By John Hall
A showdown between shippers and dockworkers that crippled West Coast commerce over the winter and most of the spring may have ended with a long-awaited ratified contract on June 4, but it promises to have profound effects on the country’s import-export business for years to come.
For the foreseeable future, it is causing billions of dollars of cargo to be diverted through alternative shipping lanes via the Suez and Panama canals en route to reliable U.S. ports from Houston and Savannah up through New Jersey and New York, a phenomenon that has led to protracted shipping times and in some cases, swollen inventories. Many companies unwilling to wait have been forced to use air carriers at nearly 10 times the cost they were paying for ocean transport.
Logistics and transportation experts tell My Purchasing Center the historic quagmire that haunted retailers and carved deep into their bottom lines could lead to significant shifts in global supply chains. Meanwhile, most who once relied on cargo ships to bring parts and products to and from Asia could see their logistics costs continue to rise through most of 2015.
It’s already costing more for U.S. companies to buy and sell on the global stage, and it’s anyone’s guess what impact this will have on procurement for the foreseeable future. One thing’s for certain: it’s a nightmare.
“Right now, people are having to fly things they haven’t flown in years. It’s scary,” Chuck Clowdis, Managing Director for IHS Transportation Advisory and Consulting Services, tells My Purchasing Center. “There were 37 container ships off the coast of Long Beach waiting to get in last April and today, it’s doesn’t seem to be getting that much better.”
The mess also has caused some unpredictable headaches. “One of the cargo lines told me they had two ships that should have been diverted but were loaded assuming the port congestion would be over, and they were essentially stuck,” he adds. “Most shippers understand they can’t divert north because everything’s messed up, unless you want to go all the way to the Arctic Circle and the only way to get those containers back to the U.S. is the Canadian National Railroad. We’ve learned a lesson. It’s going to take another nine months to a year to get this backup cleaned up.”
“You have three things working against you,” adds Tom Tanel, President, CATTAN Services Group, a leading logistics and supply chain consultancy. “The megaships coming in are way beyond the capacity people are used to handling. Two, there’s little room at the terminals to take in these containers and move them around. And then there’s the guys who pick up the container chassis and move them for intermodal operations. They just can’t keep up.”
The situation has fueled a lot of resentment and frustration. “Shippers and retailers were tired of behind held hostage by the situation,” he adds.
Roots of the Problem
In the early weeks of 2014, harsh winters out east caused a series of disruptions in intermodal traffic, leading to congestion in many of the 29 west coast ports, which handle nearly half of the nation’s import and exports.
As the weather heated in July, so did negotiations between the Pacific Maritime Association (PMA) and the 20,000 dockworkers of the International Longshore and Warehouse Union (ILWU). The PMA represents 72 terminal operators, stevedores, and shipping companies. Disputes continued to escalate the remainder of the year and into January 2015, punctuated by union slowdowns and intermittent stoppages.
By February, work at Los Angeles and Long Beach ports – the biggest and busiest in the entire country – had nearly ground to a halt, putting nearly $1 trillion in annual cargo shipments at risk. Those two ports alone are the destination for nearly half of all shoes and clothing that enters the U.S., according to a Wall Street Journal report, and are among the biggest portals for the nation’s consumer goods, electronics, auto parts and produce.
The congestion started to ease in March as disgruntled dockworkers resumed operations and incoming traffic began being diverted. Finally, on June 4, the ILWU ratified a new five-year contract to formally end the showdown.
Global Supply Chain Shifts
Now that the dust has settled, observers and analysts are surveying the damage. For West Coast ports, it’s been extensive.
According to the Journal of Commerce, total container volume has reportedly gone down almost 10% from 2014 and exports have plunged more than 15%. Meanwhile, the majority of shippers polled by the publication recently declared they plan to taper off business in west coast ports. A third said they plan to send their business elsewhere, predominantly the eastern seaboard.
