A Turning Tide For U.S. Seaports, December 2004

December 1, 2004
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American seaports are facing an unprecedented challenge when it comes to their competitiveness in comparison to foreign ports. While labor issues and the ability to handle growing cargo volumes are concerns shared globally, several issues are unique to the U.S. maritime industry, including a preoccupation (albeit understandable) with security, a critical shortage of federal funding, record breaking cargo volumes and congestion, and never before experienced strains on the nation's intermodal infrastructure.

The effect on shippers has been equally dramatic. While previous reactions by major importers have typically been temporary diversions of cargo, many shippers say they're making permanent changes in their supply chain to avoid certain ports altogether or alternatively, to move some cargo to an air freight program.

A stroll through the convention hall during last September's annual conference of the American Association of Port Authorities pretty much sums it up-security remains at the top of the list for the maritime industry. Booth after booth of exhibitors' products and services were devoted to this singular topic. "Security has been the fastest growing and least controllable cost we have had over the last couple of years," acknowledges Bernard S. Groseclose, Jr., President and CEO for the South Carolina States Ports Authority.

The maiden voyage of the 8,200 TEU vessel MSC Texas arrives at the Port of Long Beach in October.
And, like many other executives in the maritime industry, he feels the pressure of having to do more with less. "We have a certain frustration with the lack of commitment by the federal government to step up to the plate as they have with airports and other elements of our nation's security." In response, the Port of Charleston became the first major port to implement a security surcharge, which began last July. "Our charge is based on a fee to the shipping line, which is assessed at a rate of $1 per foot of the length of the vessel, and that is per port visit of the vessel. That applies to all vessels-containerships, cruise lines, barges. We expect that the surcharge will probably generate around one and one-quarter million dollars per year, based on what we see today."

Groseclose says he's a little curious as to how other ports are coping with the extra costs associated with increased security rules and regulations. "I've asked other port directors, 'How are you dealing with these extraordinary cost increases?' The Port of Charleston is just an operating port. We receive no subsidies from the state, and we have no taxing ability. We have to operate like a business, and like a business we have to cover our costs. We have a very good rate of return on our revenues and our activity at the port. It's a very productive operation. But, there has been nothing out there to offset the rapidly increasing operating expense for security. We've gone from about 48 people on our port police staff to nearly 80 now, and that's just in the last 3 years. In addition, we've gone from spending just over $2 million per year on security to over $4 million per year. The federal government has dribbled out a little bit of port security grant money for capital improvements, but it doesn't come close to what ports require and it doesn't do anything to cover operating costs," he says.

Not only is security costly for seaports, it's costly for shippers too, and in a variety of ways. For example, a recent study by Deloitte Touche Tohmatsu warns that the loss from a security breach of just one shipping container could cost companies up to a collective $1 trillion. Consider that a single case of mad cow disease in 2002 cost the Canadian beef industry $2.5 billion, while the costs of cyber attacks last year reached $12.5 billion. "Global business organizations are now squarely in the front line when it comes to protecting their supply chain, their data, their brand, and their very existence," says Jerry Leamon, Deloitte global managing partner for clients and markets. "If companies don't take steps to protect their employees, customers, shareholders, and society from risks now inherent in their businesses, they also risk more costly mandated government regulations." Finally, "In the new secure economy, CEOs are not only asking themselves how they can increase shareholder value, but increasingly, 'What can destroy our brand?'"

The upside is that there's a positive correlation between security investments and efficiency. According to Deloitte, one major private-public supply chain initiative resulted in cost savings of between $378 and $462 per shipping container.

Beth Ann Rooney, Director of Port Security, for the Port Authority of NY & NJ, says that, "We have clearly dealt with the physical security of vessels and facilities, but we're a long way from securing cargo." She cites the incident that occurred outside New York harbor last July, which prompted the U.S. Coast Guard to detain the CSAV containership Rio Puelo, after the Department of Agriculture received an anonymous email stating that containerloads of Argentine lemons were contaminated with a "harmful biological substance." Although the lemons turned out to be free from contamination, it took over a week for the ship to dock in Elizabeth, New Jersey, and the lemons had spoiled by then. CSAV told officials from the Department of Homeland Security that the incident cost the Chilean shipping company $318,000 in out-of-pocket expenses.

