Expansion strategy rests on accelerated volume growth, higher rates and innovative financing.
The South Carolina Ports Authority has successfully regrown cargo volumes while maintaining profitability, but earnings aren’t sufficient to support ambitious capital requirements, Jim Newsome, the port’s chief executive officer, recently said.
Port officials are focused on promoting rapid cargo growth, raising port fees and seeking out private investors to raise funds for infrastructure at the Port of Charleston so it can efficiently handle the new mega-size container vessels now being operated by liner carriers, Newsome said Sept. 8 in his annual state-of-the-port address.
“Earnings are very sensitive to volume. If we have 1,000 or 2,000 more containers, the margins go directly to our bottom line,” he said at a Propeller Club luncheon in North Charleston. “We have to grow well above the market to succeed.”
The state agency in August reported an operating profit of $14.3 million for fiscal year 2014, ended June 30 — almost 21 percent above budget estimates. Operating revenue was $164.1 million, up nearly 17 percent from the previous year, and is projected to reach $173 million next year. And operating earnings are growing—for the first two months of the new fiscal year they were 70 percent higher than a year ago.
In the boom years of 2006-2008, the port authority annually earned at least $50 million. Charleston suffered along with the economy during the downturn, but has turned things around since Newsome arrived in 2009.
From fiscal years 2010 to 2014, container volume has grown 32 percent, the fastest pace in the southeast. Last year, Charleston, the nation’s ninth-largest container port, achieved 8 percent growth in container volume to 1.7 million TEUs, building on 2013’s 9 percent growth. On a calendar year basis, the port’s volume is up 16 percent since 2011, compared to 6 percent in the same period for the overall container market.
The seaport has seen its share of Southeast volume during the past four years rise to 28.1 percent from slightly more than 25 percent.
Like other ports in the region benefitting from growth in U.S. manufacturing, the port is well balanced between imports and exports.
Having reestablished cargo volumes, officials are ready to implement the next phases of their expansion strategy.
South Carolina is in the midst of a 10-year, $2 billion capital investment plan ($1.35 billion funded by the port authority itself) that is expected to nearly double the agency’s asset base of $900 million by fiscal year 2020. It includes deepening the harbor another five feet, building a new container terminal and an intermodal rail facility, and upgrading existing terminals. Last year, capital expenditures were a record $89 million; the capital plan calls for spending $200 million by 2016.
But the port’s return on capital is only 2 percent.
“We need to earn 6 percent to be successful,” Newsome said. “If you’re going to be a Top 10 container port in the U.S., you have to invest.”
The goal is to exceed market growth for the next five or six years and then have sustained growth in line with the U.S. port market from 2021 to 2030.
“I think it’s unrealistic to assume we’re going to grow well above market forever and ever,” Newsome said.
Cargo Diversification. One of his priorities is to attract greater amounts of discretionary cargo — goods that inland shippers have the option of moving through multiple ports for import or export. Charleston’s productivity compared to many other ports is a key selling point, with cranes able to lift 40-45 boxes an hour, truck turn-times of 30 to 60 minutes and operating costs less than $70 per shipping unit.
A large share of that growth is expected to come from exports such as refrigerated, agricultural and forest products, as well as plastic pellets from Texas.
In two or three years, South Carolina ports plan to receive a significant quantity of plastic pellets, as domestic energy feed stocks spur a rebirth in the petrochemical industry, Newsome said. He told reporters after his speech that shippers are willing to ship the pellets east by bulk rail for transfer to containers because Houston, which is not on a main east-west trade lane, does not have enough regular ship service to handle all the cargo. Big chemical exporters in the Gulf region, he added, are also looking to diversify their port base.
More private, rail-served transloading facilities in South Carolina, with dump pits, silos or warehouses that can take unit trains and reload the bulk product into empty containers, are needed to support those types of loads, the port director said. The port authority is willing to help businesses find large, low-cost land tracts (ideally about 200 acres) on the I-26 corridor between the port and I-85, in the western part of the state. Near-port land is expensive.
The port has benefitted in recent years from several new transloading facilities on port property and off-site. But these first-generation facilities for agricultural or forest products mainly have involved opportunistic companies finding small rail sidings and loading a few containers at a time by running a conveyor under the railcars.
SCPA experienced 17 percent growth in refrigerated cargo during fiscal year 2014.
