California dreaming
Ports America sees big potential for Midwest business through Oakland.
By Chris Dupin and Eric Kulish
East and Gulf coast ports are expected to boom after the expansion of the Panama Canal is completed in 2014, giving liner companies the ability to potentially triple the size of containerships moving cargo from Asia to North America.
Ports America, with operations in 50 U.S. ports that handle about one-third of the country's containerized cargo, expects to see its business benefit from the canal. But it also believes there will be opportunity for rapid growth in other locations as well.
Earlier this year it was awarded a 50-year concession and lease agreement by the Port of Oakland in a joint venture with Terminal Investments Ltd., a company that is affiliated with the world's second-largest container carrier, Mediterranean Shipping Co.
Peter Stone, chief commercial officer for Ports America, said the company believes throughput at the Oakland property eventually could climb from about 250,000 TEUs today to as high as 2 million TEUs.
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| Peter Stone chief commercial officer, Ports America |
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| 'Our studies have indentified that about two-thirds of the Southern California intermodal traffic will migrate to Oakland.' | |
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He discussed the company's plans to create an ultra-modern terminal in a recent interview at the offices of Highstar Capital in New York, the infrastructure investment company that is a controlling investor in the company. Stone joined the company in January 2008, around the time that Highstar merged Ports America, the former DP World holdings in the United States, with West Coast stevedore MTC Holdings and auto processor Amports. A liner executive with P&O Nedlloyd prior to its merger with Maersk, Stone helped form the start-up Summit Global Logistics in Hong Kong just before joining Ports America.
Oakland's container traffic is dominated by cargo that moves in and out of the port by truck, with Stone estimating about 75 percent of the port's traffic as 'local.'
'Where we see the growth opportunity is with intermodal cargo that can go by different gateways,' he explained. As the local cargo share at the ports of Los Angeles and Long Beach grows along with the population of Southern California and space for expansion of container terminals remains limited, Ports America believes intermodal cargo bound for the Midwest will begin to move through Northern California in greater quantities.
'Our studies have identified that about two-thirds of the Southern California intermodal traffic will migrate to Oakland,' Stone said. 'Oakland has the same rail network essentially, and the same costs. It's also a day closer to Asia and has capacity to take on that growth.'
Oakland is the fifth-busiest U.S. container port.
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| Oakland outer harbor, Berths 20-24. |
The Oakland port authority's vision for the property is to move intermodal cargo at high velocity from the West Coast to minimize road congestion and air pollution. Port commissioners recently entered into negotiations with AMB Property to develop an adjacent parcel into a dedicated intermodal facility, which Stone said would run many trains at night.
'Our expectation is that ultimately 80 percent of the cargo will be moving out by rail and 20 percent will be for the local market,' he said at an industry conference in Washington organized by Infocast.
Ports America is already a big operator in Oakland through joint ventures or vendors to three terminal operators: Hanjin's Total Terminals International, 'K' Line/International Transportation Service's TransBay Container Terminals, and Evergreen/Seaside Transportation Services' Seventh Street Terminal.
Ports America expects to initially invest $160 million to upgrade 160 acres at the port, and about $500 million by 2020, in a series of projects. The investment figure is an approximation until the company gains control of the property and can closely assess each of the 13 renovation phases. The terminal operator was in the process of putting together its construction timetable and budget for the first phase in late July.
The Oakland transaction covers berths 20-24, and the company has options on berths 25-26. It also agreed to pay upfront annual rental payments totaling $686 million ($60 million in advance), and to guarantee a minimum number of inland intermodal moves within a set period or pay a financial penalty, according to Ports America's confidential business plan for the Oakland Outer Harbor Terminal Concession that the port authority posted on its Web site by mistake before pulling it down.
Ports America is actually paying 5 percent less to the port to reflect the net present value of the money ' or the discount the port gives for being able to invest the upfront money and receive an additional return. The Port of Oakland is also eligible to receive payments for any boxes above 1.6 million TEUs per year, port spokesperson Marilyn Sandifur said. Ports America estimates that such profit sharing, or 'super profits,' could be worth $1.48 billion based on its projection of future revenue streams over the course of the concession.
From the port's perspective, the deal is theoretically worth $2.5 billion based on payments, revenue sharing and improvements to infrastructure.
Combined with the deep harbor and available capacity, the upgrades are intended to make Oakland a first port of call for the 10,000- and 12,000-TEU vessels now coming on line.
The port specialist operates at 95 different facilities doing stevedoring and terminal work for vessels moving all sorts of cargo ' containers, bulk and breakbulk cargo, roll-on/roll-off equipment and automobiles, even cruise ships. It also controls two inland intermodal ports in Mexico and Chile.
The company's business model varies by location. In some places, such as Oakland, it is a full concessionaire that builds and operates a cargo facility. In others it is a joint venture partner, a pure stevedore only responsible for physically loading and unloading vessels, or a contractor hired by a port authority.
As a coast-to-coast terminal operator, the company has an advantage over local and regional operators because it can negotiate better package deals for carrier customers, Stone said.
While containerized cargo accounts for about 60 percent to 70 percent of the company's revenues, Stone said that geographic and commodity diversity has helped shield the company from the worst of the slowdown in shipping.
