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American ShipperIntermodalWarehouse

The money chase

The S.C. Ports Authority banks on profit-making strategy to finance infrastructure at Charleston and elsewhere.

   The Port of Charleston this year is likely to host for the first time a 14,000-TEU containership—and not just a trial run by a single vessel, but an entire string of vessels operating in continuous service—following the Panama Canal’s opening of a bigger set of locks in late June, the top port official in South Carolina predicts.

   Vessels that size won’t be able to enter fully loaded until Charleston’s main harbor is deepened to 52 feet by the end of the decade. In the meantime, the South Carolina Ports Authority (SCPA) is doing everything possible to generate the cargo demand and scale up facilities to meet the needs of ocean carriers operating mega-size ships.

   Projects in progress, or on the drawing board, include refurbishment of the wharf at the Wando Welch Terminal, the addition of automated truck gates, harbor deepening, construction of a new terminal at a former Navy base, an expansion of the inland port in western South Carolina, and a new port in Jasper County to be co-developed with the state of Georgia.

   The port authority’s strategic vision will only be realized, said Chief Executive Officer Jim Newsome, if it raises profits to the point of doubling return on capital and diversifies investment sources. The prescription applies to the port sector writ large, he added, because the cost of capital is disconnected from what terminals earn today, particularly when it comes to new terminal infrastructure.

   The SCPA made $30 million last year, twice as much as in fiscal year 2014, on $197 million in revenue. Midway through the current fiscal year the port was on track for $40 million in operating income, which would push the return on investment to 4 percent from 3 percent.

   “That’s not sufficient. In the public sector port business you should earn a minimum 6 percent because it’s a very investment-driven business,” Newsome said in an interview from his office in downtown Charleston overlooking the harbor entrance at the mouth of the Cooper River. “So we need to seek some modest revenue improvement. There is no way around it.”

   That means continuing to grow cargo volumes and hike prices on ocean carriers for services, such as container handling, that were sharply discounted after the recession to lure back and maintain cargo business.

   The SCPA, which operates the terminals itself with help from private stevedores, has had some success pushing through modest rate increases—about $20 per container along with a simplified fee structure—in the past 18 months and will ask its customers for similar increases again, according to the port director.

   “We’ll have to renegotiate a lot of contracts in 2017,” Newsome said.

   Several East Coast ports are working feverishly to catch up with big-ship deployments, but right-sizing infrastructure for the new behemoths of the sea takes time and lots of money.

   Ultra-large container vessels, introduced by the liner industry as a way to reduce operating costs in a low-margin era, will only be able to call large ports that have deep water. West Coast ports are blessed with deep harbors, as well as on-dock rail, large truck fleets and nearby warehousing zones, but have still experienced congestion associated with spikes in cargo volume from big ships.

   The ports of New York/New Jersey and Miami recently joined Baltimore and Norfolk as ports on the eastern seaboard with 50-foot harbors, but ocean carriers must wait until the fall of 2017 for the Bayonne Bridge to be raised enough for super post-panamax vessels to reach terminals on Staten Island, N.Y., and Elizabeth and Newark, N.J.

   The Bayonne Bridge project is estimated to cost $1.6 billion. State, county and city governments collaborated to build a tunnel connecting the interstate highway with PortMiami at a cost of more than $900 million to improve access for container trucks and cruise traffic. The Port of Savannah is in the midst of a 10-year, $1.3 billion capital plan. And the SCPA and the state of South Carolina are each contributing towards a $2 billion plan to enhance port facilities and the water, rail and road access to them.

   Charleston is already one of the most efficient ports in the nation, so achieving margins has to come from the revenue side.

   When phase one of a new 286-acre container terminal on the Cooper River is potentially completed in 2020 for $800 million, the size of the SCPA’s balance sheet will double to $2 billion. To earn 6 percent return on capital (operating income divided by total assets), the port authority will have to make $120 million per year, Newsome said.

   “Quite honestly, it’s never easy to get revenue improvement. It’s not a nice thing to talk about [with customers]. But the reality is, if you compare the Southeast port rates to the port rates in this country, they are really low for the best product in the U.S. port industry… So we have to create a good enough value proposition. You have to earn that in the market,” he said.

