Tuesday, May 20, 2014

West Coast Ports Prepare for the Future

West Coast US ports from California to Alaska find themselves confronting a perfect storm of challenges coming from different directions – challenges that can become opportunities or disasters, depending on how they are addressed.

The root of many of the challenges for container ports from Seattle to San Diego is the shifting dynamic of the container market and the ships that serve it.

"There is a major paradigm shift going on," said Mike Moore, vice president, Pacific Merchant Shipping Association. "The newer, bigger container ships have gotten a lot cheaper to build. A 19,000 TEU vessel will be launched in May. That is 72 miles of containers – in the mid-90's 5,200 TEU was considered a mega-ship.

"The cost for size has gotten less, capacity is high and there is not enough cargo," he said. "The result we are seeing is suppressed rates and mega-alliances. The larger ships combined with the mega-alliances like P3 will impact gateway choices."

The 19,000-TEU mega-vessels will ply the Asia to Europe trade. West Coast ports will see vessels in the 10,000 to 14,000 TEU range. Los Angeles and Long Beach can handle the 14,000 TEU vessels in weekly streams of five or six, while Seattle and Tacoma are more comfortable with the 10,000 TEU ships.

"The question for Seattle is whether larger ships will find their way here – and when?" said Moore. "Seattle currently has low utilization rates, which makes the cost per container higher."

One solution to Seattle's conundrum may be in working more closely with neighboring Tacoma to make the Puget Sound gateway more competitive. The two cities have received approval from the Federal Maritime Commission to enter into discussions on the subject.

One area where Seattle and Tacoma have already started cooperating is their collaborative efforts with the Port of Vancouver on the Northwest Ports Clean Air Strategy to reduce emissions from shipping and port operations in the Georgia Basin–Puget Sound airshed.

"Phase One of the North American Emission Control Plan went into effect in 2102," said Moore. "The ability to meet or exceed the standards – .1 means you are down to distillates – will lead to gateway choices.

"Collectively, we have more big changes hanging over our heads in 2014 than at any time in the last 25 years," said Moore. "You have the environmental uncertainty and cost, and container ships are moving away from a model where they own their terminals, which reduce utilization and impacts feasibility," he said. "The Port Authority can only do so much, there are only so many tools in the tool kit."

While Seattle and Tacoma huddle to chart a path into their joint future as a gateway, Long Beach and Los Angeles have been busy investing billions to meet the challenges of ever-larger TEU vessels head on.

More than one billion dollars in capital upgrades are underway at the Port of Los Angeles, including new terminals, wharf extensions, new on-dock rail facilities, deeper water at berths, crane installations, upgrading 50 acres of backlands and doubling the size of China Shipping's terminal to 142 acres. Another $370 million is being spent on the Main Channel Deepening Project, which will guarantee 53-foot-deep access to the port's containership berths.

Los Angeles has moved more containers than any other port in the nation over the last decade, more than doubling its volumes in the 10-year period. In 2010, the port's cargo terminals handled 7.8 million TEUs. Home to the nation's largest on-dock rail assets, Los Angeles provides the highest frequency of intermodal access to 14 major freight hubs across the United States.

The Port of Long Beach has even more ambitious plans for capital improvements, $4.4 billion dollars' worth of capital upgrades intended to prepare the port for larger ships and more traffic.

The Gerald Desmond Bridge replacement is the most dramatically visible of those upgrades. The bridge is a vital link in the nation's trade system that handles 15 percent of the nation's cargo and is a major commuter corridor. The original bridge was completed in 1968 and is deteriorating. The $1.2 billion replacement project will ensure the safety of commuters and truck drivers, and improve navigation safety for the ships passing beneath. Construction began in 2013 and will take at least three years. The old bridge will be dismantled when the new one is opened.

Another $1.3 billion is being invested in the Middle Harbor Redevelopment project – upgrading two aging shipping terminals into a single, 305-acre state-of-the-art terminal designed for higher productivity and better environmental performance. The program will add on-dock rail capacity, shore power hookups and the latest in advanced crane technology to move twice the cargo with half the air pollution. Features include electric rail-mounted gantry cranes and LEED-certified buildings. Construction began in 2011 with wharf improvements and new electrical infrastructure. The nine-year project will rehabilitate and modernize facilities across Piers D, E and F.

Other improvements at Long Beach include the $500 million Pier G modernization project, $65 million yet to be invested to dredge and widen the Cerritos Channel in the Port of Long Beach, which will improve safety and navigation, and between $300 million and $650 million to redevelop an existing rail yard on Pier B and remove rail bottlenecks in the port. A recently completed $100 million program equipped Piers A, G, J and T with the infrastructure for vessels at berth to plug into shore power.

One of the elephants in the Pacific for West Coast ports is the potential impact from the expansion of the Panama Canal. Speculation is rampant regarding the shifting of container traffic to Gulf and East Coast ports.

A recent report issued by a commission formed to promote prosperity and stability to the Californian city of Los Angeles is betting that the Canal expansion will bring more, not less, traffic to West Coast ports.

