LA-LB warned fee hikes could accelerate share loss

LA-LB warned fee hikes could accelerate share loss

Capturing and scrubbing ship emissions is just one of the many ways the ports of Los Angeles and Long Beach improve air quality.

Los-Angeles-Long Beach’s loss of market share could accelerate if environmental and traffic mitigation fees increase further, increasing the benefit some beneficial cargo owners are finding via of routing through East and Gulf coast ports.

“Los Angeles-Long Beach are likely to face ongoing competitive challenges from East Coast routings even in the absence of additional environmental compliance costs,” Philip Davies, principal, Davies Transportation Consulting, told the Metrans conference in Long Beach. The impact of any new environmental costs on top of existing fees “will depend on the extent to which they increase overall costs for containers through POLA/POLB,” Davies said.

Davies referred to an air quality program proposed by the South Coast Air Quality Management District that is estimated to result in $15.7 billion in incremental costs on freight transportation over the next 14 years. The regulating agency proposed that the costs be covered largely by user fees. The AQMD in one proposal suggested a $35 per TEU, and another proposal called for a $100 per-TEU fee.

Davies’ study of port competitiveness and elasticity is timely because yet another cost to freight, the ports’ latest version of their Clean Air Action Plan, is due to be released soon and presented to the harbor commissions in early November for approval. The CAAP 3.0, the third iteration of the landmark 2006 clean-air plan, by some estimates could come at a cost to terminal operators of $14 billion by 2035.

Los Angeles-Long Beach, largest US port complex, in 2016 handled 10.4 million laden TEUs, or 25.6 percent of total US laden containers. However, its market share has eroded steadily since 2002 due to a combination of factors. Labor disruptions in 2002 and 2014-15 generated a massive push by retailers to locate large distribution centers near East and Gulf Coast ports. Intermodal rail rates through West Coast ports have generally gone up over the past decade while ocean shipping rates to the East Coast have gone down compared with West Coast rates as ship sizes on all-water services to the East Coast increased.

The combination of declining East Coast all-water ocean rates caused by capacity increases, and the refusal of railroads to counter by lowering their intermodal rates from the West Coast, is improving the competitiveness of East Coast ports in serving interior destinations. Carriers beginning in June 2016 more than doubled the size of their East Coast vessels from 5,000-TEU capacity before the canal was widened to 10,000- to 14,000-TEU capacity. Vessels on West Coast services have been at the higher level for the past five years. As carriers compete to fill the new capacity to the East Coast, they are engaged in a rate war.

Expansion of the Panama Canal in June 2016 was a game-changer, Davies said, because it not only resulted in a quantum leap in vessel size on all-water services to 14,000 TEU, but a shift of traffic from the longer Suez routing to the Panama Canal improved average transit times by about four days. This mitigated some of the natural advantage West Coast ports enjoy on trans-Pacific services from Asia to interior destinations.

Loss of market share on the highly competitive trans-Pacific services accelerated this past year with the Panama Canal expansion despite the relatively inelastic nature of most Southern California imports from Asia. “POLA/POLB market share fell from 46.2 percent in the first quarter of 2016 to 44.2 percent in the first quarter of 2017, in spite of the low elasticity, due to significant reductions in the West Coast advantage over East/Gulf coast ports in ocean shipping costs following opening of the Panama Canal expansion,” Davies said.

He said that in this new environment even the largest interior load center, Chicago, could be in play now between Los Angeles-Long Beach and New York-New Jersey. Chicago in 2014 accounted for 46 percent of of the intermodal traffic from Los Angeles-Long Beach, according to a study by Mercator, he said. However, due to declining all-water ocean rates to New York-New Jersey, and reduced transit times, Chicago is becoming a bi-coastal battleground, he said.

Southern California for more than a decade now has, by necessity, relied on fees to fund costly environmental and traffic-mitigation projects. The $2.2 billion Alameda Corridor, a 20-mile rail project that eliminated 200 at-grade street crossings and expedites the transit of intermodal trains to the transcontinental network, helped to put Los Angeles-Long Beach on the map since 2002 as the leading gateway for Asian imports moving to the eastern half of the country.

Facing a crush of cargo volumes and a powerful community backlash, the ports, through their terminal operators, in 2006 initiated a traffic mitigation fee to fund the PierPass extended gates program. Los Angeles-Long Beach is still the only US port complex that keeps its gates open 80 hours a week. The 2006 clean truck program is not accompanied by a fee, but it did mandate the replacement of some 17,000 trucks with new, compliant vehicles at a cost of more than $100,000 a truck. Davies’ model assumed that truckers had to increase their rates 16 percent to pay for the new trucks, and they passed those costs onto customers.

Calculating the impact of the Alameda Corridor and PierPass fees on the cost of shipping through Southern California is not an exact science because the fees are not assessed on all cargo movements. Only containers that move by rail are assessed the Alameda Corridor fee, and only truck moves during the peak daytime hours pay the PierPass fee. Davies, therefore, spread the fees out over total port volume to come up with an average per-container fee. He translated that to the cargo diversion that was created by the increased environmental costs.

According to his model, the costs and fees associated with the Alameda Corridor, PierPass, and clean truck programs add $131.46 per FEU for every container passing through the port complex. The increased costs translate to an estimated diversion of 183,017 TEU, or 1.2 percent of the port complex’s total annual container volume, Davies calculated.

Based on those numbers, it can be concluded that the vast majority of containerized imports and exports in Southern California is inelastic when it comes to cost increases, Davies said. “This means that an increase of 10 percent in POLA/POLB costs would result in a 2.6 percent decline in traffic,” he said. If the AQMD’s proposed $100 per-TEU fee should occur, it would result in a decline of 277,000 TEU, or 1.8 percent of the total port complex volume, he added.

However, when current and potential future environmental-related costs are compounded by the reduced ocean costs and transit-time benefits East Coast ports are experiencing from the expanded Panama Canal, “POLA/POLB are likely to face ongoing competitive challenges from East Coast routings,” Davies said.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

Comments

What happens when they have to pay real costs for West Coast port and terminal serviceses, not have them buried and absorbed by carriers?

The shippers have enjoyed the benefit of low freight rates for years. They still are. At the same time, they want an array of improved services, but don't want to pay for the cost to deliver such services. They don't come for free. And, despite the belief to the contrary, the throughput rates don't cover these costs, either.