   And, he added, the Jasper Ocean Terminal on the Savannah River, planned for first-phase operation between 2030 and 2035, at an estimated cost of $5 billion, “will not happen at current rates. Simple. End of story.

   “There is no other way. There’s no big wad of money in the state governments in Georgia and South Carolina to do that,” he said.

   Port authorities can’t pin their hopes on capital contributions from states and cities because local governments are financially strapped themselves and struggle to keep highway infrastructure in a state of good repair, the port director said.

   “These are state-owned businesses. They are expected to perform and operate as businesses to either attract capital in the market or earn money to build facilities. So it’s a major challenge for all ports to invest the money to remain as modern ports and provide the service they need,” Newsome said.

   Port authorities also need to be compensated for taking on investment risk and carrying upfront financial costs for building new terminals before they generate any cash.

   “You are investing for years before you have a dime of revenue from that terminal,” Newsome said in December at the Journal of Commerce’s Port Productivity Conference in Islin, N.J. “Most ports don’t earn a proper return on capital. Ports are big businesses. They provide a good service, exist in a risky environment and they deserve to earn a proper return on capital.”

   In the Southeast, only the Port of Savannah, at 9 percent, has a decent return on capital. Houston is getting about 4 percent from its investments and Norfolk has a 1 percent return on capital.

   Recovering capital for a green-field cargo station is a challenge when cycle times are lengthy, Newsome explained. A $1 billion, 1.2 million-TEU terminal constructed over four years, for example, will incur $250 million in carrying costs that have to be earned back over the initial years of operation to be viable, according to his back-of-the-envelope calculations. If the investment target is a 10 percent return, and assuming 50 percent capacity utilization at the start, then the port would need over five years to annually earn $100 million, plus $50 million more to make up for the time when there was no income—or $150 million per year. A terminal that charges $80 per box for handling will only earn between $48 million and $77 million, assuming volume increases a third by the fifth year of operation. The per-box handling charge must quickly jump to $100 to retire the carrying costs. And by year six, the terminal could be reaching capacity and need to start the cycle over again, expanding into the project’s second phase.

   Ports have traditionally borrowed from the municipal debt market. Last year, the SCPA issued 40-year bonds at about 4.7 percent interest. Good returns on capital can help secure strong credit ratings from bond agencies so that money can be borrowed at lower interest costs. But borrowing is limited by the need to maintain debt-to-equity ratios, which influences ratings.

   Getting the Jasper port built requires private capital, because the SCPA and Georgia Ports Authority don’t have the cash and can’t borrow enough public sector debt, Newsome said. They are projected to spend about $10 billion combined on infrastructure, including harbor deepening, between now and 2040. Each will probably have to contribute $1 billion in equity for Jasper and the remainder of the cost will be financed, Newsome said.

   Pension funds with long-term investment horizons and patient capital, as opposed to pure private equity firms with shorter exit strategies, potentially are suitable partners if ports can generate higher returns. Passive pension funds want at least a 10 percent return. Thus far, except for the Ontario Teacher’s Pension Fund, which owns Global Container Terminals, they have stayed away from buying concessions for marine terminals. Deals could be structured a number of different ways, and include giving investors an annual interest rate plus a cut of revenue for new volume generated, he added.

   Global terminal operators are an unlikely source to finance new infrastructure because they want in excess of 12 percent return on capital, according to Newsome. Ports America, the largest terminal operator in the United States, recently exited a 50-year concession at the Port of Oakland to focus on its operations in Southern California and Western Canada because it wasn’t making as much money as expected. Also, serving as a disincentive for these businesses are the high expense of green-field construction, scarcity of land for expansion and the extremely slow permitting process.

   “In Europe, they have found fantastic ways to reclaim land for cheap money. It’s more expensive to do that here, so new container terminal infrastructure is very expensive today… I don’t think we should be looked at as government entities that shouldn’t earn a proper return. We should be treated as businesses that provide a good service,” Newsome said.

   Last November, the SCPA and Georgia Ports Authority signed a framework agreement governing cooperation during the Jasper permitting and planning process, including design of the terminal and supporting infrastructure, financing, and execution of operational decisions.