Cold storage facilities to process poultry and pork into export containers, or beef and lamb imports into domestic refrigerated trailers, are popping up around Charleston. Within three years refrigerated warehousing in the port district will increase 10-fold to about 600,000 square feet thanks to several new investments. Lineage, for example, plans to open a 340,000-square-foot facility served by rail in the third quarter of 2015. Agro Merchants Group began operating a 140,000-square-foot facility with blast-freeze capability in July and tenant New Orleans Cold Storage is adding 92,000 square feet of space to an existing cold storage operation on port property. SCPA is paying for the $12 million expansion.
The Port of Charleston has made great strides the past four years in becoming an intermodal-capable port. Most intermodal cargo moving out of Charleston is trucked about 15 miles to facilities in North Charleston operated by Class I railroads CSX Transportation and Norfolk Southern, complicating modal interchanges. But the Rapid Rail Drayage program in 2012 and the opening one year ago of an inland port in western South Carolina have gone a long way to drive more rail usage.
Rapid Rail Drayage is a program through which port authority employees, for a fee, coordinate drayage dispatch between marine terminals and the rail ramps for all shipping lines. Having full control of all truck loads enables the port to operate a “virtual on-dock rail,” and match inbound and outbound loads with available equipment in each location to minimize empty backhauls.
Last October, the port authority christened a $45 million, 40-acre intermodal terminal in Greer that is served by Norfolk Southern. The inland port essentially brings the seaport 212 miles to the hinterlands, saving shippers in the region and neighboring states from the congestion and higher cost associated with trucking loads to or from the city. It also serves as a forward depot for the pickup and return of empty containers, as well providing off-dock storage space for containers and chassis, with lower per diem and detention charges.
The upstate region has a strong base of international manufacturers that make good candidates for short-haul intermodal. BMW’s auto plant in Spartanburg was the first major user of the facility. The inland port’s top commodities so far are auto parts, apparel, footwear, forest products and cotton, according to the port authority.
Gate moves in Greer have steadily increased each month from about 500 to almost 7,000 in September. Between last November and September, nearly 47,000 trucks moved in and out of the terminal’s gates.
Newsome claimed the inland port has already reached the volume of the Virginia Inland Port, which has existed in Winchester for almost 30 years. The Virginia facility’s actual throughput in fiscal year 2014 was 35,305 containers, according to the Virginia Port Authority. But because SCPA doesn’t publicly report actual container lifts on and off the train it is difficult to make a direct comparison. The volumes could be similar assuming several thousand trucks in Greer don’t have pick-up and drop transactions.
Newsome has previously expressed a goal of annually handling 100,000 lifts within five years.
Sixteen percent of Charleston’s container volume now moves via rail. By comparison, 34 percent of containerized cargo now arrives and departs the Port of Virginia by rail, the highest ratio for any East Coast port. But Newsome said intermodal will never exceed 20 to 25 percent of container traffic in the Southeast because there are not enough interior rail ramps to support the service.
“We’ve got to expand our cargo-generating hinterland, and the only way you do that is with rail,” Newsome said, pointing to Atlanta, Charlotte and Memphis as markets that could be better tapped in conjunction with rail partners.
Greer has the potential to serve as a logistics cluster for e-commerce, Newsome said in a phone interview. FedEx and UPS have facilities at the nearby Greenville/Spartanburg airport and the area is within 500 miles of 94 million consumers, with two major interstates crossing through it. The inland port could support distribution centers catering to online fulfillment and supplied with imported goods by rail from the port.
The port director is also targeting breakbulk cargoes—BMW sport-utility vehicles, nuclear power plant parts, gas turbines, and steel—to supplement the main container business because the margins are good. Containers account for 78 percent of port authority revenue. The state agency collects 16 percent of its money from general cargo operations and 6 percent from the cruise industry.
SCPA has invested in a mobile barge crane with a 500-ton-lift capacity for project cargo. The crane, owned and operated by Charleston Heavy Lift, began service in April. In 2010, the port authority invested $30 million to convert its Columbia Street Terminal from a container facility to a dedicated breakbulk facility.
Last year, Charleston handled 878,000 tons of non-containerized cargo, up 36 percent since the investment. The past two years have been the highest for breakbulk volume in more than two decades, according to the port authority.
Revenue Capture. In addition to volume growth, Newsome said the South Carolina Ports Authority needs to bring in more revenue through rate adjustments.
Port officials next year plan to seek fee increases of about $20 per container, Newsome told reporters.
The increases will coincide with new, simplified contracts for shipping lines that eliminate dozens of ancillary charges in favor of a flat-fee structure designed “to create more predictable costs for our clients,” he said.
The port authority currently charges a throughput fee for each box it receives, stacks and loads; a fee for checking the box in or out of the truck gate; and fees for services such as container storage, or moving multiple boxes to pull a container from a stack.
