Photo by Patrick T. Fallon/Bloomberg
MARCH 2, 2015
Did Negotiations Lead to a Rainbow Over Panama?
California Ports in the Aftermath of the Agreement
Senior Economist, UCLA Anderson Forecast, Adjunct Professor, UCLA Anderson School
At the end of June 2014, the contract between the International Longshoremen and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) expired and a protracted negotiation ensued. In November, the PMA accused the ILWU of engaging in a slowdown. To be sure, cargo ships began stacking up as they awaited berths from Seattle to Long Beach and supply chains from Asia were interrupted. More recently the PMA responded by cancelling overtime shifts and the backlog in San Pedro Bay began to look like L.A.’s I-405 during rush hour. But finally, after eight months there is a new five-year contract and goods are again moving through the ports.
Though many weighed in on the instantaneous impact of the labor dispute, the estimates they cited (from $75 million per day to $1.9 billion per day1) neglected diversion to other ports and routings, the substitution of other goods, and the ability to move the subject goods, albeit at a later time.
In the wake of the agreement we ask: what was the near-term impact on the California economy of the slowdown of goods movement and will there be a long term shift away from California’s ports affecting the growth and health of the logistics sector? The former will inform out forecast (2015-2017) and the latter is important for policy relative to the role of the ports and the logistics industry in the future landscape of the California economy.
The near-term impact has two components, goods and services not produced during the labor dispute that will never be produced, and those that might have been produced during the forecast horizon but will now move away from California. The former includes the transport of perishable goods to the ports, support activities such as restaurants serving port employees, and the transport and warehousing of goods not ordered from Asia due to their possible delivery beyond their useful time.
Goods that are piled up awaiting offloading from ships and on docks and warehouses awaiting loading are not economic costs (though they might represent costs to the shippers and owners) in that they will be moved through the ports and the services that were not previously performed, will need to be, post contract agreement. Once the employment data is reported for the months during which the backlog is cleared, an estimate can be made of this cost. Studies of industrial and transportation strikes generally conclude that this aspect of the cost of a labor dispute is relatively small, particularly in the context of a large economy such as California.
The second near-term impact will come from activities which would have taken place in California but are diverted elsewhere. While it remains to be seen, this is liable to be quite small. The Panama Canal is congested at present and increased shipments through the canal to East and Gulf Coast ports will add considerable time to the journey. Similarly, diversion through the Suez Canal is more costly in transit time. The non-U.S. West Coast ports are small and congested and while they can take some additional cargo from U.S. West Coast ports, their capacity is limited.
From the shippers’ point of view, these additional costs have to be balanced against the risk of future port labor unrest. The ILA representing the East and Gulf ports signed a contract which runs through 2018 and though there remain some individual actions on both coasts (e.g. Oakland and Baltimore) the members of both unions seem to be set for the next few years. Though the history of the ILWU is one of more militancy relative to employers than the ILA, the ILA did authorize a strike in 2012. Thus, there is no objective way to assess how shippers will assess the change of near-term risk in response to this labor dispute. Consequently, until data demonstrate otherwise, we will assume that while some diversion will occur, it will be relatively minor.
Over a longer horizon there is much more room for diversion of port activity, particularly to East Coast and Gulf Ports. Again the calculus will balance the cost of such diversion against the risk associated with not diverting. Current expressions of dismay with regard to instability at West Coast ports (a 2002 lockout, an eight day strike by clerks represented by ILWU in 2012 and the current dispute) suggest that perhaps the risk is now considerably elevated.
The oft-delayed opening of a wider Panama Canal with double the theoretical carrying capacity is now planned for 2016 and could be a game changer in the cost versus risk trade-off. However, it is not obvious it will be. The balance of this essay discusses the complex set of issues that will go into the planning of retailers, shippers and manufactures for their post 2016 supply chains.
To begin, consider the capacity of East and Gulf Coast ports to take a sizable quantity of shipments from West Coast ports. The new standard for shipment driving per container costs is the larger more efficient Post-Panamax ships.2 These ships require deeper draft and larger facilities than most of the port terminals in the U.S. can handle, but are the ships that will be using the third channel of the Panama Canal. Ports throughout North America are investing in capacity to process these ships, however those investments require considerable time to come to fruition. Those that are investing in channel dredging and terminal upgrades for Post-Panamax ships (including Houston, Jacksonville, Charleston and Virginia)3 are hoping to see significant new business as a result of the wider Panama Canal.4 As European shippers move to these larger ships as well there will be competition for the expanded facilities. At this point in time, no one can tell how much will actually be available for diversion from the West Coast ports over the next decade.5,6
Alternatively, there are three non-U.S. West Coast ports that have some ability to take diverted cargo; Lazaro Cardenas in Mexico and Prince Rupert and Port Metro Vancouver in Canada. These are smaller and are currently congested ports. While they have also plans to expand their capacity, the amount of diversion as opposed to an increased share of trade growth is liable to be small. This is particularly true as the ports also serve growing domestic markets and are far from large U.S. population centers. Moreover, each has had its share of troubles in recent times.7 Thus, one would expect them to pick up some traffic but economies of scale and risk would suggest that not much would be diverted to these ports.
