WASHINGTON — With recent estimates that the combined U.S. East Coast and Gulf Coast has passed the West Coast as the largest destination for U.S. imports, a panel at the annual meeting of the Transportation Research Board here suggested that there are plenty of reasons for the shift to continue.
Capital spending by East Coast ports gained praise from panelists, who said the investments have yielded facilities with greater ability to take in the world’s biggest ships. It’s a factor in the change in market share, they said.
But there’s a problem that could slow the gains: Will the region have adequate warehouse capacity to handle the increase in imports?
Walter Kemmsies of The Kemmsies Group, which works on behalf of clients on port-related projects, said the East Coast has done a “terrific job” in steps such as improving water depths and adding taller cranes.
“But most of them messed up when it came to the gateway,” Kemmsies said. Warehouses generally have vacancies on the East Coast of 3% or below, he said, adding that Savannah, Georgia, at one point got to 0.1% vacancy. “That really chokes growth, if you’re outgrowing the space and you can’t find a place to get into,” he said.
But Kemmsies also said the southeastern area of the East Coast “has the most elbow room” for new projects to construct distribution centers. He added that constructing warehouse capacity is “tougher” in the Northeast and that has led to some warehouses following a practice common in Japan: building multistory facilities.
Kemmsies said decisions on where to land freight is often based on three C’s: cost, consistency and capacity. And as he noted, “Capacity on the West Coast has been squeezed quite a bit.”
The West Coast has always had an advantage in its basic proximity to major exporters and the ability to avoid moving container ships across large distances and avoiding the Panama Canal. But Kemmsies and other speakers noted that East Coast ports are in closer proximity to the 65% of the nation’s population that lives east of the Mississippi. With certain costs more competitive than the West Coast, “the East Coast can continue to offer lower cost capacity, and sorry, but the West Coast loses market share.”
Joe Greco, the vice president for containers at Ports America, which manages various port operations at several facilities around the country, said the West Coast also is dealing with a “finite amount of land” around its ports, “and so the ability to expand is somewhat challenging.”
The panel jumped from reason to reason to explain the recent shift in market share. For example, Greco said the West Coast’s emphasis on ever-increasing environmental regulations has become an issue with beneficial cargo owners.
The shipping industry, Greco said, is “adapting and accepting of emissions mitigation.” But some of the steps being taken on the West Coast are “very aggressive” and are starting to get to the point where marine operators are “looking at cost avoidance.”
Scudder Smith, a principal consultant with the engineering firm WSP, noted that there have been other surges in the past 15 years when market share shifted. It wasn’t always to the detriment of the West Coast; he noted that in 2006-2007, the East Coast lost market share to the West Coast.
But contract negotiations in 2014-2015 with unions on the West Coast led to a market share loss then — and contract negotiations are going on now, multiple panelists noted — followed by a period of stability. The East Coast then gained market share in 2018 and 2019, with both the East Coast and Gulf Coast picking up more market share in the past two years.
Smith also noted that each period of change saw widely varying freight groups rising the most. Sometimes it was paper; other times motor vehicle parts; or maybe it was cement.
And now, Smith said, the trend for reshoring and nearshoring — bringing back manufacturing to the U.S. or shifting it to Canada or Mexico — could mean the battle over market share is going to be over a smaller pie.
Another key factor is the shift of manufacturing away from China and to such Southeast Asian countries as Vietnam. Greco noted that movement changes the cost structure of shipping, because a route to the East Coast from a place like Vietnam, through the Suez Canal and then through the Mediterranean and across the Atlantic, is cost-competitive with shipments out of China and into the Southern California ports. “It changes the routing economics,” Greco said.
Ships’ use of the Panama Canal en route from Asia to East Coast ports has become more favorable, Greco said, since an expansion there was completed in 2016. Some ship classes that could not make it through the canal previously now can do so, he said.
Geopolitics is also becoming an issue, Greco said. Given tariffs, COVID lockdowns and growing tension between the U.S. and China, he said that “from a supply chain perspective, is China a partner you are comfortable with?” He did not provide an answer to that question but said “it does make people think of a diversification policy.”
“You have to ask yourself, what’s next?” Greco said.
Beyond the warehouse issue, a question from the audience focused on the ability to move freight inside the East Coast region once it gets there.
There was no definitive answer but some expressions of optimism. For example, Kemmsies said his firm is working now with Georgia on a plan regarding freight movement in the state on the expectation that Savannah will increase its imports. Greco said states have been asking his company about projected cargo volumes and their correlations with truck volumes.
Greco cited as an example of work on the ground — and not just at the port itself — the expansion of the Howard Street Tunnel in Baltimore, which will increase the ability out of the port of Baltimore to move double-stacked trains. The project is scheduled to be completed in 2025 and Greco said it will open up the north-south movement of containers, “and it is going to allow Baltimore to compete with others to get freight.”
Kemmsies also envisioned the possible construction of rail spurs that might go as much as 60 miles inland to new areas hosting distribution centers. That would be in conjunction with the the development of inland ports, which Kemmsies said the East Coast has been “prolific” in building. On the West Coast, he added, the process has lagged but “these things are beginning to emerge.”
Several times during the panel, a member said something to the effect of, “The supply chain crisis is not over.” As Kemmsies said, large companies like Walmart may have had the ability to pay enormous prices to move containers to the U.S., showing an easing of the crisis. “But when you start talking to the smaller ones, they are saying, ‘What the hell are you talking about?’”
“So the supply chain crisis is coming to an end, but it is not at an end yet,” Kemmsies said.
Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation, did raise one possible piece of good news for the West Coast: a resolution to the current labor standoff with the International Longshore and Warehouse Union. A shift back toward the West Coast is possible when that happens, but there’s no end in sight to current negotiations.