   A work plan for the 2016 fiscal year includes geotechnical studies and conceptual work on terminal design by Moffatt & Nichol, the project manager. The Jasper board is starting to work on a permit and environmental impact statement to submit to the Army Corps of Engineers, a process that is expected to take about eight years.

Growing The Pie. Charleston, the ninth largest container port in the United States, enjoyed 10 percent growth in container volumes in 2015, ending the year with 1.97 million TEUs.

   It was the second consecutive year of double-digit growth for Charleston, thanks to the port’s ability to attract discretionary cargo and the continued growth of shipments for the automotive sector. Charleston, along with other East and Gulf coast ports, was also the beneficiary in 2014 and early 2015 of cargo diversion by shippers worried about dockworker protests and severe congestion on the West Coast. The spike in cargo tapered off as West Coast port conditions returned to normal, but many cargo owners who liked the reliability and service of East Coast ports have continued to route a portion of their Asia-origin imports there. The SCPA warns that growth will be flat to modest during the first half of the year due to economic weakness in overseas markets. The delay in completion of the Panama Canal expansion also means larger vessels that could consolidate more cargo for a Charleston stop won’t be arriving in greater numbers until 2017, Newsome said in a statement.

   Port traffic globally, and in North America, is down from the halcyon days 10 years ago. Between the turn of the century and the financial crisis in 2008, container throughput at ports grew at a compound annual rate of about 11 percent, and since then has slowed to about 4 percent, market analysts say. Containerized imports in the United States were up 5.3 percent in 2015, according to statistics compiled by Hackett Associates and the National Retail Federation, but that growth was offset by declines in exports due to the strong dollar and weak foreign economies. Industrial real estate developer CBRE forecasts cargo volumes in the United States will grow about 5 percent in 2016.

   While the overall market has softened a bit, SCPA officials are confident Southeast ports like Charleston will continue to grow at twice the market average over the next five years because of population growth, as well as a resurgence of manufacturing and foreign direct investment, in the region that will lead to increased demand for import and export capability.

   In the past year, Volvo began constructing a $500 million automobile plant outside of Charleston and Mercedes-Benz is upgrading an assembly plant for semi-knocked down vans from Europe into a full manufacturing plant. In October 2014, Kent International opened a manufacturing facility for mass-market production of bicycles in the United States. All three companies import, or plan to, parts and components through Charleston.

   The SCPA’s concentrated effort to boost refrigerated cargo in Charleston is also paying off. Foreign demand for frozen chicken, turkey and pork from the Southeast, in particular, is growing and refrigerated handling commands a price premium over dry containers.

   Temperature-controlled volume has increased 38 percent to 51,000 containers from fiscal years 2011 to 2015, in large measure because the agency was able to recruit private sector companies that specialize in cold storage to build capacity near the port by selling them on the deep harbor and how it benefits export cargo, such as frozen meat, which tends to be heavier than imported consumer goods.

   As recently as January 2014, New Orleans Cold Storage was the only firm offering service for perishables and its facility was only 50,000 square feet. In November, it completed a 92,000-square-foot expansion that includes new blast-freezing capability. Agro Merchants Group, almost two years ago, retrofitted a 140,000-square-foot Piggly Wiggly supermarket warehouse with blast-freeze capability and Lineage Logistics this spring plans to open a 340,000-square-foot refrigerated warehouse, bringing the area’s total freezer operations to 600,000 square feet.

   “Refrigerated cargo is something that I’m very proud of because we faced a deficit, we weren’t doing our share of refrigerated container cargo when I came here,” Newsome said.

   To accommodate rapid growth in refrigerated container shipments, the SCPA board recently approved a $4.7 million contract for installation of four racks of plug-in, refrigerated container racks at the Wando Welch Terminal. The racks will have space and electric power for 120 containers.

   The Panama Canal expansion, furthermore, is expected to gradually shift more cargo bound for the central and eastern United States to all-water services, continuing a trend that has seen the share of Asia-origin cargo utilizing transcontinental intermodal rail from West Coast ports shrink to 65 percent, from 85 percent almost 20 years ago, Newsome said in a mid-January presentation to the Transportation Research Board’s annual convention in Washington.

