West meets east

West meets east

Every port is looking for a slice of the Asian pie. East Coast ports are no different in this regard as they look with longing at the huge market and the high-value goods produced in the Asia-Pacific region.

China soon could become the largest trading partner of the U.S. Most of this fast-growing Asia-Pacific trade, for obvious reasons, moves to and from the West Coast, and it remains the dominant gateway for this market. But West Coast realities of congestion, capacity, labor and equipment uncertainty are increasing the opportunities for more all-water services to Asia from the East Coast and especially mid-Atlantic ports.

Those ports, including Savannah, Charleston, New York-New Jersey, Norfolk and Miami, have been courting all-water traffic. But the old Chinese proverb - "Be careful what you ask for" - could apply on the East Coast if services to Asia really take off. Atlantic ports are attracting more Asian cargo, but could become victims of their own success, even if all-water growth has slowed somewhat this year due to the lack of ships available on the charter market to expand all water services.

"U.S. East Coast ports have witnessed astonishing growth in the container trade over the last two years," said J. Robert Bray, executive director of the Virginia Port Authority. "As China has become the manufacturing center for U.S. consumer products, Asia has become the fastest-growing trade for East Coast ports. U.S. retailers have built enormous distribution centers near East Coast ports, and steamship lines have added all-water services transiting the Panama Canal.

"While this growth is certainly welcome, effective management of this issue requires the resolution of two nagging issues - empty containers and chassis," Bray said.

Shipping lines are expected to add three new all-water services from Asia to the U.S. East Coast by early 2005, fewer services than had been originally planned. The Grand Alliance, which includes Orient Overseas Container Line, NYK Line, Hapag-Lloyd and Royal P&O Nedlloyd, will start a new all-water service in early August.

The Grand Alliance lines are introducing new, large vessels into their fleets, and this will allow them to take nine 3,600-TEU ships out of their existing services and form a new all-water service from Asia to the East Coast.

Smaller ports such as Boston, Philadelphia, Baltimore and Wilmington, N.C., could be well-positioned to take advantage of cargo diverted from the West Coast because they have more room to grow than larger East Coast ports and are underused, John Martin, president of Martin Associates of Lancaster, Pa., told the Trans-Atlantic Maritime Conference sponsored by The Journal of Commerce in May.

"Far East cargo dominates the import market," he said. But the question is whether East Coast ports can handle this growth in trade. "New York dominates, but VPA (Virginia Port Authority) ports are gaining in Asian import trade." The share of Asian import cargo is increasing at South Atlantic ports, Martin said. Savannah's share of traffic through South Atlantic ports is growing, while the Gulf ports' share of Asian imports has not shown the same increase, he said.

Los Angeles and Long Beach still dominate trans-Pacific containerized cargo and will continue to do so, but even with productivity improvements and technological innovations, those ports could find themselves 8 million to 9 million TEUs short of needed capacity by 2020, Martin said. Other West Coast ports, such as Oakland, Seattle, Tacoma and Portland, have higher productivity and in some cases are also underutilized, enabling them to pick up some of the slack, he said.

East Coast ports such as Savannah and VPA have positioned themselves to take advantage of the growth in Asian cargo by convincing importers to establish distribution centers nearby. Those centers primarily serve states on the East Coast.

While larger East Coast ports such as New York and New Jersey have embarked on capacity-expansion programs, they still face infrastructure problems, particularly congestion, limiting opportunities for growth. That could make the smaller East Coast ports attractive alternative gateways. For example, Baltimore's Seagirt terminal is underutilized, Martin noted.

The disadvantage for all East Coast ports is the 18 to 20 additional days it takes to deliver cargo bound for the Mid-west, compared with mini-landbridge services via the West Coast. Unless cargo is relatively low-value, the added time in inventory could more than offset the estimated $600-per-container savings from all-water services, Martin said.

West Coast ports first gained the edge in competition for U.S. imports from Asia in the 1980s. All-water service to East Coast ports was considered the slow boat from China, used primarily for low-value shipments that were not time-sensitive.

With West Coast labor unrest and changes in importers' logistics strategies, the momentum has shifted to the East Coast. Stephen Petracek, who helped introduce double-stack rail service when he managed the stack-train service of American President Lines and who is now a maritime consultant with Booz Allen Hamilton, said the reasons are clear. "The basic drivers of all-water services have changed. Reducing cost is the big driver."

The cost of mini-landbridge service via the West Coast has increased along with port congestion, rate increases and equipment shortages by the few remaining railroads seeking to recover large investments in equipment and transfer facilities. Rail rates reflect the meager level of competition in that industry, compared with ocean container shipping. Increased cargo-handling costs at West Coast ports also help to tip the balance toward the East Coast. "West Coast landside costs are going up while some East Coast costs have dropped."

