About the Atlantic Provinces Economic Council

Transcription

1

2 About the Atlantic Provinces Economic Council The Atlantic Provinces Economic Council (APEC) is an independent, non-partisan research and educational institution. Its objective is to promote the economic development of the Atlantic region of Canada. It accomplishes this through analysing current and emerging economic trends and policies; by communicating the results of its analysis and consulting with a wide audience; and by advocating the appropriate public and private sector response. APEC is a federally incorporated, non-profit organization primarily financed by membership contributions and funded research. Founded in 1954 as a partnership between the provincial governments and the private sector, it now draws widespread support from business, organized labour, and the community at large. The Chair of the Council is Karl Smith; Elizabeth Beale is President and Chief Executive Officer. Information on membership and publications is available by: Mail: 5121 Sackville Street Suite 500 Halifax, NS B3J 1K1 Telephone: (902) Fax: (902) Homepage: info@apec-econ.ca Acknowledgements APEC would like to thank Dr Mary R. Brooks, William A. Black Chair of Commerce and Professor of Marketing and Transportation at Dalhousie University for her expert insight and invaluable feedback on this report. The Atlantic Canada Opportunities Agency (ACOA) provided financial support for this research through its Atlantic Policy Research Initiative (APRI).

3 The Changing Global Economy: The Implications and Opportunities for Transportation in Atlantic Canada Executive Summary The purpose of this report is to provide an overview of the current transportation system in Atlantic Canada, to identify the key transportation issues in the region, and to highlight how the region s trade and transportation flows are being affected by the changing global economy. In this context, a specific focus of the report is the consideration of an Atlantic marine gateway for freight shipments. The report outlines the key drivers in global trade and shipping that are creating this opportunity, the specific nature of the opportunity for an Atlantic gateway, the economic benefits associated with a marine gateway, and the issues that must be addressed to successfully realize this potential. Atlantic Canada s transportation system consists of a complex array of infrastructure, services and flows. Among the key elements are: The Port of Halifax which acts as a marine gateway for container traffic with more than 80% of volumes destined for or originating from central Canada and the U.S. Midwest. A rail corridor, operated by CN, that links the region and the Port of Halifax to markets in central Canada and U.S. Midwest. Two truck corridors, one between Atlantic Canada and the U.S. Northeast and one linking the Atlantic region with central Canada. Given the unbalanced nature of the flows along these trade corridors, Atlantic trucking companies have developed triangular network strategies, taking loads south to the United States, picking up goods from the U.S. Northeast region and transporting them to Toronto or Montreal, and then bringing goods back from central Canada to the Atlantic region. Dedicated port infrastructure, including two transhipment terminals, and international and domestic marine services for crude oil and refined energy products which account for about 80% of the marine tonnage moved to, from, and within the Atlantic region. Other ports and marine services for the export of Atlantic Canadian goods to the United States and for trade with other international markets. This transportation infrastructure has facilitated a significant expansion in Atlantic Canada s international trade, particularly with the United States, during the 1990s. It has also supported the huge growth in the volume of shipments of energy products since the late 1990s. Buoyed by high energy prices, Atlantic Canada s international exports of energy products exceeded its exports of other goods for the first time in Yet the global economy is changing with rapid growth in international trade and changing patterns of trade, driven in large part by the development of global supply chains that have been facilitated by lower transportation and communication costs, technological advances and market and trade liberalization. i

4 In Atlantic Canada: There has been rapid growth in exports of raw materials and unprocessed goods such as iron ore, shellfish, pulp and newsprint to fast-growing Asian markets but, so far, relatively little in terms of value-added manufacturing. Will Atlantic exporters pursue further opportunities in these markets, requiring better marine access to Asia? Current exploration activity in the region suggests some upside potential for the export of minerals. However, the capacity for further increases in the supply of shellfish, pulp and paper may be limited. Other Atlantic manufacturers will find it hard to compete on the basis of low wages or just-in-time delivery to these markets and will more likely have to define their competitive advantage around other factors such as using technology to produce superior products and by providing better service quality. Factors such as increased competition from low cost competitors in Asia and elsewhere, a 40% appreciation of the Canadian dollar driven in part by high global energy prices, higher energy and transportation costs, weak or shifting product demand, and supply constraints in some industries point to the competitiveness challenges now facing Atlantic industry. These pressures are being reflected in current output, export and employment trends. For example, the total value of Atlantic Canada s non-energy exports has stagnated since In particular, food and forest products, which account for a large part of Atlantic rail and truck volumes and the growth in these modes over the last years, have been facing particular difficulties with significant reductions in productive capacity. How will these trends affect the Atlantic Canada s demand for transportation services by mode and destination over the next decade? Decreased demand could have significant implications for the cost and availability of transportation services while lower rail volumes to central Canada and the U.S. Midwest could free up some capacity for imported containers from Asia. In the face of increased competitive pressures, Atlantic businesses have adopted practices such as supply chain management, offshoring and outsourcing to improve their productivity or to take advantage of new market opportunities. Going forward, this will require better marine and other transportation services to bring supplies to the region and to ensure rapid delivery of products to key markets. While Asia has been one of the fastest growing markets for Atlantic exports over the last decade, a significant new opportunity to provide transportation services is opening up to service the import of goods from Asia to larger inland markets in Central Canada and the U.S. Midwest. Several trends in global trade and shipping can be observed which point to the potential for East Coast ports in North America to play an increased role in terms of providing international transportation services for services via the Suez Canal. These include: Rapid growth in Asia-North America trade driven by imports of manufactured consumer goods from low-wage Asian countries, particularly China; Potential shifts within Asia in terms of the location of manufacturing activity, which may favour increased shipments from countries such as Malaysia, Vietnam and Thailand; The deployment of larger (post-panamax) container ships; Congestion at West Coast ports in North America, prompting shippers to diversify the gateways they use; and ii

5 Congestion and ship size constraints at the Panama Canal which offer a window of opportunity to East Coast ports to capture overflow from West Coast facilities via the Suez Canal. However, several developments could affect the scope or timing of this opportunity. These include: The proposed expansion of the Panama Canal which could be completed by about 2014; Investments at West Coast ports in Canada (such as Prince Rupert) and the United States; Expansions at Gulf ports (e.g., Houston) and Mexican ports (e.g., Lázaro Cárdenas); and For Canadian East Coast ports, expansions at U.S. East Coast ports (e.g., Norfolk) as well as investments in inland terminal facilities at existing U.S. East Coast ports. In Eastern Canada, the Port of Halifax is best positioned at the current time to take advantage of these potential opportunities: It is by far the largest container port in Atlantic Canada and the 3 rd largest in Canada; It already has a broad variety of services (both international and short sea shipping); It has a deep ice-free harbour; It has doublestack Class 1 rail service to Central Canada and U.S. Midwest; and It currently has spare capacity. While there may also be opportunities for other East Coast Canadian ports, a number of challenges exist: The Port of Saint John requires increased shipping times compared with Halifax and it is constrained by tides in the Bay of Fundy; The Port of St. John s is limited by its lack of access to the major inland markets; The Port of Canso currently lacks a container terminal and Class 1 rail service; The Port of Montreal is constrained in its ability to handle larger, Post-Panamax vessels because of the depth of the St. Lawrence Seaway and the need for an icebreaker and ice-strengthened vessels during winter. The most obvious opportunity for the Port of Halifax is to expand its role as a gateway for containerized Asian imports destined for central Canada and the U.S. Midwest: Unlike New York, the Atlantic region is not a sufficiently large market in itself to influence port of call choices. Halifax is the closest major East Coast port to Europe and the Suez Canal and has an advantage in terms of serving markets in Central Canada and the U.S. Midwest, compared with U.S. ports such as Norfolk and Savannah (in terms of transit time), and iii

6 possibly New York (for Ontario shippers who dislike the potential issues arising from the use of a U.S. gateway). Some shipping lines indicate that larger vessels will need to make two or three port calls on the East Coast (including New York/New Jersey, which, because of its large local market, cannot be efficiently serviced any other way). Under this approach, Halifax could be one of several East Coast ports of call with ships dropping off loads for central Canada/U.S. Midwest (and picking up loads from the same) on their way to or from other East Coast ports further south. This topping off would represent an expansion of existing kinds of activity at the Port of Halifax. It also suggests some degree of complementarity between Halifax and other East Coast ports such that increased investment and capacity at other East Coast ports makes such routings more likely and hence increases the likelihood for spillovers to Halifax. Moreover, it is possible that a shipping line may choose to make Halifax its major East Coast port of call, with significant unloading of containers for inland markets (e.g., perhaps 6,000 TEUs rather than about 1,000 TEUs under traditional topping off activity). This approach could very quickly tap the existing capacity of the Port. Further analysis of the size and timing of this potential demand is required. There may be other opportunities for the Port of Halifax to expand: If eastern European countries become important manufacturing centres for the North American market then gateway trade between Europe and North America may flourish. Although not forecast to grow as fast as Asia-North America trade, volumes on these routes are still significant. A shift towards bigger ships on this route would limit the capacity of Montreal to service these ships and provide a greater potential role for Halifax. It may be possible for the Port of Halifax to develop as a major transhipment container terminal if gateway activity at the Port begins to grow rapidly. This opportunity needs further evaluation. The potential for short sea shipping, which would a key component of a transhipment terminal in the region, is currently restricted by government regulations. In addition, despite the development of transhipment terminals elsewhere around the globe, no such terminal has so far been developed on the east, west or gulf coast of North America. While the development of Atlantic gateway depends upon several key global developments that are largely outside of its control, there are several key factors that can be influenced by regional stakeholders that could affect the likelihood of increased gateway activity: Ensuring strong connections to inland markets. The cost and ease of transporting containers from the Port of Halifax to inland markets in central Canada and the U.S. Midwest is central to the port s competitiveness but depends almost exclusively on rail services provide by CN. CN s reputation as a railroad operator is an asset for an Atlantic gateway but are CN s operating objectives of asset utilization and cost control optimal for the development of gateway traffic? CN s operating efficiency should be a plus and CN s President and CEO recently stated, in the keynote luncheon address for Halifax Port Days, that the interests of the Port of Halifax and CN have never been more strategically aligned and that CN is prepared and totally committed to making growth at Halifax a reality. Road infrastructure will also be important for Atlantic exporters to take advantage of improved access to international markets via the Port of Halifax and for increased iv

