March 26, 2010 Sailing Into the New Century

Volume 13 | Issue 2

Shifting containerized cargo trade patterns, implication of an expanded Panama Canal, and the ability to fund infrastructure projects necess

Since 1990, containerized cargo handled at the U.S. ports increased from 15.6 million TEUs (20-foot equivalent units) to nearly 42.9 million TEUs in 2008. This accounts for an average annual growth rate of about 5.8 percent. It should also be emphasized that between 2007 and 2008, containerized cargo fell by five percent, reflecting the slowing of the world economy. This decline has continued and accelerated in 2009. Overall, containerized cargo moving via U.S. ports was 18 percent less during the first six months of 2009 than for the same period of 2008.

WEST COAST DOMINANCE
The Pacific Coast ports have dominated the U.S. container trade during the 18-year period, growing at an average annual growth rate of 5.8 percent. Atlantic Coast ports have experienced a 5.7 percent annual growth rate, while containerized cargo at the Gulf Coast ports have grown by 6.5 percent annually; however, this growth is for a much smaller containerized cargo base.

Imported cargo drives growth in container trade (a 7.5 percent annual growth rate since 1993). However, growth rate of containerized cargo imports has declined since 2006, and it has actually declined in absolute terms between 2008 and 2009. The growth in imported containers has been driven by the growth in trade with China, which averaged an annual growth rate of 15 percent from 1995 to 2008.

West Coast ports have handled about 47 percent of all imports into the United States, followed by the North Atlantic ports, which handled 24 percent of the container imports, and South Atlantic ports (from Norfolk to Miami), which handled 21 percent of total containerized imported tonnage. The San Pedro Bay ports of Los Angeles and Long Beach handle about 35 percent of imported containerized cargo into the United States. This dominance of the containerized trade by the West Coast ports, and in particular the Ports of Los Angeles and Long Beach – particularly in the late 1990s through 2002 – was driven by the fact that importers viewed theses ports as the major linkage in the imported cargo supply chain. Before the mid- to late- 1990s, steamship lines determined the port routings, and importers were essentially “port blind” as they selected an ocean carrier. The carrier decided which port the cargo would be discharged and how the cargo would be delivered to the customer. However, as the concentration of large importers (e.g., Wal-Mart, Target, CostPlus, etc.) increased in the late 1990s, these importers invested in large distribution centers in the Los Angeles/Long Beach area to serve as points in the importers’ logistic supply chains. As these importers gained bargaining power in terms of contract negotiations with the ocean carriers, they were able to “demand” a San Pedro Bay port routing from the carriers. Hence, with the development of the distribution centers and cross-dock operations in the San Pedro Bay region, the concentration of imported Asian containers at the Ports of Los Angeles and Long Beach increased. In addition, railroads providing inter-modal services at San Pedro ports further increased investment in rail trackage and inter-modal yards to facilitate the flow of containers from the Los Angeles area to the key Midwestern and Eastern consumption centers such as Chicago, Memphis, St. Louis, New York, Atlanta, Columbus, etc.

DIVERSIFICATION: CAUSES & RESULTS
This concentration of containerized cargo import activity continued to increase until several events occurred. These events include the impact of 9/11 on the distribution supply chain, the 2002 West Coast port shutdown, and major congestion issues that arose in 2004 due to rail meltdowns at the San Pedro Bay ports. The events resulted in an increased focus on diversification of containerized cargo via various U.S. ports. This is evident by the growth in container volume at the North Atlantic, South Atlantic and Gulf Coast ports. The growth of all-water service from Asia to the East Coast and Gulf Coast ports has been increasing significantly since 2002. There are two all water routings available for all-water services –the Panama and Suez canals. Each of the routings provides advantages and disadvantages to the use of the inter-modal cargo (railed from the West Coast ports). For example, the current dimensions of the Panama Canal limit the size (width and depth) of the vessels that can transit the canal, and also the transit time using an all water service to an East Coast port and then a rail move to a Midwestern consumption point is longer than using an inter-modal move via a West Coast port. This longer transit time from Asia results in increased inventory carrying costs and is more pronounced for the higher value cargo. In addition, ocean carriers prefer to internalize revenue for the entire trip from Asia to the East Coast rather than sharing the revenue with a rail carrier from the West Coast to an East Coast consumption point. However, changes are in play to improve the current negatives of using the Panama Canal. The canal will be enlarged within the next four years, allowing for the transit of much larger container vessels that, in turn, tend to have a lower per unit operating cost than smaller container vessels. Also, the ocean carriers are introducing more direct all-water services that are improving the transit times using all water routings from Asia.

