Pulse of the Ports Peak Season Forecast Conference - Summary

Today I attended the "Pulse of the Ports" conference, hosted by the port of Long Beach. This is an annual event to discuss important matters that affect the health of the port and the logistics industry. The Inland Empire is basically an inland port for container traffic from Asia and events that impact the port play a pivotal role in the economic development of the region.

The panel discussion is as follows and is modeled after typical goods movement from production to consumption:

Mario Cordero - Board President, Port of Long Beach
Paul Bingham - Principal of Global Insight
Charles Woo - CEO of Megatoys, a manufacturer of toys and retail goods
Brian Black - Senior Vice President of Trade Management and Service Groups, Hyundai Merchant Marine
Doug Tilden - CEO of Ports Americas Group
Mike Mitre - President of ILWU Local 13
John Kaiser - Vice President & General Manager of Intermodal Marketing at Union Pacific
Vic La Rosa - President of Total Transportation Services

Mario Cordero started off the event by saying that the Port of Long Beach grew by only 0.3% over the prior year; the 2nd weakest year in the past 20 years. He cited a number of concerns, concerns that would later be echoed by every single speaker at the conference.

1. Labor - Contract negotiations of the ILWA and the PMA (Pacific Maritime Association)
   


2. Infrastructure - Efficiency and productivity of the port, using bond money or cargo fees to raise revenue.
   


3. Environmental - Impacts of the 2005 Green Port Policy
   

Paul Bingham of Global Insight predicts that growth in 2008 will be slower than 2007 but that a recession will likely be limited to the United States; Asia and the Middle East will only be slightly affected by US conditions. Imports decline started in mid 2007 and should rebound by mid 2008 or later when the economy improves, expect a 5% import growth in 2010. Decreases in imports and increases in exports have balanced trade a bit, making empty containers a little harder to obtain. No congestion is expected for the next 6 months due to weak import demand but the TWIC (Transportation Workers Identification Credential) and the ILWU renegotiation are events to watch.
On the supply side most of the new ship capacity added in 2008 are of the Post-Panamax variety and a lot of these larger ships can carry over 7,500 TEU's. Unfortunately, many of these ships are not on the transpacific route (Asia to US), many are designed to move trade between Asia and Europe. Vessel operators are employing mores ships but are moving them at slower speeds due to higher fuel costs. Higher fuel charges due to rising demand and the falling dollar will lead shippers to pass the cost onto consumers in the form of fuel surcharges. Last year fires in Southern California disrupted rail lines but a similar event seems unlikely this year.

Charles Woo of Megatoys manufactures toys and retail products in China. He is the co-founder of the toy district here in Los Angeles. Hong Kong used to be the toy capital of the world in the 1970's. The first generation of manufactures in China moved from Hong Kong to the mainland in the 1980's. The second generation of manufactures in the 1990's started in China and begun their own operations. This led to overproduction and over the last 20 years the price of goods has decreased every year as competition forced manufactures to reduce their costs to remain competitive. Woo has seen the price reduction become less and less every year and was expecting that prices would be flat over the previous year but his costs have actually increased 20%. A big part of the problem is that when he negotiated the contracts last year the exchange rate was 7.5, and he was factored in an exchange rate of 7.3 for 2008, but when he signed the deal it was at 6.7. This problem has never happened before and the problem is two-fold: raw material costs are rising by 10% or more and the currency fluctuation is making it harder to forecast costs. He said that when things get really tight, shipping plays a bigger part because at some point it doesn't make sense to ship things anymore and that the fate of the Chinese exporter and the steam-ship companies are inversed, when things are bad for shippers it is good for manufactures and vice versa. He said things were really bad for shippers now, so at least the manufacturers have a little foothold in prices. The retail industry has changed; there are only a handful of companies (Wal-Mart and other super retailers) that buy goods whereas in the past there was more flexibility and that he has had to focus on year round merchandise such as Halloween and Easter.
Charles also said that regulation and product safety are playing a bigger role and that the government is starting to screen the goods at the Chinese docks rather than on the American side, making it a Chinese liability and not an American one. This means that not everyone can make goods anymore and some of the manufacturing overcapacity will decrease.