   In the next five years, the market share between West and East Coast ports could be at equilibrium with the help of the Panama Canal, he added.





CLICK TO ENLARGE

   “That’s our theory, that’s why we are investing so much money. Ocean is a commodity industry. Most freight moves on the lowest total door-to-door cost and ship cost per mile is cheaper than rail and truck cost per mile. So that’s another reason we think our assumption is right,” the former Hapag- Lloyd shipping executive said.

   And, he predicted, the Panama Canal will recapture its share of Asia-U.S. East Coast sailings that were lost the past three years to the Suez Canal, which can handle the big ships.

Big Dig, Big Ships. Newsome said there are enough 18,000-TEU vessels in operation today that container lines will have to adjust global capacity and shift 14,000-TEU vessels to the Asia-U.S. East Coast trade when the Panama Canal’s third set of locks finally open midyear—even before the Bayonne Bridge is raised.

   Industry consensus has been that New York/New Jersey would have to be an East Coast load center to make it economically viable for megaships to call East Coast ports because 50 percent of East Coast cargo is handled there.

   Based on discussions with ocean lines, Newsome speculated it is likely that a string of 14,000-TEU ships will be deployed on a regular scheduled service to the East Coast by the end of 2015 and that a second carrier or alliance could add a similar string next year.

   The SCPA fought hard to have the Corps of Engineers base its economic feasibility study for deepening Charleston harbor on next-generation containerships. That’s because a fully-loaded 10,000-TEU vessel with a 48-foot draft needs four feet of under-keel clearance to get in and out of the harbor without waiting for high tide. The Corps of Engineers’ benefit-cost analysis identified 50 feet as the best option when construction and maintenance costs are factored. The agency’s policy is to select the least-cost alternative if the economic benefits are close. As the local sponsor, South Carolina agreed to pay the additional $73 million necessary for dredging to 52 feet because officials view the Port of Charleston as a strategic asset that drives $53 billion in economic activity and indirectly supports one in 11 jobs in the state.

   The Corps of Engineers officially notified Congress in January that all project requirements have been fulfilled and recommended it be authorized for funding.

   The project received the Chief’s Report—the blueprint for construction—last September, and in December the SCPA signed a preconstruction engineering and design agreement with the Corps of Engineers. The feasibility study and environmental reviews were completed in four years at a cost of $11 million, compared to an estimated seven years and $20 million because it was put on a new fast-track review process by the Obama administration.

   The project will take the main channel in Charleston from 45 feet to 52 feet, dredge the entrance channel to 54 feet and enlarge turning basins, enabling neo-panamax vessels of 14,000 TEUs or more to enter the port without tidal restrictions. Engineering and design work, which primarily involves simulating ship movements against construction specifications, is expected to be mostly completed by the end of the year.

   The South Carolina legislature has set aside $300 million to begin construction upon completion of the design. The total project, which port officials say could be completed by 2020, is estimated to cost $510 million. State officials hope that the engineering simulations will actually reduce the project’s cost by refining more precisely what areas need to be dredged to allow safe and efficient vessel operations, Newsome said.

   The next hurdle is to get the Charleston harbor-deepening project authorized by Congress in the renewal of the Water Resources Reform and Development Act, which sets spending and policy priorities for coastal and inland waterways infrastructure. Authorization is needed if the SCPA expects to pay for maintenance dredging, which will run about $19 million per year for the expanded harbor. Flexibility on alternative financing in the 2014 WRRDA allowed the SCPA to pay some of the preparation and construction costs up front before Congress authorizes and commits federal dollars to the project. The House Transportation and Infrastructure Committee is expected to move a two-year bill this spring, but whether the full House and Senate act on a large piece of legislation in the middle of a presidential election year remains an open question.

   At 52 feet, Charleston’s harbor will probably never have to be deepened again, because the new trend in shipbuilding is to make vessels taller by adding a couple decks under the crew accommodations and bridge, Newsome said. Maersk Line, for example, is retrofitting many of its 7,500-TEU, Sammax-class vessels on the Europe-South Africa service to 8,850 TEUs by raising the wheelhouse so more tiers of containers can be carried on deck.

