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Thursday, October 13, 2011

Opinion: Harbinger of Doom or Just an Early Peak

Judging by the recent comments by some industry watchers, you would think that a few bad months of cargo numbers signals the coming of the Four Horsemen of the Apocalypse.

Yes, the United States West Coast ports have seen something odd happening this year in terms of when cargo is moving. And, yes, in terms of imports, most West Coast ports are likely to be flat or off slightly from last year.

However, the notion that 2011 is not going to follow the traditional peak season trend bears no basis in what we have seen in the past.

As an example, let's look at the Port of Long Beach – the nation's second busiest container port (and thankfully for this piece one that lists monthly cargo numbers for the past 15 years).

Ten years ago, the conventional expectation on the import shipping seasons at the Port of Long Beach was a fairly rote affair from year to year.

An average year began with January volumes tapering off from the highs of the previous year's holiday season. This was followed by the slowest month of the year, February, before imports ramped up sharply in March and April. From April, import volumes would increase steadily each month until hitting a peak in August. September would see a slight dip, followed in October by a slight rise to near peak levels, then a sharp drop off through the end of the year.

The nature of when certain cargo is delivered is, and always will be, driven by the domestic shopping seasons. Post-holiday months at the beginning of the year see less activity; Easter, summer, back-to-school and Halloween goods ratchet up imports through the end of summer, and the all-important Thanksgiving/Christmas shopping seasons see imports swell through October.

Keep in mind that we are not talking about comparing one year's raw TEU numbers to those of another year. We are talking about how each month of any given year relates to the other months of that year and how this plots out graphically.

For many years the idea of the traditional peak season trend was a given – almost taken for granted.

Then, several years before the global economic downturn that began in late 2007, there was talk that the peak season model was mitigating – spreading out over the year with peaks and valleys flattening.

However, an analysis of the past 15 years of monthly import data at the Port of Long Beach shows no major flattening or change in the traditional peak season pattern (except for a very slight flattening of the peak months of the holiday season). This analysis plotted average month-to-month import trends at the Long Beach port from 1995 to 2010, from 1995 to 2007, and from 2007 to 2010.

In all three cases, the plots were consistent with the traditional view of the annual shipping trends as detailed above (See Chart 1). In fact, it is interesting to note that plots of the average annual trend from 1995 to 2007 and the average annual trend from 2007 to 2010 mirror each other – except for the previously mentioned very slight flattening of the August and September peaks. When only considering the month-to-month trends throughout the year (not the actual cargo numbers for the respective years), this seems to indicate that even the global economic decline has not noticeably impacted the traditional peak season trend.



It goes without saying that there have been individual years that have deviated slightly from the traditional trend, but in most cases these deviations still essentially followed the traditional annual pattern.

Now there is talk that the traditional seasonal trends at the port will not occur this year. That somehow the current economic situation is going to blow the traditional model out of the water.

Fortunately, the numbers do not bear this out.

Our analysis suggests that 2011 may be little more than an exaggerated version of the typical shipping year – certainly with higher highs and lower lows, but still following essentially the traditional peak season track.

The overall trend line for 2011 has played out so far like this: January and February dropped off from the 2010 peak season, just as normal, but bottomed out in March, a month later than the traditional pattern. April saw a much larger than normal increase followed by slight declines in May and June. The peak for the year, at least so far, appears to be July, a month earlier than normal.

In other words, so far this year, 2011 has experienced three notable differences from the traditional peak season pattern: The slowest month of the year came a month early and was significantly lower than normal; the rebound after the beginning of the year dip was much higher than normal; and the busiest month of the peak season came a month early.

These are not the things of which economic catastrophe are made.

In addition, when considering the actual 2011 deviation from the traditional annual trend in TEU numbers, the numbers are very small (See Chart 2). The dramatic March dip represented an actual loss over where the traditional season trend would have placed it of about 40,000 loaded inbound TEUs. While this may be significant at many ports, for the second busiest port in the Western Hemisphere, it represents about a 1.25 percent drop compared to last year's total import numbers and only about 3 percent of all loaded inbound TEUs handled by the port so far this year. The early peak also cost the port another roughly 15,000 loaded inbound TEUs. Added together, these declines still only represent about 20 percent of the import TEUs handled by the port in a single month.



