Ship Cargo Volume Slumping
by George Raine
Cargo volume at West Coast ports, after years of being dominant in U.S. maritime trade, is slumping, clearly the result of the worsening global economic crisis but also because Gulf Coast and East Coast ports are gaining favor, shipping industry executives say.
The first priority for the cargo container business, of course, is making good decisions in an economy in which consumers have zipped their wallets, orders are a fraction of what they were in good times, Asian factories are shuttered and unemployment rates are rising.
Long-term infrastructure improvements, including increased rail service and improved trucking conditions - as well as helping to cleanse the air at pollution-heavy, dangerous ports - will be necessary for the West Coast to hold on to market share amid ever-increasing competition from across the country, experts say.
Container cargo volumes moving through the West Coast ports fell again in October, and 2008 is now expected to be the slowest year since 2004, according to the National Retail Federation. Collectively, the decline at West Coast ports is more than 1 million containers so far this year, American Shipper magazine reported.
Down from last year
Through October, Long Beach, Los Angeles, Oakland, Seattle and Tacoma have handled 17 million TEUs, or 20-foot equivalent units, as the cargo containers are referred to in the industry, a decline of 6.6 percent from the 18 million TEUs processed in the first 10 months of last year.
But even after a recovery, growth in Asian trade is more likely to benefit the Gulf Coast ports, served by the Panama Canal, and the East Coast ports, which handle Southeast Asian cargo routed via the Suez Canal in Egypt, according to the authoritative supply chain adviser Drewry Shipping Consultants Ltd. of London.
In an article getting considerable attention in the industry, Drewry wrote that while the slowdown in volume along the West Coast "looks like the natural result of the credit squeeze," several factors have combined to undermine the position of the Pacific Coast ports, not the least of which is the complacency and increased rates of U.S. railroads.
Shipping to destinations in the East after goods enter West Coast ports is now more expensive than what is known as the "all-water" route to East Coast and Gulf Coast ports - eliminating rail passage across the country, from West to East, the article notes.
A third set of locks is to open at the Panama Canal by 2014 and, Drewry notes, that will create more transit capacity for container ships using the all-water route linking Asia and the United States.
"Even if growth continues as strongly as it has in recent years, any new trade will probably pass the West Coast by," the article reads. "Volumes are unlikely to decline, but the days of strong growth on the Pacific Coast are behind us."
Michael Jacob, vice president of the Pacific Merchant Shipping Association in San Francisco, has bought into the idea the West Coast faces daunting structural problems. His trade association represents 60 maritime terminal operators and ocean carriers.
"In the long term, we are seeing the threat of all kinds of issues - issues on steroids," he said. These include "the lack of freight-supporting infrastructure," meaning highway and rail improvements as well as improved port facilities; and pricing, due to fuel, environmental costs, port container fees, and the costs associated with congestion, said Jacob. "Everyone has environmental issues," he said, "but we have them in spades."
In addition, Jacob says that some shippers are choosing an alternative route around California, "investing somewhere else."
He added, "We are actually on the front end of a long-term structural change of business models where people are building their supply chains around California" for goods not destined for California.
At the Port of Oakland, Lawrence Dunnigan, manager of business development and international marketing, agreed that more cargo is moving directly to the East Coast than was the case in past years, but he believes the West Coast remains a viable market that also serves the Midwest. For all its pluses, the Panama Canal route remains an expensive option, Dunnigan said, and far more time-consuming than a 14-day trip from China to the West Coast.
"People are not shutting down warehouses or abandoning the West Coast," he said. "You still have to supply the West Coast."
It is true that the Port of Virginia, the Georgia Ports Authority in Savannah and others made infrastructure improvements in recent years, which they accelerated when fuel prices shot up, and that explains some of the volume increase in East Coast and Gulf Coast ports, Dunnigan said.
Savannah is particularly aggressive, handling 2.7 million containers each year with the capacity to move more than 6.5 million annually, said Doug Marchand, the executive director of the Georgia Ports Authority. In August, Savannah's year-to-date growth rate was 10 percent, the highest among all the major ports, and ahead of other ports that were also growing quickly at the time, New York-New Jersey (5.7 percent) and Norfolk, Va. (6.5 percent).
