Lacking competitive juice

Lacking competitive juice Scathing state report says regulatory burdens threaten SoCal ports' ability to lure discretionary cargo.

By Eric Johnson

   A report released in June by the California state Senate Republican Office of Policy outlines a scenario in which the state's ports could easily become marginalized by the shifting patterns of trade unless California actively makes its ports more welcoming to shippers.
   The report hits upon two developments in recent years:
   ' A move by shippers to diversify the gateways they use to bring containerized goods into North America.
   ' Increasing regulatory barriers that California ports face in trying to lure discretionary cargo to Los Angeles, Long Beach and Oakland.
   In particular, the report dwells on the ramifications the widened Panama Canal ' which would allow larger vessels to make direct calls from Asia to the U.S. East and Gulf coasts ' could have on future trade through California ports.
   The report, compiled on behalf of state Republicans (the minority party in the state legislature), hints that an increasingly onerous regulatory landscape will hurt the ports' competitiveness going forward. Those regulations, primarily to offset air emissions and to help build infrastructure, have become a costly addition to the bills of shippers who move their goods through California.
   'Without swift and decisive action, this industry could go the way of aerospace and high-tech, extending the recession and driving more high-paying jobs to other states where job creation is a priority,' the report said. 'The recovery that is floating all boats in the rest of the nation appears to be bypassing California's ports. The ports of Long Beach, Los Angeles and Oakland appear to be suffering from another problem that may have been hidden by the effects of the recession. Increasing competition from other ports appears to be diverting an increasing amount of the discretionary cargo, which makes up the bulk of California's port activity, to other ports.'
   The report states that trade through Los Angeles and Long Beach constitutes one of California's biggest economic engines, processing more than $500 billion in goods in 2008, representing more than 40 percent of all U.S. containerized imports and nearly 30 percent of all exports, and generating more than $10 billion in state and local taxes.
   The worry is that dampened container volumes ' even amidst a surge in traffic since December ' is a symptom of California's eroding competitive advantage.
   'California is becoming less competitive as a global trade gateway and this decline in trade volumes is not a function of the economic downturn alone, but rather the result of trade policies, attitudes and politics both in California and in other ports domestically and internationally,' the report said.
   Chief among the worries are the prospects of a widened Panama Canal.
   The state Republicans' policy report points to a 2008 Drewry Supply Chain Advisors white paper on transpacific trade that categorically states the widening of the Panama Canal and development of cross-Suez trade will sideline the U.S. West Coast from a large percentage of future North American trade growth.
   Specifically, a widened canal would allow larger ships to call directly at U.S. East Coast ports on all-water services. And growth of trade from Southeast Asia and the Indian Subcontinent would completely bypass the transpacific.
   The Drewry white paper suggested that a set of locks that could accommodate 8,000-TEU ships (up from 4,800-TEU ships today) would push discretionary cargo headed anywhere east of Missouri out of the West Coast's sphere of influence.
   Port officials in Los Angeles and Long Beach are cognizant of these threats, and have been warning for years that other ports in North America are happy to point out to shippers the extra cost burdens they face in California.
   That said, they also point out the added costs for shippers who plan to more substantially use the Panama Canal and U.S. East Coast ports are unknown at this point.
   'Customers have bigger issues than a clean trucks fee in deciding where they want to route their cargo,' Port of Long Beach Executive Director Richard Steinke said at a forum in Long Beach in early March. 'We don't know what the canal fees will be. We do know what the costs of dredging will be (for U.S. East Coast ports planning to capitalize on the wider set of locks). I don't think we'll see this earth-shattering movement of cargo unless we don't do what we need to be doing. Cargo wants to come to Southern California. It makes sense for shippers and lines to come here. But if certain things don't happen, if projects don't get done or if there are labor issues, it will put questions into people's minds.'
   His counterpart in Los Angeles, Geraldine Knatz, added that 'cargo won't all shift on the first day the new locks open. We have to focus on what we're doing, because if it's not the canal, it will be something else. Our customers want to come here. They really do. It's our job to keep them here, to keep them happy.'
   In 2009, Southern California ports also began to offer financial incentives to shipping lines that increased their share of discretionary cargo. But some shift appears inevitable, no matter how happy the Southern California ports can make shippers.
   Maritime industry sources estimate more than 3 million TEUs would immediately shift from the West Coast to all-water service once the expanded canal opens for business, said Jeffrey D. Holt, managing director for infrastructure banking at the Bank of Montreal, in a January presentation to the Transportation Research Board conference in Washington.
