The huge costs of anti-pollution programmes and the seemingly endless arrival of ever-larger ships are the latest obstacles to the otherwise serene US West Coast journey to handle more of the nation’s traffic.
The drive to zero emissions is proving troublesome and vessels over 14,000 teu – commonplace on other trade lanes – are a rarity in the US. Doubts over the US West Coast’s ability to handle them have been exacerbated by a Drewry report stating that the Los Angeles and Long Beach port complex is unable to cope with larger ships at the moment because of huge construction projects taking place and the issue of multiple terminals serving the same strings at different times. As a result, Drewry says that shipping lines are reluctant to bring anything bigger right now.
The ports play down these fears, telling Port Strategy that they can handle 18,000 teu loads, but economist Jock O’Connell of Beacon Economics says there is valid reason for doubt. However, he says that the fault is not wholly with the ports: “There is a huge disconnect between the landside and the seaside. Lines are just going ahead with bigger vessels because they see economies of scale and don’t talk to the ports about when to bring them in.
“For their part, the ports made a big noise of how they dealt with one or two calls by the 18,000 teu CMA CGM ship, as though it was like organising the Super Bowl. The line then talked about five or six calls a week, which makes it a much different affair. And those have not materialised. “
Operation pressure
Bigger vessels and fewer calls are putting a strain on logistics efficiency and co-ordination of the different transport modes, say industry sources. They point out repeatedly that unlike Europe, container ports on the US West Coast are concentrated in only a few areas. “With the dominance of unionised labour, terminal operators have to be much more careful to balance the periods of hectic activity with those when there is very little for the labour to do,” says one observer. “It is becoming more difficult with each bigger ship.”
These considerations are in addition to the ever-present issues of the Panama Canal effect and the attitudes of the ILWU dockworkers. The canal is handling vessels of 13,000 teu, bigger than expected and this has led to traffic bleeding away from the US West Coast. As Mr O’Connell puts it: “Savannah, Georgia recorded a 19,000 teu jump in business year-on-year in May, while the increase at LA/Long Beach was 18,000 teu – and they are many times larger. So, the ports are keeping a very close watch on what is happening.”
On the trade union front, hostility between the port and the unions remains and with the dockworkers’ six-year contract officially ending in July 2019 employers have already offered a three-year extension on the same terms. But automation is a major sticking point. This is likely to heat up further as Long Beach’s Middle Harbour terminal nears completion in two years, billed as the country’s most advanced automated facility.
Indications are that the ILWU might suggest an automation tax or fee to offset the expected loss of jobs – on the lines of a proposal already put forward by dockers’ unions in Europe. But no matter which segment of the supply chain pays the fee, the consumer will ultimately bear the cost.
Adding to the labour worries are strikes by container delivery drivers, unconnected to the ILWU. Though confined to only a few businesses, there have been 15 this year and these are viewed as a new push by the Teamsters union to become the official union for the drivers.
Committed to growth
Oakland maritime director John Driscoll says the port is definitely committed to ultra large vessels and is currently testing and seeking approval to handle vessel manoeuvres at a new turning basin off Berth 37. It is also adjusting arrival and departure windows for these larger ships, raising six port-owned cranes, negotiating with the main terminal operator to purchase up to six new ship-to-shore gantry cranes over the next four years, and improving/upgrading the fendering and bollard infrastructure to be able to handle the larger ships.
“We do not expect automation to be required for another 10-15 years,” says Mr Driscoll. “The cost is extremely high and cost benefit analysis does not currently support pursuing in Oakland. However, we are open to it with the right partner, for the right reasons, and when demand warrants it. We have ample terminal capacity that when required we can put into production in the more conventional manner.”
The port estimates 2%-3% growth a year in traffic over the next five years, and has fixed its budget on 2% growth.
There are strong indications that Seattle/Tacoma – tied together in the Northwest Seaport Alliance – are preparing to steal some of LA/Long Beach’s thunder over big ships with an order of new cranes specifically aimed at handling 18,000 teu ships. The alliance has approved a $52m purchase of four more container cranes to join the four already on order for Husky Terminal in the South Harbour.
Seeking specifics
But asked about the big ship plans, the alliance shies away from a direct answer. “We are projecting modest growth,” says Tong Zhu, chief commercial officer for containers and real estate. “By focusing on best-in-class service through our Operations Service Center, we are committed to making our gateway the easiest with which to do business.”
A port statement earlier this year said: “We can identify strategic terminals within our portfolio to invest in the upgrades necessary to handle the 18,000 teu ships when they enter the trans-Pacific trade. We also can strategically consider which other terminals stay focused on smaller ships that some carriers will continue to employ.”
While smaller ports along the seaboard are concentrating on their niche markets, mostly with considerable success, controversy continues to grow over oil-related projects. Vancouver, Washington is still mired in arguments over a proposed oil terminal, four years after the first proposal was made. Numerous public meetings have ended in deadlock and each year the proposed developer renews its lease for the land.
Increasing demand for bulk and breakbulk exports more than counterbalance this, a testament to the wisdom of a broad cargo base. A record volume of 7.5m tonnes was handled last year but possible hiccups loom because of the new mood of protectionism in the White House.
Says Alastair Smith, chief marketing and sales officer: “We have exceeded our 2017 budget forecast by more than 1% due to market trends. Steel imports have been strong for the first half of the year, which may be due, in part, to stockpiling inventory prior to the results of the US Department of Commerce’s Section 232 Steel Trade study.” This refers to the huge imports of cheap foreign steel that domestic producers say have undercut the market – and if the department agrees, severe tariffs will be levied.
