Breaking Point: Ports Perform Under Pressure

U.S. container ports are busy trying to update aging infrastructure and ease congestion, while handling increased demand. Can the government and private sector help? What does the future hold?

“The U.S. economy has been transformed by unprecedented growth in containerized imports. Growth in the transportation infrastructure hasn’t kept pace. If we don’t fix this, supply chains will bog down, consumer prices will go up, and the economy will suffer.”

That warning was issued in May by John Bowe, president, the Americas, for global transportation company APL and its sister company APL Logistics.

“Containerized U.S. imports from Asia will grow by about 30 percent in the next three years, but ports aren’t improving productivity fast enough to keep pace and railroads aren’t adding enough track, equipment, or terminal capacity to handle the load,” said Bowe, speaking at a Massachusetts Institute of Technology conference.

“We’re pushing too much cargo through a pipeline that is not growing fast enough. Eventually it will be overwhelmed. We need to act now to prevent gridlock.”

While Bowe’s comments may sound dire, they are far from unfounded. One look at port volume statistics shows why.

From 1990 to 2005, container traffic at the ports of Los Angeles and Long Beach rose 280 percent, from 3.7 million TEUs to 14.2 million TEUs. The Port of Seattle saw its container volume grow 78 percent, Charleston grew by 147 percent, and Savannah rose by 354 percent.

“No one will tell you today that U.S. ports are fine,” says Richard Bank, a partner with the Washington, DC law firm Thompson Coburn LLP, and former director of the Office of Maritime Affairs at the U.S. Department of State.

The Monumental Shift

The current state of U.S. port affairs stems from a monumental shift in the volume and flow of world trade.

“As trade with China and the rest of Asia mushroomed, and vessel size grew to realize economies of scale (using larger ships lowers the per-box shipping cost), trade flows shifted,” Bank explains. “Now, the great volume of goods moves direct from the Far East to U.S. West Coast ports.”

Because of the trend toward large ships that do not fit through the Panama Canal (post-Panamax vessels), shippers sending goods to the East Coast shifted from using the all-water route to using double-stack trains to move goods from West Coast ports eastward.

“This volume tested the limits of our port and intermodal infrastructure and serious constraints began to emerge,” Bank explains. “Facility inadequacies caused delays and other problems, raising concerns among carriers and shippers.”

Five years ago, Big Lots Stores, which operates 1,400 retail outlets throughout the United States, shifted its Asia freight to all-water service, according to Marion Zingaro, director, import operations for the Columbus, Ohio, retailer. “The issue was not port congestion, but railroad service constraints,” Zingaro says.

In other cases, shippers simply looked north from Los Angeles/Long Beach and routed their freight through the Ports of Oakland or Seattle.

“Cargo diversion from Los Angeles created a 25-percent increase in business last year,” reports Linda Hothem, CEO of Pacific American Services, an Oakland, Calif.-based third-party logistics provider that handles imports from Asia. “At least 15 percent of that growth came from importers looking for alternate ports.”

“Although the U.S. West Coast recently has accommodated trade growth, primarily from China, it is walking on thin ice,” Bank warns. “Under current work rules, capabilities, and road and rail infrastructure, West Coast ports are not ready for the next spurt in ocean trade. If Asia trade continues to grow at 10 percent annually, West Coast ports will reach their limits soon.

“We will see delays and extra demurrage and warehousing costs,” he says. “Companies won’t get cargo when they want it, factories won’t get parts when they need them, consumers won’t get products when they want them. Certain industries and products—such as high-tech—will be significantly affected.”

The problem is exacerbated by the inflexibility that results from an overloaded network. “At or near full capacity, transport systems become fragile,” says Edward Hamberger, president and CEO of the American Association of Railroads (AAR).

“With inadequate redundancy, there are fewer alternative routes and facilities, breakdowns and backups proliferate faster and further, and disruption recovery takes longer.”

What’s On Tap

The maritime community has not remained idle about addressing capacity-related issues. It currently spends billions of dollars building new terminals, developing productivity programs, and investing in new technology. Port-related improvement efforts currently underway include:

Strategic growth plan. In California, Gov. Arnold Schwarzenegger’s “Strategic Growth Plan” proposes $107 billion for transportation, $18.9 billion for expanding trade corridors, and $2 billion for the state’s ports. His goal is to reduce congestion in the state’s transportation system by 20 percent in the next decade while increasing capacity by 15 percent. The plan calls for increased use of dedicated truck lanes and high-occupancy toll lanes.