Rooney says, "We don't yet have clear protocols and procedures to deal with those types of emergencies," and when it comes to responding, in the case of NY/NJ, "it's complicated by the fact that you have two states, multiple local jurisdictions, local mayors, Senators, and everyone gets to have a say." The focus for many ports now, as the 'Operation Lemon Drop' incident illustrates, is "response and emergency management-business continuity issues," says Rooney. As World Trade went to press, the port was preparing to conduct a Department of Homeland Security-sponsored 'war game.' According to Rooney, "We're going to look at massive disruption, a complete port shutdown. We want to know when the port would reopen again and what cargo would get priority. Do oil and chemicals move first, or is it food and retail? What about passengers? And, what is the economic impact day-to-day in the case of a complete shutdown?" This is the first 'war game' of its kind, she adds. "We've had a lot of exercises geared towards response, but this one's geared towards consequence management and business resumption."

Part of the problem is that the federal government "has not worked out protocols for how to start the trade and transportation system after an event. That's the reality," states Stephen E. Flynn, senior fellow at the Council on Foreign Relations. "The biggest unaddressed question right now is that while there have been efforts to improve the security of the system to prevent a terrorist incident, there has yet been no planning or exercise done for how to restore the system should our preventive efforts fail. There has to be a national level incident-management scheme. They're putting the system together, but they haven't started managing incidents yet."

In written testimony prepared for "The 9/11 Commission's Maritime Transportation Security Proposals," Flynn gives his assessment of the state of U.S. seaports.

He writes, "I am confident that the 9/11 Commission would readily acknowledge that, had they had more time, one of the areas they would have spent it is on would have been in fleshing out their recommendations for improving transportation security specifically, and critical infrastructure protection more generally. This is not the strongest part of their report. Still, the Commission has performed a valuable service by documenting:

(1) That during the decade before September 11, 2001, counter-terrorism measures as a part of border security was not seen as a national security matter and were largely neglected.

(2) That there remains a serious lack of balance in our investment in protecting the transportation sector with over ninety percent of the nation's annual investment in TSA going to aviation-and virtually all of that has been dedicated to only passenger security.

(3) That the risk of harm is great or greater in the maritime and surface transportation modes.

(4) That TSA still not has developed an integrated strategic plan for the transportation sector nor has it developed plans to protect the individual modes of transportation."

"Based on my assessment of the state of transportation security both before and since 9/11, I agree with all these findings. I would add to that list my concern that many of the helpful measures being pursued by the administration in the area of maritime transportation security are not being adequately resourced to address the threat to this sector."

Regarding security funding, Flynn notes, "Since 9/11, Washington has provided only $516 million dollars towards the $5.6 billion the Coast Guard estimates U.S. ports need to make them minimally secure. In the FY2005 budget, the White House asked for just $50 million more. Given the severe constraints on the state and local budgets within the jurisdictions where America's commercial seaports are located, it is difficult to see how these ports are in any position to bankroll the new security requirements that have been thrust upon them."

"Congress also failed to authorize new funding to pay for staffing and training Coast Guard inspectors to verify that everyone is following the new rules. This is so even though the Maritime Transportation Security Act mandates that the Department of Homeland Security certify annually that ports and ships engaged in commerce with the United States are compliant with the code. The evidence to date is that much of the international maritime community is simply going through the motions. On the day the ISPS (International Ship and Port Facility Security Code) went into force (July 1, 2004), only one-half of the world's port facilities had gotten around to submitting their security plans-and most were thrown together in the final weeks before the deadline. In the United States, according to a GAO report released on June 30th, every one of the 2,913 facility plans submitted to the Coast Guard in early 2004 were found to be deficient. Just 120 had undertaken the necessary remedial steps to secure approval by mid-June 2004."

