Contender or pretender?
U.S. East and Gulf coast ports vie for new Panama Canal trade flows, but may not share equally in spoils.
U.S. ports from New York to Galveston have spent the past six years positioning themselves to attract a new wave of container traffic expected with expansion of the Panama Canal by late 2014, when a new lane doubles capacity and ships two-and-half-times the current size limit are able to transit the narrow isthmus.
Port authorities are working overtime to win federal and private funding to dredge channels, build on-dock rail and expand terminals to accommodate the bigger vessels and extra cargo flow. Billions of dollars in investment have been spent or are on the drawing board.
As trade growth has waned, they have their eye on stealing a portion of the West Coast’s cargo base. Drewry Supply Chain Advisors in late 2008 estimated that West Coast ports could lose 25 percent of their inland intermodal cargo (more than 3 million TEUs) originating in Asia to East and Gulf coasts ports in the following decade.
Many analysts and industry officials, however, believe only a small number of U.S. ports will be able to handle the 12,000-plus-TEU ships. They say other ports need to dial down their expectations and consider becoming niche ports for other commodities or secondary ports that can receive feeder vessels in the 4,000- to 6,000-TEU range from offshore load centers.
Experts also argue that many ports do not have the demand to justify 50-foot drafts because they serve regional markets and not the interior of the country.
‘In some ways the great recession may have saved them from themselves because I believe that had all those investments that were being talked about in 2005-06 been made, you’d be looking at average per container costs probably doubling or tripling,’ said Laurie B. Mahon, who led the international engineering team advising the Panama Canal Authority on its expansion project.
‘So one of the things we’ve seen with the recession, as people are putting port expansion plans through a different microscope, is that people are starting to realize strategically that we’re going to see ships coming to the East Coast and no longer making three, four or five port calls. They’re going to make one call where they drop the bulk of their cargo and then they’ll make a second call probably to pick up’ outbound cargo, she said during a mid-January presentation at the Transportation Research Board’s (TRB) annual convention in Washington.
Experts also say large vessels might drop import cargo at a secondary port that has less of a draft requirement once the vessel is not fully laden and rides higher in the water.
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‘That completely changes the planning structure of many ports on the East Coast and it highlights the fact that we don’t have a national port policy. We don’t even have regional port policies, and in some states like Louisiana, we don’t even have a state port policy,’ said Mahon, a former Wall Street investment banker specializing in infrastructure and project finance.
Critics, such as Mahon and Tampa Port Director Richard Wainio, say that without federal direction ports are fighting over scarce resources and upgrading in ways that don’t necessarily address national freight needs.
‘We have ports competing against each other for traffic at a time when actually that competition is probably international and not really national,’ Mahon said.
Making matters worse, she added, is a broken U.S. dredging program that doesn’t strategically allocate funds to the most critical projects.
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The U.S. Army Corps of Engineers has a multiyear backlog of projects on its schedule and is plagued by lengthy environmental reviews and a haphazard congressional funding process, according to maritime industry representatives. Most funding is the result of special earmarks inserted in legislation by lawmakers to help their districts.
‘It’s a very politicized process. The squeaky wheel gets the dredge,’ Mahon said.
Wainio says ports with 43- to 45-foot channels have enough depth to serve 6,000- to 8,000-TEU vessels, which are expected to be predominant on canal routes.
The uncertainty about federal priorities for ports, as well as rail and highway connections, makes it difficult for investors to decide which projects are worth supporting. The lack of clear direction was compounded last year when the multiyear surface transportation reauthorization bill stalled in Congress. The Obama administration says it wants to maintain the current spending levels until 2011 so it can develop infrastructure policy and financing reforms.
Government and industry officials acknowledge that hundreds of billions of dollars in upgrades are needed for the nation’s long-neglected transportation system, but agreement breaks down on how to finance the effort. Some states want more leeway to toll cars and trucks on interstate highways.
That is the type of indirect factor that investors would want to know about, Mahon said, because it could influence the cost of certain international supply routes and the competitiveness of certain ports trying to attract shippers.
Although credit markets are still very tight and lenders much more cautious in the wake of the recent financial crisis, Mahon said good projects can still get financing.
In spite of all the preparatory activity, there are some who believe the immediate impact of the Panama Canal on East Coast ports will be much less than advertised.
‘My theory is that it will be a small change, at least in the beginning. It’s not some kind of game changer, but a bump’ in volume for the East Coast, said Asaf Ashar, a research professor at the University of New Orleans’ National Ports and Waterways Institute, and an independent consultant based in Washington.
