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The tide's starting to turn, so to speak, in part because shippers have come off one of the roughest peak shipping seasons in years. Without pointing fingers, suffice it to say that the unprecedented volume of cargo coming out of China into the U.S. combined with a series of breakdowns along the transportation supply chain made resulted in significant congestion, which mostly affected the port complex of Los Angeles-Long Beach, the major gateway for this trade lane.
Michael Hokana of the federal Maritime Administration's (MARAD) Office of Ports and Domestic Shipping, is an advocate for short-sea shipping.
"We see short-sea shipping as another phrase for domestic waterborne shipping here in the United States. It's about a billion tons of cargo per year-about 14 percent of the national cargo tonnage. It's fairly inexpensive. It costs less than 2 percent of the total freight bill for the United States. It provides roughly 124,000 direct jobs and generates about $10 billion in annual freight revenue, including $300 million in federal tax and $55 million in state tax."
The major components of short-sea shipping are the inland waterway trade; the Columbia-Snake River and Ohio-Mississippi River systems, which accounts for about 622 million tons of freight; and the Great Lakes system, which amounts to about 115 million tons-mostly coal, limestone, and crushed rock, explains Hokana. "The final component is domestic ocean, which covers service from the United States to Puerto Rico, Alaska, and Hawaii. This is non-contiguous trade, or offshore trade. The tonnage is not as high, and most of that is actually container trade. The number of containers moved by short-sea shipping to Puerto Rico alone is 370,000 FEUs annually."
What's driving short-sea shipping"MARAD's leading the charge on the short-sea shipping initiative as a way to help the United States with other national problems, like congestion, which is seriously affecting highways like the I-95 corridor and the I-5. We're trying to get some cargo off of trucks and roads, and where it makes sense, to get it on the water," says Hokana.
"About 5 years ago, Matson tried a waterborne service on the West Coast, but it didn't work out. They had a couple of ships that were fairly old, they needed a lot of crew, and they were not the right sized capacity for the service. The route was Los Angeles to Oakland, then Seattle and back again."
"However, in the last 3 years, Osprey Lines has found success by starting a service to Houston from the Louisiana area that transported containers filled with bags of grain, which were being shipped overseas in a U.S. food aid program. This 'guaranteed cargo' helped sustain Osprey Lines, and they branched out with short-sea services in other areas. For example, putting containers on barges all the way up the Mississippi from Baton Rouge, Louisiana. Osprey Lines bought an offshore supply vessel, the Sea Trader, and converted it to carry containers. The vessel calls include ports such as Houston, Tampa, and Brownsville, Texas."
"Another short-sea service, PIDN (Port Intermodal Distribution Network), is moving international containers that arrive in the lower port of New York up to Albany. Part of the start-up for this program came from a 2-year clean air grant from the state of New York; it takes trucks off the road and it also means cleaner air. That grant may run out and PIDN may run into some trouble, but the barges are carrying containers and the service is developing. Also, the port of Bridgeport, Connecticut, is starting a service from lower New York harbor to Bridgeport. That's going to help out Connecticut, and it's being funded by a $5 million grant. They think they can get 50,000 trucks off the road each year, once the program is in full-swing in about 2 years."
One of the biggest obstacles is the Harbor Maintenance Tax (HMT), says Hokana. "Basically, there are several parts to the HMT, when it comes to short-sea shipping. First, when cargo arrives in the U.S. from overseas it gets taxed as an import. Then if it's transshipped from the Port of New York to Virginia, for example, it gets taxed again; that's really hurting the start-up of short-sea shipping operations. Trucks and rail don't have to pay that second tax. On a typical container with a value of $100,000, it can add up to hundreds of dollars."
The HMT is also an issue for border trade, notes Hokana, who adds that MARAD would like to see an exception from the HMT extended to the U.S.' NAFTA partners. The good news is that legislation is being introduced in Congress early in 2005 to address the HMT.
Hokana is quick to point out that despite this challenge, there are some developments that are exciting. "One of the biggest stories in my opinion is the Brownsville, Texas to Houston short-sea route, which is part of a system that may reduce congestion at the ports of Los Angeles and Long Beach. This particular project is being spearheaded by Hutchinson Wampoa, one of the world's largest port developers, who is putting $1.2 billion in Ensenada, Mexico to deepen and expand that port. A major U.S. rail company-Kansas City Southern-just bought a northern Mexico rail line from there over to Brownsville. The water leg is distributing it to Houston, where you can then go by rail to anywhere in the nation." Previous analyses have estimated that shippers would save $400 per container if it moved to Brownsville from Asia rather than through LA-LB. Transit time would also be reduced.
Saving time and money is always an attraction for shippers. To help make short-sea operators even more competitive, Hokana says that old, slow vessels also need to be replaced. "Operators also need to know that the traditional 'build it and they will come' mentality is also a very tough nowadays for the banks," he warns.
In the meantime, the trucking industry is also beginning to see the advantages of short-sea shipping, says Hokana. "We met with Craig Fuller of Xpress Direct, and he told us that getting containers from Seacacus, New Jersey to Long Island, through New York City, is just a nightmare. They can't keep drivers; the trucks are always late; they need another alternative. So, now we're seeing the people that control what mode the cargo moves, starting to look for other choices."
Will shippers bite?It's clear that shipping community is beginning to take short-sea shipping seriously, says Hokana, just follow the money. He cites Hutchinson Wampoa, one of the largest terminal operators in the world. "They're huge, and they're selective. They were offered the chance to set up a hub terminal in Cape Verde off the coast of Africa. They took a look at it and they didn't see it as promising, so they didn't do it. On the other hand, they've put a lot of money into Freeport, Bahamas. It's a natural deepwater port and acts as a hub for European to South American cargo. And, they're putting a lot of money into the Ensenada project."
Finally, it appears that shippers too are ready to put their money where their mouth is, especially after having endured a peak shipping season wrought with so much congestion. "Some of these vessels really had a hard time in Los Angeles waiting two weeks out at anchor, then coming into port and waiting 6 days to get a gang, and maybe getting only half a gang (to unload the vessel)," says Hokana.
Indeed, maybe the breaking point has finally arrived for shippers, who may be more willing than ever before to look for creative solutions to keep their supply chains moving.
Sidebar: Profits Keep Carriers AfloatCarriers have been riding a wave of profits recently, but the pendulum will eventually swing back to favor shippers beginning next year, say maritime analysts. Chairman Steven R. Blust of the Federal Maritime Commission said last year: "I have heard it predicted that within the next few years the demand by shippers for capacity will meet up nicely with the supply of space, as carriers bring new vessels and new capacity into the trades."
While carriers are apt to benefit from another good year in 2005, changes in supply and demand are expected to materialize in 2006. New ships are entering the trade lanes and they have double the capacity of older vessels.
Ray Miles, the chairman of CP Ships, was quoted recently as saying that cyclical booms don't last forever. "Our view is that 2006 is probably going to be the first challenging year for the industry."
However, if the current rail and road congestion continues, more shippers could begin to shift freight to all-water service. This would offset the capacity glut. The question, though, is whether shipper demand will also continue growing. The answer, at least in part, is that China shows no signs of cooling down.
Furthermore, more high-value production will move to China, and ocean carriers can charge more for these cargoes. And, the elimination of textile quotas will also push even more textile and apparel production to China.