Expert says global trade could underperform without proper infrastructure investment, marine terminal process optimization.
Economists and international development agencies are bullish on international trade, with forecasts that cross-border exchange of goods will continue to expand at historic rates.
But infrastructure and logistics impediments could slow the rate of trade growth, cautioned Walter Kemmsies, the chief economist at marine and freight engineering firm Moffat & Nichol. At a certain point, he said, the increased cost of importing and exporting due to congestion could discourage shippers and lead them to focus on their domestic markets, or switch to more efficient ports as their international gateway.
The recent gridlock at U.S. West Coast ports illustrates the potential damage businesses face when supply chain bottlenecks occur. The situation cost importers and exporters billions of dollars in lost sales and extra transportation and storage expenses. Frustration reached the boiling point as goods sat for weeks in ports, warehouses or farm sheds waiting to get on a ship. The situation reached a crisis level because of the labor dispute between the longshoremen’s union and terminal operators, but the underlying problem is that the marine intermodal system was ill-prepared from an infrastructure and operating standpoint to adapt to the changing dynamics of the container trade, including the introduction of much bigger ships.
Positive trade projections “are not factoring in the fact that can only happen if we invest in a lot of infrastructure and really improve the way we move things around the world, and dramatically reduce waste,” Kemmsies said during a mid-January panel presentation at the Transportation Research Board conference in Washington. “Trade cannot grow if it’s becoming very expensive.”
Trade appears poised to expand as long as the costs don’t get out of hand. A major phenomenon is the rise of the middle class in emerging economies. According to the Organization for Economic Cooperation and Development (OECD), there will be more people in the global middle class by 2030 than were in the world in 1980. Higher disposable income is driving global demand for higher quality goods and food products because people want a better standard of living.
Since 1950, world trade in manufactured goods has grown twice as fast (7.2 percent) as global economic activity, according to the World Trade Organization, spurred on by the reduction in trade barriers, information technology, outsourcing, population growth and containerization in ocean transport. Experts expect the trend to continue at a 6 percent compound annual growth rate during the next 10 years.
According to the OECD’s recent transportation outlook, shifting global trade patterns will lead to a fourfold increase in international freight transport volumes by 2050, with average transport distance across all modes increasing 12 percent.
Tonnage at world ports is projected to increase from 17 billion tons in 2010 to 66 billion tons in 2050, the International Transport Forum report said.
In the United States, international container volumes at 12 of the top 14 ports (minus Miami and New Orleans) grew 4.7 percent to 39 million TEUs in 2014 to exceed their pre-recession peak as the U.S. economy continued to strengthen, according to data from the American Association of Port Authorities. Loaded containers reached an all-time high of 25.5 million TEUs, with imports up 6.8 percent to 17.8 million TEUs.
The robust container business caught the maritime sector by surprise and contributed to congestion at a handful of major ports.
Container trade to and from the United States is projected to grow much more slowly this year because of the congestion and labor turmoil at West Coast ports, according to Mario Moreno, an economist at IHS. January imports were down 10 percent and cargo diversion to Canadian and Mexican ports, as well as increased use of air cargo, will restrain container import growth in the first half of the year.
The new driver in the U.S. container market will be exports, Kemmsies argued. Compound annual growth for exports since 2006 is 3.2 percent versus 0.3 percent for imports. The data shows that exports dipped 0.5 to 1 percent last year, but Kemmsies said that was because of congestion and the strong dollar reducing demand for American goods and services, not global economic weakness, as many assume. Kemmsies said the answer lies in empty containers. In 2014, almost 700,000 more standard shipping units than the prior year were quickly turned around and sent back to the main production countries without circulating inland where they could be reloaded with outbound goods.
Nonetheless, Kemmsies predicted exports in containers will grow faster than imports during the next five to 10 years, in part because many agricultural products that previously were shipped by bulk transport are being converted to containers. The trend is a result of several factors, including overseas demand for more identity-preserved, specialty grains (example, non-genetically modified soybeans) that can be contaminated when dumped in large holds at grain elevators or rail transload facilities. High-end consumer soy trades on the Chicago Mercantile Exchange at almost 50 percent more than lower quality soy that is sprayed with pesticides and often used as animal feed. Shippers want to protect the value of their products and at roughly $12 per bushel can afford the higher cost of container transport.