As far as the Suez Canal, dimensions don’t limit the size of the container ships that can transit, but there is concern over the region’s political instability and piracy incidents. The Suez routing from Asia to the East Coast is longer than via the Panama Canal, but as production centers shift to South Asia and India, this routing can, in some cases, provide very competitive transit times to the use of the transpacific routings and inter-modal moves from the West to the East coasts. In addition, ocean carriers are increasing India-Europe express services, with the use of Mediterranean ports for transshipment centers for cargo destined further to the United States and Europe. The Suez routing is becoming particularly attractive as production centers shift into India and Vietnam. Supporting growth in India production centers is the fact that the Indian Government, along with private sector interests, are investing heavily in port infrastructure to accommodate the growth in India. Major container terminal investment in Vietnam is also increasing, as exemplified by the new MOL/TraPac terminal.

GROWTH IN ALL-WATER SERVICES
The all-water services have been growing at the expense of the West Coast ports, particularly between 2006 and 2007. The Journal of Commerce reported that in 2007, containerized cargo imports via West Coast ports fell by 1.5 percent, while imports via the East Coast ports grew by 8.9 percent. In addition to the decline in the cargo imported via the West Coast, inter-modal cargo moving from the West Coast to Midwestern, Gulf and East Coast points has fallen over the past years, reflecting the growth in all-water services. The Inter-Modal Association of North America reports inter-modal moves off the West Coast to the North East fell by 27 percent between 2006 and 2007. This reflects not only the growth in all-water services, but also the desire for ocean carriers to reduce system-wide operating costs by increasing the control of equipment, particularly empty equipment. Adding to the decline in inter-modal moves has been the increased inter-modal rates published by the UP and the BNSF.

Between the first half of 2008 and the first half of 2009 (as shown in sidebar) containerized cargo moving via the Southern California ports and the Pacific Northwest ports have fallen to a greater extent than the decline in container activity at North Atlantic, South Atlantic and Gulf Coast ports.

Several factors, besides the downturn in the economy, have impacted the volume of containers moving via the San Pedro Bay ports of Los Angeles and Long Beach. The increased environmental and infrastructure fees at West Coast ports, particularly in Los Angeles and Long Beach have and will increase the cost of doing business at these ports. Environmental regulations are also choking development at the Ports of Los Angeles. For example, MOL/TraPac has been trying to modify its terminal in Los Angeles since 1997, and plans recently passed environmental review. The inability to complete terminal expansion plans at the Ports of Los Angeles and Long Beach is a major concern of shipping lines and terminal operators, and it contributes to the increased development of all-water services.

Terminal productivity and cost at the Ports of Los Angeles and Long Beach have also become an issue with ocean carriers and terminal operators at the San Pedro Bay ports. The typical vessel discharge/load productivity at the San Pedro Bay ports is 25 to 27 moves per gang hour compared to typical vessel productivity at Atlantic and Gulf Coast ports, which ranges from 35 to 40 moves per gang hour, and even higher. There have also been historical congestion issues at West Coast ports and rail service, as well as long shore (ILWU) and management disruptions. The impact of the West Coast port shutdown in 2002 is still fresh in the minds of importers/exporters and ocean carriers/terminal operators. This shutdown had a major impact on the diversification of ports used by importers. In turn, it fueled the growth in all-water service and the development of distribution centers at Atlantic and Gulf coast ports since 2002.

DISTRIBUTION CENTER DEVELOPMENT
Fueling the growth in the all-water services is the fact that the major importers have and continue to develop distribution centers at East and Gulf coast ports. For example, the Georgia Port Authority has attracted numerous distribution centers totaling nearly 20 million square feet. The Virginia Port Authority has also been aggressively pursuing the development of distribution centers. Current distribution centers in the Hampton Roads area and the Front Royal area (which is the location of the Virginia Port Authority’s inland port). Similar distribution center development is also occurring in Houston, fueling growth in Asian cargo imports at the Port of Houston.

Other ports including Charleston, Wilmington (N.C.), Baltimore and New York are also aggressively pursuing distribution center development. Such development is also occurring in the Jacksonville area as well as in the Orlando and South Florida regions.

INCREASED CONTAINER TERMINAL CAPACITY
Paralleling the growth in distribution center development and the growth in all-water service is the development of new container terminal capacity on the Atlantic and Gulf coasts. For example, at the Port of Mobile, AP Moeller and CGM/CMA have developed the Choctaw Point ContainerTerminal. The Port of Houston recently opened the Bayport Container Terminal. The Port of Jacksonville developed the MOL TraPac Terminal and is currently developing the Hanjin Terminal. Both are nearly 200-acre terminal sites, and AP Moeller has developed a nearly 300-acre terminal at Portsmouth, Va. The Virginia Port Authority plans to develop a 600-plus acre facility at Craney Island. Other terminal development is possible along the Delaware River. Land is available for terminal development at Savannah, and a newly formed Georgia Ports Authority/South Carolina State Ports Authority has the ability to develop a 1,800 acre-plus terminal on the Savannah River in Jasper County, S.C. In addition to the existing and planned capacity at Atlantic Coast ports, several Gulf Ports are planning container terminal capacity. These include a new container terminal at the Port of Freeport and the planned LaQuinta terminal at Corpus Christi.