7 distribution of imports throughout the region. In addition, ensuring the adequacy of road infrastructure to Central Canada will be an important complement to rail for time sensitive shipments. To the extent that containerized imports through the Port of Halifax are destined for New England, the efficiency and capacity of road and border infrastructure to the United States will also be important. Boosting Port Efficiency. The Port of Halifax s efficiency is imperative. Higher efficiency can improve cost structures and make the port more attractive to shipping lines. Enhanced efficiency also improves transit times and reliability for shippers. The Halifax Port Authority, the terminal operators, CN and the stevedores all have a role in maximizing the port s productivity. Ensuring sufficient port capacity. The Port of Halifax is currently operating at about half of its capacity, but the long-term viability of the port as a gateway depends upon its capacity to expand. While one recent study indicated that the Port s effective capacity is about 750,000 TEUs per year, the Halifax Port Authority believes that its two container terminals can handle about 1 million TEUs per year. Port capacity is fragile and can change quickly if shipping lines alter their ports of call or new services are added. However, if a port cannot accommodate such shifts, they will miss out on the opportunity. There is therefore a need to build capacity ahead of demand. This makes port and terminal investments inherently risky with a lack of security for private lenders. It is the practice of the governments of most countries to provide financial support for the development of port infrastructure. Many governments view common user port infrastructure as a public good and so subsidize it. Canada is one of very few countries that expects common user ports to be financially self-sufficient. Options for expansion at the Port of Halifax include the expansion of the two existing container terminals by using adjoining land, shifting operations to an all rail inland terminal, and a third container terminal. Turning potential into reality. Despite the trends favouring the growth of East Coast ports and Halifax s favourable location and capabilities, shippers and shipping lines still need to be convinced to add Halifax to their ports of call or to make a major shift in favour of Halifax. The Port of Halifax believes that it is ready for this opportunity and is aggressively trying to make itself known and to market its capabilities. Removing regulatory barriers. A number of regulatory issues need to be addressed if the full potential of an Atlantic gateway is to be realized. A relaxation of CMA port financing restrictions is an important step to support infrastructure development and was strongly recommended by the CMA Review Panel. Even so, direct government funding for port infrastructure will still be needed. Regulations affecting the viability of short sea shipping will need to be addressed if the port is to become more of a transhipment hub. Working together. Many stakeholders have an interest in the development of an Atlantic gateway but its success will depend upon their ability to work together with a clear vision, commitment and coordinated action. What would be the economic benefits of increased gateway activity through the Port of Halifax? While the main potential benefits can be identified, further analysis is required to quantify their dollar value and significance. The Port of Halifax would benefit from higher revenues and incomes for the Halifax Port Authority, the terminal operators and the stevedores. These higher incomes would generate increased personal income tax, sales tax, corporation tax and other revenues for municipal, provincial and federal governments. v

8 Increased port activity will create demand and increased opportunities for trucking and tertiary transportation services, including distribution and logistics such as the facility being established by Consolidated FastFrate in Halifax. An enhanced Atlantic gateway would improve access to markets, particularly in Europe and Asia, for both Atlantic exporters and importers. Atlantic businesses would benefit from a larger number of shipping lines calling the Port of Halifax, more frequent services and increased container capacity. However, the magnitude of this potential benefit depends upon the competitiveness of Atlantic exporters and their interest in taking advantage of new and fast growing markets, such as those in Asia. If the Port of Halifax increases its container handling from Europe and Asia, there may be potential spillover effects to other Atlantic ports to provide complementary services. However, the scope for this potential is not yet clear. It is also not clear if there is potential for Atlantic companies to add value by capturing additional supply chain activity in the region. Canada s economy would benefit from increased economic activity through the Port of Halifax, including increased federal tax revenues. From a strategic point of view, an enhanced and more efficient Atlantic gateway would complement both the Pacific gateway (through the Port of Vancouver and Prince Rupert) and the Port of Montreal (especially as container ships increase in size), ensuring that all Canadian businesses have more competitive marine transportation options. It would also support the federal government s stated objective of developing Canada s trade with Asia. Enhanced marine services from Asia through the Port of Halifax would provide Canadian importers with additional transportation options to West Coast ports, which would assist them in managing risk in their supply chain, particularly as services through the Suez Canal develop. Moreover, as Canadian imports from Southeast Asian countries such as India, Thailand and Malaysia grow, Halifax is better suited than Vancouver to be the main gateway to central Canadian markets. Similarly, exporters, particularly those from Ontario and Quebec, would benefit from improved marine access to markets in Asia and eastern/mediterranean Europe While the development of an Atlantic gateway presents a real opportunity, particularly for the Port of Halifax, other Atlantic transportation priorities, that are not necessarily critical to the gateway concept, should not be neglected. The state of Atlantic Canada s current transportation system affects companies competitive position. In a recent APEC survey of foreign firms in Atlantic Canada, the region s transportation system, particularly road and air, was rated as worse than in other jurisdictions where these firms operate. It is vital to ensure that Atlantic exporters can move goods quickly and easily across the U.S. border. The United States accounts for about 80% of the region s merchandise exports by value and 66% of its non-energy exports. In 2002, about 40% of the Maritime provinces international merchandise exports by value were shipped by road. Key issues that need to be addressed include ensuring adequate infrastructure and resources at border crossings to eliminate congestion; minimizing the negative impact of advance notification procedures; addressing ways to help SMEs comply with new security standards; and liaising with U.S. authorities on the development and implementation of border security measures. Adequate funding mechanisms are vital to maintaining and upgrading key road corridors within the region. Trucking accounts for the majority of flows to the U.S. Northeast as well as the majority of non-energy freight movements within the Atlantic region. The Atlantic region has one of the highest road densities in the country in terms vi

9 of kilometres of roads per person but lacks the tax base to support it. Despite significant improvements to the region s road network in recent years, the ability of the provinces to participate in federal cost-shared programs remains a concern. Regulatory convergence should be another top priority, in particular, working with U.S. counterparts to harmonize regulations within NAFTA. Differing equipment standards and other regulations (including cabotage) reduce the efficiency of cross-border truck movements. Other regulatory barriers include those affecting short sea shipping. Finally, consideration should be given as to how to assist small Atlantic shippers that lack the volumes to ensure capacity on ships, planes, railcars and trucks and the bargaining power to influence rates and service levels. Is there scope for a shippers cooperative or similar venture to improve transportation access for smaller players? vii

10 viii

11 The Changing Global Economy: The Implications and Opportunities for Transportation in Atlantic Canada Contents Introduction...1 PART I: ATLANTIC CANADA'S TRANSPORTATION SYSTEM Chapter 1: Atlantic Canada s Transportation System: Key Infrastructure, Flows and Issues...3 PART II: GLOBAL SUPPLY CHAINS & TRENDS IN GLOBAL SHIPPING Chapter 2: Supply Chains and Changing Global Trade Patterns...11 Chapter 3: Key Trends and Issues in Global Shipping...15 PART III: AN ATLANTIC GATEWAY: POTENTIAL, BENEFITS AND CHALLENGES Chapter 4: Opportunities for an Atlantic Gateway...25 Chapter 5: The Economic Benefits of an Atlantic Gateway...31 Chapter 6: Issues in Developing an Atlantic Gateway...35 PART IV: ASSESSMENT Chapter 7: Summary and Conclusions...39 Appendix A: Transportation Infrastructure and Trade Flows...41 Appendix B: Key Transportation Issues for Atlantic Canada...57 Glossary...63 ix

12 x

13 Introduction International trade continues to grow rapidly, spurred by market and trade liberalization, reductions in transportation and communication costs and the development of new information and communication technologies. Global trade patterns are also changing with the emergence of large, rapidly growing Asian economies, most notably China and India. Firms are developing sophisticated global supply chains to improve their competitiveness, focusing on their core competencies and outsourcing other parts of the production process. Efficient supply chains also facilitate just-in-time deliveries and enable better responsiveness to dynamic customer demand. Efficient, cost effective and reliable transportation is a key component of successful supply chains. Spurred by the development of these global supply chains, particularly in manufacturing, container shipping is the fastest growing sector of marine transportation. Shipping lines are deploying larger vessels to accommodate trade flows between Asia and North America while ports in the Far East, North America and around the world, are ramping up investments and expanding infrastructure to better accommodate rapidly increasing shipping volumes. Yet congestion at West Coasts ports and capacity constraints at the Panama Canal are prompting shipping lines to consider all-water services via the Suez Canal to reach North American markets. These global developments are impacting Atlantic Canada s economy. The region s international trade has accelerated since the early 1990s and in the past decade there has been a tenfold increase in Atlantic exports to China. Yet the United States remains the region s largest trading partner and issues relating to security and border congestion have come to the fore in recent years. While low density and regulatory issues affect the efficiency of the region s transportation flows, the huge growth in Atlantic Canada s shipments of energy products since the late 1990s has occurred without any major transportation concerns. Recent trade data now indicate the extent to which the Atlantic region is facing strong competitive pressures and these will potentially influence the region s demand for transportation going forward. In addition, in light of the trends in global shipping, a significant new opportunity has emerged for the Atlantic region to play a role as a transportation gateway for manufactured goods coming into North America from Asia. This opportunity is a specific focus of this report. Purpose and Scope The purpose of this report is to provide an overview of the current transportation system in Atlantic Canada, to identify the key transportation issues in the region, and to highlight how the region s trade and transportation flows are being affected by the changing global economy. In this context, a specific focus of the report is the consideration of an Atlantic marine gateway for freight shipments. The report outlines the key drivers in global trade and shipping that are creating this opportunity, the specific nature of the opportunity for an Atlantic gateway, the economic benefits associated with a marine gateway, and the issues that must be addressed to successfully realize this potential. The report is organized into four main sections: Part One provides an overview of Atlantic Canada s transportation system. It identifies the largest trade and transportation flows, outlines the key transportation issues for the region, and discusses how changes in the global economy are influencing current and emerging transportation trends in the region. Two appendices provide additional detail on the region s transportation infrastructure and the transportation policy issues. 1

14 Part Two discusses the emergence of global supply chains and their impact on international trade. The implications of these trade flows for global shipping are emphasized along with key developments in marine shipping that are further shaping the nature and direction of global shipping patterns. With this global context, Part Three of the report assesses which East Coast ports are currently best positioned to take advantage of these trends, identifies the potential opportunities for an Atlantic gateway and the likely economic benefits. The broad issues that must be addressed to turn this potential into reality are also scoped out. Part Four summarises the key points of the report and places the discussion about an Atlantic gateway in the larger context of the region s transportation priorities. So much of the region s existing and future trade still depends on the efficiency of the region s highway system and border crossings into the United States as well as shipments of bulk cargo by water. These other transportation issues and priorities must not be neglected in a pursuit of an Atlantic gateway. 2

15 Chapter 1 Atlantic Canada s Transportation System: Key Infrastructure, Flows and Issues A strong transportation system is the critical link for Atlantic Canada s trade with national and international markets. With the volume of Atlantic Canada s trade doubling over the last two decades, the demands on the transportation system are growing while evolving trade patterns and expanding industries, such as offshore oil and gas, are changing the nature of the transportation services required. The liberalization of North American trade, beginning with the Free Trade Agreement with the United States, has contributed to a re-orientation in Atlantic trade patterns along a north-south axis. In 1989, Atlantic Canada s international exports were the same size as its interprovincial exports but are now more than 40% larger. 1 International imports have also expanded rapidly. While the United States remains Atlantic Canada s largest trading partner, some firms have benefited from rapid growth in demand from Asian markets while others are having to respond to intensified competition from low cost producers. These global shifts are having a marked influence on trade and transportation flows in the Atlantic region. Overview of Atlantic Canada s Trade Patterns by Transportation Mode Existing transportation data permit some analysis of current transportation flows but do not permit a complete analysis of origins, destinations, modes and commodities. For example, air cargo volumes are currently only collected for larger carriers with only limited destination and no commodity detail available. Truck movements only include for-hire trucking whereas, at least at the national level, private or own-account trucking is estimated to be larger than for-hire trucking. 2 Most of the available data are for the Atlantic region as a whole, rather than for individual provinces. However, based on the available data, roads, rail lines and ports all play an important role in the shipment of goods in and out of the Atlantic region (Table 1). Air cargo tonnage is comparably small, but is typically used for higher value or time-sensitive goods. Rail and marine shipments are both dominated by shipments of specific commodities which obscure the transportation patterns for other products. These flows are therefore identified separately (see Table 1). For example, total rail shipments from Atlantic Canada are dominated by the movement of iron ore from Labrador to ports in Quebec for export to international markets. In 2003, iron ore accounted for 77% of the total rail tonnage moved out of the Atlantic region. On the marine side, shipments of crude oil and refined petroleum products account for 80% of total marine tonnage to, from and within the region. These flows reflect shipments of crude oil from three producing offshore oil fields to regional, Canadian and U.S. refineries, via a transhipment terminal in Newfoundland; shipments of crude oil from international markets to the region s three refineries; a storage and transhipment terminal in Nova Scotia for crude and refined petroleum, largely destined for the United States; and shipments of refined petroleum products from Atlantic refineries to local, U.S. and international markets. The growth of these offshore fields along with capacity expansions at the region s refineries, most notably in Saint 1 APEC (2005), Transportation and Atlantic Canada s Changing Trade Patterns, Report Card, December. 2 Statistics Canada (2006), Study: Economic importance of transportation, The Daily, May 19. 3