OffPeak program. At the Ports of Los Angeles and Long Beach, 12 major shipping terminals last year formed a non-profit entity, PierPass Inc., to work on congestion solutions. One solution is the OffPeak program, launched in July 2005. OffPeak reduces congestion in and around the ports by establishing new night and Saturday shifts at the terminals. By December, more than one million truck trips had been diverted out of daytime traffic, reducing congestion noticeably.

Since the start of the program, 30 to 35 percent of container cargo at Los Angeles/Long Beach has moved to new OffPeak shifts on a typical day.

“The 12 terminals participating in the OffPeak program are processing an average of nearly two trucks per minute per terminal,” says PierPASS Inc. President and CEO Bruce Wargo.

TruckTag security program. In January, PierPASS unveiled the TruckTag security program to improve the process of checking trucks and drivers entering the terminals. Under the program, PierPASS distributes RFID tags to be installed on trucks, enabling quick and secure terminal check-in.

When trucks arrive at a terminal, an electronic reader posted at the gate automatically reads the RFID tag. Simultaneously, drivers insert their commercial driver’s license into a machine that verifies that the driver and truck have authorized business at the terminal. Historically, each driver displayed the license to a security guard upon entry to a terminal. The marine terminal operators are funding the program, estimated at $1.2 million.

The Heartland Corridor. Portsmouth, Va., had been trying for decades to develop a 568-acre riverfront parcel with deepwater access—then known as the Cox property. When the Virginia Port Authority identified in 2000 that it would have a capacity shortfall in its existing facilities by 2010, the project gained some traction. In 2001, A.P. Moller-Maersk purchased the Cox property with the intention of developing it as a primary East Coast shipping hub.

In 2004, Maersk and the state of Virginia announced joint plans: APM Terminals would spend $500 million to construct the terminal, the state would expand road access to the facility, and both the state and federal governments would support rail expansion.

The latter ultimately led to the development of the Heartland Corridor—a $266-million project that will remove height impediments along rail track from Virginia to Ohio, enabling the use of double-stack trains. The project will also extend the rail line directly into the new facility, and adjust the capacity of roads that feed the railroad and terminal.

New equipment and expansion projects. The South Carolina State Ports Authority (SCSPA), whose container traffic grew 14 percent last year, is spending $64 million on new container cranes. The Port of Charleston also replaced an old bridge over the ship’s channel with a new cable-stayed bridge to provide clearance for the next generation of post-Panamax ships.

Charleston is also considering two major expansion projects—a new 280-acre container terminal on the former Charleston Naval Complex, and a new terminal on the South Carolina side of the Savannah River in Jasper County.

In Savannah, Ga., the Georgia Ports Authority (GPA) opened the first phase of a new container berth at its Garden City Terminal. Phase One features a 1,200-foot dock, bringing the terminal’s total linear berthing space to 8,800 feet, which makes it the largest single terminal container facility on the U.S. East and Gulf coasts.

Phase Two, scheduled for completion in 2007, will include an additional 100 acres of paved storage area and 1,000 linear feet of dock. The new $109-million berth will increase the terminal’s total capacity by 20 percent.

The GPA’s 10-year plan calls for investing more than $700 million in the Port of Savannah, according to Doug Marchand, executive director. The plan includes deepening the harbor from 42 feet at mean low water to 48 feet. The Port of Savannah will have the capacity to handle 4.37 million TEUs by 2015.

The rail infrastructure required to support this country’s explosive trade growth is a private sector responsibility. The railroads decide how much to invest in what portions of their infrastructure.

Rail is a capital-intensive business. From 1980 to 2005, for example, major U.S. freight railroad capital spending on infrastructure and equipment totalled more than $120 billion. In addition, railroads expend $10 billion to $12 billion per year to repair and maintain their assets.

U.S. Class I freight railroads will spend more than $8.2 billion in 2006 laying new track, buying new equipment, and improving infrastructure, according to the AAR. The industry’s capital expenditures budget is a 21-percent increase over last year. Between 1995 and 2004, railroads put an average of 17.8 percent of their revenues into capital expenditures.

“While these capital investments are substantial, are they enough to adequately address intermodal congestion and network bottlenecks?” asks Christopher Koch, president and CEO of the World Shipping Council, which represents the steamship industry in Washington. “The railroads would likely answer ‘no,’ or at least ‘not in the time frame the shipping public demands.'”

Pressure on Panama

By anyone’s estimate, the Panama Canal plays a critical role in U.S. trade. Sixty-nine percent of the Canal’s commerce moves to or from the United States; 47 percent moves to or from Asia.

“The importance of the Panama Canal to America’s maritime commerce is difficult to overstate, particularly as U.S. rail and inland infrastructure struggles to keep up with the demands of commerce,” Koch says.