While our analysis is by no means an in-depth economic modeling of what to expect for the rest of the year, it does show in some small way that even if Long Beach import volumes decline for the rest of the year, it may not be the harbinger of disaster that some industry watchers are suggesting. It may just be a variation on the same trend that has been playing out each year for more than 15 years. And maintaining the same economic trend for more than 15 years, month-in-month-out says more about the long-term robustness of the port and shipping industry than any one or two month decline.

Vancouver USA Port Board Adopts Inflation-Based Salaries

The governing board for the Washington state Port of Vancouver agreed Tuesday to the adoption of a rule allowing commissioner salaries to be adjusted by inflation every five years.

Passed unanimously by the three-member board, the new rule replaces a system that allowed the commissioners to set their own salaries each year. Under the new rule, the commissioners will not be eligible for a raise until 2013.

Commissioners had previously cited public opposition to an annual pay raise as a major factor in moving toward the five-year plan.

The three commissioners--Nancy Baker, Jerry Oliver, and Brian Wolfe--currently receive a $500-per-month salary for their part-time work on the port board, as well as medical, dental and vision benefits.

The commissioners also receive $104 for each day during the month that they conduct business, such as commission meetings.

Under state law, port commissioners are limited to a maximum of $12,535 in annual per diem compensation.

The Vancouver commission seats are elected positions, with terms lasting six-years.

Hueneme Port Exec. Dir. Taormina Steps Down

Oxnard Harbor District Executive Director Anthony Taormina, who oversaw the day-to-daybusiness operations of the Port of Hueneme, officially stepped down Monday after nearly five years at the helm.

Taormina, who also served as executive director from 1985 to 1996, will maintain a two-month consulting contract with the port worth up to $35,000.

Commissioner Mary Ann Rooney raised concerns about the lack of language in the consulting contract requiring Taormina to disclose other firms he is consulting for while under the port contract.

Taormina, who announced his decision to retire in April, said he would disclose the other businesses he is working for.

The board voted 4-1 in favor of the contract, with Rooney the only "nay."

In a separate action, the five-member Oxnard Harbor District board also unanimously approved the appointment of Deputy Executive Director Pete Wallace to serve as interim executive director. The board approved a temporary salary increase for Wallace from his current $152,625 to $188,370 while he fills the position. The district plans to conduct a search to permanently fill the executive director position.

Hueneme is the only deep-water harbor between the Long Beach/Los Angeles port complex and the San Francisco Bay area. A niche port specializing in automobiles, fresh fruit and produce, Hueneme is the US Port of Entry for California's central coast region.

Alameda Corridor Asks SoCal Ports for $6M Support

The agency operating the Alameda Corridor in Southern California has officially requested almost $6 million from the ports of Long Beach and Los Angeles to cover corridor revenue shortfalls in the current fiscal year.

The official notification follows on a request made nearly two-months ago to the two ports made by the Alameda Corridor Transportation Authority (ACTA), which operates the 20-mile-long Alameda Corridor cargo rail line servicing the ports. ACTA told the two ports in August that that the authority required $2.95 million from the port in FY2012 to cover a debt service shortfall on the $2.4 billion corridor, which opened in 2002.

At the time, the request came as a bit of a bittersweet pill because in March, ACTA had told the ports that it would need $9 million in shortfall coverage from each port.

ACTA has stated that increased traffic on the corridor since March has revised the shortfall coverage projection downward to the $2.95 million from each port.

Tuesday, October 11, 2011

Inventory Theft: Prevention and Detection

By James S. Peet, Ph.D., CFE

One of the issues facing most shipping operations, but particularly breakbulk, is that of inventory theft. While theft of breakbulk cargo has been reduced with the introduction of containerization, it has not been eliminated. Nor will it probably ever be. All one can do is to establish controls to reduce its incidence.

