Bad shipper experience could result in long-term cargo diversion, according to port economist John Martin.
The recent West Coast port slowdown over labor issues was more damaging economically and will result in more permanent cargo diversion to the East and Gulf Coasts than the 10-day lockout of longshoremen more than a dozen years ago, prominent port economist John Martin predicted Tuesday.
“I believe the damage is probably even more significant than the shutdown in 2002” because port productivity was crippled for a prolonged period and many shippers incurred serious increases in inventory carrying costs, Martin said following a presentation at the American Association of Port Authorities’ spring conference in Washington.
In addition to stocking extra inventory and paying more for alternative transportation options, retailers lost sales and had to discount goods that were out of season, as detailed in American Shipper’s Port Disruption Damage Ticker.
Negotiators for the International Longshore and Warehouse Union and the Pacific Maritime Association in late February tentatively ended over nine months of contentious talks by agreeing on a new five-year contract for 29 ports on the West Coast. During the last four months of negotiations, the ILWU dispatched fewer crane operators and other dock workers in an apparent attempt to gain leverage over waterfront employers, resulting in massive backlogs of containers on the wharves and ships in the harbor waiting for a berth. Importers faced delays getting their goods to stores in time for the holiday and spring selling seasons, and exporters lost revenues from canceled sales and spoiled products when they couldn’t fill overseas orders in a timely manner. Large importers were able to reroute some cargo to other North American ports, or use airfreight, to avoid the congestion, but the measures increased transportation costs.
The ILWU rank-and-file is expected to vote within a few weeks on whether to ratify the new contract.
There is no hard-and-fast data about the actual economic impact of the 2002 port disruption. Then, as now, many sectors and individual companies suffered from the delays, but some of the extra expenses and lost revenue were simply transferred to other U.S. ports and transportation providers, reducing the overall impact on the U.S. economy at large. In 2006, the Congressional Budget Office pegged the economic cost of a one-week shutdown at the ports of Los Angeles and Long Beach, plus a three-week recovery, at about $2 billion. A similar estimate today would likely be larger to account for a bigger economy.
Experts believe that over time the 2002 shutdown, combined with rate hikes for intermodal service, caused West Coast ports to lose about 10 percent of market share to East Coast counterparts as shippers, scarred by the experience of cargo held hostage, sought to diversify their import gateways.
Martin said chances are greater today that shippers seeking increased reliability will permanently divert more of their Asia imports to East Coast and Gulf ports because there is “more elasticity in the system with respect to all-water services,” which makes it easier to substitute ocean transport via the Suez and Panama canals for intermodal service off the West Coast to reach consumers in the Midwest or further east.
“Back in 2002, there were not a whole lot of all-water services,” he said during a question period following his presentation.
Martin has his finger closely on the pulse of the container business in North America. His firm, Martin Associates, has conducted hundreds of market and expansion feasibility studies for ports in the past 20 years.
As container lines improve their speed and increase direct routings to the East Coast and Gulf Coast, the difference in transit times compared to intermodal will narrow and make the all-water routes more attractive, said Martin.
“I think there will be much more structural shifts than we saw in 2002 provided the East Coast and Gulf Coast ports are prepared to handle the cargo,” he said.
The ports of New York-New Jersey and Virginia, in particular, have experienced severe congestion themselves for the better part of 18 months due to outdated work practices and infrastructure that aren’t equipped to meet cargo peaking associated with the arrival of much larger vessels.
Several factors, including East Coast congestion, could dampen any potential market shift, Martin cautioned.
For one thing, West Coast terminal operators, ports and labor could collaborate on operational improvements and offer incentives to make container ports there attractive again to beneficial cargo owners.
The other big outlier, Martin said, is intermodal pricing. Transcontinental railroads significantly hiked rates in the middle of last decade as old contracts expired, driving some shippers to ocean transport.
Competitive rail rates would make it easier for shippers to stick with the mini land-bridge option.
“I think there’s probably more incentive for western railroads to be more flexible than they were back in 2005,” Larry Gross, a senior consultant on rail at FTR Associates, said in a phone interview.
Gross stressed that he had no knowledge about railroad pricing decisions at the moment, but added, “I think that there is some ability to affect routing at this point via rates.”
Also left unsaid is how the price of fuel and new toll rates for the Panama Canal will influence vessel routing decisions and shipper preferences.
According to a new original research report from American Shipper, Won’t Be Fooled Again: How BCOs Plan to Avoid the Pitfalls of West Coast Port Congestion, many beneficial cargo owners are actively seeking long-term shifts of their cargo to U.S. East Coast ports.
Expert says West Coast port disruption worse than 2002 lockout
