Out of the Woods? No Way

As industry chatter picks up about possible diversion of cargo away from West Coast load centers, it’s not as clear to me as it is to some that West Coast port volume will continue to decline in favor of East and Gulf ports. Although raising, and even dwelling on the possibility may be a good idea as an attempt to keep West Coast labor in line, or to make the case for East and Gulf Coast ports as alternatives, it probably is not a good bet for the long run.

That’s because over the long term, the cost of oil, and so of fuel, is likely to rise — note the recent change in the bunker surcharge — and so the shorter West Coast transit times will reassert themselves as a driving factor, and rail rates will find more mutually agreeable levels. That’s to say nothing of potential East Coast labor problems.

As a result, I expect West Coast ports to maintain their dominant volume position for years to come and for distribution patterns across the continent to remain largely in place.

This issue has received a lot of attention over the past year or so, and many interests will no doubt keep stoking the fire. But it all smells like a red herring to me and, to my mind, should already have run its course. Surely, it is time to move on to more meaningful matters, like the sorry state of our business.

The absence of a significant peak season in 2009 — we didn’t have a great one in 2008, either — is important, not only because volume remains below not only past years’ levels, but also below levels where carriers can make a profit.

And some carriers are still making moves that are hard to figure, including deploying massive ships loaded far below capacity.

But let’s look beyond all of this to another component of our industry’s travails. If the past is any indicator of what we can expect, and I believe it is, the industry’s troubles aren’t over yet.

Historically, the busiest time of year in container shipping is the four or five months from June or July through October or into early November, known as the “peak season,” or for wholesalers and retailers, the “back-to-school” or “holiday” season.

A second, less busy but still significant period for rising volumes typically occurs before Chinese New Year in Asia, as factories push out orders to meet deadlines just before the 10- to 14-day holiday period. It typically takes some time at the end of the New Year celebrations to gear production back up. This was especially true this year as many factory workers, who had gone home for the holiday, did not return because of factory closures.

Assuming this pattern holds for the rest of 2009 and into early 2010 (Chinese New Year’s Day 2010 coincides with Valentine’s Day), no significant uptick in cargo volume is likely until March or April 2010, or later.

This is surely an ongoing problem for ocean carriers, which are working diligently to restore some sensibility to their rates and service, even if there is a range of approaches, good and bad, to this process.

It also is an issue for retailers, which have to be especially careful in the management of their ordering process. Order too much and slow retail sales will exacerbate excess inventory problems; order too little and be stuck without sufficient stock to satisfy what appears to be the early stage of retail recovery and increasing consumer confidence.

Among those industry constituents certainly watching the situation carefully are the private equity outfits that invested billions of dollars in ocean terminal assets earlier this decade. These investments were, at least in part, based on a calculation that said cargo volume would grow on a perpetually upward curve. In the words of the old song, “Oops, there goes another rubber tree plant, ker-plunk.”

Where are the analysts now and what are their explanations? What do the return-on-investment calculations look like at the end of the third quarter? What are the prospects our industry can recover enough for these investments to return to a positive footing? And if it does not, from where will the capital for future investments come?

Of course, we won’t need much new infrastructure for a few years, not at least until we catch up with what we’ve already built.

Barry Horowitz is the principal at CMS Consulting Services. He can be contacted at 503-208-2232, or at barryh@cms-cs.com.

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