   Besides harbor deepening, the SCPA is making other preparations for big ships. In late May or early June, it will receive two giant ship-to-shore cranes for the Wando Welch Terminal from Chinese manufacturer ZPMC for commissioning in September or October.

   Wando Welch, Charleston’s busiest terminal, was built in 1982 to handle ships in the 2,000-to-4,000-TEU range.

   To support the heavier cranes and withstand the tensions of moored 14,000-TEU vessels, construction crews are strengthening the Wando Welch Terminal’s 3,800-foot wharf, bollards and tow wall, replacing gantry rails with wider gauge tracks and making other upgrades in three phases. Construction has eliminated one of three vessel berths and put a premium on coordinating with ocean carriers, stevedores and the local longshoremen’s union to work vessels quickly and minimize disruptions. Some services with vessels that aren’t restricted by the Interstate-526 Cooper River bridge are being redirected to the North Charleston Terminal.

   Service has remained seamless except for a few minor “hiccups,” Barbara Melvin, the new senior vice president of operations and terminals, said.

   “We are quite confident this project is on schedule. The contractor has stayed on top of everything and has significant incentives to finish this early,” she said.

   The $85 million wharf refurbishment is scheduled to be completed by December 2017. The SCPA received a $10.8 million TIGER grant from the U.S. Department of Transportation for the project.

Customer Focus. One way to bring in more users and cargo business is to improve service. Charleston already is considered one of the most productive seaports in the United States, with cranes handling an average of 43 vessel moves per hour.

   The SCPA has extended terminal hours during the week and on Saturdays and is moving to more technologically advanced, automated gates that will enable drayage companies to pre-notify terminals of incoming trucks. Such systems, which are common in many ports, replace manned kiosks in every inbound and outbound lane with cameras and optical character recognition software that can read the container, chassis and license plate number of each vehicle and match it to a work order for a particular container pick-up or delivery. The driver uses a reader to scan his driver’s license and Transportation Worker Identification Card. The systems generally require fewer clerks, who are housed in a remote office.

   The port authority is conducting a trial program of the system at its inland rail port in Greer and plans to roll it out this year at the seaport.

   Pre-notification improves terminal efficiency, because stacks can be culled for containers so that they are ready for the driver ahead of time.

   Trucking company dispatchers will be able to go online and enter information about an upcoming container exchange. Any problems—a missing ocean carrier booking number or container number, or a trucker at the wrong terminal—can be resolved before the driver shows up, which saves idle time. If the transaction is clean, the motor carrier gets a gate code, which is broadcast upon arrival by WiFi cargo equipment operators so they can retrieve the box and load it on the truck’s empty chassis when it pulls into the appropriate transfer spot. At the outbound portal, cameras take images of the container to document any potential damage, the license plate is matched to the container, a ticket of the transaction gets printed and cameras verify that the container matches the ticket.

   The SCPA, driven by a desire to move corporate personnel closer to port operations, early this year put its headquarters building in downtown Charleston up for sale.

   Meanwhile, Newsome has embarked on a two-year process to create a more collaborative and responsive culture within the port authority that benefits employees as well as port users.

   “Cultural change is harder than nuts and bolts of a business because every department has its own culture,” he said. “So we’re talking about aligning the culture across the organization in a way that helps us move faster, make better decisions, be more responsive to our clients, and ultimately make our employees happier.”

   Simplifying contracts was also driven by a desire to better serve ocean carriers. Port staff realized that most invoices involved small amounts of money that didn’t add up to significant revenue, but created lots of work on both ends to generate, review, approve and process. Instead of billing carriers for each activity in the terminal involving their boxes, the port authority applies standardized fees for throughput and gate moves, as well as a flat fee applied to each container for ancillary services that were previously tracked and itemized.

   “Our fee structure is much more manageable. Before it was like a phone book,” Newsome said. “Now carriers have much greater predictability, can manage the extra charges and have fewer items to dispute. If they can anticipate their volume they’ll have a good idea of future costs.”

   Plus, the change forced the SCPA to become better at yard planning because it has an incentive to minimize the number of lifts to dig a box out of the stack—something it previously billed the customer for even though the customer has no control over storage decisions. And those invoices proved problematic for container lines’ accounting systems, which typically require expense items to match some kind of internal work order, or activity, he said.

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