16 John, have contributed to rapid growth in marine shipments of energy products since the late 1990s. Table 1a: Tonnage Loaded in Atlantic Canada by Destination and Mode, 2003 Tonnes (000 s) Road Rail - Iron Ore Rail - Other Marine - Energy Marine - Other Air All modes Within ATL 14, ,308 21,357 1, ,643 Quebec 1,592 19,342 1, , ,512 Ontario 1, , ,050 West Interprovincial 2,713 19,342 2, , ,863 U.S. 3, ,985 35,754 10, ,566 Other Int ,084 6, ,179 International 3, ,985 37,838 16, ,745 Total 20,333 19,342 11,128 60,154 21, ,263 Table 1b: Tonnage Unloaded in Atlantic Canada by Origin and Mode, 2003 Tonnes (000 s) Road Rail - Iron Ore Rail - Other Marine - Energy Marine - Other Air All modes Within ATL 14, ,307 21,357 1, ,641 Quebec 2, , ,558 Ontario 1, , ,697 West Interprovincial 4, , ,974 U.S ,100 3, ,744 Other Int , ,374 International ,116 32,459 5, ,135 Total 19, ,157 54,335 7, ,755 Source: Statistics Canada. Notes: 1. Marine data for Quebec refer to the St. Lawrence region and for Ontario the Great Lakes region. 2. Road data are for-hire trucking only is the most recent data available for all modes. Within Atlantic Canada, trucking is the dominant transportation mode for freight other than energy products. Short distances tend to make trucking more economical, particularly for firms moving small volumes. A lack of rail services there are no active rail lines in Prince Edward island or in Newfoundland also limits the use of rail. Interprovincial trade is dominated by road and rail shipments to and from Quebec (51.5%) and Ontario (41.5%). Only 7% of road and rail tonnage is destined for or originates from Western provinces. For-hire trucking accounts for at least half of the road and rail tonnage to central Canada but is particularly important for goods originating in the region. For container imports via the Port of Halifax, rail is most likely to be used. Truck and rail volumes are not evenly distributed with significantly more tonnage coming into Atlantic Canada than being shipped out. For U.S. trade, the marine mode accounts for a majority of non-energy exports, but truck and rail are also important. About 75% of the truck shipments are to the U.S. Northeast although the fastest growing destinations have been in the North Central region and in the South. 3 The most 3 APEC (2005), Building an Efficient Transportation System: Atlantic Priorities for Transportation Policy Reform in Canada: Halifax: APEC. 4

17 notable feature of these data are that southbound movements are much larger than northbound movements. The volume of truck and rail exports to the United States is three times larger than imports from the United States. This can create problems for trying to maintain the economics and profitability of transportation services. Partly as a response, truckers have developed triangular network strategies, taking goods south to New England and the Northeast, picking up goods for Central Canada, and then bringing goods back from Central Canada to the Atlantic provinces. For other international markets, marine activity dominates, with more volumes of cargo being exported than imported to the region. Schematic Overview of Atlantic Canada s Transportation System Atlantic Canada s transportation system consists of a complex array of infrastructure, services and flows. Among the key elements (see Chart 1) are: The Port of Halifax which acts as a marine gateway for container traffic with more than 80% of volumes destined for or originating from central Canada and the U.S. Midwest. A rail corridor, operated by CN, that links the Atlantic region and the Port of Halifax to markets in central Canada and U.S. Midwest. The main CN rail line is the most common route for rail cargo from most points in Atlantic Canada. 4 Two truck corridors, one between Atlantic Canada and the U.S. Northeast 5 and one linking the Atlantic region with central Canada. 6 Goods shipped to central Canada from the region have to travel a considerable distance north because of the lack of an eastwest corridor through Maine. Given the unbalanced nature of the flows along these trade corridors, Atlantic trucking companies have developed triangular network strategies, taking loads south to the United States, picking up goods from the U.S. Northeast region and transporting them to Toronto or Montreal, and then bringing goods back from central Canada to the Atlantic region. Dedicated port infrastructure, including two transhipment terminals, and international and domestic marine services for crude oil and refined energy products which account for about 80% of the marine tonnage moved to, from, and within the Atlantic region. Other ports and marine services for the export of Atlantic Canadian goods to the United States and for trade with other international markets. 4 There are also several short-line operators in the Atlantic region along with railway operators in Maine which can provide access to New England markets. See Appendix A for details. 5 The main road routes to the United States flow through the border crossing in New Brunswick at Woodstock and Milltown. The Woodstock border crossing links up the I-95 highway which is the main north-south highway on the U.S. East Coast. The Milltown crossing near St. Stephen joins with the number 9 highway in Maine. Trucks must travel about 150km on mainly two lane traffic before reaching the I-95 a trip of nearly two hours. 6 The main road route into central Canada is through New Brunswick into Quebec northwest of Edmundston. 5

18 Chart 1: Major Trade Flows Through Atlantic Canada s Transportation System Note: All flows are to and from the Atlantic region, not to a specific province. Volumes are indicated in millions of tonnes, Source: Statistics Canada, APEC. Key Transportation Issues for Atlantic Canada Atlantic Canadian companies depend on the transportation industry to move their products to market and to bring in inputs and goods for retail or wholesale in the region. The state of Atlantic Canada s current transportation system affects companies competitive position. In a recent survey of some of the largest companies headquartered in Atlantic Canada 35% of manufacturers and almost 25% of exporters reported that the region s transportation system was having a large or very large negative effect on their business. 7 In an APEC survey of foreign firms in Atlantic Canada, the region s transportation system, particularly road and air, was rated as worse than in other jurisdictions where these firms operate. 8 The key transportation issues for the region are summarized in Table 2 and a more detailed discussion of these issues is provided in Appendix B. 7 Chaundy, David (2006), Pressure at the Top, Progress, September 2006 pp APEC (2007, forthcoming). 6

19 Table 2. Key Transportation Issues for Atlantic Canada Major Issue Mode/Sub-Issue Description Economic Efficiency Low Density Low density affects cost and availability of services often creating undue reliance on a few providers or users. Regulation Border & Security Finance Adequacy of Intermodal Service Road Air Marine Security Measures Border Congestion Roads & bridges Port Airport Some users would prefer more rail connections but volumes are inadequate for rail providers to offer the service. Varying weight restrictions in Atlantic provinces and U.S. states as well as cabotage rules impede trucking efficiency. More open skies agreements could broaden air cargo services and facilitate business travel. Shipping regulations (i.e. cabotage, duties and build provisions) restrict the viability of short sea services. Compliance costs are a burden for exporters and the transportation industry. Current infrastructure not adequate for volumes, especially trucking. Pre-notification procedures are not working efficiency. Limited provincial resources to participate in cost-shared infrastructure programs. CMA requirements restrict port financing options Airport rents present a burden for regional airports Labour Labour shortages Acute shortages in trucking and marine sectors reflect aging population and out-migration. Source: APEC. The region s low density limits the availability of services for users and can often contribute to undue reliance on one provider. Similar risks are present for providers which may depend upon one or two key users. For example, the port of Saint John lost one shipping line (Star Shipping) when the St. Anne-Nackawic mill closed in September The closure also cost Forterm, a port terminal operator that specializes in handles forest products, 50% of its revenue. 9 Low density also creates a challenge for maintaining a large infrastructure network. The efficiency of the region s transportation system is restricted by sparse intermodal service creating a high reliance on trucking. Security measures and border congestion have become critical issues since 2001 and are particularly important for trucking. The United States accounts for about 80% of Atlantic 9 The mill re-opened in January 2006 under new owners and will produce hardwood kraft and dissolving grade pulp for the textile industry in India. Although nearly 80% of the mill s production will be shipped through the Saint John port, tonnage will be less than under the previous operation. 7

20 Canada s exports and about 66% of its non-energy exports. In 2002, over 40% of the Maritime provinces international merchandise exports by value were shipped by road. The adequacy of border infrastructure to cope with rising trade volumes and stricter security measures, the compliance costs associated with increased security, and inefficiencies within the system, such as the procedures for pre-notification, are some of the main concerns. Different regulations between provinces and states or between Canada and the United States can impede the efficiency of the transportation system, such as different weight restrictions for trucking. Regulations can limit the viability or scope for services (such as air cargo or short sea shipping). While Canada s transportation system has shifted to a more market-orientated system, financing is still an issue, particularly for ports and airports. Despite investments in the regions infrastructure, the four Atlantic provinces face pressures in trying to maintain and upgrade a vast transportation network with a limited population and tax base. A more recent concern has emerged over the adequacy of the labour supply for the region s transportation industry, particularly trucking and marine. Out-migration and retirement of a rapidly aging workforce are chipping away at the labour supply. A lack of skilled workers could compromise transportation efficiency, especially if it is difficult to finance capital investments to reduce labour requirements. Current Trends in Atlantic Canada: The Impact of a Changing Global Economy Atlantic Canadian companies are already responding to the opportunities created by fastgrowing markets in Asia. Atlantic exports to China have increased tenfold over the last decade, led by exports of iron ore and shellfish. Atlantic exports to other developing Asian countries, including India, Indonesia and Thailand have been growing rapidly since 2000, although again they tend to be dominated by a few key products such as pulp, paper and shellfish. Nevertheless, some Atlantic firms and institutions are selling higher value-added technologyintensive products and services such as education, engineering and environmental consultancy in these markets. Will Atlantic exporters pursue further opportunities in these markets, requiring better marine access to Asia? Current exploration activity in the region suggests some upside potential for the export of minerals. However, the capacity for further increases in the supply of shellfish, pulp and paper may be limited. Other Atlantic manufacturers will find it hard to compete on the basis of low wages or just-in-time delivery to these markets and will more likely have to define their competitive advantage around other factors such as using technology to produce superior products and by providing better service quality. Issues such as increased competition from low cost competitors in Asia and elsewhere, a 40% appreciation of the Canadian dollar driven in part by high global energy prices, higher energy and transportation costs, weak or shifting product demand, and supply constraints in some industries point to the competitiveness challenges now facing Atlantic industry. These pressures are being reflected in current output, export and employment trends. For example, the total value of Atlantic Canada s non-energy exports has stagnated since In particular, food and forest products, which account for a large part of Atlantic rail and truck volumes and the growth in these modes over the last years, have been facing particular difficulties with significant reductions in productive capacity APEC (2006), Energy Sector Masks Challenges Facing Atlantic Exporters, Report Card, September. 11 Forest products are the largest item carried by rail from the Atlantic region to the United States, representing about 65% of the total. Forest and food products are the leading commodities in terms of truck movements within and through the Atlantic region. Wood products accounted for almost half of the increase in tonnage trucked to the United States from Atlantic Canada between 1995 and