The Blue Ribbon Commission 2020 has suggested a possible merger between the ports of Los Angeles and Long Beach. The commission stated that the two ports should work together to carry the influx of new vessels from the Panama Canal expansion – that the ports "should be competing with ports in other regions, not with each other."

The commission also said that a merger makes sense because of a drop in market share at the ports of LA and Long Beach, the busiest seaports in the US. The ports' combined market share fell more than 5 percentage points in the last ten years. "That drop in market share alone is the size of the fifth-biggest port in the country, Seattle-Tacoma, which accounts for more than 60,000 jobs and has in excess of $100 million in revenue," the commission said. "We should fight to bring those jobs and tax revenues back to Los Angeles."

The commission's suggestion does not have the support of Long Beach port officials. "Simply put, this is a bad idea," said Doug Drummond, president of the Long Beach Board of Harbor Commissioners. "The Port of Long Beach is not interested in a merger with our neighbor.... I can assure you that the Port of Long Beach is better run by the citizens of Long Beach."

Then there is the point of view that the Panama Canal expansion may not be such a game changer after all.

"From our perspective, the real game is not Panama Canal expansion," said Noel Hacegaba, Acting Deputy Executive Director for the Port of Long Beach. "Our perspective is that it is the growing size of vessels that will have the greatest impact on our port facilities and traffic.

"Here at Long Beach, we already receive 14,000-TEU container ships, whereas the Canal will only handle ships up to 12,500 TEU. The real competition to the Panama Canal is the railroad."

And the real competition to West Coast US ports is from the Canadian and Mexican ports of Prince Rupert and Lazaro Cardenas, respectively, said Hacegaba. "A couple of years ago the Mexican government offered the Lazaro Cardenas concession to APM Terminals, which belongs to the Maersk Group."

Lazaro Cardenas, under APM management, could offer the same kind of competitive threat to Los Angeles/Long Beach that Prince Rupert, BC offered to the ports of Seattle and Tacoma. "Prince Rupert's growth was driven by taking container traffic from Seattle and Tacoma," said Hacegaba.
Meanwhile, almost all the other West Coast US ports are growing, especially in breakbulk and ro/ro traffic, as well as bulk and agricultural commodities.

The Port of San Diego is focusing on the specialty cargo business. In August 2013, the Port completed a $3 million Capital Improvement Project at the Tenth Avenue Marine Terminal to provide more flexible berthing and to improve its ability to handle specialty cargo that requires large space for storage and staging. The project included the demolition of transit sheds and warehouses. The demolition provided an additional 58,000 square feet of open space at Tenth Avenue Marine Terminal.

San Diego has also switched on its new shore-power system at the Tenth Avenue Marine Terminal, which will improve air quality and reduce greenhouse gas emissions by allowing cargo vessels to "plug in" rather than run their diesel engines while in port.

North of Los Angeles, Port Hueneme is positioning itself to be ready when, and if, a federal short sea shipping initiative to divert cargo from the nation's highways to its waterways begins making substantial inroads. Short sea shipping involves all-water routes where barges and smaller vessels transport cargo between larger ports to reduce wear and tear on roads, cut traffic congestion and reduce air emissions.

"We don't want to sit back and watch what's going on," said Kristin Decas, the port's executive director. "We want to engage. If the public policy emerges, and short sea shipping starts evolving, we want to make sure we're on the map."

In the San Francisco Bay area, the Port of Oakland is moving forward on a $500 million Phase 1 redevelopment of the former Oakland Army Base (OAB) into a modern intermodal logistics cluster. The development includes new utilities across the entire site, a new bulk terminal, modern warehousing and cold storage facilities, and a recycling facility on the City side, as well as a new rail yard on the Port side of the property.

Last July, the Oakland Board of Port Commissioners unanimously approved a litigation settlement agreement with SSA Terminals, LLC and SSA Terminals (Oakland), LLC (collectively, "SSAT"), one of the Port's major long-term seaport tenants.

The settlement involves four of the Port's seven marine terminals, and will create operationally the 3rd largest terminal on the US West Coast. In terms of size and operational efficiencies, this new "mega-terminal" will be more in line with competing terminals, allowing the Port to sustain and attract more maritime cargo, which currently supports approximately 40% of the 73,000 jobs the Port generates annually in the region.

There is also a Marine Highway Initiative to establish a "container on barge" service stretching from West Sacramento to Oakland with stops in Stockton. The goals are to provide a viable marine highway service between regional ports, improve goods movement in Northern California and reduce truck traffic congestion and emissions on major roadways. Additionally, the service aids shippers by reducing the costs to ship heavy containers.

The story is the same all the way up the West Coast. The California ports of Redwood City, Stockton, Sacramento, and Humboldt Bay are all beginning or in the middle of expansion and improvement projects, as are ports in Oregon and Washington. Alaska ports are also expanding and improving their facilities, preparing for more traffic from the opening of the Arctic sea routes and increased petroleum exploration and development activity. It seems the Panama Canal expansion could be the least important factor in the planning matrix of US West Coast port leaders.