Carriers and shippers have dramatically increased their utilization of the Canal, particularly for all-water services from Asia to the U.S. Gulf and East coasts. From 2001 to 2005, the TEU capacity of containerships transiting the Canal increased by 59 percent, the number of containerships transiting the Canal rose by 47 percent, and average vessel size increased 21 percent.

“The Canal, however, is now operating at close to capacity, and additional throughput improvements are increasingly difficult to obtain,” Koch notes.

Post-Panamax vessels that do not fit through the Canal currently represent 27 percent of the world’s capacity of containerized maritime shipping, according to the Panama Canal Authority (ACP). Shipyards have contracts to build more than 250 additional vessels of this size in the next four years.

“By the end of 2011, the total post-Panamax containership fleet will consist of approximately 670 ships with a capacity of almost 4.6 million TEUs—close to double the capacity of the existing post-Panamax fleet,” according to ACP.

By 2011, approximately 37 percent of the world’s containership fleet capacity will consist of vessels that do not fit through the Canal. A large part of this fleet will be placed in competitive routes, such as the transpacific-intermodal route and the Suez Canal route, according to ACP.

“The Canal will reach its maximum sustainable capacity between 2009 and 2012,” the authority notes. “Once it reaches this capacity it will not be able to handle demand growth. Service quality will deteriorate, resulting in a reduction in the competitiveness of the Panama maritime route.”

The voters of Panama will decide this year whether to fund a $6-billion expansion of the Canal’s capacity.

The Panama Canal expansion plans include new lock dimensions sufficient for 10,000-TEU vessels. Canal capacity is currently approximately 330 million tons; with the new third set of locks, capacity could reach 600 million tons.

The expansion project includes three other main components:

  1. Construction of two lock facilities, one each on the Atlantic and Pacific sides of the Canal.
  2. Excavation of new access channels for the new locks, and widening of existing navigational channels.
  3. Deepening of the navigation channels, and the elevation of Gatun Lake’s maximum operating level.

If Panamanian voters approve the project, construction could begin in 2007, with completion slated for 2013 or 2014.

U.S. ports such as Houston expect to benefit significantly from a Panama Canal expansion.

“The Port of Houston currently handles few post-Panamax ships. Most of these vessels coming from Asia travel west through the Suez Canal to get to the East Coast,” explains Tom Kornegay, the port’s executive director. “This expansion will put Houston in a position to compete with East Coast ports for vessels of this size.”

To accommodate increased maritime traffic—and prepare for the possible Panama Canal boom—the Port of Houston plans to invest $1.2 billion in its new Bayport Container and Cruise Terminal. Phase I of the facility will open in late August, and additional phases will be built based on market demand.

No Silver Bullet

No simple solution exists for meeting the challenge of America’s maritime and intermodal infrastructure constraints. But while the private sector has become increasingly vocal about its concerns on this issue, the federal government has been comparatively and disconcertingly quiet.

Acknowledging that congestion is a tremendous threat to the economy, U.S. Secretary of Transportation Norman Mineta announced in May a new national initiative to tackle highway, freight, and aviation congestion.

Congestion “kills time, wastes fuel, and costs money,” Mineta said in a speech to the National Retail Federation. He noted that America loses an estimated $200 billion a year due to freight bottlenecks and delayed deliveries, consumers lose 3.7 billion hours and 2.3 billion gallons of fuel sitting in traffic jams, and airline delays waste $9.4 billion a year.

The government’s initiative provides a blueprint for federal, state, and local officials to tackle congestion, according to Mineta. In addition, over the coming months, the U.S. Department of Transportation plans to focus resources, funding, staff, and technology to cut traffic jams, relieve freight bottlenecks, and reduce flight delays, he noted.

Plan Leaves a Port Hole

But other than convening a new commission to study the issue, and recommending that states work with the private sector to encourage infrastructure investment, the plan contains no concrete solutions. In fact, it doesn’t mention ports at all, focusing entirely on highways and airports.

APL’s Bowe believes public-private collaboration is the only way to deal with infrastructure constraints. He calls for development of a national freight policy, significant new investment in the U.S. rail network, and significant productivity improvements at U.S. ports.

“Government can’t be counted on to pick up the massive cost of infrastructure improvement,” Bowe noted in his MIT presentation. “The private sector will have to play a larger role. But we’ll look to government to provide incentives that stimulate investment.”

The railroads support this idea of federal financial investment tax incentives. The AAR is working on a legislative proposal for an investment tax credit that would increase and accelerate the amount railroads and other parties invest in rail infrastructure.

“Projects to expand freight rail capacity would be eligible for a tax credit,” Hamberger explains. “Eligibility for the tax credit would extend to any taxpayer—even shippers—who makes a qualifying improvement expenditure.”

“Whether Congress will agree with such a proposal in the present budget environment remains to be seen,” notes Koch.