21 How will these trends affect Atlantic Canada s demand for transportation services by mode and destination over the next decade? Decreased demand could have significant implications for the cost and availability of transportation services while lower rail volumes to central Canada and the U.S. Midwest could free up some capacity for imported containers from Asia. In the face of increased competitive pressures, Atlantic businesses have adopted practices such as supply chain management, offshoring and outsourcing to improve their productivity or to take advantage of new market opportunities. Going forward, this will require better marine and other transportation services to bring supplies to the region and to ensure rapid delivery of products to key markets. 9

22 10

23 Chapter 2 Global Supply Chains and Changing Trade Patterns Trade and market liberalization are facilitating the freer flow of goods and some tradeable services. Companies striving for enhanced competitive positions are adopting innovative strategies in sourcing their supplies, delivering their products and accessing new markets. Geography is no longer as big a market barrier to business as it once was. The reduction in transportation and communication costs as a result of technological advances is enabling companies to develop intricate supply chains spanning the globe and re-shaping trade flows. The Emergence of Global Supply Chains Companies, through their supply chains, are re-configuring their business operations and corporate organization. The division of labour espoused by Adam Smith has been revolutionized in the modern era: it is no longer confined within the company but can be outsourced, locally or globally, to operators specializing in specific processes. Supply chains encompass all activities associated with the flow and transformation of goods from the raw material extraction stage through to the end user, as well as the associated information flows. 12 Modern supply chains are complex consisting of a connected series of specialized segments of production or business processes. Just-in-time production and delivery is the business model minimizing the time between the two ends of a supply chain. Lean operation reinforces the goal of streamlining processes and developing succinct supply chains to reduce inventory levels. These complex practices necessitate diligent supply chain management: Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies. 13 One essential aspect underlying successful outcomes in supply chain management is the efficiency and reliability of transportation networks: it s all about planning the logistics to accommodate the flows of goods and people: Logistic management is that part of supply chain management that plans, implements and controls and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements. 14 Good logistics can narrow geography by reducing the time to transport products in the sourcing and distribution process. Transportation and logistics providers such as FedEx and UPS are leaders in creating innovative methods catering to the supply chain demands of their customers. Companies now rely on a myriad of transport strategies to move their products. Advances in transportation system and communication networks have reduced transportation costs and 12 Ballou, Ronald H. (2004), Business Logistics/Supply Chain Management, 5 th Edition. New Jersey: Pearson Prentice Hall. 13 Council of Supply Chain Management Professionals (CSCMP), accessed at 14 Council of Supply Chain Management Professionals. 11

24 transit times. Examples of some of these advances include containerization (allowing for reduced shipping costs), higher performing vessels and equipment for moving freight, improved air cargo services (e.g., enabling overnight delivery), more efficient intermodal linkages, broadband Internet, satellite product tracking gear, information systems and web-based logistics platforms. Wal-Mart for example, is renowned for its responsiveness in sourcing products, distribution and delivery to store shelves. Several notable trends are fuelling the development of supply chains, perhaps most importantly cost control. Companies are trimming their costs by outsourcing non-strategic components to suppliers who can produce more cheaply. These suppliers are increasingly located in emerging market economies where lower-wage labour is plentiful offshoring. Outsourced and offshore producers can produce more cheaply as a result of greater economies of scale and other gains from specialization such as learning by doing. Cost savings are also achieved by carrying fewer inventories although lean inventory levels require diligent monitoring. On the other side of the income statement, supply chains that allow for greater responsiveness to transitory consumer tastes give companies a competitive edge and boost sales. Dell, for example, sets the benchmark in allowing buyers to customize their computer purchases with products assembled only upon order. Dell s just-in-time sourcing, manufacturing and delivery of the final product is successful because of the effectiveness of its supply chains. Atlantic Canada s Participation in Global Supply Chains Atlantic Canadian companies have largely provided products at the starting point of the supply chain. For example, companies tap into Atlantic Canada to secure commodities such as oil, iron ore, lumber and pulp. The growth of the region s exports since 1990 has largely been resource driven. Some companies have enhanced their global presence. In manufacturing, McCain Foods has successfully established operations worldwide to tap into new consuming markets. McCain s supply chain is largely integrated. On the other hand, major seafood companies such as High Liner and Fishery Products International globally source and process fish products. Global supply chains are also evident in Atlantic business services industries which have grown through contracts to provide outsourced service-related functions. Call centres such as EDS answer computer services inquiries from U.S. customers and Keane Inc. creates and maintains computer systems for international blue-chip companies. The Atlantic computer services industry is moving away from hardware repair services towards software development and business solutions. International corporations have relied on regional companies such as Whitehill, Xwave and Caris, for example, to develop software solutions for their operations. While supply chains offer flexibility and cost saving advantages, they add complexity to business operations. The old adage, a chain is only as strong as its weakest link, rings true. A problem at one link causes a ripple effect; the effect can be severe and exponential as a company may have several tiers of suppliers. Some companies, in pursuing a lean operation, rely on a single supply source to further maximize cost advantages but these companies are vulnerable to having no alternatives when their single supplier encounters disruptions. Sourcing components and selling to markets globally means that companies are also highly vulnerable to geo-political disruptions and natural disasters. This can lead to production interruptions and delay in product deliveries, especially when companies are too lean and do not have sufficient inventory to buffer against temporary supply shortages. Getting supplies or final products to global destinations exposes companies to transportation risks including congestion at port terminals and delays in 12

25 transit. New and tougher security measures are an added dimension to the risks. The higher cost of energy and the tighter supply of fossil fuels may challenge companies to rethink their just-in-time models and supply chains. Companies are making adjustments to their global supply chains to mitigate the risks. One adjustment is establishing suppliers closer to demand markets. Michelin for example, can produce tires cheaper in Asia but its North American plants are more competitive to serve the North America auto market than sister plants in Asia because they can supply tires to Ford and Toyota s North American plants faster and without the risk of delay: the auto industry is more sensitive to time than costs. Companies are also investing in technology to track flow through all aspects of inbound supply and product distribution. Toyota is a world-leader in its sophisticated supply chain monitoring procedures. Changing Global Trade Patterns: The Rise of Asia In the past 15 years, global trade has expanded by more than 7% annually, much faster than global output growth. The volume of world merchandise trade is expected to increase by more than 9% in 2006, about 2% faster than last year s pace. The development of global supply chains, including outsourcing and offshoring, are reflected in the changing patterns of international trade. North American and European companies are shifting manufacturing facilities to Asia, in particular to China. China is the third largest exporter in the world, behind Germany and the United States. Chinese merchandise exports have averaged 25% growth annually since Other important Asian exporters include Singapore, South Korea, Malaysia and Thailand. Export growth in China and its neighbours, particularly manufactured products, is indicative of their role as international production centres. The shift of manufacturing from North America and Europe is also evident in foreign direct investment (FDI) flows. China has received, on average, $53 billion annually in FDI this decade. 16 Some of this investment is directed towards increasing local production capacity for the Chinese market but a significant part is being used to establish offshore manufacturing facilities that feed directly into the investor s own global supply chain. North American and European markets are important destinations for products manufactured in China and Asia. The United States is the world s largest single importer, importing $1.5 billion worth of merchandise in 2004, representing almost 17% of world imports. However, countries in the enlarged European Union account for an even larger share of global imports. China is now Canada s second largest supplier after the United States but is displacing the United States and other producers for some manufactured products. The current pace of international trade is expected to continue throughout the remainder of the decade. By 2008, trade between Asia and North America will be 27% higher than in By comparison, eastbound trans-atlantic trade (between North America and Europe) is forecast to grow by 24%, with westbound trade increasing by 17%. Asia will continue to galvanize trade patterns but shifts are occurring within the region. Production costs in China are rising, prompting companies to consider offshoring to cheaper neighbouring Asian countries including Malaysia, Vietnam, and Thailand. Indeed, intra-asia trade is projected to grow by 35% between 2005 and China is seeking to shift towards higher value manufacturing by incrementally curbing its reliance on labour-intensive production 15 UNCTAD Handbook of Online Trade Statistics. 16 UNCTAD. 17 Global Insight, as published in The physical internet: A Survey of Logistics, The Economist, 17 June 2006, p

26 processes, largely because of its projected slower population growth in the coming decades. Over the next 25 years, the country s working-age population is projected to grow 0.4% annually, lagging the global average of 1.2%. 18 Meanwhile India s favourable demographics could enhance its role as a global manufacturing centre. India s real growth potential, however, lies in the service sector because of its educated and English-speaking work force. North American companies are investing more in production facilities in Central and Eastern Europe (CEE). 19 One objective of these investments is to diversify their sourcing locations and mitigate the risk of excessive reliance on Asia. Companies are sourcing their intermediate inputs closer to North American markets. The CEE countries are alternatives because production costs are seemingly competitive to Asia. Although direct costs such as wages are slightly higher, the hidden costs are not perceived to be as high. Hidden costs include delays that reverberate through their supply chains. Trade and transport traffic originating from Asia has strained transportation capacity causing congestion and damaging delays. The economic size and performance of the United States is a major influence on international trade patterns. While growth has been robust in the U.S. in recent years, overall economic activities are projected to ease in the second half of 2006 and into 2007, primarily due to a slowdown in the housing market. However, because rising real estate wealth has been an important driver of U.S. consumer spending, there is a risk that consumer spending growth could slow substantially, with a consequent impact on the demand for imported consumer goods from countries such as China. 18 China Daily, September UNCTAD (2006). World Investment Report New York: United Nations. 14

27 Chapter 3 Key Trends and Developments in Global Shipping The development of global supply chains is shaping international trade and transportation patterns. The past five years have been characterized by strong demand in North America and Western Europe for imports from Asia. Growing trade volumes between Asia to North America are placing greater demands on shipping lines to service these flows with consequent shifts in global shipping patterns. Changing Global Shipping Patterns and West Coast Congestion Increasingly world trade is handled by containers: in 2000, 70% of cargo trade was in containers, up from 23% in 1980 and expected to reach almost 90% by Containers are more cost effective in transporting high volumes over long distances. Some products that were traditionally shipped as bulk cargo are now being shipped by containers, such as pulp and paper products. 21 According to Drewry Shipping Consultants, growth in global container tonnage accelerated during the past ten years. Annual average growth in the past decade was 10.6% but in the five years to 2004, growth was 11.4%. 22 Total worldwide container port throughput was 36 million TEUs in 1980 growing to 266 million TEUs in Forecasts indicate that container throughput could rise to almost 470 million TEUs by Asia s prominence as an exporter to markets in Europe and North America is reflected in recent shipping and container trends. Asia s share of global container throughput increased from 25% in 1980 to 46% in China s ports now account for the largest volume of container movements than any other country, and more than double the share of shipments in the secondplace country, the United States (Chart 2). Recent growth at U.S. ports has been largely fuelled by trade with Asia. In 2005, 38% of container import volumes in U.S. was from China, more than double the share in 1995 (15%). 24 Outside of shipping routes within Asia, traffic on trans-pacific (Asia-North America) and Asia- Europe routes have been the fastest growing, particularly container movements from Asia (Chart 3). Meanwhile, the trans-atlantic route has grown more slowly in terms of volumes, reflecting slow growing trade between Europe and North America. Imported container volumes from Asia to North America and Europe, the biggest consuming markets in the world, are overwhelming ports in these continents. In North America, the main entry point for containers originating from Asia are West Coast ports, primarily Los Angeles, Long Beach, Oakland, Seattle and Tacoma. In the past decade, the Port of Vancouver has made inroads in attracting some of this business, and is now Canada s largest container port. During the peak shipping season in 2004, there were serious delays at ports in southern 20 Fung, David (2005), Building Our International Trade Gateways, presentation to the CME Conference and Trade Show, Toronto ON, November. 21 In recent years, Nova Scotia s Bowater Mersey mill, for example, has switched the transport for the majority of its production from breakbulk vessels calling the nearby port in Liverpool to containers via the Port of Halifax. 22 Fossey, John (2006), On the Brink, Containerisation International Yearbook, p Notteboom, Theo E. (2004), Container Shipping and Ports: An Overview, Review of Network Economics, vol. 3, no. 2, pp Brooks, Mary (2006), Access North America: Expanding Gateways to the U.S. Consumer market, presentation to the Transportation Research Board Summer meeting, LaJolla CA, July. 15