The (not so) good news-cargo volumes are growing

The good news is that cargo volumes are on the rise, the bad news is that cargo volumes are on the rise. More than any other port(s), Los Angeles and Long Beach have felt the effects of the massive influx of cargo from Asia. Historically, the port complex has been the gateway for inbound Asian trade, and therefore it's no surprise that LA/LB was one of the first to exhibit 'stress cracks.'

China's Minister of Communications, Zhang Chunxian told attendees at a maritime industry conference recently that the container volume from China is likely to reach 60 million TEUs this year, and hit 100 million TEUs by 2010-those numbers are daunting.

Currently, shortages of longshore labor, port congestion, and intermodal service problems are hurting the movement of freight at LA/LB, but many industry executives believe it's only a matter of time before similar problems crop up along other Pacific Rim ports.

During the height of the peak shipping season this fall, between 20 and 30 vessels were forced to drop anchor outside the breakwater in LA/LB, while the time required to 'work' a vessel doubled from a normal 3-4 days to an average of 6-7 days. Ongoing rail problems only exacerbated the issue. To its credit, the port complex has pursued such initiatives as the Alameda Corridor (a high-speed rail corridor to expedite intermodal freight), PierPass (the extended gate hour program, which will become effective in early 2005), and has hired additional longshore labor. It may be too late, because some shippers have already made changes in their supply chain strategies.

J. Michael Zachary, Director of Port Planning and Logistics for the Port of Tacoma remarks, "The biggest thing we're seeing is a diversification of cargo coming up to Tacoma. The reason we're seeing it is that the ships are being put off schedule because of the circumstances in Southern California; they're either having to wait to get in to berth, they're not being off-loaded in time, or the boxes are not being moved inland according to their schedule. We have seen an increase not only in actual boxes arriving, but we've also seen a tremendous amount of customers actually coming to the port and saying, 'I'm ready to make a move here-how much can you take?' Our objective is making sure that what we tell them is correct, i.e. that we do have capacity, and that the capacity will perform. We're talking mostly rail capacity, not only in and out of the Port of Tacoma, but throughout the entire state of Washington and the Pacific Northwest region."

Zachary said that at the beginning of the year, BNSF and UP railroads were spending most of their money of capacity improvements along the southern corridor. However, when the congestion started appearing in June and July, the railroads began spending more on increasing capacity on other routes. "The dollars spent today (on rail routes) do not give us increased capacity tomorrow or even next month. But, it does show that the railroads realize that they need to increase capacity, and they understand that cargo is coming north."

Obviously, because Southern California represents a market of 28 million people, a dramatic shift in freight movement isn't likely. Yet, there's a lot of freight that transits LA/LB on it's way to other markets, such as the East Coast, the Southeast, and the Midwest. "The Midwest and the Northeast have also been our breadbasket," says Zachary, and the logistics infrastructure to serve those markets is already in place. "With more cargo coming into those lanes, costs are actually driven down." The bulk of diverted cargo the Port of Tacoma is now handling is that which is, "everything north of Memphis and east of Chicago." Meanwhile, freight destined for the Southeast is also on the rise.

As for all-water routes from Asia to the U.S., the post-Panamax vessels still can't pass through the Panama Canal, and the Canal is "nearing maximum capacity levels," according to the Panama Canal Authority. Even still, most every port along the U.S. East Coast is reporting increased container volumes from Asia. JAXPORT, the Jacksonville, Florida, port authority, currently relies on feeder vessels to accommodate Asia trade. However, "our goal is to have direct service to Asia," says a spokesperson for the port. "It's no secret that by offering direct service to Asia, we'll open up tremendous growth."