According to the Association of Certified Fraud Examiners' 2010 Report to the Nation, inventory theft is listed as a non-cash asset misappropriation scheme, which cost companies, on average, $90,000. In the transportation and warehousing industry this type of theft accounted for more than 25 percent of all cases, with almost 5 percent taking place in operations/inventory with a median loss of $239,000.

Many breakbulk operations that have warehouse or transfer loading operations are prime targets for internal theft. If the shipping firm is small, that increases the odds that inventory theft will occur. The reasons for this are usually a lack of established fraud controls and policies, and the simple matter that in smaller firms there is usually a greater degree of trust because everyone knows everyone else. Theft from smaller firms can oftentimes lead to a firm going bankrupt.

It’s common knowledge that an ounce of prevention is worth a pound of cure. Toward that end, the first step in preventing inventory theft is to let employees know that you’re serious about the matter and will take strong action against them if they are caught stealing. The fear of getting caught is one of the strongest deterrents. Nobody wants to be embarrassed in front of his peers and coworkers and considered a common criminal.

Fraud Policy
The best way to inform employees is through the development and distribution of a fraud policy. This policy should be in writing and should be read and signed by every employee (including the CEO, the COO, and the CFO).

The policy should clearly describe the actions that will be taken against employees who commit theft (or any other type of fraud). Actions can be as limited as an oral or written reprimand for a first offense up to termination and prosecution.

Surveillance
Another way of preventing and detecting inventory theft is through the use of surveillance. Surveillance can be conducted through either the use of surveillance cameras, undercover operations, distant surveillance, or a combination of any of these.

Care should be taken in placing surveillance cameras, as courts have ruled that employees have a certain expectation of privacy in certain places – so you would not want to place them in bathroom stalls or similar settings (despite the fact that goods can be concealed while in the head).

Undercover operations and distant surveillance usually use trained personnel, either from within the firm or from private firms. If using private firms, be sure that they are properly licensed according to their jurisdiction (for example, anyone conducting surveillance for a fee in Washington State is required to have Washington State-issued Private Investigator’s license). If you break the law while having surveillance performed you may be criminally and civilly liable.

Red Flags
Red flags are indicators that something is amiss. With inventory theft, some of the red flags include the obvious – inventory shrinkage, fictitious inventory, employees seen walking off the property carrying inventory (you would be surprised how common this is) and an excess of damaged goods. Some is not so obvious, but is easily uncovered, such as an audit showing more inventory is coming in than going out/being sold, or business is up but revenues are flat or down.

Identify Problem Areas
The first step in solving any problem is to identify it. If you have evidence of any of the above red flags, you need to determine if that is the case and investigate it.

A simple (but time consuming) method in inventory control is to validate inventory by performing an unscheduled, unannounced physical count, preferably using an external auditor (one not involved with the company and has nothing to hide). Be sure to check boxes to ensure that they hold the correct inventory (you’ll probably find some empty boxes stacked behind full boxes). In fast moving transloading or breakbulk operations you’ll need to identify where the potential losses can be readily hidden prior to conducting the audit.

Another option is to engage a fraud examiner to conduct a fraud examination. Fraud examination is a methodology for resolving fraud allegations from inception to disposition. The ACFE provides a list of Certified Fraud Examiners (CFE’s) who can perform these functions. Different from an auditor or CPA, a CFE is trained and experienced in detecting and investigating fraud, which includes collecting evidence for purposes of litigation (i.e., a CFE is prepared to go to trial).

Hotline
A fraud hotline is one of the best ways to catch fraudsters. According to the ACFE’s Report to the Nation, more than 40 percent of all fraud was initially detected through a tip, three times as much as by any other method (internal audits uncovered less than 14 percent). Most tips usually come through a hotline.