Brian Black of Hyundai Merchant Marine said that prospects for carriers looks pretty challenging. Fuel costs, especially the price of oil, are adding to the shippers problems. In 2006, a metric ton of fuel cost $306. In 2007 a metric ton costs $500. 5 years ago a barrel of oil sold for $29 and now the market places it at $106. In fact, 60% of the costs shippers have are fuel costs and consumers are facing fuel surcharges from shippers, fuel surcharges from the railroads and fuel surcharges from truckers, a triple dip as everyone passes on their costs. Container growth in the United States is estimated to be 3 - 5% for the year, which is below the 8% average per year that existed for the last 10 years. Container growth is expected to increase in developing countries at a much faster rate than in the US.
Container traffic is starting to shift to the East Coast as shippers try to spread their risk around. Shippers are looking at alternative locations and ways to move their assets based on growth. Agricultural products make up a lot of US exports, which are difficult to ship since they don't go well into containers. Shippers want faster throughput, the speed at which containers can be re-used again, since the faster the turnaround on containers the fewer containers they have to lease.
On June 1st trucks are going to have to be registered, costing $250 to initially register a truck and $100 a year afterwords. In October, a $35/ TEU fee will be imposed. Older trucks will be banned and all these fees may increase drayage costs by 80 - 200%.
For the Olympics in Beijing, factories will be closing 30 to 60 days in advance and shippers are not sure if there will be a surge in volume prior to this event or if manufacturing will be outsourced to other locations. Shippers are wary of people using their containers to warehouse their goods during this time period since containers will still be at a premium with such uncertainty.

Doug Tilden of Port Americas Group said that there is an imbalance brewing in port development. Ports in China are being built at an incredibly fast pace and are very efficient but there is no growth in ports on the American side and productivity remains stagnant. The APM (A.P. Moller - Mersk) terminals in Portsmouth, VA are a promising sign but are no match for the infrastructure commitment of the Rotterdam APM .
The recession should ease tension at the ports but the bounce-back will hurt as the US recovers and the port goes back into overdrive.
LA/ Long Beach is still the gateway for Asian goods; higher fuel costs are actually a boon for California since fuel costs make it a lot more expensive to move things through the Panama Canal and into East Coast ports.

Mike Mitrre of the ILWU says his workers have a wealth of experience and do not want to chase work away. The upcomming negotiations for the ILWU started 5 months before the contract is due to expire, an event that has never happened before. It took drastic efforts to get the union to agree to meet early and such an early meeting signals the unions commitment to smooth and orderly negotiations.

John Kaiser of Union Pacific, the largest railroad in the United States, said that 2006 was a record year for moving units, due in a large part for freight moving out of the country. For the West Coast, train movement was flat from 2006 to 2007.

Union Pacific is increasing the capacity of it's Sunset Route (California to Texas) which will double the capacity for trains to travel from El Paso to LA. Union Pacific plans to spend 3.1 billion this year in infrastructure improvements because they see a bounceback after the US recession ends. Union Pacific also plans on installing another track through Pomona into the city of Industry and by 2011 they expect the new rail to be able to handle 110 trains a day (up from 70 trains a day that it is currently running).

Union Pacific also plans on creating logistics hubs around significant rail spots (Salt Lake City, Chicago, Houston, Inland Empire) meaning that they want to control the industrial land as well as the tracks.

These are bad times for the railroads: Furniture from Asia is down, vehicle sales are down 2 million from the previous year and no new coal plants mean that they will be shipping less coal.

The good news is that exports of grain are up (which have a hard time being transported by trucks since they don't fit well into containers) and chemical production in Texas is up.

Vic La Rosa from Total Transportation Services says that a slowing economy and rising fuel prices mean that truck carriers are reducing their fleet size. In addition, cargo is being diverted to the East Coast. Wal-Mart used to have 50% of its warehousing operations in California and have reduced that number to 10%, others are following suit. Things are too expensive in California.

The ports are demanding the following concessions from the trucking companies: a $250 a truck registration fee, RFID tags in the trucks, TWIC standards for employees, a truck ban on all trucks made before 1989, a $160/ FEU fee in addition to the pier pass cargo fees.

Punta Colonet in Mexico and Prince Rupert in Canada are serious threats to ports in California.

Vic is a member of the Coalition for Responsible Transportation (CRT) a topic I talked about in a previous post.