CANAL IMPACT
Underlying the growth in all-water containerized service activity at the Atlantic and Gulf coast ports, as well as the investment in distribution center activity, is the expansion of the Panama Canal to be completed by 2014, and the increased deployment of vessels via the Suez Canal, particularly to serve the growing trade with ports located to the south of Singapore. But it is unclear that the expanded Panama Canal will alone actually increase the share of containerized cargo moving via the East and Gulf coasts at the expense of the West Coast ports. As a result of the shifts in all-water services that have occurred since 2002 due to the West Coast Port Shutdown, the changes in distribution center geographic locations and logistics supply chain patterns of importers; development of new container terminals on the Atlantic and Gulf coasts; and inter-modal pricing by the railroads that shifted cargo away from West Coast ports, the dynamic changes in all water vs. inter-modal services may be over, or at least slowing. The West Coast ports have come to realize that the demand for their usage is not inelastic, and, in fact, substitute port routings via the all-water services are viable. Similarly, the railroads have also found that pricing of inter-modal services do impact importers/exporters port choice decisions, and the higher intermodal rates of the early 2000s actually did impact the West Coast port routings in favor of all water services. What the expanded Panama Canal will most likely impact is the size of ships that will call at U.S. Atlantic and Gulf Coast ports.

CHANNEL-DEPTH CHALLENGES
With the deployment of larger vessels via the Panama Canal after 2014, as well as the deployment of larger vessels via the Suez Canal, the ability of Atlantic and Gulf Coast ports to handle the larger vessels is critical. The larger vessels that will be deployed via the expanded Panama Canal and the Suez Canal will require a 48-50 foot channel depth when fully laden. This presents a serious constraint at many Atlantic and Gulf coast ports, as the majority of these ports that will compete for the new services consisting of larger container vessels do not have channel depths in this range. Currently, the ports of Baltimore, Norfolk and Miami are the only ones that have 50-foot channels. The Port of Miami has been authorized to deepen to 50 feet, while feasibility studies by the U.S. Army Corps of Engineers are currently underway at several Atlantic and Gulf Coast ports.

The ability to handle the larger container vessels is critical to attract all-water services at the Atlantic and Gulf Coast ports. However, the U.S. Army Corps of Engineers is responsible for the selection of the ports at which channel deepening will occur. The current economic situation has severely limited the ability to fund the deepening projects, and the benefit-cost criteria by which the U.S. Army Corps of Engineers uses to rank the deepening projects has been criticized for its lack of consistency in its definition of benefits and costs. As a result, Atlantic and Gulf Coast ports at which channel deepening feasibility studies are now underway may not be able to receive the federal funding necessary to attract the larger ships deployed on the all-water services. This will result in a loss of potential economic impact to those regions in which these ports are located, due to the lack of federal funding for the deepening projects.

INFRASTRUCTURE INVESTMENT: VITAL TO THE FUTURE
Martin Associates estimated that the U.S. deepwater ports supported more than 13 million jobs throughout the nation and contributed about $3.2 trillion to the economy. The economic value of this cargo activity handled at the deepwater ports represents about 25 percent of the U.S. Gross Domestic Product. The deepwater ports system is vital to the movement of foreign trade, and the components of the coastal ports system are essential to the operation of the entire logistics system used by this nation’s exporters and importers. Without the support of the federal government in terms of infrastructure investment, particularly with respect to channel deepening and maintenance funding, certain regions of the US will be penalized in terms of the their ability to realize their full economic impact potential. With the need to stimulate the faltering economy, investment in the Marine Transportation System offers an attractive and productive segment to which federal funds should to be directed. It would be difficult to identify a single economic sector that supports nearly 13 million high paying jobs, as well as a sector that is vital to the enhancing the competitive position of the U.S. manufacturing and agricultural sectors in the global economy.

John Martin, Ph.D., founder and president of Martin Associates, has conducted more than 500 port economic, planning and marketing studies in the past 36 years for seaports, terminal operators and ocean carriers in the United States, Asia, Europe and South America. He is currently developing strategic plans for key U.S. ports and numerous port authorities, national and international terminal operators, ocean carriers and private investment groups. Visit: www.martinassoc.net

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