While the United States hems and haws about its transportation infrastructure issues, other countries are making great strides.

“China has a well-organized national plan for infrastructure construction to accommodate the country’s export growth,” says Richard Bank. “Though the United States is on the receiving end of that export growth, unfortunately there is no corresponding, nationally coordinated infrastructure construction program.

Time for a National Plan?

“This raises the question, ‘Should there be a national plan for trade-related infrastructure investment in this country?'” Bank continues. “Our ports compete with each other for business. Will the market generate sufficient incentive for individual ports to make the necessary investments to accommodate projected growth?”

Though port developments are often viewed as local or regional projects, their impact is national in scope—and should be thought of that way, says Bank. “U.S. ports no longer simply serve their hinterlands; they serve markets thousands of miles away,” he explains.

“Port development is a national issue that affects consumers and markets across the country,” he says. “Shouldn’t the same kind of effort that went into building the interstate highway system go into supporting or developing our port system and the transportation infrastructure that supports it?”

Carrier Outlook: Bigger is Better

One way to put current U.S. port capacity constraints in perspective is to consider the ballooning size of the world’s containership fleet and the surplus of ocean-going capacity. While ports are challenged to dredge harbors and berths, and retool dated facilities and equipment to accommodate growing container volume and vessels, ocean carriers must add new ships to their fleets and increase the frequency of port calls.

Wary that ports can’t keep up with these demands, many shippers are diversifying points of entry to add capacity, speed turnaround times, and create more contingencies in their global supply chains.

Ocean carriers, by contrast, continue to consolidate assets—as evidenced by Maersk Sealand’s recent acquisition of P&O Nedlloyd—and build more post-Panamax vessels. The consequence? Bigger ships are carrying more containers to more ports strapped for space—and this trend will likely continue.

“As of year-end 2004, the world containership fleet was comprised of 3,375 vessels of 7.2 million TEUs. Sixty-nine percent of the existing fleet capacity was built after 1995, and of this, 55 percent is post-Panamax capacity. Another 950 new containerships (3.6 million TEUs) are scheduled for delivery over the next three years,” reports the U.S. Maritime Administration’s 2005 Containership Market Indicators.

Maersk Line led the way in the U.S. Maritime Administration’s 2005 Top 50 ocean carriers ranking, with 3,231 vessel calls at world ports, accounting for more than 10.8 million TEUs in capacity (see chart). MSC, APL, Hapag-Lloyd, and Evergreen rounded out the top five carriers based on volume.

Maersk and MSC together operate 298 containerships—or 27 percent of the world’s fleet—and supply 25 percent of total capacity delivered to ports. The top 20 ocean carriers as a whole are responsible for 85 percent of the world’s ocean-going capacity.

Top 50 Ocean Carriers by Capacity
Operator Vessels Calls CAPACITY (TEUs)
Maersk Line 204 3,231 10,838,765
MSC 94 1,425 4,616,685
APL 40 762 3,602,263
Hapag-Lloyd 30 806 3,367,491
Evergreen 50 813 3,162,560
Hanjin 56 741 3,105,669
CP Ships 48 870 2,440,411
MOL 26 579 2,288,863
K-Line 39 573 2,279,654
OOCL 27 411 2,113,417
NYK 37 657 2,076,039
Horizon Lines 15 1,117 2,044,819
Hyundai 18 404 2,022,588
Zim 38 612 1,927,966
COSCO 41 513 1,803,287
Yang Ming 31 491 1,796,662
CSCL 46 398 1,784,036
CMA-CGM 37 562 1,740,089
Hamburg-Süd 27 499 1,358,565
Matson 10 458 1,106,266
Hatsu 6 109 691,364
CSAV 18 251 568,908
LT 16 201 566,565
Wan Hai 13 152 467,002
Norasia 15 151 466,727
Dole 7 265 408,600
Libra 5 154 374,880
Alianca 3 96 356,362
UASC 11 131 295,574
Independent 4 155 215,696
Turkon Line 4 126 149,133
CCNI 6 64 147,392
Safmarine 4 67 141,746
Montemar 2 44 136,202
Gold Star 4 43 129,063
Great White 4 112 117,565
Tropical 2 96 115,200
FESCO 3 66 114,930
ANL-CL 1 25 99,025
Maruba 6 36 75,741
Macandrews 1 20 72,120
Seafreight Lines 2 64 70,464
PM&O 3 47 68,274
TSK 2 20 52,780
Marfret 3 21 41,326
Sinotrans 4 15 40,591
Rickmers 1 15 28,320
CNCO 1 25 28,050
Anchor Transport 1 12 18,864
Mercosul Line 2 10 17,525

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