'We haven't changed our investment model. We continue to invest because our view is more of a medium to long-term hold,' he said. 'Over 50 years, Oakland will be a very valuable piece of property and valuable terminal to have.'
Investment in marine terminals has dried up since the financial crisis, a far cry from the go-go times between 2005 and early 2008 when institutional investors and private equity groups aggressively bid up prices to exorbitant levels for those types of facilities by taking on massive debt. High valuations were driven by a common belief that strong growth in trade volumes would continue unabated, and a decline in container volume was never contemplated.
Rationale. In a separate conversation at the conference, Stone said the timing of the deal was good because prices are more reasonable without all the competition for terminal assets. The acquisitions made financial sense for the company even at the bottom of the economic and investment cycles, and profit margins will only get better as trade rebounds, he added.
Oakland's downturn in container volumes has been relatively mild compared to sister ports on the West Coast. The port handled 2.2 million TEUs last year, off 6.4 percent compared to 2007. Through June this year, container volume was down 13.9 percent. Container volume at the Port of Long Beach shrank 11.27 percent last year and is down 27.4 percent year-to-date. At Los Angeles, TEUs fell 6 percent in 2008 and 15.6 percent year-to-date. Seattle's TEUs dropped 13.6 percent last year and 21.7 percent so far in 2009. And the Port of Tacoma saw traffic decline 3.3 percent in 2008 and 14.9 percent during the first half of this year.
Stone said trade dynamics will not markedly change with the expansion of the Panama Canal, which means investing in West Coast ports is still a viable business proposition. East Coast ports that are predominantly served today by all-water ocean service because they have deep channels, great local demand or rail capacity, such as Norfolk, Va.; New York; and Savannah, Ga., will get the lion's share of new canal traffic.
The West Coast will also continue to remain relevant because shippers are not going to move cargo from North Asia to the East Coast only to haul it back to Chicago. Norfolk and New York will get cargo headed to Columbus, Ohio, for distribution and maybe some cargo from Europe to Chicago, he said.
'The movement of a vessel string through the canal and then railing to the Midwest is the worst use of resources in terms of carbon emissions' and transportation dollars. 'The fastest, most rational way of moving cargo to Chicago and points southwest is via the West Coast, the way it's done today, in a very high-scale and efficient manner. That means trains moving 70 mph across the desert,' Stone said.
Shippers also have to factor in the higher cost of all-water service via the canal versus the ocean and transcontinental rail cost of a West Coast debarkation. An ocean carrier requires five vessels transiting the Pacific in 11 to 13 days to serve a route from China to the West Coast, but needs to deploy nine vessels to move the same volume to the East Coast, he noted. All-water rates may become less competitive with ships now costing about $125 million a copy to build and $15 million per year to operate.
William F. Rooney, managing director for North and South America at Hanjin Shipping, agreed at the Infocast event that reverse inland intermodal from places like Norfolk will probably only go as far west as the Ohio Valley.
'We'll have to see what rail rates are and how railroads respond to additional competitive pressure from the all-water service and bigger ships,' to definitively determine intermodal's range from the East Coast, he added.
'I believe the West Coast is clearly going to remain viable, but that there will be additional discretionary cargo that will move to the East Coast (in part because of the increased fees and other business costs in California). The question is what happens for cargoes that are going east of Chicago from West Coast ports today? I think the jury is still out,' Rooney said.
Ports America will take possession of the Oakland terminal at the end of the year from APM Terminals. It hopes to keep APM's affiliate, Maersk Line, and Horizon Line as tenants. A Maersk spokesperson said a decision about its future in Oakland is due around Labor Day.
'We hope to have them as customers,' Stone said. 'We think as incumbents we can make it comfortable for them.'
Mediterranean Shipping Co., which doesn't have a primary gateway on the West Coast, will be the terminal's anchor tenant. Its interest in the facility is driven by its need to find an alternative terminal for intermodal cargo due to vessel size restrictions at its Long Beach terminal, according to the confidential business plan. Transferring its intermodal cargo will give MSC more space to handle cargo destined for the Los Angeles metropolitan area.
'The main drivers of growth for this venture will be MSC business,' the business plan said. 'MSC has a long-term capacity constraint at the Port of Long Beach and currently handles large volumes of containers at other carrier's facilities and even at off-dock container yards (at significant extra cost). Additionally, MSC has limited on-dock rail capability at its terminal in Long Beach, which puts it at a competitive disadvantage to other carriers with on-dock rail. This lack of on-dock rail means that MSC's gateway cargo is also subject to the higher trucking fees in the San Pedro Bay area. For these reasons, MSC, not to mention other carriers in similar circumstances, have begun to look for alternative gateway ports to southern California.'
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| 'What we expect to do here is to open the opportunities of transload to a greater number of importers and for a greater number of commodities.' | |
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Ports America bases its volume projections for the terminal on MSC's new business, retaining existing customers, and its ability to attract other carriers interested in its efficient, low-cost operating model and intermodal access.