The mode shift is also motivated by the desire of overseas customers for smaller shipments to prevent rotting, limited transport networks in Asia to move bulk products to inland destinations and the fact that U.S. ports are pouring more dollars into container terminals than bulk facilities.
More trade, especially of the export variety, is welcome news because it generates economic activity and jobs that tend to pay more than those focused on solely serving the domestic market. Export growth is also needed to help close the goods trade deficit and maintain the dollar as the world’s reserve currency.
The U.S. balance of payments worsened by another $505 billion last year and during the past four decades the cumulative trade deficit has reached about $8 trillion. The net outflow of U.S. dollars in the form of import purchases is increasing the supply of dollars held overseas and eventually could debase the dollar’s value, and lead investors to sell dollars in favor of currencies that can retain value, economists say.
In 2010, President Obama set an ambitious goal of doubling exports by the end of 2015, but so far U.S. exports have only grown about 48 percent. Kemmsies said the nation needs to more than double exports if it wants to close the trade gap because of the disparity in value compared to imports.
Import and export tonnage, excluding energy commodities such as coal and oil, is almost the same, yet the trade deficit is still large because the United States imports high-value consumer goods and exports low-value commodities such as grain. About 70 percent of such exports moves by bulk transport, while the mix between bulk and container imports of commodities is about the same.
Ocean carriers are ahead of the demand curve, investing in mega-size container vessels mostly because they are much cheaper to operate on a per box basis. The influx has led to overcapacity and low rates for the time being. These leviathans of the sea can only access large ports with adequate water depth, berth space and rail connections, which is resulting in container trade being routed through a few locations and in concentrated periods. The top 12 U.S. container ports already handle 87 percent of international and domestic container traffic, according to the American Association of Port Authorities. Kemmsies said their share is likely to grow because the cities that surround them are growing local markets for imported goods and building greenfield ports in non-urban areas is extremely difficult and expensive. Big ships also require fewer trips to deliver the same amount of cargo, which means that containers are washing over ports in big waves and creating unpredictable periods of intense truck traffic.
The concentration of container volumes on fewer vessels and in fewer ports has put pressure on marine terminals to right-size their operations and redesign, in conjunction with other cargo interests, business processes for supplying chassis and interfacing with motor carriers and railroads.
Ports and terminal operators for the most part have done a good job improving the flow of cargo inside their facilities by dredging access channels, adding larger cranes, building on-dock or near-dock rail facilities, and installing more truck gates and sophisticated operating software. Notwithstanding the short-term need to catch up to the big-ship realities, those investments and innovations are not being matched outside the gates by the public sector, Kemmsies said.
The acclaimed freight economist, a highly sought speaker at industry events, argues that the U.S. transportation system isn’t up to the task because of inadequate inland infrastructure that leads to and from ports, and logistics networks that traditionally were biased towards imports. More public and private sector infrastructure investment and logistics process improvements are needed, Kemmsies believes, to better support containerized, as well as bulk, exports.
He is not alone in that critique. Many freight transportation advocates, such as the Coalition for America’s Gateways and Trade Corridors, maintain that the federal government needs to finish development of a freight transportation strategy, establish a dedicated freight fund tied to a source of revenue, appropriate all user fees for harbor dredging for their intended purpose and take other steps to improve goods movement so the United States can remain competitive in global markets.
And freight infrastructure needs to support domestic goods movement as well as international traffic. They share the same highways, bridges and rail lines when outside port boundaries. U.S. freight volumes are expected to increase 45 percent by 2045, according to the Department of Transportation. But investment in transportation infrastructure as a percentage of GDP, across all levels of government, is less than 2 percent. And business leaders complain the investment is not strategic or multimodal.
The failure to adequately invest in infrastructure represents “a slow-going implosion of American competitiveness,” Sen. Richard Blumenthal, D-Conn., commented during the hearing.