By contrast, the Port of Seattle said October volumes dropped 14 percent. Loaded import containers fell 17.4 percent. Tuesday, the port commission approved its 2009 budget, cutting operating expenses by $9 million. Approximately 109 staff positions will go unfilled into the first six months of the year. To the north, the Prince Rupert Port Authority in British Columbia - served by the Canadian National Railway with service to Chicago - said its container traffic increased 281 percent in the third quarter, compared with the first quarter.
Also on the West Coast, the Port of Long Beach, the nation's second largest, was down 7.7 percent in October and the Port of Los Angeles, the nation's largest, was off 3.9 percent from October 2007.
Global economy's impact
The Port of Los Angeles said, "The global economy continues to play a role in our drop in cargo volume. Exports have declined due to the stronger dollar. Retail sales are down, which naturally affect the import of new goods. We anticipate seeing this trend continue for the remainder of the year."
The Port of Oakland - recently bumped from fourth largest in the nation to fifth by the Georgia Ports Authority's facility at Savannah - is far more balanced between imports and exports and so is less affected by the falloff in imports than other major ports. So far this year, Oakland is down 6.4 percent in imports but up 4.4 percent in exports.
That's still a red number Oakland wants to go away, but recovery is not at hand.
"Certainly 2009 is looking very bleak. That is the word I have heard several times," Dunnigan said.
A softening of port business on the West Coast is not only in part due to the precipitous downturn and increasing attractiveness of alternate cargo routes, but to financial challenges ocean carriers face at California ports, said Jonathan Gold, vice president for supply chain and shipping policy at the National Retail Federation.
"People are looking at the business environment surrounding California right now," said Gold, referring to container fees being imposed by ports, and expenses related to cleaner truck programs and other fees. "They're making decisions on whether to use California ports or other ports."
Gold added, "They are trying to balance the risk in the supply chain, trying to look and see how they get the best advantage," including considering Canadian and Mexican ports.
Moreover, said Gold, the 2002 labor dispute at the West Coast ports - when workers were locked out and the ports shut for 10 days after the workers staged a slowdown when contract talks stalled - also influenced decisions to ship around the West Coast this year.
A new contract was negotiated and agreed to July 28, but before the ink was dry, merchants "wanted to hedge their bets" and "did not want to get caught as they did back in 2002," having all their eggs in the baskets of the West Coast ports, Gold said.
"There is new leadership for the employers (the Pacific Maritime Association, representing ocean carriers and terminal operators) and the union (the International Longshore and Warehouse Union) and we kept hearing a deal would get done, but until we saw the deal in place, there was doubt out there," said Gold.
At the ILWU in San Francisco, Craig Merrilees, the spokesman, said "some of the employer groups whipped up their members into a paranoid lather urging companies to spend all sorts of extra time and money to reroute their cargo when it was not necessary."
He added, "Most observers who follow the industry saw there was little or no probability of repeat of the 2002 fiasco."
But even with a new, improved contract, ILWU members are working fewer hours, feeling the effects of the slowdown like most everyone else.
Ron Widdows, the chief executive of Neptune Orient Lines Limited, the parent of APL, its container shipping arm, put it succinctly Nov. 19 when he announced a reduction of 1,000 positions worldwide; the closure of the APL office in Oakland, affecting 350 people, some of whom will relocate to an office in a more "cost-effective" location in another state; and other adjustments when he said, "The negative conditions we are seeing in the marketplace are unprecedented in our industry's history."
Widdows added, "This reflects our considered view that what we are seeing goes beyond a normal cyclical downturn." He said he anticipated further deterioration in trading conditions and described the outlook for profitability in 2009 as "grim." As evidence, APL is taking 20 of the 130 cargo ships in its fleet out of service.
Said APL spokesman Mike Zampa, "When we come out of this, we will look different. Leaner. Absolutely. Not all carriers have paid close attention to their cost structure. In the end, some of them operate services that are not profitable. That can't happen any longer."
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