Tuesday, May 17, 2011

“Pulse of the Ports” Predicts 2011 Peak Season Growth

By Keith Higginbotham, California Contributing Editor

Six supply chain and logistics experts speaking at the Port of Long Beach’s 7th annual “Pulse of the Ports: Peak Season Forecast” on March 30 came to the same overall conclusion for the 2011 year ahead: international trade will continue to grow through the end of the year while structural changes will continue to transform the industry over the long run.

More than 400 members of the shipping, logistics and transportation industries attended the event, hearing representatives from the various sectors of the supply chain talk about the outlook for the 2011 peak shipping season.

This year’s industry panel featured speakers representing the retail, ocean carrier, terminal operations, railroad, and logistics sectors. An additional speaker offered an economic projection of the upcoming peak season. While the event is geared toward stakeholders in the Southern California supply chain industry, nearly all the speakers offered a local, regional and national perspective during their respective presentations.

Ocean Carrier Sees Increased Trade Growth

Frank Baragona, president of CMA CGM (America), offered up an industry view from the perspective of the ocean carriers.

While bullish on the continued growth of trade heading into 2011, Baragona warned about issues such as container supply, landside infrastructure constraints, and rising bunker fuel costs that could damper the perceived recovery since the disastrous 2009 downturn.

“We do see continued [US] GDP growth,” Baragona said. “This is a good signal that consumers’ confidence is recovering and people are back transacting business in the marketplace.”

Turning to capacity supply and demand, Baragona said that on a global level capacity has grown on average 10 percent per year over the past decade to a 2010 level of just over 14 million TEUs, and he predicted a similar 8 percent to 9 percent annual growth rate in global capacity for the next two years, ending 2012 at about 17 million TEUs.

Baragona said that his firm had earlier predicted a more optimistic picture for demand in 2011, but the rise in bunker fuels prices, the disaster in Japan and the turmoil in the Middle East have all put a cloud on those projections, though he remains guardedly optimistic for a positive year.

Turning to issues on the landside, Baragona said that the key concern is efficiency at the ports to deal with the 12,000-plus TEU vessel classes that are now entering service.

“We would like 150 moves an hour, but we are not there yet. These ships cannot be laid up for three or four days. They only make money when they are out steaming,” Baragona said.

He added that it is not just the dock, but also the rail networks, the highways systems, the port infrastructure that all play into the needed efficiency.

From a carrier operational perspective, Baragona said that bunker fuel costs, slow steaming and the Panama Canal are all major topics of internal discussion.

Baragona called his presentation chart of bunker fuel prices per ton over the past three years “scary,” adding that in just over 26 months the price per ton of bunker fuel has almost tripled.

“If anyone in this room questions the logic of a bunker surcharge, this should explain it,” he said.

Baragona said that a typical CMA CGM 8,200 TEU vessel on a roundtrip from South China to Long Beach and back burns about $3.5 million to $4 million in bunker fuel per trip.

In addition to surcharges, another method to deal with rising fuel costs is slow steaming on the backhaul, where vessels on their return trip move at speeds well below standard ocean-going vessel cruise speeds. Estimates suggest that a vessel cruising at 17 to 19 knots instead of full speed at 23 to 26 knots, can save about 5 percent to 7 percent on fuel costs.

Baragona said that the industry has been quick to adopt backhaul slow steaming. Of the 45 service loops on the West Coast, for example, the number using slow steaming has risen from one service in mid-2009 to more than 15 in February 2010 and almost 25 as of today. Baragona pointed out that on the East Coast the rise of slow steaming has been even more pronounced, rising from two service loops out of 22 in mid-2009 to 12 in February 2010 to nearly 17 as of today.

Turning to the opening of the $5 billion expansion of the Panama Canal in 2014, Baragona said, “It will provide an alternative. It is going to provide options to the supply chain that don’t exist today.”
Baragona said that there will be a shift from the West Coast to the East Coast, but he hesitated to describe it as a “fundamental” shift.

“You will see a shift because not everything that moves today is time sensitive,” he said.

The one caveat he offered, though, was whether the East Coast in 2014 would have the infrastructure to accommodate the larger vessels that will be able to transit the canal.