Big retailers have been leading the development of all-water shipments through the East Coast. Large chains such as Wal-Mart, Kmart, Best Buy, Home Depot, Dollar General, Dollar Tree, Lowe's and Pier One have opened big distribution centers near East Coast ports - and their volumes reflect it. According to Booz Allen, Wal-Mart used West Coast ports for only 43 percent of its Asian traffic in 2001, compared with 74 percent in 1994.

Savannah has been perhaps the most successful East Coast port in competition for Asian business. The Georgia port handles 30 percent of Wal-Mart's import business, while Norfolk handles 10 percent. Savannah's containerized shipments from Asia jumped 41 percent last year to nearly 666,000 TEUs. Asian volumes at other large East Coast ports including Charleston and New York-New Jersey also saw steep increases.

Savannah has 13 weekly all-water services from Asia. "We anticipate announcing as many as three additional new services related to the Asian and Mediterranean trades in the coming months," said Tom Swinson, a spokes-man for the Georgia Ports Authority.

The presence of large East Coast distribution centers convinced shipping lines to invest in all-water services from Asia to the East Coast via the Panama Canal. A weekly all-water service re-quires nine or 10 vessels, compared with five for a trans-Pacific service to the West Coast, making carriers reluctant to commit to all-water services. The formation of vessel-sharing alliances in the 1990s mitigated that issue, because a carrier could participate in an all-water service by contributing only two or three ships to a 10-ship service.

Those investments are showing results. In 2002, the East Coast share of U.S.-Asia trade was 21 percent, compared with 18.6 percent in 2001, Petracek said. Asian cargo moving through East Coast ports increased 37 percent last year, compared with 17 percent through the West Coast.

But East Coast ports realize that the distribution centers alone will not continue to drive growth figures as strong as these. They are therefore trying to further increase their share of the Asian trade by pushing deeper into the U.S. heartland through the so-called reverse mini-landbridge services. These combine all-water service to the East Coast with an intermodal rail move to an inland destination in the Southeast or Midwest.

To offset what is a considerably longer transit time - more than two weeks in many cases - the reverse mini-landbridge services must offer significantly lower costs to shippers. Total transit time to an inland U.S. destination from the East Coast is at least 18 days longer than for a mini-landbridge movement through the West Coast, said William Coffey, president of Beaufort Maritime Group in Newport, R.I. That makes this routing a difficult or impossible option for many shippers, and probably limits this market for East Coast ports.

Still, competition between West and East coast ports for trade from Asia - by far the largest and fastest-growing trading region for the U.S. - will be determined by a number of factors, among them rail capacity, the Panama Canal and the ports themselves.

Petracek said the western railroads - Union Pacific and Burlington Northern Santa Fe - are reaching capacity in equipment and rail transfer yards. The railroads thus can invest heavily in a cargo that produces a low margin at existing rates, or increase their rates and encourage more cargo to seek an East Coast routing. The western railroads are still committed to intermodal, the fastest-growing segment of rail traffic.

A key factor in East Coast-West Coast competition is the International Longshore and Warehouse Union. Petracek said the ILWU is perceived as being a high-cost, unreliable labor force, while the International Longshoremen's Association on the East Coast is perceived as being much more accommodating, though there are fresh signs that the ILA is becoming more restive (See article, Page 16).

Despite the problems of the West Coast, it's not all smooth sailing for the all-water routes to the East Coast. Some East Coast ports, notably New York and New Jersey and Savannah, experienced temporary but severe congestion after the management lockout of ILWU members at West Coast ports in the fall of 2002, and truckers at both ports remain agitated over long truck lines.

Capacity limitations at the Panama Canal also could limit East Coast expansion. The canal is operating at about 95 percent of capacity. Even if the canal authority decides to build a new set of locks, it would take years to complete and probably wouldn't open until 2012 at the earliest, Coffey said. And if shipping lines continue to add all-water services, the container sector may force tolls even higher, as container lines outbid breakbulk and bulk carriers for transit slots through the canal, Petracek said. Tolls rose again last fall, and it now costs more than $125,000 to move a 4,300-TEU ship through the canal. Another toll increase is planned this year.

Ironically, the growth of Asian services to the East Coast also could be slowed by their popularity among shippers. Encouraged by high vessel-utilization rates through much of last year, carriers are approaching importers with per-container rate increases of as much as $500 for all-water service. That would bring the cost of all-water service closer to intermodal rates through West Coast ports. Although all-water rates are about $1,100 to $1,200 higher than the ocean portion of the West Coast mini-landbridge services, costs of rail shipment from the West Coast make mini-landbridge more expensive than all-water service.