Furthermore, while the long-standing "logistics philosophy" has for years revolved around using LA/LB as a gateway to the U.S. with a mini-landbridge (rail) to the East Coast, the reality is that such as strategy may no longer be saving time or money, asserts Zachary. "From a logistics point of view, Norfolk Southern and CSX do not have a very good east-west intermodal service, so the cost and the reliability from an East Coast port getting into Columbus, Ohio, for instance, or Louisville, Kentucky, or the Tennessee area, is not there. We're seeing traffic destined for those areas (which would have previously gone through LA/LB) now going through us. It's really picked up since June and July, and each month is a significant increase over the previous month." He adds, "The people we're talking to-shipping lines, railroads, 3PLs, logistics companies-are saying the only reason they went through LA/LB before was because of the local market, and also because there was a cost structure down there. Once they make this move (to the Pacific Northwest), they find that the cost structure is better going through the northern tier rather than Southern California, especially for the inland distribution aspect."

Another advantage, says Zachary, is the high level of community support for the maritime industry. "Up here, [longshore] labor and the PMA (Pacific Maritime Association) have voiced their support to the increased capacity and the willingness to make it work." Meanwhile, in Oregon, Washington, and British Columbia, "The Departments of Transportation have realized that the Pacific Northwest is a major gateway for freight. The state of Washington, for instance, has created several 'freight mobility' initiatives. And, a lot of our politicians are looking at what's happening down in Southern California and learning from the lessons."

The Port of Charleston has also experiencing changing freight patterns. "Since the ILWU lockout, we have seen some shifting of business," says Groseclose. "Some of it may be related to that, but there's also been changes in the domestic market. The Southeast is becoming a bigger market and shippers are starting to look at things differently. Why not all-water to the East Coast?"

Groseclose also sees the limitations with the Panama Canal, which he believes "puts more emphasis back on the Suez [canal] route, particularly from Southeast Asia to the U.S. East Coast. If you look at the growth in India and China, what we're seeing is growth that's better than 25 percent annually. Coming west through the Suez Canal is not a bad alternative. We're already seeing more containerized freight from China and India."

He adds, "My biggest concern is the state of our infrastructure in the country. The congestion on highways, roads, all the way to links between terminals and rail yards, for instance. I think we've got a really serious issue facing our industry, and it impacts everyone in the intermodal transportation process. How do we move this freight to market in a timely fashion? Rail is a weak link, certainly, but at the same time our highway system is not necessarily a great alternative. If rail was to be improved it could become a viable opportunity to shift some of that cargo-to get it off of the highways."

Indeed, a study by the Association of American Railroads (AAR) asserts that if 25 percent of freight volume is shifted to road from rail, then 3.3 million truckloads of freight could be taken off the highways. Such a move would save commuters an average of 44 hours each year and reduce congestion costs by an average of $620 per household each year in the 49 major cities reviewed. "One freight train can carry as much as 500 trucks, and one intermodal container train can carry nearly 300 truck trailers," remarks Edward Hamberger, the AAR's president and chief executive.

Nonetheless, Groseclose says the problems surrounding infrastructure and transportation have thus far generated more talk than action. "Congress just put another extension on T-21 (the federal transportation bill). When are we going to do something about it? We keep on delaying the inevitable here." He is referring to the passage by Congress in late September of an eight-month extension on a federal spending plan for roads, highways, and bridges, which means that lawmakers will have to start from scratch on the bill when it convenes next year.

The challenges of handling surging trade volumes are not just limited to LA/LB or even U.S. seaports. An official with IE Canada, the Canadian Association of Importers and Exporters, said recently, "We have serious intermodal problems and we need collective solutions, rather than individual finger-pointing." The group is putting together a public-private shipping coalition to address the issue. As it stands now, "The importer is paying for the delays that are occurring," says the official, noting that at the Port of Vancouver some cargo is taking 15-17 days to reach Toronto or Chicago, rather than the usual 5-7 days.

The Port of Tacoma's J. Michael Zachary opts for the 'make lemonade from lemons' approach, so to speak. Regardless of the problems caused by the huge increase in cargo, he says it's all been "worth the wait."

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