“We found that 90 percent of our invoices generated 10 percent of our revenues,” he said. Instead of billing carriers for each activity on an à la carte basis the port will provide an “all-you-can-eat buffet. You order whatever you want, and we’ll provide the service,” Newsome said.
The simplified contracts will make it much easier for carriers, which have cut back on administrative personnel in recent years, to bill their cargo customers for port expenses and budget for the upcoming year. It also creates an incentive for the port to operate smarter, he added.
Contracts will be based on each line’s volume not on the volume of their vessel-sharing partnerships.
The South Carolina Ports Authority is one of a small number of ports that operate terminals themselves rather than renting wharfs to private terminal operators.
The fee increases are an effort to restore pricing after several years of providing low-cost service. During the recession in 2009, Charleston lost an inordinate amount of cargo business and subsequently offered incentives to bring back liner carriers. Now that the port has stabilized its business and become one of the most efficient operations in the United States, it is taking steps to strengthen its financial results.
Newsome said gate costs in the future will be rolled into the cost of stevedoring services and the port will seek for the first time to charge chassis providers for space to store their equipment.
Putting responsibility for gate costs in the hands of stevedores that run the gates makes better sense, he told American Shipper, because the stevedores can consolidate their labor costs when billing the ocean carriers.
The port authority eventually intends to offer demurrage billing once enhancements to its information technology system are completed, which Newsome said will provide another revenue stream. The port that best knows the location of each container and carriers can outsource this cumbersome task in exchange for a share of the demurrage they charge shippers.
Some lines are more willing than others to support the rate hike.
“We think that’s reasonable if you have the best product in the U.S. port business, at the lowest prices today. I won’t say it will be easy, but it’s important to us to justify what we’re doing” for that incremental revenue, Newsome said.
52-Foot Harbor. The South Carolina legislature has committed $700 million toward Charleston’s infrastructure expansion—$300 million toward harbor deepening, $225 million for a new intermodal container transfer facility, and $170 million for an ICTF access road to a new container terminal being developed at the former Charleston Navy base.
The campaign to deepen the Port of Charleston beyond 45 feet to ensure safe passage of mega-size containerships achieved a major milestone Oct. 7 when the Army Corps of Engineers released its draft feasibility study and environmental impact statement.
For years the harbor-deepening debate centered on achieving a 50-foot draft, but the federal agency said it has accepted the locally preferred option for a 52-foot navigation channel that would make Charleston the deepest port on the U.S. East Coast. The bigger project would also cost $210 million more than earlier iterations.
“We want to be able to handle a fully loaded ship in the largest exporting region in the country without tidal restriction,” Newsome said in a phone interview.
Vessels with 8,000 to 10,000 TEUs of capacity are becoming the standard in the U.S. East Coast trade with Asia and Europe. The Port of Charleston already works an average of seven vessels up to 10,000 TEUs each week, but they cannot enter or exit fully loaded. Vessels enjoy a 48-foot draft at high tide. Ocean carriers cannot maximize economies of scale for big ships without full utilization and they don’t want expensive assets idle waiting for the tide to come in.
Newsome said the port authority wants to offer vessels a 24-hour turnaround, from the time a ship arrives at the pilot station on its way to berth to the time it drops the pilot off, and be able to lift 2,000 containers on and off the ship during that period.
The preliminary Army Corps plan calls for a 54-foot entrance channel at low tide with a 950-foot width, up from the current 47-foot depth. The entrance channel will be extended an additional three miles further to the ocean to achieve proper contour and allow water from the Cooper River to drain out, according to the port authority and the study.
The main channel up to the Wando Welch Terminal on the Wando River and the new Navy base terminal will be 52 feet at mean low water. Further up the Cooper, beyond the Navy base, the channel to the North Charleston Terminal will be dredged an additional four feet to 48 feet.
The turning basins for the Wando and new Navy terminals will be enlarged to 1,800 feet, while the North Charleston turning basin will be 1,650 feet.
The project also involves raising dikes in the inner-harbor areas to handle the new dredge disposal material and an expansion of the ocean disposal area for the outer-harbor spoils.
The new deepening plan is estimated to cost $510 million and provides the maximum net economic benefit to the nation in terms of transportation efficiency over 50 years.
The Army Corps’ benefit-cost analysis, however, identified 50 feet as the best option when construction and maintenance costs are factored. A 50-foot project is priced at $437 million. Army Corps policy is to select the least-cost alternative if the economic benefits are close. South Carolina sought, and was granted, a waiver to go to 52 feet.