28 California while the Deltaport facility at Vancouver had to reduce volumes in early 2005 to clear a backlog of containers. 25 Chart 2: Top Ten Countries for Container Movements (million TEUs) China (inc. HK) USA Singapore Japan Korea Taiwan Germany Malaysia UAE Netherlands Canada Note: Data in million TEUs. Canada ranks 20 th and is shown for reference only. Source: Containerisation International Yearbook Major investments are taking place at ports around the world (including China s biggest ports, Hong Kong and Shanghai) to expand capacity and improve the management of volumes on Asia-North America and Asia-European shipping routes. In Canada, a $170 million investment to develop the West Coast Port of Prince Rupert from a bulk cargo and cruise port to a container port is underway. Completion of the 500,000 TEU container terminal is scheduled for October, CN is investing in its rail connection between Prince Rupert and its U.S. Midwest hubs. Current plans could see the port expand to 2 million TEUs by Meanwhile the Port of Vancouver is awaiting final authorizations from the federal government to proceed with a $300 million addition of a third berth at its Deltaport terminal, which will increase the existing 900,000 TEU terminal capacity by 50%. Construction is scheduled to begin in January 2007 and be complete by July Drewry Shipping Consultants (2005). Report prepared for the Halifax Port Authority. 26 Butcher, Paul (2006), Expanding Capacity to the North: Prince Rupert, British Columbia, presentation to the Transportation Research Board Summer meeting, LaJolla CA, July. 27 Vancouver Port Authority (2006), Vancouver Port Authority Welcomes Federal Minister's Decision on the Deltaport Third Berth Project, Press Release, November 3. 16

29 Chart 3: Major Global Container Trade Routes, 2005 (TEUs and growth rate) Note: Chart shows container traffic (in million TEUs) and growth rate (%) in Other major trades include intra-asia (32 million TEUs), other intra-regional (13 million TEUs) and North (North America, Europe, Asia)-South (Latin America, Africa, Australasia) trade (20 million TEUs). Source: Drewry Shipping Consultants Ltd. However, despite measures to improve productivity and the flow of containers, there is little in terms of major terminal expansions at the largest U.S. West Coast ports. 28 Based on current confirmed investments, the expected growth in trade with Asia is forecast to outstrip capacity at West Coast ports in North America during the second half of this decade. 29 Trends in Global Shipping: Bigger Companies and Bigger Ships Shipping lines move the goods, establish the shipping lanes and deploy adequate vessels for transport. They provide the services on behalf of clients the shippers. The shippers are the companies whose goods fill the containers hauled across oceans and seas. The shippers motivate the liners to establish transport networks that move their goods as timely as their supply chains dictates. Larger shippers have more influence on routing patterns. Small shippers do not have the same pull and do not get first priority on available space. The balance of power is shifting towards shippers, in particular top global retailers (Table 3). 28 There are ongoing minor expansions at the Port of Los Angeles. A US$120 million expansion at the Port of Seattle is due to be completed in In terms of intermodal services, BNSF and CSX Class 1 rail carriers recently announced the launch of a high-volume rail corridor between California s ports and fastgrowing Southeast destinations such as Memphis and Atlanta. 29 Drewry Shipping Consultants (2005). 17

30 Table 3: Top 20 Container Importers in the United States, 2004 Rank Company TEUs/year 1 Wal-Mart 576,000 2 Home Depot 301,200 3 Target 202,700 4 Sears/Kmart 186,000 5 Dole Food Company 164,100 6 Chiquita Brands International 115,600 7 IKEA International 100,000 8 Lowe s 100,000 9 Heineken USA 83, Ashley Furniture Industries 69, Costco Wholesale Corporation 66, Payless ShoeSource 54, Samsung 52, Matsushita Electronic Corp. of America (Panasonic) 52, Toyota Motor Sales, USA 52, General Electric 51, Williams-Sonoma 50, Mattel 49, Pier 1 Imports 48, Sony Corporation of America 47,900 Source: Manufacturing and Technology News, October 2005, as reprinted in George Stalk & Kevin Waddell (2006), The China Rip Tide: Threat or Opportunity? Boston: The Boston Consulting Group. Shipping lines are merging or forming alliances to strengthen strategic positions, add more vessels to service certain routes and achieve better economies of scale (Table 4). In 2005, Maersk Sealand acquired P&O Nedlloyd; Maersk was already a dominant player, accounting for the biggest share of container tonnage at U.S. ports - 13% in Hapag-Lloyd also purchased Canada s CP Ships the same year. Consolidation and alliances enable the top carriers to increase their market share. The Top 20 carriers accounted for 26% of global slot capacity in 1980 and 70.5% in By October of 2005, the Top 20 accounted for 87% of the fully cellular vessel fleet. 31 Rising market share gives carriers more bargaining power in negotiating service contracts and counters the power of increasingly powerful shippers. These new alliances and acquisitions amongst shipping lines have important implications for ports and terminal operators as services are consolidated or routings changed. For example, in September, the Virginia Port Authority (VPA) downgraded its cargo growth forecast for the fiscal year because of acquisitions amongst shipping lines that has rationalized calls to VPA ports. 32 Shippers are increasingly demanding more than the provision of transport services but also logistics expertise from shipping lines. Consequently, transportation providers are evolving towards integrated services in their business portfolios. Marine transportation conglomerates are now owners of terminal operators, container shipping lines and transportation logistics companies. For example, the NYK Group encompasses Cerescorp (operator of Halifax s Fairview Cove terminal), NYK Lines and NYK Logistics. A.P. Moller-Maersk operates APM Terminals, the Maersk shipping line and provides logistics services. 30 Notteboom (2004). 31 Containerisation International Yearbook ci-online news alert, September 27,

31 Table 4: Largest Container Shipping Lines Rank Company TEUs in Service Container Vessels in Service AP Moller Group* 1,523, MSC 736, Evergreen Group 470, CMA CGM 424, APL 326, CSCL 317, COSCO 308, NYK* 292, Hanjin 291, MOL 240, Note: AP Moller Group includes Maersk Sealand * Currently call at the Port of Halifax. Source: Containerisation International Yearbook Mergers and acquisitions are occurring amongst terminal operators and transportation providers. For terminal operators, investments at ports are expensive endeavours. Mergers and acquisitions allow operators to increase their capital pool and receive higher returns on their investments. Four major operators (Hutchison Port Holdings, APM Terminals, PSA and DP World) now control over 40% of global container ports by tonnage (Table 5). 33 Table 5: Top Ten Global Terminal Operators, 2005 Rank Operator TEUs (millions) Share of Global TEUs (%) 1 Hutchison APM PSA P&O Ports Cosco DP World Eurogate Evergreen MSC SSA Marine Source: Journal of Commerce, July With container traffic increasing, carriers are shifting towards bigger post-panamax vessels: ships with capacity of 5,000 TEUs or more. Maersk plans to grow its post-panamax fleet by 74% by In 1991, three-quarters of the global container fleet had capacity below 3,000 TEUs and no post-panamax vessels. By 2006, about 30% of deployed ships will be post-panamax (Chart 4). In 2005, 17% of new ship orders were super post-panamax container ships exceeding 7,000 TEUs. 35 The newly launched Emma Maersk, the largest container vessel in the world, has a capacity of 11,600-14,500 TEUs and will be part of Maersk s trans-pacific route; it is already too large to fit through the planned expansion of the Panama Canal but would be able to be redeployed to an Asia-North Europe service. 33 Leach, Peter (2006), Pedal to the Metal, Journal of Commerce, July Leach (2006). 35 Roach, Jonathon (2006), Is There Trouble Ahead?, Containerisation International Yearbook

32 Chart 4: Share of Global Container Fleet, by TEUs (%) * < More than 5000 Note: * estimated. Source: BRS Alphaliner Fleet Report as reported in Notteboom (2004) The size of future vessels and how quickly post-panamax vessels are deployed depends on several factors including how quickly orders for these vessels can be filled, the cost of construction and their engine propulsion capabilities. The extent to which that shipping lines can operate these larger vessels efficiently and under full utilization will also factor into how many post-panamax vessels they deploy and on which routes. Larger vessels tend to have lower cost per TEU-mile but bigger will not always mean better economics for all shipping lanes. 36 Many carriers have not experienced continuous full capacity utilization. Over the next decade, ships with capacity ranging from 5,500 to 6,500 TEU are expected to be the most competitive and have the best flexibility in serving diverse shipping lanes. 37 Big ships will alter shipping patterns. Vessel size may influence the number of port calls on a particular shipping route and some ports currently lack the harbour depth and crane capacity to handle containers from these bigger ships. The size of vessels also affects the choice of routing patterns as post-panamax ships cannot currently transit through the Panama Canal. The Suez Option: A Window for East Coast Ports in North America? West Coast ports are the main entry point for Asian trade flows entering North America but their share of this trade has declined from almost 85% in 1997 to below 78% in 2004 as incremental trans-pacific cargo has shifted towards all water routings to East Coast ports, primarily via the Panama Canal. 38 Big box retailers are partly behind this shift because of mounting land transportation costs (such as insurance and fuel), road congestion, the tight availability of space for trucking and rail shipments to inland destinations and concerns about potential port disruptions during labour negotiations. Moreover, congestion and resulting delays on the West Coast have become a serious issue. Since 2004, congestion at West Coast ports and on the intermodal rail system has reinforced importers concerns. To ensure timely deliveries, 36 Notteboom (2004). 37 Notteboom (2004). 38 Drewry Shipping Consultants (2005). 20

33 particularly during the peak shipping season, shipping lines have diversified their routes and increased routings via the Panama Canal to East Coast ports such as Savannah, Charleston, Norfolk and New York/New Jersey. The Panama Canal accommodates about 4% of world trade and at least 13% of seaborne U.S. trade. 39 However, routing through the Panama Canal to enter North America East Coast ports has also become problematic: the canal is reaching its capacity. By early 2005, the Panama Canal was at 93% effective utilization. 40 There is very little scope for additional container services to be scheduled via Panama. 41 Bottlenecks on the West Coast and near capacity through the Panama Canal have prompted shipping lines to consider another alternative: the Suez Canal (Chart 5). The Suez is the important link between Europe and Asia and is a primary conduit for tanker and dry bulk trade. However, transporting containers from Asia to North America through the Suez is relatively new and presently there are few dedicated services: the Grand Alliance s AEX and Maersk s two MECL strings are the main Suez pendulum services between Asia and the North American East Coast. Chart 5: Suez and Panama Pendulum Shipping Routes Between Asia and North America Note: Some shipping lines operate round-the-world services that travel from Asia to West Coast ports, on to East Coast ports via Panama, across the Atlantic to Europe, and then back to Asia via Suez. The Suez Canal offers several key advantages over the Panama Canal for shippers and liners. The Suez Canal is not constrained by its ability to handle bigger containers ships while the Panama Canal, at present, is unable to accommodate ships above 5,000 TEUs (post-panamax ships). Constant sea level, unlike elevation changes through the Panama Canal, also enables ships to travel at higher speeds through the Suez Canal. 39 Boske, Leigh (2005), The Impact of U.S.-China Trade on Multimodal Transportation Systems and the Economics of Texas and Mexico, University of Texas, p Page, Mark (2005), presentation to Port of Halifax stakeholders. 41 Drewry Shipping Consultants (2005). 21

