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Excess Capacity Trumps East Coast Port Battles for Investment

U.S. East Coast seaports have a serious overhang of unused terminal capacity. The Port of Charleston handled about 1.4 million 20-foot equivalent container units last year, just 38 percent of its available capacity of 3.7 million TEUs. At Savannah, the 2.9 million TEUs handled left some 40 percent of its terminal capacity unused. The Port of New York and New Jersey has a maximum capacity of 12 million TEUs, but handled only 5.5 million TEUs last year, according to figures provided to The Journal of Commerce.

At the roughly 4 percent cumulative annual growth over the past decade, the port said it would take 23 years to fill its available capacity. Terminal operators at New York-New Jersey were said to have taken a big financial hit in contract renegotiations with carriers over the past few years, with a terminal executive telling me at last month’s Trans-Pacific Maritime Conference that terminal rates at the East Coast’s largest port are unsustainable, a term usually applied to depressed ocean rates.

“There is a lot of excess capacity in the system,” veteran port consultant John Martin told the JOC. “It’s due to the fact that the projections developed in the 2000s were for double-digit growth ad infinitum, and we really see now how that isn’t the situation.”

It’d be one thing if the overcapacity were simply a result of East Coast ports over-expanding based on earlier, more optimistic trade growth assumptions with no more expansion planned for the foreseeable future. But as The Atlanta Journal Constitution reported in a recent front-page series of articles examining plans to deepen the Savannah River, that’s far from the case. According to a survey by the paper, 10 ports along the East Coast will be upgraded over the next decade at a total cost of $15 billion.

Given all that planned investment, the paper asked, “Is all the additional port capacity needed? Will U.S. ports cannibalize each other at the expense of taxpayers?”

The conclusion of the series, written by Daniel Chapman, is that, at the very least, there are serious questions as to whether all this expenditure is needed. Annual growth projections have ratcheted down from the 7 to 9 percent range before the 2008-09 financial crisis and recession to 4 to 5 percent today, and as Martin said, ports increasingly need to consider near-sourcing of production of consumer products such as clothing.

Then there’s the uncertainty surrounding how much container cargo will be diverted to the East Coast following the 2014 expansion of the Panama Canal to handle ships up to 12,000 TEUs. While some believe the East Coast will see a windfall of new volume as bigger ships arrive carrying more cargo, others believe West Coast ports and railroads will aggressively seek to preserve their market share. Under that latter scenario, ships arriving on the East Coast would be bigger, but the amount of incremental volume the East Coast eventually sees would be minimal.

All this means it’s about time for a reassessment. The series investigates the increasing disconnect between the state-driven pursuit of port expansion as a growth driver and competitive advantage over other states, versus the growing realization that such a system promotes unnecessary expense in an era of scarce resources.

A congressional moratorium on earmarks has put the brakes on the traditional mechanism for funding of port deepening, while Sen. Lindsay Graham, R-S.C., has proposed legislation calling for a more national assessment of which ports should get deepened.

“Without a national strategy, critics say, there will be too many ports and terminals serving too few customers and too much cost to taxpayers,” Chapman wrote.

The uncomfortable truth is ports aren’t necessarily pursuing more cargo, but instead are seeking to attract bigger ships in hopes of preventing those ships from going elsewhere. Ports’ desire to deepen for bigger ships is driven as much by the need to accommodate the ever-larger ships carriers are deploying — and not losing those ship visits to competing ports — as it is by a desire to increase trade and the jobs that go with it.

Chapman cited the Army Corps of Engineers’ economic impact study on the deepening of the Savannah River to 48 feet, which predicted “no additional cargo volume through Savannah harbor as a result of the proposed harbor deepening.” In other words, the benefits of the deepening would come through lower costs for shippers resulting from greater economies of scale achieved by the larger ships.

Martin, the port consultant, said the issue with East Coast port capacity is really about accommodating the needs of the larger ships, such as ensuring cranes can reach across more containers stacked on deck, rather than being able to handle more containers at the terminals.

Summing up the series, a former Army Corps’ economist said of the ports’ rush to expand: “It’s an arms race. All these ports want to be deepened because nobody wants to lose. But there’s so much uncertainty in the industry that nobody knows if these will be good bets or bad bets.”

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him on Twitter at twitter.com/PeterTirschwell.

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