It also anticipates increased local cargo growth as a return to higher fuel prices and greater availability of distribution centers allows Oakland to capture cargo that currently arrives at Los Angeles-Long Beach and is trucked to Nevada distribution centers before delivery to the San Francisco Bay area. And Oakland continues to be a prime gateway for agriculture exports from the central California valley.
One of its key selling points will be the conjoined logistics park presumably to be developed by AMB Property (see related story) that gives shippers the unique option of letting the carrier move an intact ocean container straight from the vessel to inland rail, transloading the cargo or remixing the cargo at a cross-dock without spending much time in inventory.
Transloading is the process of emptying 40-foot international containers and repacking the contents into 53-foot domestic containers or trailers to reduce railroad costs and gain quicker control of the goods so they can be redirected where needed, rather than waiting until the original container arrives at a warehouse across the country for deconsolidation and distribution. Transloading also enables retailers to mix and match merchandise from multiple origins into a container or trailer for a single store or distribution center, as well as perform added services such as final packaging or price tagging. The contents of three ocean containers will usually fit in two domestic boxes. Most transload centers are located miles from the port, requiring trucks to shuttle loaded and empty containers back and forth from the port and railhead for processing.
For vessel operators, transloading means they can turn around their shipping boxes quicker than retrieving them, or waiting for them to circulate back, from the interior of the country.
Ports America and AMB plan to eliminate the extra hassle and truck cost by providing all the logistics service at the same near-dock site.
'What we expect to do here is to open the opportunities of transload to a greater number of importers and for a greater number of commodities,' Stone told American Shipper. Traditionally, transload has been limited to garments and apparel because the extra labor and truck drayage costs eat up too much margin for lower value products. 'But if we can lower the cost, the more doors we can open for other commodities,' he said.
Ports America believes the concept will become a trend in the logistics industry. 'People will start to ask for the Oakland model in other ports to have the same flexibility,' Stone said.
Ports America is planning to make more intensive use of the property, and make some changes to handle inland moves.
'We have well developed engineering design plans, and plan to build this along the lines of a European terminal using electric rail-mounted gantries for the stacks that will be perpendicular to the pier or the waterfront, versus parallel, which is the tradition on the West Coast today. The main reason for both those features will be reduced emissions and reduced energy consumption. Each stack will have its own rail mounted gantries, two on each stack so that there will be up to 12 stacks.'
The Outer Harbor Terminal will be the first semi-automated terminal on the U.S. West Coast and will have a unique above-grade foundation system for the cranes that will avoid having to disturb the pavement, underlying polluted soil or reconfigure the drainage system. APM Terminals operates a new private terminal at the Port of Virginia in Norfolk that is semi-automated.
Stone said that by using electric cranes and hybrid yard hostlers the company should be able to reduce air pollution by some 94 percent moving the same volume of cargo today. The company claims it will improve vessel service productivity to 35 lifts or more per hour.
'With a 50-year concession, we can buy the greenest, state-of-the-art equipment. The Port of Oakland has had the courage to allow us to make that kind of long-term commitment,' he said.
Ports America has developed specifications for the cranes it wants to buy to handle the world's largest vessels by 2011. With the industry in a slump, it's an opportune time to be ordering equipment, he added.
During the first five years, Ports America plans to upgrade the wharf to accommodate the new cranes, gate and maintenance facilities, and install new technology such as optical character recognition for license plate and container number identification at the gates, satellite-based equipment tracking devices and a new terminal operating system.
It will mostly handle local container traffic until more cargo is diverted from the San Pedro Bay ports and the intermodal facility is completed. The business plan estimates that MSC will begin diverting inland intermodal cargo to Oakland by 2020, or possibly sooner if Asia trade picks up faster than expected. The company expects inland intermodal volume to ramp up to 1 million TEUs within five years of start up and reach 2 million TEUs within a decade.
Ports America also said in its business plan that local cargo in Oakland will eventually displace inland intermodal cargo by the end of the concession period as is happening at the Southern California ports today. But company officials said that extra capacity and other unknown factors may change that long-run dynamic.
Stone said that as container traffic shifts from Los Angeles and Long Beach to Oakland, shippers and liner companies will be able to use the same rail networks they utilize today. He said that unlike competitors to the north on Puget Sound and Prince Rupert that are limited to Chicago-area deliveries, shippers utilizing Oakland can reach distribution centers and customers throughout mid-America, from Chicago to Memphis to Dallas.
There are some issues with expanding rail traffic to the Midwest to levels that Ports America envisions, such as raising the roofs of snow sheds at the Donner Pass to accommodate double-stack trains. But the Burlington Northern Santa Fe and Union Pacific railroads both seem willing to make the investments to accommodate higher intermodal volumes.
Stone would not provide details on the participation of Terminal Investments, but said Highstar was confident that it would be able to raise the needed funds for expansion.
'All options are open for financing. Eventually the banks will return to infrastructure as a very good investment.'
Ports America is involved in several other major infrastructure projects around the country, including development of a new automobile terminal in Bayonne, N.J., and is bidding for development of the Seagirt Terminal in Baltimore.
Company officials have not indicated whether they will submit a competing bid for CenterPoint Properties' proposed privatization of the Virginia Port Authority's marine terminals in Hampton Roads.