The next key element is competition. As with capacity it is difficult to put a number on the impact of competitive forces, however we can describe these forces qualitatively. The basic competitive force is the cost of shipping from Asia to the population centers in the Eastern U.S. These costs are the price of shipping plus the cost inventory tied up in shipping for a longer time period.
The shipping costs from Hong Kong or Kobe to Houston or Charleston will obviously be greater than to Tacoma or Los Angeles simply because the distance is longer. There will be an additional cost associated with passage through the canal, a transit fee which has not yet been determined.8 Once at the port, the costs will be less due to lower labor costs in the intermodal transfer process. Rail costs per mile and offloading costs at the final destination are likely the same.
The first wild card in relative costs is the advent of EEE class ships. Maersk was the first to order 20 of these behemoths, ships that can carry over 18,000 TEUs. The efficiency of EEE class ships results in a nautical mile cost per container lower than Post-Panamax ships. However, EEE class freighters are too wide to transit the expanded Panama Canal. Consequently, not only will the shipping costs to the West Coast ports be lower due to the shorter distance traversed, but also due to the increased efficiency of the vessels carrying the cargo.
The second wild card in the cost equation is possible congestion and delays at the newly refurbished Canal. One of the benefits of the canal widening is its capacity to transit petroleum and LNG ships from U.S. Gulf Ports to Asia and the West Coast. The wider canal will be able to handle 90% of current LNG ships, an increase from today’s 10%. In addition, agricultural products from America’s Heartland and from the South East, heretofore expensive to ship to Asia will become more attractive and are businesses are lining up to use the newly expanded canal.9 Again there is a huge variance in the estimates of the amount of this traffic.
Finally, estimates by the U.S. Department of Transportation show a striking difference between the perception of major Eastern metropolitan areas being closer to Asia after the opening of the widened canal and reality. Because of the added water distance, and the slower speed of ocean going freighters relative to rail cars, goods shipped to Dallas from East Asia through the San Pedro Bay ports will arrive 4 days earlier than if they were shipped through the Canal to the Port of Houston, 5 days earlier to Atlanta than were they shipped directly to Georgia through the Port of Savannah and a day earlier to New York.10 Therefore, the more time sensitive the goods, the less attractive diversion would be.
The conclusion of this essay is quite simply, the short-term impact, constrained by infrastructure, is assumed it to be relatively small. For the forecast, our estimates of 2015 Q1 are slightly weaker and for 2015 Q2 will be slightly stronger, though not by the same amount. As for the long-term, there are too many moving parts to answer the question. To be sure, shippers, manufacturers and retailers will be considering the costs and risks of moving supply chains from the West Coast ports after 2016. It is neither obvious they will, nor obvious they won’t move a substantial amount of cargo eastwards by ship. The experience of 2002, coming at the beginning of a one-time incredible boom in imports from Asia, is not of much help in providing answers. Thus, policy makers, ports, and unions have room to affect the outcome and by their actions will do so one way or the other.
1. Wallace Witkowski, "How a West Coast Port Closure Would Hurt The Economy," MarketWatch, February 6, 2015
Stephen Cohen, "The Economic Impact of a West Coast Dock Shutdown," Berkeley Roundtable on The International Economy, University of California, Berkeley, 2002
2. Post-Panamax ships will be able to pass through the Panama Canal after the widening. They carry approximately 11,000 containers (TEU's) compared to the largest ships able to pass today
(Panamax) at 4,000 TEU's and they require at least 10 feet deeper channels at the port than Panamax ships.
3. KC Conway, "North American Port Analysis: Preparing For The First Post-Panamax Decade," Colliers International White Paper, August 2012
4. The widening of the Panama Canal and the addition of a third transit lane is expected to open in 2016.
5. A study by the Tioga Group for the USACE Institute for Water Resources and Cargo Handling Cargo Program in 2012 concluded it is almost impossible to generalize about the unused capacity of East Coast and Gulf Ports as there are too many potential choke points in the offloading process. A similar conclusion was reached in a 2006 Congressional Budget Economic Impact study.
6. US Department of Transportation Maritime Commission, "Panama Canal Expansion Study, Phase 1," November 2013
Kevin Knight, US Army Engineer Institute For Water Resources; US Army Corps of Engineers, "The Implications of Panama Canal Expansion to US Ports and Coastal Navigation Economic Analysis," December 2008.
7. The Canadian ports are, as of February 25, being impacted by a labor dispute at CN Railways. Prince Rupert is completely dependent on CN and therefore a riskier Port to be heavily vested in. In 2013 the Mexican Military took control of the Port of Lazaro Cardenas in an effort to end the domination of the port by Drug Cartels.
8. On January 5th the Canal Authority announced a proposed revision to the toll structure. Whatever fee schedule is ultimately put into place, it must cover the over $5B cost of the Canal project.
9. Dan Molinski, "Ports, Shipping Companies Retool for Bigger Panama Canal," Wall Street Journal, February 17, 2014 "Panama In LNG Tie-up," Tradewinds, January 15, 2015
10. US Department of Transportation Maritime Commission, "Panama Canal Expansion Study, Phase 1," November 2013 Liliana Rivera and Yossi Sheffi, "Logistics: Shipping on The Panama Canal," Quarterly Americas, Spring 2011