34 However, until recently, the economics of the Suez route have not been favourable for carriers. Canal fees are currently much higher for Suez. Moreover, to provide weekly service from Asia to the North American East Coast via Panama requires approximately eight ships compared to about ten ships necessary to provide weekly service via Suez. 42 In addition, it has been difficult to secure these additional vessels because of tight conditions in fleet availability. Yet recent analysis suggests there will be a surplus of post-panamax vessels that could be deployed on Asia-North America East Coast routes over the next three years. 43 Furthermore, the trend towards bigger vessels will improve the economics of the Suez option for carriers. The starting point where Asian containers begin their export journey to North America will factor into shipping lines decision to choose either the Panama or the Suez routes. Singapore and Laem Chabang (Thailand) are currently the break points from a transit time perspective (Chart 6). Some experts in the shipping industry indicate that the potential catchment area could extend eastward to include Hong Kong and the ports in the Chinese Pearl Delta. If shippers begin to source more of their input from these Southeast Asian locations, the volumes and deployment of bigger vessels will reconfigure costs so that, in cases where West Coast ports are not easily accessible, ships leaving ports in southern China, Thailand and Malaysia (and certainly India) would sail to North America s East Coast through the Suez Canal while ships leaving northern Chinese ports (e.g., Shanghai and Qingdao) would travel to the East Coast via the Panama Canal. Chart 6: The Dividing Line for Choosing Panama vs. Suez Routes to North American East Coast Ports (Asian ports by million TEUs & global rank in 2005) 42 Leach, Peter (2006), Split Decision, Journal of Commerce, June 19, pp Drewry Shipping Consultants (2005). 22

35 The economics of the decision to choose Suez versus Panama routings depends on several factors. While marine distance is important, total transit time is affected by the number of port calls made on route. Vessel size, fuel costs and canal fees also need to be considered. A recent assessment of these relative costs concluded that the cost premium of the Suez routing is low, if it exists at all. 44 If the basic economics to support Suez routings are in place, and with capacity constraints at West Coast ports and the Panama Canal expected to persist, a critical question then becomes whether North American East Coast ports can accommodate increased volumes and larger ships. The Port of New York/New Jersey is investing to deepen its harbour to 50 feet and plans to add rail infrastructure at its terminals. Norfolk will have a new deepwater container terminal by 2007, operated by APM Terminals, Maersk s sister company. Panama is responding to the capacity and competitive pressures it is facing. A national referendum in October 2006 approved the plan to expand the Panama Canal with construction expected to begin in The project will cost an estimated US$8-13 billion and will be completed in 2013 or 2014, depending on the implementation of a highly complex water management system. However, transit prices will likely rise to partly fund the expansion. There is therefore a window of opportunity for East Coast ports to gain new business originating from Asia. Once the Panama Canal expansion is complete, will East Coast ports be able to retain any new business they have gained? Although the competitive pressures will intensify at this point, shipping lines may choose to maintain a diversity of options, particularly where their experience with shipping via the Suez Canal to East Coast ports has been positive. Other developments also pose competitive pressures for the Suez-East Coast option. Aside from previously mentioned expansions at West Coast ports in Canada and the United States, investments are also taking place at U.S. Gulf ports. For example, Wal-Mart s new distribution centre near the Port of Houston, which opened in 2005, and dredging at the Port of Savannah, where major retailers have distribution hubs, are partly in anticipation of the Panama Canal s expansion. Other options under development include investments at West Coast ports in Mexico, specifically, Lázaro Cárdenas and the Port of Manzanillo. Construction of a new $200 million terminal is underway at Lázaro Cárdenas to increase its capacity to handle two million TEUs annually, designed to attract volumes that would otherwise be destined for Californian ports. At 50 feet, Lázaro has Mexico s deepest harbour. In addition, the Mexican government indicated it will invest $250 million at Manzanillo to build a container terminal and modernize port facilities. These Mexican ports will need to improve their rail infrastructure connection to the United States. A significant step towards this improvement was Kansas City Southern s acquisition, in 2005, of controlling interests in both the Texas-Mexico Railway Company and Mexico s most important railroad company, Transportacion Ferroviaria Mexicana, thus providing rail service from Lázaro Cárdenas to Texas and through to Kansas City. 45 Kansas City is considered by some stakeholders as a potential future hub for North American trade and distribution. 44 Drewry Shipping Consultants (2005). 45 This superseded the 2004 NAFTA Railway agreement between the three rail companies. 23

36 24

37 Chapter 4 Opportunities for an Atlantic Gateway Numerous companies in Atlantic Canada are responding to the opportunities created by fastgrowing markets in Asia. The region s merchandise exports to China have increased tenfold over the last decade and exports of goods to other developing Asian countries, including India, Indonesia and Thailand have been growing rapidly since Some Atlantic firms and institutions are also providing services in Asia, including education services and engineering and environmental consultancy. A significant window of opportunity is opening up for ports on the East Coast of North America to be bigger players in providing transportation services. This opportunity has been created by continued rapid growth in trade between Asia and North America, congestion at West Coast ports, and capacity and size constraints at the Panama Canal. Can Canadian East Coast ports take advantage of these developments to act as a North American gateway for Asian trade via the Suez Canal? Which Canadian ports are best positioned to respond to these trends? And where are the key opportunities for the Atlantic region? Which Canadian East Coast Ports Are Best Positioned to Take Advantage of New Opportunities in Global Shipping? The Port of Halifax is Canada s third largest container port. It has a deep, ice-free harbour well situated on major shipping routes to Europe and Asia. Indeed, it is the closest East Coast international container port in North America to Europe and the Suez Canal. CN provides a Class 1 doublestack rail service to central Canada and the U.S. Midwest. The port already operates as a gateway: in 2004 about 80% of the port s container cargo was destined for or originated from outside the Atlantic region. 46 The port has a broad variety of marine services, both internationally and short sea shipping and has been identified by some global shipping lines as one of the key North American entry points. In addition, it currently has spare capacity. The Port of Saint John in New Brunswick and the Port of St. John s in Newfoundland and Labrador handle some container business but currently serve niche markets. A number of transportation stakeholders in the region acknowledge that they are not currently positioned to accommodate large container volumes. The Port of Saint John has one weekly container service to Florida, the Caribbean and South America which specializes in refrigerated containers (reefers) for food products. The port is not currently a port of call for shipping lanes from Asia and would have a longer marine transit time compared with Halifax. In addition the port is constrained by the large variation in tides in the Bay of Fundy which makes scheduling port calls a challenge. The Port of St. John s is limited by its lack of transportation access to major inland markets. Oceanex operates the only container line into the port with services to Halifax and Montreal. While the Canso Superport in Nova Scotia is comparable to Halifax is terms of its total cargo tonnage handled, it does not have a container terminal or a Class 1 rail service. The port mainly handles refined petroleum at its Statia Terminals, along with mineral aggregates and pulp products. There has been some recent discussion about establishing a container terminal at the Port of Canso. Trident Holdings Inc., consisting of local business people and international port stakeholders, is proposing a $300 million brownfield investment. A feasibility study is currently being conducted. 46 MariNova Consulting Ltd. (2005), Short Sea Shipping Market Feasibility Study. Report prepared for Transport Canada. 25

38 The Port of Montreal is Canada s second largest container port with excellent rail services provided by CN and CP. Most of Montreal s container business is with Europe. However, the depth of the St. Lawrence Seaway limits the ability of the port to handle larger, Post-Panamax vessels. The need for an ice-breaker and ice-strengthened vessels during winter is also a significant constraint. The Port of Halifax is therefore the best positioned port in Eastern Canada at the current time to take advantage of these potential new opportunities in global shipping. 47 Consequently, the remaining analysis in this report on the opportunities, benefits and challenges for an Atlantic marine gateway focuses on the Port of Halifax as the central asset. A Gateway for Imported Goods from Asia to North America The most obvious opportunity for the Port of Halifax is to expand its role as a gateway for containerized Asian imports destined for central Canada and the U.S. Midwest. Containers from the China/India subcontinent and the Far East already account for 35% of direct containerized export tonnage, but only 16% of container import volumes. 48 Unlike New York, the Atlantic region is not a sufficiently large market in itself to influence port of call choices. However, the port is well positioned geographically to take advantage of increased trade between Asia and North America. The Port of Halifax is the nearest major North American East Coast port for transit from the Suez Canal (Table 6) and is closer than West Coast ports for trade with the Indian subcontinent. It is also becoming a viable alternative to West Coast ports for south-east Asian markets such as Malaysia, Singapore and Vietnam. Table 6: Transit Times between Selected Ports in Asia and North American East Coast Transit time (days:hours) Mumbai (India) Laem Chabang (Thailand) Singapore Port Klang (Malaysia) Hong Kong (China) Shanghai (China) Busan (South Korea) Halifax 14:13 19:20 18:06 17:21 21:00 22:12 p 21:15 p NY/NJ 15:01 20:18 19:05 18:20 21:23 21:17 p 20:19 p Norfolk 15:18 21:01 19:12 19:00 22:06 21:08 p 20:10 p Savannah 16:09 21:16 20:02 19:02 p 21:20 p 20:02 p 19:17 p Note: Times based on 22 nautical miles per hour. All routes via Suez except those noted ( p ) which are via Panama. Source: World Ports Distances Calculator ( The cost, time and reliability of access to inland markets in central Canada and the U.S. Midwest will also influence shippers supply chain decisions and in turn this will influence the decisions of shipping lines in choosing their ports of call. In this regard, CN s intermodal connection from Halifax to the U.S. Midwest is more competitive than transit times from the ports of Norfolk and Savannah A more detailed description and assessment of Atlantic ports is provided in Appendix A. 48 Halifax Port Authority. 49 A detailed assessment of port container handling (dwell times) and rail transit times would help substantiate the advantages of Halifax. 26

39 Chart 7: North American East Coast Ports (million TEUs & global rank in 2005) The Port of Halifax has other advantages for shippers and shipping lines. Storage space and security clearance traffic is not as congested as in some U.S. East Coast ports and some Ontario shippers prefer to use a Canadian port of clearance. The ports of New York/New Jersey and Norfolk are also situated within high density local markets which exhaust a large proportion of the containers aboard the shipping vessels used to service these local markets. The remaining containers may not be adequate to serve additional inland regions. 50 Another advantage is the port s export business which currently attracts shipping lines to the port. Unlike most North American ports that are major calls for cargo to and from Asia, export tonnage from the Port of Halifax exceeds its import volumes. Hauling containers with export content back to Asia improves the trade balance for the carriers, thus reducing the cost of servicing that route. The deployment of post-pananax ships would further enhance Halifax s position to capture a share of Asia-North American trade. Some shipping lines indicate that these vessels will need to make two or three port calls on the East Coast (including New York/New Jersey, which, because of its large local market, cannot be efficiently serviced any other way). Under this approach, Halifax could be one of several East Coast ports of calls with ships dropping off loads for central Canada/U.S. Midwest (and picking up loads from the same) on their way to or from other East Coast ports further south. This multi-port call routing on the East Coast would represent an expansion of existing activity at the Port of Halifax. Maersk s MECL 2 is example of this approach (see box). It also suggests some degree of complementarity between Halifax and other East Coast ports such that increased investment and capacity at other East Coast ports (e.g., the dredging of New 50 Although the deployment of bigger vessels or more frequent services could offset this apparent advantage, tidal issues and the Bayonne Bridge in New York/New Jersey pose hurdles to the operational efficiency for carriers. 27