While larger shipping firms and ports have the finances available to set up their own hotlines, what can smaller firms without the funds do? One option is to outsource the job. EthicsLine (http://ethicsline.com/) is the official hotline of the ACFE. It offers fraud hotlines via telephone, the web, and web connected mobile devices, such a Blackberry, iPhone, and Android. For firms under 500 employees the annual cost is approximately $2,500. If you think $2,500 a year is expensive, consider the alternative (up to 5 percent loss of annual revenue due to fraud).

When implementing a hotline, be sure to advertise monetary rewards for cases that result in action or prosecution. Interestingly enough, the proven maximum payment for any tip should be no more than $1,000. For some reason, anything more than that will lead to a decrease in hotline tips.

The fraud hotline should also allow for anonymous tips. This provides the tipster with the security of knowing that they will not have any retaliation against them for reporting the crime.

A hotline will only be successful when employees are aware of it. Ways to educate employees include discussions at staff meetings/training sessions, placing posters in highly visible locations (this also gives your customers the feeling that you take the issue seriously – always a positive marketing technique), including flyers with paychecks (if you still issue paper paychecks) or paystubs, notifying employees when having them sign the fraud policy, and providing them with refrigerator magnets. The hotline material should always include the phone number, the fact that tips can be anonymous, and mention of rewards.

While impossible to eliminate, the establishment of a few controls can greatly reduce the incidence of inventory theft, leading to increased efficiency and adding to a company’s bottom line.

James Peet, a Certified Fraud Examiner (CFE), is the principle manager of Peet & Associates, LLC, a fraud examination business located just outside Enumclaw, Washington. He is a graduate of two law enforcement academies and has earned a BA at the University of Miami, an MA from California State University, Hayward and the Global Trade, Transportation, and Logistics Certificate, as well as a Ph.D. from the University of Washington.

New HQ For Long Beach Port In Limbo After Board Drama

Concluding an at times tense public meeting on Monday, the governing board for the Port of Long Beach failed to approve the purchase of the World Trade Center (WTC) in downtown Long Beach, again throwing port staff's nearly 11-year search for a new headquarters building into limbo.

The five-member port commission split 2-2 on the proposed $130 million purchase of the 27-story Long Beach office tower. Commission President Susan Wise recused herself from the vote because she and her husband both rent office space in the WTC.

The port has been seeking to replace its circa-1959 headquarters building that has been determined to be seismically unfit. The WTC is one of several properties that port management have considered over the past year as a possible location to move the more than 450-member port staff.

The port had planned to internally fund and build a $220 million state-of-the-art "green" headquarters in the port, but the plan was shot down last year by Mayor Bob Foster as too expensive, despite no planned expenditures of taxpayer funds. Since the mayor's decision, the port has been looking to lease or purchase a nearby office building to house the port staff.

In preparation to purchase the WTC, the port entered into a 60-day due diligence agreement with WTC owners Legacy Partners LLC on Sept. 12.

Prior to taking public comment on Monday, the board met in closed session to hear details of a due diligence report on the WTC. The report, detailing the condition of the WTC, was conducted under a confidentiality agreement with the current WTC owners. The agreement, according to the port attorney, limited what the port board could reveal in public session about the behind-the-scenes discussion.

Once in public session, the four sitting board members almost immediately locked horns – debating whether the board would even vote on the purchase, or just take public comment and simply discuss the matter.

Commission Vice-President Thomas Fields, leading the discussion in Wise's place, initially indicated he thought that a vote on Monday was unlikely. Freshman commissioner Doug Drummond interjected his objection to what he called Fields' "unilateral" decision that no vote would be taken and indicated he thought a vote could follow public comment and discussion.

The port attorney, responding to Fields, said a vote could be taken following discussions but was not required.

Numerous individuals spoke during the more than hour-long public comment session, including some of the biggest names in development and real estate in Long Beach.

Former port commissioner and real estate investor Roy Hearrean addressed the board, offering his support for a newly built port headquarters and asking the board to reject the WTC purchase. During his commission tenure from 1991 to 2003, Hearrean participated in early planning stages for a new port headquarters.

