The Urethane Blog

Trade Economics

US ports: Gridlock on the waterfront

Robert Wright

 
Unless terminals modernise, American importers and exporters face higher costs than their rivals
Ships gather off the ports of Los Angeles and Long Beach, California February 6, 2015 in this aerial image. The chief labor negotiator for shippers and terminal operators at 29 U.S. West Coast ports raised the ante in contract talks with the dockworkers' union on February 4, 2015, warning that ports plagued by chronic cargo slowdowns were days away from complete gridlock. Picture taken February 6, 2015. REUTERS/Bob Riha Jr (UNITED STATES - Tags: TRANSPORT MARITIME BUSINESS EMPLOYMENT) - RTR4OPTD©Reuters

The ports of Long Beach and Los Angeles

The MSC Renée, whose sheer black sides loom over the wharf at Pier 400, the US’s biggest container terminal, is an emblem of modernity and efficiency. At 366m long, the ship is enormous, capable of carrying 13,000 containers full of goods between Asia and the US west coast. But the superior economics of the MSC Renée’s immense size and hyper fuel-efficient engines have ebbed away since it hit the port in Los Angeles.

In theory, the light blue cranes at Pier 400 should be able to whisk the containers from the vessel and reload it within four days. Instead, it will linger for a week because Pier 400 cannot provide enough dockworkers — the result of an antiquated system for assigning workers to the port’s terminals. The return trip, carrying American exports to China, will be delayed.

 

The MSC Renée and Pier 400 are suffering from a slowdown at ports in California, Oregon and Washington that has clogged some of the country’s most vital trade arteries since October. The congestion disrupted production at US car factories, led to shortages of French fries at Japanese McDonald’s franchises and prompted a profit warning from Gap. The port congestion cut US gross domestic product by $40bn in December alone, analysts at Deutsche Bank estimate.

The dispute over a new labour contract was settled last month, but the problem of congestion and inefficiency at the west coast ports remains. After years of failing to invest in the latest, most sophisticated equipment, they are falling far behind ports in other regions — Asia in particular. Ships are growing ever larger to handle more goods, but US ports struggle to accommodate them. And infrastructure around the ports — rail lines and roads — is under strain.

Failure to come to grips with these problems could have profound consequences. Unless the ports’ record improves, US importers and exporters face higher costs than their international competitors for moving goods. They also risk the repetition of events of recent months, when perishable goods have rotted while waiting for export and imports have arrived too late for retailers. Above all, they face the prolonged uncertainty of knowing that even a minor disruption might break the ports’ fragile link in their supply chains.

During the recent slowdowns, shipping lines began to use alternative routes, with goods from Asia travelling to the US east coast by way of the Panama and Suez canals or through Canadian ports. But the long line of anchored ships waiting in San Pedro Bay to dock at Los Angeles and Long Beach — which handle 40 per cent of US container traffic — serves as a reminder of how many shipping lines still depend on the most direct trans-Pacific route.

“We’re getting worse, slower and more expensive,” says Dan Smith, of Tioga Group, a transportation consultancy. “The volume and complexity here in southern California have made the problems most obvious here.”

The question — for the US and world economies as well as those directly involved in shipping — is whether frustration over the latest crisis will translate into significant reform, bringing west coast ports’ productivity closer to that of the world’s best facilities.

Mario Cordero, head of the Federal Maritime Commission, which oversees the US’s seaborne trade, called for the maritime industry to start taking shippers’ complaints about US ports’ high costs and poor reliability more seriously. “It’s time to move towards substantive solutions,” Mr Cordero says.

Carrying more containers

The MSC Renée’s presence illustrates the challenges. The popularity of alternative routes from Asia to the US means that container traffic at the San Pedro ports rose only a relatively modest 15.6 per cent between 2004 and 2014. But the cargo increasingly travels in vessels like MSC Renée that can carry about 50 per cent more containers than the biggest ships just five years ago.

For the terminals, this trend has created new challenges. Some days they are underworked, but on others their capacity is strained by the task of finding space for 10,000 just-unloaded containers. Such spikes in traffic are rendering obsolete an old industry saying that operators should not build terminals for peak traffic — or “build the church for Easter Sunday”.

“Now we’re getting two Easter Sundays a week at some terminals,” Mr Smith says.

Shipping lines have rushed to form alliances — similar to those struck between airlines — to scrape together enough cargo to fill the bigger vessels. The MSC Renée is carrying cargo both for its owner — Mediterranean Shipping Company, operator of the world’s second-biggest container ship fleet — and Maersk Line, operator of the biggest. The two co-operate in the 2M vessel-sharing alliance. Pier 400 is operated by another arm of the AP Møller-Maersk Group that owns Maersk Line.

One industry executive says few anticipated how disruptive these alliances would be for the ports. “I don’t think anybody realised when these new alliances came in [that they] would blow up the harbour when you start bringing multiple lines into your terminal,” he says. “Your terminal becomes less efficient.”

Productivity problem

Jon Slangerup, chief executive of the Port of Long Beach, the public sector body that owns the port land, says the slowdown by the International Longshoremen and Warehouse Union — which cut the number of crane operators it sent to terminals by two-thirds from late October — hit the terminals just as the end of the pre-Christmas season might have eased congestion.

The union says the problems stemmed from the existing congestion, which it blames on employers’ under-investment. It cut crane operator numbers, it says, because amid the severe congestion only the most experienced staff could work safely. Productivity in many ports fell by 40 per cent. It has slowly returned to normal since a tentative contract deal was agreed on February 20.