40 York/New Jersey s harbour) makes such routings more likely and hence increases the likelihood for spillovers to Halifax. According to Hapag-Lloyd Canada s Managing Director, the ability of U.S. East Coast ports to attract and handle larger post-panamax vessels, especially New York- New Jersey, will strengthen Halifax s attractiveness in capturing Asia-North American trade flows. 51 Recent Developments at the Port of Halifax: Increased Linkages with Asia In the last 18 months, several new developments have reinforced the potential for the Port of Halifax to be a bigger player in Asia-North American container shipping. In May 2006, Middle East Container Line service MECL 2, one of Maersk s two Asia-North America services via Suez, began calling the port. Ships on the MECL 2 leave Tanjung Pelepas, Malaysia calling Colombo, then ports in along the Red Sea and Algeciras (Spain) before calling Halifax s Southend terminal (Halterm) and traveling to New York/New Jersey and Norfolk. This is the second weekly Suez pendulum container service calling at the Port. The Grand Alliance s AEX service has called at the port since the late 1990s. AEX has evolved over the years due to changes amongst its members which include Hapag-Lloyd, OOCL and NYK. AEX s Suez pendulum starts at Laem Chabang (Thailand), travels westward through Asia with one European stop (Giaio Tauro, Italy) before calling at North American East Coast ports including the Fairview Cove terminal. 52 Halifax is the only Canadian port of call in China Shipping s new round-the-world Asia Med America Express (AMAX) service. AMAX is an Asia westbound round-the-world service that transits the Suez Canal. It made its first call in Halifax in October Last year, the Canadian Retailers Shippers Association also chose the Port of Halifax as its East Coast gateway for imports from Southeast Asia and India to be distributed in central Canada. Shipments began in July It is also possible that a shipping line may choose to make Halifax its major East Coast port of call, with significant unloading of containers for inland markets. This approach could very quickly absorb the port s existing capacity. For example, the three Suez services currently calling at the port absorb approximately 130,000 TEUs annually, equivalent to almost one-quarter of the port s total TEUs in One potential concern of the shift towards bigger vessels is the limitation of the MacDonald Bridge which has been noted as a possible constraint for some post-panamax vessels to call the Fairview Cove terminal. The size and timing of the demand for Asia-North America shipping via the Suez Canal needs further empirical investigation. 53 This analysis needs to include an assessment not only of potential trade volumes originating from Asia, but also the relative size of the various inland destination markets in North America. For example, how much tonnage destined for East Coast North America, Central Canada and U.S. Midwest regions is currently routed through West Coast ports but could, potentially, be routed through East Coast ports? 51 Holger Oetjen, Halifax Port Days 2006, Panel presentation. 52 Hapag-Lloyd (2006), 53 Recent analysis by Drewry Shipping Consultants for the Province of Nova Scotia should help to clarify this potential. 28

41 Strengthening European linkages At present, European trade flows are the most important business for the Port of Halifax, representing about 47% of total direct containerized cargo (although about 63% of imported container tonnage). 54 However, in recent years, traffic between the port and Europe has been flat. Stagnating trade between North America and Europe partly explains this trend which was affected by slow economic growth in Western Europe and shifts in North America towards increasing trade with Asia. Economic growth in Europe has been recovering over the last few years and the acceptance of former communist countries in Eastern Europe into the European Union is expected to further enhance trans-atlantic trade flows. While trans-atlantic routes are not forecast to grow as fast as Asia-North American lanes, volumes will still be significant. Can the Port of Halifax increase its profile in servicing Europe- North American shipping routes? Halifax has an advantage over U.S. ports in that it is a day closer to European markets (Table 9) but again, it is the total shipping time and cost to inland markets that matters. Table 9: Transit Times Between Selected Ports in Europe and North American East Coast Transit Times 1 Rotterdam Antwerp Felixstowe (days:hours) Montreal 2 6:06 6:06 6:00 Halifax 5:06 5:07 5:03 NY/NJ 6:10 6:10 6:07 Norfolk 6:17 6:17 6:14 Savannah 7:11 7:11 7:08 Notes: 1. Times based on 22 nautical miles per hour. 2. The actual transit times for Montreal are underestimated because 22 knots is too fast for the latter part of the inland voyage and in winter the St. Lawrence can only be transited in daylight because the navigation buoys are removed. Source: World Ports Distances Calculator ( Currently, Montreal is the dominant port servicing Canada-European trade, boasting highly regarded, expedient rail linkages (serviced by CP and CN) to inland markets. However, a trend towards bigger ships on this route would limit the capacity of the port of Montreal because of the limited depth of the St. Lawrence Seaway. The largest ships currently calling the Port of Montreal are 4,100 TEUs (i.e. the Canmar vessels) 55 while the larger container ships calling Halifax currently exceed 4,200 TEUs. 56 The freezing of the St. Lawrence Seaway during the winter is also a challenge. In addition, Montreal is encountering intermittent congestion and tight land storage facilities. From a Gateway to a Transhipment Hub? Growth in container volume from Asia combined with increased trade flows from Europe could create the prospect for the Port of Halifax to develop as a major transhipment container hub. A marine transhipment hub is a byway for big vessels ships to offload and for smaller, feeder ships to redistribute goods to other destinations. 54 Halifax Port Authority. 55 Port of Montreal. 56 The largest container ships currently servicing Halifax are less than 5,800 TEUs while some smaller services such as Oceanex have a capacity less than 4,200 TEUs. 29

42 Key to a transhipment hub s existence is its geographic positioning as a converging and crossover point for many shipping lanes. A Port of Halifax transhipment hub would service Asia-North America and Europe-North American trade routes. Geographically, Halifax is positioned to be a stop for big mother ships with a network of marine connections to offloading feeder ships to redistribute to other ports. Short sea services would transport containers to Montreal, Northeast U.S. states and other ports in the Atlantic region. The Freeport transhipment terminal in the Bahamas would be a formidable competitor in serving seaboard destinations south of Virginia. The development of Halifax as a major marine transhipment hub depends on several key elements including its capacity to handle large transhipment volumes and the viability of short sea shipping services from Halifax. Based on the port s current capacity, a weekly service by one or two shipping lines could conceivably absorb all the spare capacity if the mother vessel offloads the major portion of its containers in Halifax. The port already has short sea connections to St. John s and New England but service is limited in terms of frequency and volume. A recent study indicates that current traffic volumes at the port and regulations do not economically support the expansion of short sea services. More feeder services may be possible if traffic increases and if U.S. stakeholders are interested in feeder connections from the port. 57 However, there are also important regulatory issues that need to be addressed to support the viability of short sea shipping. The potential for the Port of Halifax as a major transhipment terminal needs further evaluation. Despite the development of transhipment terminals elsewhere globally, no container transhipment terminals have been developed, so far, on the East, West or Gulf coast of North America although Freeport has positioned itself as a hub for the Caribbean and grown rapidly in the last few years. 57 Brooks, Mary, J. Richard Hodgson and James Frost (2006), Short Sea Shipping on the East Coast of North America: An analysis of opportunities and issues. ( 30

43 Chapter 5 The Economic Benefits of an Atlantic Gateway What are the economic benefits of increased gateway activity through the Port of Halifax? Would these economic gains accrue to the Halifax region only or would there be spillover benefits throughout Atlantic Canada? What is the national significance of an Atlantic gateway and would it complement a Pacific gateway on the West Coast of Canada? This chapter identifies the potential economic benefits for Halifax, the Atlantic provinces and Canada. However, further detailed analysis is required to quantify the magnitude and dollar value of these effects. Halifax The economic benefits of increased Atlantic gateway activity, anchored by the Port of Halifax, would directly benefit the port. Increased shipping line calls and container traffic at the port would translate into higher incomes including harbour dues and berthage fees for the Halifax Port Authority, additional terminal container handling fees collected by terminal operators and increased labour income for the stevedores. The direct impact of increased port activity would have indirect impacts on other sectors of the economy and induce further economic impacts as port and other workers spend their increased incomes. In turn, these higher incomes would generate increased personal income tax, sales tax, corporation tax and other revenues for municipal, provincial and federal governments. Last year, the Halifax Port Authority generated $27 million in revenues from its port operations (which includes container services, bulk cargo and cruise ships). Halterm Ltd, one of the two container terminal operators, earned nearly $37 million in According to the Port of Halifax website, the port generates 9000 direct and indirect jobs with an economic impact of $700 million. A recent economic impact study for the Halifax Gateway Council estimated that the Halifax gateway (defined to include the Port of Halifax, Halifax International Airport and related rail and trucking activities) contributed $600 million in direct GDP to Nova Scotia s economy, with an additional $980 million in indirect and induced GDP effects. 58 Direct employment at the Port of Halifax was estimated at 4,780, with total gateway employment of 11,900. The study estimated there were an additional 16,600 indirect and induced jobs generated in Nova Scotia s economy. Total tax revenues from the Halifax gateway were estimated at $170 million for the federal government, $79 million in provincial taxes and $6 million in municipal revenues. Increased port activity will create demand and increased opportunities for trucking and tertiary transportation services, including distribution and logistics. The establishment of Consolidated FastFrate s warehouse in Halifax could be the beginning of burgeoning distribution and transload activities. 59 Consolidated FastFrate will provide distribution services in Halifax, mainly for Canadian Tire. Merchandise arriving at the port will be trucked to its warehouse in Burnside to be sorted by region and then transported to other major Canadian distribution centres or directly to stores in the Atlantic region. CN is also considering building a container transload facility in Halifax to fill empty containers for export out of the port. 60 On the logistics side, the Canadian Retail Shippers Association (CRSA) hired Armour Transportation Systems in 2005 to coordinate the logistics for transporting its merchandise arriving at the Port of Halifax to their 58 InterVISTAS Consulting Inc. (2005), Halifax Gateway Council Economic Impact Study. 59 The Greater Halifax Partnership recently issued an RFP for a study to examine the potential for a transload industry in Halifax. 60 Peters, Tom (2006), CN sees Port of Halifax as Asian gateway Chronicle Herald, September