"Building [a new port] building, costs less than buying the World Trade Center," Hearrean told the commission. "And a new building will generate five times the number of jobs than buying the World Trade Center."

Hearrean said the biggest concern with the WTC as a port headquarters was difficulty in adequately securing the subterranean parking at the WTC – which in addition to port staff would also have to serve non-port WTC tenants and hotel guests of the adjacent Hilton hotel. He said such a situation would be "easily penetrated."

"I would highly recommend that the port rethink this, and consider doing what staff has [suggested] – build what they want built. In the long run [a new building] will be more efficient, provide more security and provide a reduced cost over time," Hearran said. "I'm here to ask you to follow your dream – build your building."

Greg Hall, managing director of Legacy Partners, speaking in support of the WTC purchase told the commission that, "where as a build-to-suit would only cost money, and in theory have no payback, the acquisition of 1 World Trade – generating millions of dollars a year even after a factor to increase costs for your occupancy – has a distinct and attractive payback period probably in the 20-some-odd-year range."

Hall also pointed out that since the port currently owns the parking facility at the WTC, the port would have the flexibility to arrange the parking in any way it wished to ensure security.

Attorney Skip Keesel, owner of several downtown parcels, encouraged the port to reject the WTC purchase and instead build a new building on one of his properties. He said such a move would allow the port to build what they want and save the port money in the long run.

"Moving this port building downtown is an important thing," Keesel said. "It will create a tax base, it will create 2,700 jobs over time – hard hat jobs, I'm told, up to 1,700 – creating what everybody in this room wants."

Keesel pointed out that he has offered the port free rent in one of his existing downtown buildings, which the port staff could move into almost immediately. During this time, the port could build a new structure on one of Keesel's parcels, which he offered to the port at "fair market value."

"How can you beat that," Keesel asked the commission. The port board had previously considered a downtown Keesel building as a possible relocation site, but rejected it in favor of the WTC.

Recently retired port commissioner Mike Walter supported the building of a new port headquarters in downtown, telling the commission that the port staff have done an admirable job in creating a "shovel-ready" project.

Walter said that during his entire six-year term on the port commission he always maintained reservations about a possible purchase and relocation of the port headquarters to the WTC. He told the commission that his main concerns regarding a possible WTC relocation focused on security issues, the vast size of the WTC of which the port would only occupy 30 percent, and the overall cost.

Once back behind the rail, freshman Commissioner Rich Dines complimented the WTC and Legacy Partners, but said that he still had concerns that the port – if it purchased the WTC – would have to pay off a loan of the building to the tune of an additional $14 million above the $130 million proposed purchase price.

Reading from prepared comments, Dines said that by the time all occupancy and relocation costs were included, the total price for the building could rise to $170 million, well above what Legacy Partners paid for the building at the height of the market in 2007.

Dines supported building a new port building in downtown, though he offered no suggestion about what such a building might costs or how it compared to the WTC purchase price.

The current estimate for the new port building as designed by port staff – built on port property and not requiring the purchase of prime downtown property – is $220 million.

Drummond also rejected the idea of purchasing the WTC, concurring with Dines that the port should be "downtown, in a building built to today's standards."

On the opposite side of the issue, Commissioner Nick Sramek said that he supported the WTC purchase, calling it an "ideal" location for the port staff and the most "cost-effective" solution available. He said that it was revealed in closed session that it would cost the port $70 million to $80 million more over ten years to purchase another building or even build a new building in downtown.

"For [the additional] $70 million to $80 million...we would have to put out over the next ten years," Sramek said, "I can't see anything other than the WTC. There is just too much of a differential."

Fields also supported the purchase of the WTC, citing that he could see no justification for keeping port staff in the current building – one deemed unsafe – for an additional three to five year while a new building is constructed.

"Every figure we have seen, when you [project] it out for ten years," Fields said, "[it] comes out more reasonable to purchase the WTC. This is not even close."

Drummond said that given the board's split vote, "need we go back in our room and discuss it? Need we prolong the agony?"

Fields responded, "I would like to think that reasonable people, when the facts are put before them, can come to a reasonable understanding."