Baragona said that while there will be “adequate and reasonable” vessel capacity through the whole 2011 peak season, the concern he pointed to is whether there will be enough containers. He pointed out that 96 percent of new containers are built in China and in 2008 and 2009 China almost shut off the construction. Supply dropped from 5 million new containers a year in 2007 to 300,000 in 2010. Add to this that new and larger ships continued to join the fleet and this led, in some part, to the situation last year where shippers began to experience a shortage of available containers.

“My advice is this,” Baragona said, “Be very judicious in your contracting. Equipment availability is going to be critical. I don’t think any company is immune from it and I would certainly be cautious.”

Terminal Turn Times a Key Challenge

Bringing the perspective of the terminal operators to the industry panel, SSA Containers president Ed DeNike said that a key issue for the continued efficacy of the terminals is turn time for drayage trucks.

DeNike said that the biggest concern related to turn times for terminal operators was what he called “traffic bunching.”

Due to the neighboring ports of Long Beach and Los Angeles PierPass system, which splits day/night drayage to lessen local traffic and charges per-TEU fees on daytime gate calls, DeNike said that truck traffic bunches up outside terminals around the lunch hour during the day and then again as the night gates prepare to open at 6 p.m.

“When we first started [PierPass], we thought as terminal operators that it would help us better than it is today,” DeNike said. “It’s probably serving the purpose as far as containers on the freeways and some other environmental concerns, but as a terminal operator it is not serving us near as well as it could.”

DeNike showed images of the approach road to the SSA operated terminal at Long Beach’s Pier A at various times of the day and night. At 9 a.m., no trucks are visible, however just two hours later the line of trucks clog the road for more than three miles. The massive queues form again, two trucks abreast for miles, at around 3:30 p.m. as the truckers await the opening of the night gates.

“They don’t want to come in before 6 p.m., because they would have to pay an extra $100 penalty for a PierPass fee,” DeNike said. “So what they do is line up an hour or two or three ahead of time to get into the terminal.”

The slow times at the gates during the day, he said, are causing tremendous extra expenses in labor, with each gate shift costing $1,000 per longshoreman per day. “We can’t man up in the daytime for truckers not to show up for [staffed] hours in the morning, then show up all at once and serve them properly,” DeNike said.

The same situation occurs at night, he said, pointing out that “we can’t man up at night to serve them between 6 p.m. and 10 p.m.,” if the truckers are going home at 10 p.m. while SSA is paying for longshore gate labor for a full eight-hour shift.

“We need to have dedicated day and night drivers,” DeNike said. “We need to work all day and all night if we are going to make this thing work.”

DeNike said that one of the potential solutions that all of the terminals are actively implementing is automation technology.

Besides the traffic bunching, the other main problem that slows down the gates is the tedious manual input of information from each truck into the terminal computer system by longshore workers.

DeNike said that while SSA has automated the out gate, automating the in gates has proved to be more of a problem due to the type of information required to be input, but he expects a system that dramatically reduces the manual input of information on the in gate will be up and running at the SSA terminal within several months.

DeNike announced that within the next several months, the SSA terminal in Long Beach will be home to what SSA believes is the first centralized gate system in the world. Using this system, clerks in a Long Beach control room will be able to staff the various SSA terminal gates throughout the nation, all through automation.

“What this means is that hopefully we are going to be able to utilize everyone a lot more than we are today,” DeNike said.

Longshore workers at the centralized control room, he said, will be able to shift from working one terminal’s gates to another’s at the flick of a switch as truck calls ebb at one terminal and increase at another.

BCOs, Retailers See Strong 2011

Offering up the perspective of retailers and beneficial cargo owners, Jonathan Gold, the Vice-President of Supply Chain & Customs Policy for the National Retail Federation, began with a recap of the 2009 recession and the recovery of 2010.

The retail industry saw sales drop 2.7 percent in 2009, only to rebound 3.7 percent in 2010. In addition, Gold said, import volumes in 2010 jumped 17.4 percent and holiday sales, originally projected at 2.3 percent, actually came in at 5.7 percent – the largest jump since 2004.

Gold predicted that despite facing challenges such as high unemployment, continuing issues with the housing market, rising fuel and commodity prices and legislative/regulatory uncertainty putting pressure on consumers, retail sales will increase 4 percent in 2011 with single digit percentage gains in import volumes.

