The announcement last week by carrier alliances that beginning in late March they will deploy three new all-water services from Asia to the East Coast through the Panama Canal was a dagger to the hearts of West Coast ports besieged by congestion and labor problems.
Still to be answered is the question, will the new services with small, inefficient Panamax vessels transition in 2016 into permanent services utilizing vessels with capacities of up to 14,000 20-foot container units through the enlarged Panama Canal? Or are these services a temporary move to avoid West Coast port congestion until the ports return to normal?
Opinions by industry experts vary as to the long-term impact of the disastrous 2014-15 contract negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association. Some observers, especially those on the East Coast, see the events of the past nine months as ushering in a second round of permanent cargo losses similar to the diversions that took place after the 2002 contract negotiations that ended in an employer lockout and a Taft-Hartley injunction.
“This was not a one-year event,” said John Wheeler, vice president of carrier sales at the South Carolina State Ports Authority. Wheeler said about 10 percent of the cargo diversion that took place in 2002 ended up being permanent. He estimates that 15 percent of this year’s loss of cargo at West Coast ports will be permanent. “This is going to be another watershed moment,” he said.
Jon Slangerup, chief executive at the Port of Long Beach, said that after meeting with retailers and other beneficial cargo owners that ship through Southern California, he is convinced a wholesale shift of cargo to the East Coast “is not a sustainable move.” The larger BCOs told him the extra expense of higher freight rates to the East Coast and backhauls to interior destinations is adding $2 million to their transportation costs, Slangerup said.
Paris-based Alphaliner said last week that carrier alliances that include about a dozen trans-Pacific carriers will introduce three new services from Asia to the East Coast through the Panama Canal this spring. The services, all with vessels with capacities of less than 5,000 TEUs, will remain in operation at least through the 2015 peak-shipping season this autumn. The services will add about 6 percent capacity to the Asia to East Coast trade lane, Alphaliner said.
If there had been no West Coast labor issues, carriers would not have even considered launching these services. Carriers since 2013 have been cutting back on their Panama Canal services because, as Maersk Line CEO Soren Skou told the JOC’s TPM conference in Long Beach that year, carriers could not make money utilizing Panamax vessels on long routes.
According to Alphaliner, an 8,000 TEU vessel, compared to a Panamax ship, has a 47 percent lower slot cost, and a 13,000-TEU vessel has a 60 lower slot cost than a 4,800-TEU Panamax vessel..
Therefore, initiation of three additional Panama Canal services with these smaller ships, “Could be a message of times to come,” said Gene Seroka, executive director of the Port of Los Angeles. It certainly lets West Coast ports, terminal operators and longshore labor know that carriers and BCOs are unhappy with the treatment they have experienced in recent months and the West Coast transportation industry must earn back their trust, Seroka said.
A major factor that BCOs will consider in planning their cargo routing in the months ahead will be where freight rates are headed. At present, there is so much demand for vessel space to the East Coast that carriers are able to earn a profit on their Panama Canal services. The current spot rate for shipping a 40-foot container from Shanghai to the East Coast is $4,659, compared to spot rates of about $3,200 last year, according to the Shanghai Container Freight Rate Index. The rates had actually spiked at $5,049 per FEU in February.
By contrast, the SCFI spot rate from Hong Kong to Los Angeles last week was $1,835. Even with the addition of an intermodal rail charge of $2,000 to the East Coast, all-in costs on the all-water services are noticeably higher, and the all-water route adds an extra week to 10 days of inventory carrying cost to the shipment. For freight moving to key import hubs in the interior such as Chicago, Columbus, Kansas City and Dallas, the backhaul makes the East Coast routing much longer and more costly — in normal times.
However, as Adam Hall, senior director of international logistics at Dollar General told TPM 2015 earlier this month, diverting freight away from the West Coast became a matter of survival for retailers if they were going to get merchandise, especially seasonal merchandise, to their shelves on time. Despite the inherent advantages in the West Coast gateways in normal times, Hall said retailers are not married to any one port. “We will move back and forth if we have to,” he said.
In other words, port reliability is an important factor in cargo routing, even more so today. Home-improvement stores and other retailers with spring merchandise, for example, encouraged carriers the past few months to increase capacity with so-called extra-loaders, or single-voyage sailings, to the East Coast. Wheeler said there have been at least 27 extra-loaders since the West Coast congestion problems began, and he expects others this spring. West Coast ports project that conditions will not return to normal until May, providing the ILWU membership in April votes to approve the tentative contract that was reached on Feb. 20.
At the same time, many BCOs this month are entering into service contract negotiations for the 2015-16 season that runs from May 1-April 30. If BCOs commit large volumes of cargo to the all-water services for the coming year, the new services will certainly continue through the peak-shipping season, if not beyond.
However, the current situation is fluid. If the West Coast ports indeed eliminate the backlog of vessels and on-terminal containers by May, they could see more large vessels coming their way. Seroka said carriers are scheduled to receive a number of large ships into their global fleets, most of which will go into the Asia-Europe trades, where they will bump vessels of about 14,000 TEUs into other trades. Carriers are indicating a number of those ships could be deployed to Los Angeles-Long Beach if the ports earn back their trust, he said.
Maersk Line spokesman Tim Simpson said he is seeing rapid improvement in Los Angeles, and he expects Maersk’s three Southern California services to be back to normal in the next several weeks. When carrier rotations and port operations on the West Coast are back to normal, carriers and BCOs will look closer at the economics of their operations, including unit costs, fuel burn, transit times and freight rates. “This is a price game,” he said.
That is why it is so important that the Southern California ports continue to address productivity issues that will still be in play after the current congestion problems are resolved. The ports, along with the three major chassis providers, on May 2 initiated a neutral, or gray chassis pool, and equipment availability is already noticeably improved, Seroka said. The ports are also rolling out a free-flow program for delivering containers to higher-volume importers, and importers and their truckers are reporting improved efficiencies, Seoka said.
Slangerup added that improvements can be seen week-to-week now, with terminals turning ships in three to four days compared to four to five days last week. Additional skilled yard crane operators are exiting the training programs each week, and truck turn times are improving, he added.
Yet these improvements will not be enough if the ports fail to win back the trust of BCOs through consistently reliable performance, Slangerup said. “We betrayed that trust,” he said, and the ports must win it back. “That’s where our focus is,” he said.
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