And traffic at southeast and east coast ports is booming. According to Zepol, a Minnesota-based company that provides U.S. import and export data, Gulf and eastern ports are handling a significant surge in volume. The port of New York/Newark grew by over 34,000 TEUs (or “twenty foot equivalent units,” the standard length of a container). Volume at the port of Savannah rose by 20% (an increase of over 40,000 TEUs) and by 29% in Houston (nearly 31,000 TEUs).
Peter Friedmann, Executive Director of the Agriculture Transportation Coalition, told the Long Beach Press-Telegram that manufacturing plants have already begun to shift from China to south Asian countries such as Vietnam, Bangladesh and India, which are closer to the Suez Canal.
“If it’s a cargo container that finals in Long Beach or Las Vegas or Phoenix, it’s going to continue going through L.A./Long Beach. It won’t be diverted,” Clowdis says. “But if it’s headed to Cincinnati or Columbus or Chicago, it’s more than likely going to get re-routed through the canals and up to the Gulf or East Coast. But typically only the smaller vessels can do that.” That will change in mid-2016, when a massive Panama Canal expansion project is expected to be completed.
Boon for Air Freight Businesses
Some companies relying on West Coast ports either had sufficient inventory or patience to ride out the big slowdown this spring. Others were forced to resort to alternate and in some cases, far costlier measures
In fact, the ongoing backlog has been a boon for many carriers in the TransPacific air freight markets. AsiaPacific airlines, for example, posted a healthy 7% gain in international cargo the first of the year, according to the Journal of Commerce.
“The West Coast port situation saved the air freight business,” Clowdis tells My Purchasing Center. “The good thing for the air cargo industry is the bad thing that happened there.”
Many companies in need of timely shipments of vital parts and components were forced to contract with air cargo companies.
Clowdis says the port crisis also has been a boon for trucking and intermodal providers. (In an unrelated matter, truckers serving the West Coast ports left their cabs in late April in a dispute over wages and other issues, according to recent news reports.)
“Trucking will probably be fine,” he says. “A great deal of the port business already moves by intermodal rail. And intermodal is going to continue to do well. It’s a bit slower than trucks –if I catch the fast train in Chicago on Tuesday by 2 pm, it’s in the warehouse in San Bernardino by 10 on Friday. That’s not bad. And it’s cheaper, too.”
The ‘new normal’?
Of course, the day will come when things quiet down and business resumes at all 29 ports on the western seaboard. But that may come too late as supply chains adapt to slower routes and lower freight bills, Clowdis theorizes.
“It’s not unlike what happened back in July 2008 when diesel prices spiked,” Clowdis tells My Purchasing Center. “A lot of people took a close look at intermodal and quickly moved away from trucking to that. Well, when diesel settled down and we saw that it wasn’t going to stay at $12 a gallon, a lot of that business went back to trucks, but not all of it.
“The supply chain got accustomed to the fact that it could deal with waiting 18 hours more than it was used to because their transportation costs were lower,” he adds.
Unions May Continue to Dog Shippers
In spite of the June 4 contract resolution, some of the issues that surfaced during the port showdown may continue to dog shippers and buyers for years, Tanel says.
One largely unpublicized bone of contention among ILWU union members was a new policy that took away their rights to inspect truck chassis before allowing haulers to enter ports to retrieve shipping containers. Tanel says he believes they viewed it as a threat to their jobs.
“They’re still trying to retain jurisdiction on this,” he says. Presumably because it poses a threat to some jobs, automation continues to be a sticking point. “The unions are really resisting efforts to automate the cranes, entry and exit gates, or cargo handling equipment,” he says. Aggravating matters are incessant spats between the ILWU and competing unions.
For the long-term, it’s unlikely shippers will ever forget the West Coast nightmares and what it cost them. “The West Coast guys are worried about the congestion and preventing it from happening again,” Tanel says. “Every time a contract approaches renewal, people are going to wonder, is this going to happen again?”
John Hall is a freelance writer who reports on commodities markets and procurement and supply management topics for My Purchasing Center. His website is jhallmedia.com.
George E. Krauter
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