After Dines made it clear he would not change his vote, even after further closed-door discussions, Drummond openly stated that he was changing his vote and would agree to the WTC purchase. Drummond then called for a motion to purchase the WTC.

When Fields called the vote seconds later, however, and much to the surprise of both Fields and Sramek, Drummond and Dines voted against the WTC purchase, thus locking in a split 2-2 vote.

Fields called on the port attorney, asking if it was acceptable for Drummond to vote against his own motion.

The port's attorney said that putting forth a motion was merely presenting the board with a question, and each commissioner could vote any way they chose once the motion is forwarded.

Drummond concluded by saying that he believes "good people can have different opinions."

The split vote essentially leaves the WTC purchase in limbo.

If a different vote is not reached by Nov. 1 – the end of the 60-day agreement period with Legacy Partners – the agreement will terminate. The port board has two scheduled meetings before the Nov. 1 deadline.

Long Beach Port Reaches Major Dredging Project Milestone

The Port of Long Beach announced Monday that a major component of a capital dredging project at the port is now complete, with main channel depths now reduced to 76 feet from two miles outside the harbor entrance to the port's Middle Harbor and East Basin serving the crude oil terminal on Pier T.

The completion of the project means that VLCCs – Very Large Crude Carriers – can now steam directly to berth at the T121 facility rather than first lightering offshore.

Prior to the dredging project, the turning basin did not have the depth to allow access by fully laden VLCCs. The East Basin can now safely accommodate vessels with up to 69 feet of draft. According to the port, the deeper, wider channel and basin will also provide additional, safer access for the world’s largest container ships to call in Long Beach.

"This is a critical project for the Port of Long Beach. It greatly enhances the Port’s capabilities and navigational safety," port Managing Director of Engineering Doug Thiessen said. "We’ve been very fortunate to develop a strong and successful working partnership with the Army Corps of Engineers that has resulted in some major improvements to this harbor."

Col. Mark Toy, U.S. Army Corps of Engineers Los Angeles District Commander commended the port on its environmental and commercial vision in regards to the dredging project.

"The U.S. Army Corps of Engineers is thankful to the Port of Long Beach and the City of Long Beach for entrusting us with the construction management for crucial port and city projects. Today we celebrate a project and a partnership that continues ‘Building Strong’ and taking care of people," Toy said.

The main channel project is part of a larger 17-month $40 million dredging project to be completed before the end of 2011. The port is providing about $35 million of the funding with $2.6 million from the Army Corps and $2.4 million in federal economic stimulus funds.

The Army Corps has been providing project construction management with the actual dredging performed by Manson Construction Co.

In addition to the main channel deepening, the overall project has included dredging to improve navigation at the Catalina Express ferry landing in downtown Long Beach and the removal and environmentally safe containment of 660,000 cubic yards of decades-old contaminated sediment in the harbor, left over from the former Navy station in Long Beach.

Judge: Longview Port and Grain Operator Labor Dispute Should Go to Arbitration

A federal judge on Friday said that a contentious lease dispute between the Port of Longview and tenant EGT Development, that has led to months of protests by union dockers, should be decided by a labor arbitrator.

EGT, which operates a new $200 million grain export facility at the port, is suing the port over language in its lease. The port claims that the lease binds EGT to use International Longshore and Warehouse Union workers to staff the facility. EGT disputes the port's interpretation of the lease language.

Earlier this year, as it prepared to bring the grain facility online, EGT contracted with a third party to provide staffing. The third party hired members of a different union, which led to ILWU protests that have seen hundreds of union members arrested and led to tens of thousands of dollars in property damage.

District Court Judge Ronald Leighton told attorneys for the port and EGT that a labor arbitrator should rule on the lease language. He has asked the two sides to offer their suggestions on how to move forward.

Judge Leighton said it was clear that during the discussions formulating the lease, both the port and EGT were aware of the ILWU labor exclusivity language, but each side wanted to reach a lease agreement while deferring the labor questions for later.