, and the owners who fare best will be those who have thought the decision through and papered it before the choice is forced upon them.

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The information in this Member Alert is provided for guidance only. Members should seek specific advice regarding their individual circumstances. While the Club has taken reasonable care in preparing this publication, it accepts no responsibility for any errors or omissions, or for any consequences arising from reliance on the information contained herein.