The port authority and the state could be responsible for covering the $73 million cost of dredging an additional two feet, although Newsome said the difference is to be negotiated. Assuming the federal government accepts the normal 60/40 cost-share formula for deepening, the federal contribution could be $29 million.
One reason for the Charleston deepening project’s extra cost is that the Army Corps discovered the entrance channel is harder than previously thought and will require a cutter dredge to break up the material. On the positive side, it is expected to silt up less in the future, according to Newsome.
The recently authorized dredging project for the Port of Jacksonville, by comparison, will cost $684 million to take the channel from 40 to 47 feet. The Army Corps there opted for a 45-foot project and local sponsors will cover the cost for the extra two feet. The Port of Savannah river-deepening project from 42 to 47 feet is estimated to cost at least $706 million.
The Army Corps annually spends about $13 million to $15 million in maintenance dredging. The expanded harbor will cost an additional $3.5 million to maintain. Under current law, the federal government pays for all maintenance of navigation channels up to 50 feet.
Newsome said going to 52 feet is important because fully loaded 10,000-TEU ships have a 48-foot draft and a 52-foot harbor provides a 10 percent under-keel clearance without tidal restrictions.
Experts eventually expect container lines to introduce 13,000- to 14,000-TEU vessels to the East Coast, possibly after raising the Bayonne Bridge at the Port of New York and New Jersey is completed in about two years to allow passage to inner harbor terminals.
Vessels taking the Panama Canal or Suez Canal routes are likely to look for a Southeast port to load with exports because of the manufacturing boom and large agricultural production in the region. Export containers on average are nearly twice as heavy as imports, making the extra depth crucial for fully utilizing a vessel’s capacity.
“We want to be able to handle a fully loaded vessel in the largest exporting region in the country without tidal restriction,” Newsome said.
A month earlier, Newsome had touted Charleston’s future ability to offer a six-foot draft advantage at 50 feet, enabling carriers to handle another 1,000 loaded export boxes per week, or 52,000 containers a year, and also increase port revenue.
Officials changed their thinking about the harbor’s desired depth as carriers continued to place orders for larger and larger vessels, he said.
South Carolina has escrowed $300 million to cover the local sponsor’s share of the project. State officials were even prepared to use any remaining funds to cover the federal portion of the project and then seek reimbursement rather than waiting for Congress to appropriate funds. A provision in the new Water Resources Reform and Development Act gives local sponsors the flexibility to self-finance construction without further congressional authorization to keep projects on pace, but there is no guarantee of reimbursement.
A final recommendation on the deepening project is expected to be completed by the Army Corps’ chief engineer in September 2015. The Chief’s Report is essentially the blueprint for construction.
Port authority officials expect to begin construction shortly thereafter by advancing the $300 million and financing the rest of the project, if necessary. They express confidence that necessary federal funding will be provided because the Charleston deepening has been put on a fast-track as part of the White House’s “We Can’t Wait” initiative to speed up permitting and reviews of critical national infrastructure projects.
The feasibility study for a project of this magnitude normally takes five to eight years and costs about $18 million to $20 million, according to the Army Corps. The entire study will now take four years and cost $15 million, half of which is funded by SCPA.
The Army Corps’ decision “recognizes that the Southeast needs a 50-foot or deeper harbor. We believe the federal government has now decided that it’s necessary to fund their share of harbors that have merit, so we believe we will qualify for significant federal reimbursement,” Newsome told American Shipper.
Additional cost savings may be identified during the preconstruction engineering and design phase, the port authority said in a statement.
He noted that the cost for environmental mitigation is only about $35 million, or 7 percent of the total, compared to some projects where the environmental component is as much as 50 percent of total cost.
“For the cheapest cost we can get the deepest harbor in an environmentally responsible way,” he said.
The Charleston deepening is expected to be completed in 2019, barring unforeseen circumstances, Newsome said.
Infrastructure Investment. The 286-acre container terminal under construction, which will be able to accommodate three large vessels at once, has a price tag of $800 million. State-owned Palmetto Railways is developing the dual-rail served, intermodal container transfer facility adjacent to the new Navy base container terminal.
Newsome said the port authority will finance the balance of the terminal costs through traditional borrowing in the bond market and by bringing in private equity investors.
“There are several firms that are interested in investing in this space. And we’ll hope to do a deal with them,” he said, pointing to pension funds that like infrastructure as an investment vehicle because of the consistent returns they generate.
Rather than offering a concession agreement to a consortium consisting of an investment firm partnered with a private marine terminal operator for exclusive use of a terminal, the port authority is looking for company that will invest in modernization.
“The difference is we want to operate the port,” Newsome said after his speech.
This article was published in the November 2014 issue of American Shipper.