   In late March, Jeff Siewert, director of international logistics for Home Depot, said at a forum organized by the Port of Long Beach that the ports were in fact doing a good job of luring back discretionary cargo.
   'This is a great set of ports, but it just seemed there was always a surprise waiting for shippers,' he said. 'But we're now considering putting more discretionary cargo through Long Beach. Long Beach staff was the reason. They reached out to Home Depot.
   'This will always be the gateway for local traffic, but what about discretionary traffic? There will always be a comparison for traffic going to inland points. We have to consider that and what's best for our supply chain and our end customer.'
   The state Republicans' report addresses those cost issues that shippers face in using California's ports.
   'The regulatory climate in California has not escaped the notice of the shippers, or California's competitors,' the report said.
   For instance, a container moving through one of the Southern California ports could be subject to as much as $150 in fees for clean truck and infrastructure programs, PierPass, the Alameda Corridor and air quality and congestion reduction. On a box that costs a shipper $2,000 from Asia, $150 is 7.5 percent.
   The Pacific Merchant Shipping Association, which lobbies on behalf of container lines and terminals on the West Coast, estimates the state's air quality regulator, the California Air Resources Board, has collected $5 billion since 2007 in various programs to eliminate emissions from port operations.
   The report suggests that state Democrats have attempted to use the ports as a way to raise funds for projects that go beyond the scope of goods movement. And those moves, the report said, have led to excessive fees on California-bound containers.
   'Despite their importance to the economy, the state's ports and trade infrastructure have been taken for granted for years, and the competitive advantage that the state has enjoyed and the economic benefits they have brought could very well disappear over the next decade,' the report said.
   Volume at Los Angles dropped 14.7 percent in 2009, and at Long Beach, 17.8 percent. Together the ports shed more than 2.5 million TEUs, nearly equivalent to total throughput at Savannah, the nation's fourth-largest port.
   'The precipitous drop in trade coming through the ports acted as an anchor for unemployment numbers, as the hours for longshoremen in the San Pedro ports dropped by 31 percent and the Bay Area dropped by 24 percent,' the report said. 'In real terms, in February of 2006, Los Angeles and Long Beach employed almost 1,200 longshoremen each day. In 2009, that number had dropped to 660 jobs, a drop of almost 50 percent.'
   Terminal operators, however, said in early August they have increased labor levels 37 percent since January as volume has increased through the ports. As of late July, the ports were collectively handling about 25,000 truck turns per day, up from a low of 19,000 in 2009, but well below the peak of about 35,000 per day in 2007.
   Meanwhile, the report mentions nine existing ports or future projects that have already (or could potentially) lure cargo away from California ports, namely:
   ' The container terminal in Prince Rupert in British Columbia, Canada.
   ' A potential port to be developed in Baja Mexico called Punta Colonet.
   ' The established Port of Lazaro Cardenas in Mexico.
   ' The ports of New York-New Jersey, Virginia, Baltimore, Savannah, New Orleans, and Houston.
   And it suggests a handful of remedies, from a regulatory perspective, to recharge the competitiveness of the state's major container ports, including:
   ' Invest air quality infrastructure dollars raised through a state proposition that California Republicans say 'are collecting dust at the (CARB), instead of waiting for matching dollars that may never materialize. (CARB) is sitting on over $750 million that could be invested in grade separations on the Alameda Corridor and in cold-ironing berth electrification.'
   ' Devote funds to replace the Gerald Desmond Bridge, which links the two ports to a key highway used by trucks to ferry containers to inland distribution centers. 'Where other states are speeding the investment in infrastructure upgrades, California remains 10 years away from completing this major bottleneck in the goods movement network.'
   ' Push for air quality and infrastructure costs of trade to be shared evenly on a federal level. 'California can no longer afford to be the only state imposing fees to address the costs of trade. These costs should be shared by all the beneficiaries of that trade in the form of a consistent federal trade policy.'
   ' Eliminate uncertainty for shippers. 'Next to additional fees, the biggest impediment to job growth at the ports is the lack of certainty as to what new regulatory scheme will be imposed by (CARB). Constantly changing rules and requirements are an additional barrier that drives business away.
   'In essence, California has banked for decades on being the only game in town,' the report said. 'We have assumed that big retail chains and the shippers bringing their products from China would continue to pay higher prices for the convenience of using our ports. Relying on California's huge market, state policymakers have levied increasingly significant costs of shippers and freight lines. These California-only costs, combined with the increased cost of rail, the infusion of new competition throughout the nation along with the tearing down of the artificial barriers in the Panama Canal have left California in a precarious position.'
   (For links to the full report and a May report on the costs and merits of shippers using the ports of Los Angeles and Long Beach, go to    www.AmericanShipper.com/links).' Eric Kulisch contributed to this report.