“Just as you would normally be digging out from the mess . . . labour then decided to be the big contributing factor [to congestion],” Mr Slangerup says.

To avoid future crises, all the many parties involved in each shipment — including shipping lines, terminal operators, truckers, railroads and the shippers that own the cargo — need to co-operate better, most participants agree. Mr Slangerup says the present arrangement is “highly fragmented”.

“All of them have information content and hardly any of it is shared,” he says.

Another, less welcome, development could ease the west coast ports’ congestion problem: losing market share. The operators of the Panama Canal had expected to add at least five extra weekly container ship services for the US east coast once its expansion is completed next year, on top of the 10 Asia-US ships that use the canal each week. But it might add a further two new weekly services as shipping lines try to get away from the west coast, says Jorge Quijano, administrator of the Panama Canal.

“We will be ready to do what we can to attract whatever amount of cargo is there,” he says.

Additional capacity

The key to the southern California ports’ future may lie in the scene unfolding five miles from Pier 400, in a part of Long Beach known as Middle Harbor, where gantry cranes that will stack and sort containers are being tested in preparation for the opening of the new Long Beach Container Terminal, scheduled for this summer.

According to Mr Slangerup, whose organisation is investing $1.3bn in the project, the facility will open up significant new capacity. Because it will be almost entirely automated, it will require 40 to 45 per cent fewer workers per container moved than existing facilities.

It should also help Long Beach improve its productivity, which is good by US standards but poor by comparison with the world’s best. In 2013, Long Beach terminals moved an average of 88 containers on and off ships every hour, according to research by the JOC Group. The figure — the best in the US — is well behind the 130 moves per hour of Tianjin, in northern China.

“It creates a perfect opportunity for the Port of Long Beach to have both the latest and the greatest demonstration of container handling,” Mr Slangerup says.

Despite the labour shortages, Pier 400 is already the most efficient terminal on the US west coast, averaging 96 moves per hour in the JOC study. However, Mr Trombley already seems to be looking ahead to a time when the bulk of loading and unloading ships at the port will be done by machines.

“We’ll continue to push as much technology through this facility as we can, to the point where the next step is something bigger and better, which is automation,” Mr Trombley says.

For the moment, no new operator is working toward full automation, apparently out of fear of provoking the union. While the ILWU formally agreed to greater automation in 2008, there was conflict last year over the introduction of automation at Los Angeles’s TraPac Terminal, owned by Japan’s Mitsui OSK. It was resolved only with an agreement to keep more workers employed than had been planned. Without sharp reductions in worker numbers, the significant investments required for such projects — Hong Kong’s OOCL is investing $600m in the new Long Beach Container Terminal — make little sense.

Yet the view from Angels Gate Park, overlooking San Pedro Bay, illustrates why automation and other efficiency measures are becoming urgent. Stretched towards the horizon are nearly 30 container ships, the sun catching on their splashes of white paint, each carrying thousands of containers and tens of millions of dollars of goods.

Mr Slangerup insists that investments such as Middle Harbor and in new rail terminals should prevent similar scenes in future. The ILWU has been co-operating with the projects, Mr Slangerup insists. “I think they do understand the incentives,” he adds.

Others, privately, would like a confrontation with the ILWU and regret that February’s settlement was reached without one. This reflects the uneasy sense that the industry’s inefficiency makes it vulnerable to disruption.

Tim Simpson, US communications director for Maersk Line, says the industry should recognise it is ripe for challenges from innovative competitors. “The challenge is going to be for the parties in the industry to start taking a hard look at changing . . . the antiquated way we run our businesses,” he says.

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Size matters: Bigger vessels hold key to American efficiency drive

The largest container ships in the ports of Los Angeles and Long Beach are some of the biggest ever built. But these vessels, capable of carrying 13,000 or more 20-foot equivalent units of containers, are still not as big as the ships some shipping lines would like to see docking at the ports.

On routes between Asia and European ports — where there are fewer concerns about terminals’ efficiency — the biggest ship currently operating, the MSC Oscar (pictured), measures 395m (1,297ft) long by 59m (194ft). The vessel, operated by Mediterranean Shipping Company, can carry 19,224 TEUs of containers. One TEU equates to the smallest size of standard container in current use.

The size of the vessels illustrates how far the industry in recent years has pushed some fundamental truths about shipping economics. As long as the ship is reasonably full, the costs per container of operating a single large vessel are far lower than those for operating two smaller ships of the same total capacity.

Yet, as recently as 2004 the Port of Long Beach was trumpeting how it was receiving an 8,500-TEU vessel, then the world’s biggest. It was only in 1988 that APL took the step of deploying a 4,600 TEU container ship that was the first to be too large to transit the Panama Canal. The first container ship — the IdealX, which sailed from Newark to Houston in 1956 — carried just 58 35ft-long containers, equivalent to about 100 TEUs.

The speeding up of ship-to-shore cranes and advances in information technology have been critical in the rapid growth of container ships. But it remains unclear how big they will grow before shipping lines decide that the constraints of their size outweigh the benefits of their efficiency. The newest terminal at Long Beach’s Middle Harbor has been built to handle 22,000 TEU vessels.

Steven Trombley, managing director of Long Beach’s Pier 400, the US’s biggest container terminal, says his terminal is constantly “pushing the envelope” to improve efficiency.

“We want to continue to bring big boats in here. But, if the cargo doesn’t move, we’re in big trouble,” he says.

http://www.ft.com/intl/cms/s/0/38e0825e-c677-11e4-a13d-00144feab7de.html