Double trouble depresses volumes

Two issues are converging on US West Coast ports. Firstly, costs of terminal development are in danger of becoming prohibitive because of bureaucratic hoops and environmental restrictions/requirements. So much so that potential investors could be shying away. Secondly, ports are chafing under a $200/teu fee that is diverting more traffic through Canada, especially Prince Rupert and Vancouver.

All this comes against a background of uncertainty over future traffic volumes. Selective memories are at work among port management and boosters. When the miseries of 2008 faded into memory and seemed destined to be unrepeated, optimistic forecasts of growth mushroomed. Now that there is a possibility of 2008 redux, the optimists have crawled back into their shells and the common theme is one of extreme caution.

Import volume forecast for 2011 has been cut, yet again, to 10.5m teu, 2% down on 2010.

At Los Angeles/Long Beach import volumes in the fourth quarter are expected to drop by almost 5% over 2010. A huge increase in export traffic, expected to be as much as 15% up on 2010, will be insufficient to increase overall volumes through the port as they account for only one-third of traffic.

The Canadian issue has been complicated by Congress in the form of possible retaliation against Canada for supposedly using underhanded tactics to divert traffic from the US West Coast. In the best-case scenario, some form of subsidy will come from the government to allow the West Coast ports to reduce their fees.

Impartial observers know such a simple outcome is unlikely and that the accusation will probably follow the well-worn route of a trade dispute and end up before the World Trade Organisation.

Ports are having to be diplomatic in their reaction, to avoid antagonising Congress and jeopardise future federal subsidies. They have cut through the political grandstanding to highlight the real difficulty, the Harbour Maintenance Tax, introduced in 1986. In theory, this is levied to beef up a fund to pay for upkeep, mostly dredging but also pilings, berth walls, roadways and the like.

Says the Association of American Ports: "$1.3bn and $1.6bn annually in harbor maintenance tax (HMT) but, in a typical year, less than $800m is appropriated for channel maintenance, leaving a growing surplus of $5.6bn in the HMT Trust Fund (as of November 2010.)"

Politicians ignored the growing deficit until the Panama Canal began to widen its own channel, leading to ports yelling for money to deepen to 15 metres. (Sometimes literally – there are reports of Harbour Commissioners yelling at members of Congress.)

The six main West Coast ports have made a joint appeal to the Federal maritime Commission. "We are especially concerned about the loophole in the Harbor Maintenance Tax that allows shippers to route US-bound cargo through non-US ports and across our land border to avoid paying the tax." The ports say: "Canadian transportation industry sources promote the fact that this loophole in US tax policy gives them up to a $200 cost advantage per container over US ports and actively market this advantage to our own customers."

Seattle's Tay Yoshitani makes the real problem clear. “Through our own policy, we’ve tilted the playing field against ourselves. By leveling that field, we can protect the nearly 300,000 jobs generated by ports on the West Coast and the revenues that our communities need for economic recovery.”

In other words, the unfairness has been imposed by the US itself. But if the tax is removed, the ports will have to cough up all the money themselves.

The best solution, according to a maritime specialist, is for Congress to stump up with the shortfall in the fund and disperse it in some form to qualifying ports, then get rid of it and forget all about the "investigation".

Regardless of such controversies and political interference, ports individually reckon they are on a pretty good footing.

Oakland, the third biggest on the coast, has hit the headlines for all the wrong reasons – the Occupy protestors invaded the port during a demonstration. "No damage was done and only one shift was disrupted," says a port official. Although the incident has not led to a rethink on security, work continues on an "Intrusion Detection System and a Geospatial Security Mapping System that will greatly improve our capability to prevent, respond and recover from incidents in a timely manner," says facilities security officer Mike O'Brien. Some funding is coming from the federal Port Security Grant and California's Port and Maritime Security Grant.

In terms of concrete and steel projects, the focus is on the 364-acre former army base, turning it into a trade and logistics centre costing $480m for the first phase. Apart from a rail terminal, the deep water break-bulk export terminal is being resuscitated.

At the two biggest ports in the north-west, crunch time is looming over which gets the trans-Pacific Grand Alliance (NYK Lines, OOCL and Hapag Lloyd) service. All three now call at Seattle’s Terminal 18 but have asked Tacoma to bid for business (about 400,000 teu a year), with a decision to be made by the end of the year.

An obvious conclusion to be drawn is that the shipping lines are playing the ports off against each other, hoping to start a bidding competition that will drive down fees. Some observers say the Alliance will probably split traffic between the two ports, but this would mean duplicating office staff and having to deal with two sets of port authorities as well as different ILWU local offices.

Both ports play down the significance of the decision, but Tacoma probably has more to gain, partly because overall volumes have dropped. Adding to the importance is the Washington United Terminal, which has been extended by 200 metres. Even though the port may not have wanted to spend the $32m involved, its contract with Hyundai stipulated that the extension had to be carried out when the operator bought two extra cranes – which happened in January 2009. The terminal is under-used.

Seattle will have more to lose, as the Grand Alliance takes up 24% of total volumes. Added to which, the port faces an extra moment of anxiety in the next few months over Terminal 46, operated by Total Terminals International. The company's lease expires in 2015, with an option to renew for another 10 years provided that the decision is made by 2012.

Linda Styrk, seaport managing director, says the port's capital budget is "under tremendous pressure" because of the cost of having to contribute $300m to the Alaskan Way viaduct – with the money coming from the overall port finances, which includes the airport.

Terminal 18 operator, SSA Marine, is continuing with capital expansion and is installing three new post-panamax cranes this month plus another three shortly after.

Perhaps the best strategy for West Coast ports is to dive wholeheartedly into bulk and break-bulk (scrap steel and waste paper exports are keeping Los Angeles afloat). Vancouver, Washington is a prime example. As with most bulk ports, 15% of Vancouver's traffic is imports and 85% exports. Total tonnage in 2010 increased by 18% to 5.7m tonnes. Next year, the port anticipates revenues from typical sources, including tenant rents, shipping fees and property-tax revenues, of $66m, up by 28% from this year’s budget.