Cargo volumes at East as well as West Coast ports will continue to grow in 2011, Gold said, but the situation in Japan and unrest in the Middle East could have an impact on the rest of the year.

Gold said that some of the consideration that retailers look at in making their port decisions include: proximity to distribution network, operational efficiency, workforce stability, the ocean services offered, and fees and regulations.

“Things such as the Clean Truck Fee, infrastructure fees, hour restrictions, and also the politics at both the local and state level also have an impact,” Gold said.

Railroads Ready for Predicted Record Season

Bringing the perspective of the railroad sector, Clarence Gooden, Executive Vice President and CCO for CSX Corp., forecast a record-setting fall peak in intermodal rail traffic and said the railroads are prepared with increased equipment and support.

Gooden predicted that 2011 would see a record-setting year in the number of intermodal shipments by the railroads, surpassing the industry peaks of 2006.

“It looks like we are going to have a very traditional peak this year, with goods and services beginning to increase somewhere around August – a very dramatic and traditional peak,” Gooden said.

From a rail perspective, Gooden said that a successful peak revolves around three major components: container capacity, train capacity and the intermodal network capacity.

On the issue of container capacity, Gooden said that the drop in worldwide container-to-slot capacity from three-to-one to two-to-one over the past decade means that the existing containers will have to be turned around faster to maintain efficiency.

Gooden said that CSX expanded their national rail asset fleet last year to handle an extra 3,000 TEUs and will further increase this amount in 2011 by another 8,000 TEUs of capacity. Gooden pointed out that CSX has added more than 400 additional locomotives to their asset fleet since the recovery began in early 2010, with plans to bring several hundred more online in 2011.

CSX is also beefing up their assets to deal with an ongoing boom in coal shipments, which require a great deal of rail assets due to the sheer tonnage being hauled, and an expected bumper harvest in grain which is also expected to require a large amount of rail equipment. CSX also handles about 88 percent of all the fertilizer shipments in the US, which require a great number of rail assets.

“We think we have a great balance of service in terms of being able to handle this traffic as we move forward,” Gooden said.

Positive West Coast Trade Growth Predicted

Offering an economic perspective of the port industry, transportation expert Dan Smith of the consulting firm Tioga Group, predicted continued trade growth through 2011, albeit at a smaller pace than in 2010. At the same time, Smith tackled several long-held assumptions about the future impacts of the Panama Canal expansion, railroad pricing and a predicted capacity crunch at the Southern California ports of Long Beach and Los Angeles.

Smith began by pointing out that not only was 2010 a strong initial recovery for the port industry after a historically dismal 2009, but that “the recovery happened a lot quicker than we thought it would.”

Container traffic at the West Coast ports swung from being down 14 percent in 2009 to being up more than 19 percent in 2010.

Smith said that while West Coast ports have regained some of the minor volumes that had shifted to the East Coast since 2006, the regular players on the West Coast also lost some cargo to alternative West Coast ports such as Prince Rupert, Manzanillo and Lazaro Cardenas – though the shift has been subtle.

“So just as trade has always shifted a little bit back and forth between the West Coast ports, it continues to shift,” Smith said.

Smith acknowledged that the completion of the Panama Canal expansion in 2014 was a source of considerable discussion within the industry, but in his opinion, “the reality is probably a lot less dramatic than the trade journals and speakers might imply.”

While the new Panama locks will allow some of the largest container vessels to pass through, Smith believes “the trade volumes to fill those vessels is still many years away.”

Smith said that the canal authority is planning its own financial future on much more modest rates of growth – about 3 percent a year – and thus it is unlikely that there will be the volume needed for 12,000 TEU vessels to utilize the new locks before 2020.

The canal authority, Smith said, is looking first and foremost at growing the volumes of the services already using the canal and only then will they look to building the capacity to fill the larger TEU vessels.

Smith also shot down the idea that the US railroads have been pricing themselves out of the market as a myth.

“The business the railroads have now is the business they want, and they will fight to keep it,” Smith said.

He pointed out that the railroads have an “unbroken record of providing the capacity and performance to keep the traffic that they really want to keep.”

Smith said any shift to the East or Gulf Coast is likely to be small and gradual, taking one or maybe two decades.

While some customers will shift to take advantage of new all-water opportunities as new non-West Coast port capacity comes on line, Smith does not predict it will be a stampede.