Some vessel services will switch ports of call, ‘but there will not be a dramatic shift.’ The big movements are already locked in by large shippers who have located their distribution centers around Norfolk, Savannah and Houston, he said in an interview. The big retailers have perfected their supply chain software and organization to the point that they know the status of inventory at all times and are more concerned with reliability than speed of delivery. The depreciation of time value means they aren’t willing to pay an intermodal premium of several hundred dollars to save a few days transit time.
‘There are so many unknowns right now that the only thing that is known is that the Panama Canal will be expanded. We don’t even know the status of U.S.-China trade in three years,’ so predicting which ports will gain new container business is premature, said Bruce Lambert, executive director of the Institute for Trade and Transportation Studies. ‘Some people will win more than others,’ he acknowledged.
The institute is the freight research arm for several state departments of transportation in the Southeast.
Among the variables under watch by analysts are:
‘ The economic state of the wounded liner industry in several years and whether carriers will have the wherewithal to add services. Industry experts believe the canal initially will handle fewer services and transits as carriers consolidate cargo from Panamax to post-Panamax vessels.
‘ The likelihood that West Coast ports and (possibly) railroads will become more aggressive on pricing to recapture intermodal freight being diverted to other ports. (Railroads have become much more disciplined in recent years and must consider a host of complex factors when it comes to rates. Other factors may outweigh rates in shippers’ minds and railroads may find it uneconomical to lower rates.).
‘ Competition from the Suez Canal, and new ports in Canada and Mexico.
‘ The potential for the International Maritime Organization to issue stricter emissions standards for vessels, requiring the use of cleaner fuels and technology, adding to the cost of vessel owners and operators.
‘ The lingering impact of the recession on demand.
‘ More production in China relocating closer to market in Central and South America.
‘ Fuel prices.
‘ Whether the Panama Canal will stick with its announced schedule for toll rates, which increased last spring from $63 to $72 per TEU for laden containers and from $50.40 to $57.60 for empty boxes. Canal officials so far have resisted calls from struggling ocean carriers to reduce toll rates. The maritime industry paid $1.32 billion in tolls to transit the Panama Canal in 2008. The container line segment paid the lion’s share of the tolls, $712.5 million, up from $646 million in 2007.
The rise in tolls, from about $40 per TEU to $72 per TEU since 2003, has halved the $65 saved in voyage costs by using larger vessels, thereby only improving the relative position of all-water by about $30 per TEU versus intermodal, excluding non-operational factors such as port and cargo handling fees, administrative costs, labor issues, and local regulatory burdens on the West Coast that favor the all-water route, according to Ashar.
He said the all-water content of the eastern U.S. import market may increase a few percentage points by pushing west another 50 to 100 miles the 300-mile band from the coast that roughly marks the dividing line for shippers optimizing costs and transit times between intermodal rail from the West Coast and direct ocean transport to the East Coast. There also may be a slight increase in higher value goods moved by ocean mode.
‘So the effect is to increase the density within the area that’s already all-water and maybe increase its penetration,’ he said.
With so many competitors beyond the traditional import hub of Los Angeles-Long Beach ‘ Oakland, Prince Rupert in Canada, Seattle-Tacoma, Punta Colonet planned for Mexico’s Baja region ‘ it’s hard for East Coast ports to gain market share and to predict the ultimate winners, Ashar said.
‘I think too many consultants and others have been basically indicating that you are going to have a doubling of container moves over the next 10 or 20 years. They say, we collectively on the East and Gulf coasts don’t have the capacity to handle this expansion, you have to build new greenfield container terminals. I don’t believe that,’ Wainio said during a webinar last October held by the Federal Highway Administration.
‘I believe that basically our ports in the East and the Gulf have the latent capacity to be able to handle the kind of demand we see well into the future. I mean capacity that we can fairly quickly bring into play by expanding current facilities, improving productivity, having labor work an extra shift, adding better equipment, improving the processes so they can greatly improve productivity at the ports. And, then you have many ports who have land, they can quickly develop into container facilities.
‘And so the bottom line is, I am not sure if you have to spend the kind of money some people are contemplating to get the capacity you need in the future. There are easier ways, perhaps, to do it,’ Wainio said.
Nonetheless, there are many ports that have a head start in the container trade sweepstakes. Shipping line executives say the principle ports ‘ with the demand density to load most vessels and the land connectivity to move the shipments to consumer markets ‘ will be:
‘ New York-New Jersey in the Northeast.
‘ Norfolk, Va.; Charleston, S.C.; Savannah, Ga., in the Southeast.
‘ Houston in the Gulf.
What follows is an attempt to handicap the prospects of several ports for attracting cargo and raising capital for large expansion projects, based on public comments by industry experts and interviews.