Vancouver has yet another project to fall back on: A 10-acre commercial and public area is planned on the site of the port’s original warehouse.
Downbeat outlook
Across the Columbia River from Vancouver, a much more depressing situation faces Portland. This is still struggling to replace the loss of the sole container line that used the port, following protracted disputes between the container terminal operator and the union. The terminal is now used only for vehicle exports, while a new 19-acre storage yard is being developed.
Ken O’Hollaren, marine marketing director, says the port moved 291,000 vehicles in 2016 and this is expected to grow this year. “We have a fresh start at the terminal and are studying the future of containers, with an eye to niche carrier service. Additionally, we are working with a consultant to study the port’s future role in container shipping and a sustainable business model for managing and developing the terminal.”
Meanwhile, Longview is on course to beat the 2016 record tonnage, with volumes up 46% in the first quarter over the previous year. Potash, corn and soybeans have been the big growth areas.
The port continues a broad capital development programme, with an industrial rail corridor, multi-cargo handling improvements and reshaping the road access system.
Then , in a drive for greater efficiency, Los Angeles has taken a new approach in the trend to knit together in a tidy platform the multiple threads of digital information sought by port customers, and suppliers. In partnership with GE Transportation, a division of General Electric, a single platform is being developed for users to get information simply and directly.
Chris Chase, port marketing manager, emphasises that this is a pilot programme – involving one terminal — and is information based. “It’s a bit different to the Business Intelligence systems from Navis and others. It links systems together to put data in a comprehensive package, so that users don’t have to waste time in hunting for the data they need.’
The starting point is the customs manifest for each shipment. “This is the driver as it is the basis for every shipment,” says Chris Chase. “Security of data is paramount and the system ensures that each user, such as a trucking company, gets only the data it needs and can’t see the data of other users, such as the terminal operators.”
The port has earmarked $1m, with the first round of results set to be gathered during July.
TAKING A STANCE ON THE CLIMATE
National political turmoil is dragging Long Beach and Los Angeles into the controversy over climate change and the environment, threatening to damage their competitive standings over the US East Coast.
As departments or divisions of their respective city councils, the country’s two biggest container ports have to abide by the councils’ diktats. And the mayors of the two cities, along with a number of cities throughout the country, are opposed the current White House administration’s scepticism of climate change.
The mayors are among more than 90 in the country determined to follow the Paris Climate Accord, which includes the aim of cutting greenhouse gas emissions at the ports to zero.
Because the environmental programmes of the last 10 years have been so successful, the ports today account for less than 1 percent of air pollution in Southern California, but are convenient targets for politicians to show that they take the environment seriously.
The cost is considerable, with the Pacific Merchant Shipping Association estimating about $35bn over the next 5-10 years. “This definitely is a factor that worries the ports,” says trade economist Jock O’Connell of Beacon Economics. “It could well erode the competitive nature of the two ports.”
Adding to the burden is the law of diminishing returns, with more money being needed to get smaller degrees of improvement. As port spokesperson Phillip Sanfield puts it: “We have taken the low hanging fruit and must move on to the next decade.”
The two ports’ environmental programmes are being closely watched throughout the country and they have been resolute in their stance that their goals remain unchanged. However, while no one will publicly admit it, they are having to spend an inordinate amount of time and money on environmental controls, drawing resources away from other activities.
Long Beach’s new executive director, Mario Cordero confirmed that the port is “continuing to pursue environmental goals in a balanced fashion and [is] proceeding with sustainable development.”
Other ports along the Western Seaboard, pleased to be out of the public eye, are finding the going easier and while still working to reduce pollution are able to devote more energy on development and infrastructure.
POSITIVE BACKING FROM RATINGS’ AGENCIES
Credit rating agencies take a generally optimistic view of US West Coast port finances and prospects. In recent bond issue, the ratings have been just below the top tier of creditworthiness.
The agencies tend to be more positive to ports that are also linked to airports. Oakland is seen particularly favourably, with Moody’s upgrading instruments in issue and awarding good ratings on planned issues. The highest rating is A1 (up from A2) for $656m of senior lien bonds already in issue.
However, Fitch has expressed concerns about the White House budget plans to cut or eliminate grants. The agency says these would “force US ports to choose between issuing debt to keep capital improvements on schedule, thus raising their leverage positions, or delaying capital programs to allow cash from operations to accumulate. However, recent partnerships between regional ports [mentioning Puget Sound specifically] could lower capital expenses in the long run for some entities, partially offsetting the cuts.
“The growth of partnerships between regional nearby ports could help some ports offset funding cuts by reducing capital expenses,” says Fitch. “Strategic alliances in which one port may focus on, for example, cold storage while its partner specialises in general bulk could mean lower capital expenditures for both.
“Partnerships also give ports more power when they negotiate fees with shipping companies,” says the rating agency. “As shipping lines create larger alliances, negotiations tend to favour shippers. Ports can strive to balance this dynamic by creating alliances of their own.”
Noting the trend of bigger ships, Fitch says channel deepening projects need to be continued. “Additionally, most ports that are currently considering deepening projects are too far from others to make such an alliance on large-scale capex workable.
“The fiscal effectiveness of these port partnerships remains unclear. Fitch would not consider a rating or outlook change until the partnership has shown a positive and sustained impact on volume and other financial metrics, such as debt service coverage and leverage.”
Fitch concluded that the 2017 outlook for US ports is “stable”.