Transportation planners direct too much money to highway projects while underinvesting in the intermodal system and inland waterways, which efficiently move grain, chemicals, fertilizer, petroleum and other bulk products, Kemmsies said. Maintaining locks, dams and river navigation channels, as well as separating road and rail crossings, often results in greater economic return for the nation, he noted.
Unscheduled lock outages and other impediments on the Mississippi River, for example, have made barge traffic less predictable and contributed to the Port of New Orleans’ share of agriculture exports falling to 45 percent from 65 percent at the beginning of the century.
Investments in highways and bridges, including dedicated truck lanes, are still needed to increase capacity, but projects must be more carefully selected based on benefits, he added.
A well-known problem to agriculture producers, referenced earlier, is that containers aren’t readily available where export products are located. Ocean carriers often encourage customers to deconsolidate 40-foot containers at warehouses near the port so the empty boxes can be quickly shipped back to Asia to carry more lucrative inbound loads. Meanwhile, containers that make transcontinental moves by rail or truck typically land near major population centers where consumers live. Midwest agriculture shippers often have to wait days or weeks to get the required equipment and pay hefty repositioning fees because of the equipment mismatch.
SB&B Foods in Casselton, N.D., for example, pays $900 for each empty container trucked to its packaging center, Kemmsies said in Feb. 10 testimony before a Senate Commerce, Science and Transportation subcommittee. The time delay for acquiring equipment is serious because some agriculture goods trade under quota systems established in free trade agreements and not hitting the quota in a given calendar year could impact the quota level for the following year. And, the Moffat & Nichol economist said, farmers and agricultural traders can lose overseas customers if they don’t meet tight delivery windows.
One solution to address this structural deficiency, according to Kemmsies, is for logistics providers and railroads to invest in more transload facilities that allow 53-foot domestic containers to be loaded with commodities in the nation’s heartland and sent by rail to special facilities near ports where they can be transferred to 40-foot ocean containers that are plentiful close to the source.
Katie Farmer, vice president of consumer products for BNSF Railway, suggested industry find ways to consolidate grain loading near inland intermodal logistics parks where containers are also plentiful.
Metropolitan planning organizations and state transportation departments may be even less prepared than marine terminals to deal with the onslaught of container traffic, according to Kemmsies.
“Planning and other congestion issues went dormant during the economic recovery from 2009 to 2014. It is not a matter of dusting off old plans because the mix of imports and exports has changed to become more balanced,” he wrote in a column for the March issue of American Shipper. “The mix may change even further if infrastructure improvement plans are more focused on exports, which are needed to sustain the economic recovery. Recent data trends indicate congestion for imports has a more negative impact on exporters because ocean carriers are more averse to losing time getting containers back to import origins.”
Without adequate infrastructure investment and automation of marine terminals, the flow of cargo will slow down and prices will increase to ration capacity, Kemmsies warned. The 18,000-TEU vessels that operate in the Asia-Europe lane likely will be deployed in the transpacific market by the end of the decade and need to be turned in four or five days. The only way to do that is with a high degree of mechanization.
“So if I have any nervousness about the future of freight volume growth, it’s because we need to innovate and build infrastructure a lot faster, particularly because as the volumes grow they concentrate in a few places and congestion worsens,” he said at the TRB gathering. And when the cost of trade is high, shippers may make the calculation to simply use expensive domestic inputs.
Port congestion occurs in other parts of the world, too. Even Rotterdam, one of the best run ports in the world, has experienced traffic delays because the road networks were not prepared for the thousands of truck trips generated by the new-generation vessels.
“It is time to focus on sustainable trends and rework the freight movement system,” Kemmsies wrote. “What worked for a world population of 4 billion and a 1-billion-person middle class will not work for a 7 to 8 billion population and a global middle class of 5 billion people. Attributing growing congestion problems to a range of issues [weather, stevedore contract negotiations, truck driver shortages, and chassis imbalances] will not cut it. Industry participants must rethink how to handle flows based on the intermodalism that characterizes U.S. freight movement.”
The OECD report echoed similar themes, including the need for more multi-modal connections and adapting infrastructure, including port-hinterland connections, to deal with big ships.
This article was published in the April 2015 issue of American Shipper.