Contenders
The Port of New York-New Jersey, the third-largest U.S. seaport, is widely considered one of the destination points for the new class of mega-containerships because of its huge regional market. It has been adding road access, modernizing and expanding its on-dock rail system, and dredging the main channel from 45 feet to 50 feet in phases. In 2009, it planned to spend $2 billion over two years on these capital projects.
The port is also planning on building a 110-acre container terminal and an intermodal facility adjacent to the Global Terminal at the site of a former automobile terminal in Jersey City.
The port’s ability to receive super-size containerships, however, could be delayed until it can resolve a clearance issue with the Bayonne Bridge connecting Staten Island and Bayonne, N.J. The 151-foot clearance below the bridge prevents 7,000-TEU ships from calling the port’s main container terminals in Newark and Elizabeth, N.J., as well as Staten Island.
The port authority has been studying whether to modify or replace the bridge, but faces a second bridge dilemma at a time when its consolidated revenue stream ‘ tolls from tunnels and bridges, airport fees, marine terminal leases ‘ has significantly decreased. The 82-year-old Goethals Bridge is crumbling and the agency wants to replace it by 2016 with a modern design that can handle more traffic. Construction costs are estimated to be $1 billion, but officials have not yet determined the final project cost.
In the meantime, the port authority has begun a $63-million rehabilitation project to replace the deck’s steel and concrete layers. With limited resources, the port authority has to make a choice between addressing the Goethals Bridge, and blocking the entrance to the harbor, or raising the Bayonne Bridge.
Total project cost of modifying or replacing the Bayonne Bridge could range from $1.3 billion to jack up the bridge to $2.2 billion to build a new bridge, according to a U.S. Army Corps of Engineers’ study last August. A bored tunnel option would cost about $2.2 billion to build, and an ‘immersed tunnel’ about $3.1 billion.
Immersed tunnels are composed of prefabricated segments that are constructed elsewhere and floated to the tunnel site to be sunk into place and linked.
Mahon said many people in the maritime and logistics industry incorrectly presume that New York-New Jersey is ‘too big to fail,’ and will find a way to deal with the Bayonne Bridge air draft and dredging because of the port’s importance to the regional economy. Normally, that might be the case, but with the steep drop in revenues and a large list of safety-related public works projects to address, the port authority is concentrating its capital budget on keeping facilities in good repair. The Goethals Bridge has been afforded higher priority and will get addressed first, meaning the Bayonne Bridge will have to wait its turn.
The port authority has said the Bayonne Bridge could take at least 10 years to complete because of the lengthy environmental reviews and permitting, the need for further studies and cost-benefit analyses, environmental and transportation impacts and the lack of identified funding sources. Officials are holding out hope that a new study might validate the possibility of changing the bridge into a lift bridge so the center section could be raised ‘ a fix that might be cheaper and more quickly accomplished.
The Port of Virginia already has a natural harbor depth of 50 feet and by July will have double-stack intermodal rail access to Columbus, Ohio, thanks to a Norfolk Southern expansion project. CSX Transportation, the other major eastern railroad, also is working on raising tunnel clearances for double-stack trains connecting the port to the Midwest.
The downturn in container trade has pushed back plans to build a large terminal on dredge fill until next decade. The state of Virginia, which already has had success attracting private capital for infrastructure projects, is weighing a huge concession deal to privatize its three self-operated marine container terminals and an inland intermodal terminal in Front Royal. The Virginia Port Authority also is negotiating to lease a modern facility from APM Terminals, which opened a $450 million private terminal near the state-owned facilities in 2007. The port authority expects better coordination and customer service by controlling all four terminals in the Hampton Roads area.
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| NYK vessel docked at the Port of Savannah. |
The ports of Charleston and Savannah will likely be first ports of call for many carriers, Mahon and others predict.
The South Carolina State Ports Authority plans to build a 280-acre terminal at a former Navy base. At full build out the new terminal is expected to increase Charleston’s port capacity by about half, or 1.4 million TEUs, to about 4.2 million TEUs. The $750 million project has been stretched out due the economy, which has led to a 40 percent drop in box volume during the past two years. Charleston’s harbor is 45 to 48 feet depending on the tide.
The South Carolina authority, along with the Georgia Ports Authority, is planning construction of a major new terminal in Jasper County, just downstream from Savannah.
Savannah’s advantages include superior rail and highway access, a large concentration of nearby retail distribution centers that serve as magnets for cargo vessels, and good state labor laws.
The Georgia Ports Authority is trying to get approval and funding to deepen the Savannah River channel from 42 to 48 feet. The project is estimated to cost up to $650 million. The port authority’s goal is to have the deepening completed before the opening of the expanded Panama Canal. continue.