The shift of container shipping services toward U.S. East and Gulf Coast ports and away from West Coast ports is far from over, according to industry veteran John McCown, founder of Blue Alpha Capital and former CEO of liner company Trailer Bridge.
During a discussion presented by investment bank Stifel on Dec. 6, McCown noted that the East/Gulf Coast share of container imports among the top 10 U.S. ports has risen from 43% in 2015 to 47% this year. “I see that trend continuing to play out,” he asserted.
Panama Canal plus U.S. population
Two factors are fueling the transition: the larger locks of the Panama Canal, which opened in June 2016, and location density of the U.S. population.
“Ships [serving the East Coast] are now 58% larger than they were [prior to canal expansion],” he said. “That’s changed the economics of moving all-water to the East Coast. What used to be a really meaningful difference in the size of ships [calling at the West versus East Coast] has been fully mitigated. The ships are now the same size.
“The cost of moving freight by water is geometrically less than moving it by land,” he continued, estimating that it costs less than a $0.05 per 40-foot-equivalent unit (FEU) per mile (FEU-mile), versus “easily $2 by truck and close to $1 by rail.”
Ocean transport allows shippers to more cheaply move cargo to where their buyers are. “If you look at the density of the U.S. population relative to the coasts, it’s simply a closer distance to the U.S. East and Gulf Coasts – 76% of the population is closer to these coasts than to the West Coast,” he said.
“I don’t think it’s going to swing quite that far,” he added, referring to the current 53-47% West versus East/Gulf Coast split. “But we’ve been seeing a swing of 80-90 basis points [0.80-0.90%] per year in that direction [i.e. away from the West Coast ports] over the past three or four years and that will continue for a multi-year period,” McCown predicted, noting that Long Beach, California and Seattle/Tacoma, Washington have been particularly hard-hit by the coastal transition.
More room to grow
The East and Gulf Coast ports securing the most cargo growth in the years ahead are likely to be those that offer the best distribution center (DC) options for cargo shippers, he opined.
“Savannah has been a real out-performer because it realized that having large DCs around the port and marketing to the Walmarts and Home Depots and Amazons of the world rather than the carriers is the best strategy. You also see that in Houston.”
A key advantage going forward will be availability of land for DCs and other facilities. The largest ports are “often located in very large cities and those cities have grown up around them,” he said, noting that smaller up-and-coming ports such as Jacksonville, Florida are showing promise because they don’t face the same land constraints.
Trade-war impacts
McCown also commented on the trade war – how it is impacting overall inbound U.S. container traffic and how it relates to the East-versus-West-Coast issue.
He noted that the top 10 U.S. ports account for 90% of inbound containers, with 65% coming from Asia and 42% from China. He cited a “very meaningful impact from the China tariffs in October,” with the U.S. ports posting an 8.5% year-on-year decline in inbound container volume.
As previously reported by FreightWaves, there was significant “frontloading” of U.S.-bound cargoes in second half of 2018 as shippers sought to bring in boxes prior to potential tariffs. One possible reason for the sharp decline in October 2019 might be that the “comps” are getting tougher due to frontloading behavior the year before.
This dynamic is very evident in container-shipping prices tracked by the Freightos Baltic Daily Index. Over the past six months, pricing on the China-to-U.S. West Coast (SONAR: FBXD.CNAW) route has been much lower than in the same period last year, but roughly on par with the second half of 2017.
To the extent there was frontloading to avert tariffs, McCown said it would almost certainly involve shipments to California or Washington state “because there would be two to three weeks more transit time to the East Coast and if you’re trying to get there before an increase in tariffs, you’re always going to defer to the West Coast.”
Blue Alpha’s data shows that in October 2018, inbound container volumes to U.S. ports increased by about 14% versus October 2017. Those gains were indeed driven by the West Coast, where volumes were up about 17% in October 2018 year-on-year, with the East Coast volumes up by just under 10% that month.
Fast-forward to this October and the trend reversed: West Coast inbound volumes were down by almost 15% year-on-year and East Coast volumes were down by only around 2%.
As long as the trade war persists, the East Coast will have several advantages, believes McCown.
“More of the trade on the East Coast is tied to Europe and South America, which isn’t really affected by the current tariff situation. Also, the tariffs are driving imports [from China] to places like Vietnam. The more you move into Southeast Asia, the more it becomes geographically closer to the East Coast by shipping westbound through the Suez Canal,” he said. “So, all else being equal, the [trade war] situation favors the East Coast relative to the West Coast.
Asked whether an end to the trade war would shift the pendulum back to the West Coast, he maintained that it would not. “I don’t see it going back. I think it’s a structural change,” he said.
“Between the expanded Panama Canal and the bigger ships and the increased use of the Suez Canal from Southeast Asia, you’re going to see more volume to the East Coast. This will have an impact on both trucking and rail firms, and I think you will continue to see this transition play out for years to come. Supply chains don’t adjust overnight.” More FreightWaves/American Shipper articles by Greg Miller
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