44 distribution centres in central Canada (using CN). 61 Demand for other third-party logistics provider (3PLs) may grow if the Port of Halifax becomes a bigger pivotal point for companies supply chains. However, a recent study suggested limited potential for 3PLs because of Atlantic Canada s small local market, limited rail service choices and its higher cost base. 62 Atlantic Canada An enhanced Atlantic gateway would improve access to markets, particularly in Europe and Asia, for both Atlantic exporters and importers. Atlantic businesses would benefit from a larger number of shipping lines calling the Port of Halifax, more frequent services and increased container capacity. However, the magnitude of this potential benefit depends upon the competitiveness of Atlantic exporters and their interest in taking advantage of new and fast growing markets, such as those in Asia. Are Asian markets and marine services relevant for some of the emerging industries in the region such as IT services and biotechnology? Commodity exporters are already taking advantage of these trends and current exploration activity in the region suggests some upside potential for the export of minerals. However, the capacity for further increases in the supply of shellfish, pulp and paper may be limited. Other Atlantic manufacturers will find it hard to compete on the basis of low wages or just-in-time delivery to these markets and will more likely have to define their competitive advantage around other factors such as using technology to produce superior products and by providing better service quality. While Atlantic exporters remain heavily focused on the United States, it may be time to encourage greater exploration of other fast-growing markets. Smaller firms in particular may benefit from programs that help them evaluate their market potential in these countries and to improve their capacity to successfully manage the logistics of international shipping and their own supply chains. As the density of container traffic though the Port of Halifax increases, is there potential for Atlantic companies to add value by capturing additional supply chain activity? 63 For example, there have been suggestions about the possibility of exploiting NAFTA rules of origin. This would entail further manufacturing or assembly of products entering Atlantic Canada but destined for the United States such that the product would then be treated as a NAFTAoriginating product. However, the recent appreciation of the Canadian dollar has eroded Atlantic manufacturers competitive advantage to build on this potential. Again, it is not yet clear whether the region s economics would support other value added supply chain activity and this would require further investigation. 64 If the Port of Halifax increases its container handling from Europe and Asia, there may be potential spillover effects to other Atlantic ports to provide complementary services. However, the scope for this potential is not yet clear. Aside from improved marine access to global markets, and possible spillovers in terms of additional port, short sea or trucking activity, there seems to be limited clearly identifiable benefits for the three other Atlantic provinces of an enhanced Atlantic gateway anchored in 61 The CRSA includes companies such as Sears Canada, Sony of Canada and Reitmans (Canada). Three more retailers are joining the association bringing to 14 the number who are or soon will be importing merchandise from Southeast Asia and the Indian sub-continent via Suez and the Port of Halifax into Canada. 62 MariNova Consulting (2004), Greater Halifax Distribution Study. Report prepared for the Halifax Port Authority, the Greater Halifax Partnership and Halifax Regional Municipality. 63 This prospect is one question currently under consideration in a proposal to establish an inland port in Moncton-Dieppe. 64 As an example of how such spillovers can occur, UPS global hub in Louisville originally provided warehouse and distribution services for Toshiba parts. However, UPS has now expanded its services for Toshiba by offering technical customer support (call centre and repair services). 32

45 Nova Scotia. Provincial government support for such an initiative may therefore depend on their assessment of the benefits of improved marine access for their businesses in their province and the potential for improved regional transportation infrastructure that will be necessary to support an enhanced gateway. Canada Canada s economy would benefit from increased economic activity through the Port of Halifax, including increased federal tax revenues. From a strategic point of view, an enhanced and more efficient Atlantic gateway would complement both the Pacific gateway (through the Port of Vancouver and Prince Rupert) and the Port of Montreal (especially as container ships increase in size), ensuring that all Canadian businesses have more competitive marine transportation options. The Government of Canada recently announced funding of $321 million over the next four years for specific infrastructure, transportation technology and border security projects that are designed to improve the capacity and infrastructure of the Pacific Gateway. A further $270 million was allocated for future investments in the Asia-Pacific Gateway and Corridor Initiative. Enhanced marine services from Asia through the Port of Halifax would provide Canadian importers with additional transportation alternatives to West Coast ports, which would assist them in managing risk in their supply chain, particularly as services through the Suez Canal develop. Moreover, as Canadian imports from Southeast Asian countries such as India, Malaysia and Thailand grow, Halifax is better suited than Vancouver or Prince Rupert to be the main gateway to central Canadian markets. Similarly, exporters, particularly those from Ontario and Quebec, would benefit from improved marine access to markets in Asia and eastern/mediterranean Europe. About $1.8 billion of merchandise exports from Ontario and Quebec were cleared through Nova Scotia s ports in For Quebec, about 1.2% of its total merchandise exports were cleared through Nova Scotia s ports compared with 2.3% though ports in British Columbia. For Ontario, 0.55% of its exports were cleared through ports in Nova Scotia compared with 1.25% through ports in British Columbia. In total, about $4.7 billion of merchandise exports from other Canadian provinces were cleared through Nova Scotia s ports in Support for an Atlantic gateway would complement the federal government s stated objective of developing Canada s trade with Asia. 66 The federal trade minister has indicated that Canada needs to be more aggressive in pursuing bilateral free trade agreements to take advantage of growing Asian markets. Canada is currently pursuing or exploring trade or investment agreements with South Korea, China, Japan and India. 65 This total includes containerized cargo cleared through the Port of Halifax and energy products cleared through the Port Hawkesbury transhipment terminal. 66 Emerson, Hon. David (2006), Shaping a Global Commerce Agenda for Canada, Speech to the Canadian Chamber of Commerce, Ottawa, June 8. 33

46 34

47 Chapter 6 Issues in Developing an Atlantic Gateway The potential for an enhanced Atlantic gateway, leveraged by the Port of Halifax s current position, depends upon several key global trends that are largely beyond the region s control. However, these developments are already underway: Imports from Asia to North America are increasing as manufacturers and importers develop their global supply chains to take advantage of lower production costs in Asia; Congestion and risks of delays at West Coast ports are prompting some shippers to diversify to East Coast ports; The Panama Canal is facing capacity challenges (at least until 2013/14); Some shipping lines are considering additional routes or new network services using the Suez Canal, especially given the above factors and as trade with Southeast Asia grows; There is sufficiently large and growing demand from central Canada and U.S. Midwest which is beginning to induce the need to load/unload containers at the Port of Halifax. In addition, as West Coast ports continue to experience congestion, growing demand for imports on the West Coast will cause traditional landbridge traffic to be displaced to East Coast ports. Nevertheless, there are several factors that regional stakeholders can influence that will affect the likelihood and extent of increased Atlantic gateway activity. 67 Ensuring Strong Connections to Inland Markets The cost and ease of transporting containers from the Port of Halifax to inland markets in central Canada and the U.S. Midwest is fundamental to the port s competitiveness but depends almost exclusively on rail services provide by CN. CN s expansion in the mid-1990s of the St. Clair rail tunnel linking Sarnia, Ontario with Port Huron, Michigan and markets in the U.S. Midwest facilitated a huge increase in rail shipments from the Atlantic region and allowed the Port of Halifax to be a bigger player serving the U.S. Midwest by improving transit time and service. CN s reputation as a railroad operator is an asset for an Atlantic gateway but are CN s operating objectives of asset utilization and cost control optimal for the development of gateway traffic? CN s operating efficiency should be a plus and CN s President and CEO recently stated that the interests of the Port of Halifax and CN have never been more strategically aligned. 68 He further stated that CN is prepared and totally committed to making growth at Halifax a reality. CN s investments at Prince Rupert and its consideration of a transload facility in Halifax are indicative of its potential willingness to invest in an Atlantic gateway. Road infrastructure will also be important for Atlantic exporters to take advantage of improved access to international markets via the Port of Halifax and for increased distribution of imports throughout the region. In addition, ensuring the adequacy of road infrastructure to Central Canada may be an important complement to rail for time sensitive shipments. To the extent that containerized imports through the Port of Halifax are destined for New England, the efficiency and capacity of road and border infrastructure to the United States will also be important. 67 This is in addition to the need for further empirical analysis as identified in Chapters 4 and Harrison, E. Hunter (2006). Keynote luncheon address to Halifax Port Days, September

48 Boosting Port Efficiency The Port of Halifax s efficiency is imperative. Higher efficiency can improve cost structures and make the port more attractive to shipping lines. Enhanced efficiency also improves transit times and reliability for shippers. The Halifax Port Authority, the terminal operators, CN and the stevedores all have a role in maximizing the port s productivity. Capital investment is a key factor in improving port productivity. Ensuring Sufficient Port Capacity The Port of Halifax is currently operating at about half of its capacity, mainly due to underutilized capacity at the Halterm terminal (which is at about 25% of capacity). But the long-term viability of the port as a gateway depends upon its capacity to expand. When would such investments be required? A recent study for an inland terminal indicated that the Port s effective capacity is about 800,000 to 900,000 TEUs per year. 69 However, the Halifax Port Authority believes that the current land available for its two container terminals facility is adequate to service about 1 million TEUs per year. The annual growth scenarios of 3% and 5% used for the Halifax Gateway Council Strategic Plan indicates that this capacity would not be reached until almost 2020 at the earliest. 70 But the Port of Halifax is pursuing much more ambitious growth targets and a few additional shipping lines can make a significant difference. For example, according to the Halifax Port Authority, a weekly service from Asia that calls at Halifax might typically account for 1,000 TEUs per week, or about 52,000 TEUs per year. 71 The addition of ten such weekly services would bring the Port to its effective capacity. Moreover, if a shipping line decided to reconfigure its services and tranship 6,000 TEUs per week at the Port of Halifax, that would be equivalent to an additional 312,000 TEUs per year. Port capacity is therefore fragile and can change quickly if shipping lines alter their ports of call or new services are added. Shippers are planning their medium and long term strategies now and assessing the viability of transportation choices in their supply chain decisions. Moreover, a shipping line s decision to reconfigure its container services and ports of call are made based on existing capacity instead of future capacity. If a port cannot accommodate such shifts, they will miss out on the opportunity. There is therefore a need to build capacity ahead of demand. For example, when the Deltaport at the Port of Vancouver was built in the mid-1990s, many considered it to be unnecessary. But the terminal expanded much more rapidly than anticipated. 72 Even then, shipping lines typically sign up for only short term contracts of say three years. These factors make port and terminal investments inherently risky with a lack of security for private lenders. It is the practice of the governments of most countries to provide financial support for the development of port infrastructure. Only in cases of very large ports or those with terminal facilities developed under long-term build-operate-transfer concessions is it possible to self-finance expansion. Many governments view common user port infrastructure as a public good and so subsidize it. For example, the private sector is contributing only half of the $ MariNova Consulting (2006), Halifax Inland Terminal and Trucking Options Study. Report prepared for Halifax Regional Municipality and Halifax Port Authority. 70 InterVISTAS (2005), Halifax Gateway Council Strategic Plan. 71 If the vessel dropped off 250 import containers and loaded the same number for export, this would be amount to 1000 TEUs as a standard 20 foot container is equivalent to 2 TEUs. 72 A similar comment could be made with regard to the establishment of the Halterm terminal in the 1960s. 36

49 million financing for the new terminal at Prince Rupert in British Columbia. 73 Canada is one of a very few countries that expects common user container ports to be financially self-sufficient. Options for expansion at the Port of Halifax include the further development of the two existing container terminals by using adjoining land, shifting operations to an all rail inland terminal, and a third container terminal. A recent study indicated that an inland terminal could increase the port s effective capacity by about 250,000 TEUs per year but concluded that current volumes are insufficient to justify the investment at the present time. 74 The capital cost of this development was estimated at about $60 million. The Maersk-Sealand proposal in 1998 to build a third ocean container terminal with additional capacity of 550,000 TEUs was estimated to cost about $300 million. Both terminal operators at the Port of Halifax are currently investing to enhance their capacity and efficiency. Ceres has ordered two post-panamax cranes which are expected to be delivered in Halterm s latest $10 million capital expenditure program expansion will add more storage space and additional equipment including loaders to improve container stacking density. 76 Both terminals have had dredging contracts to ensure depth appropriate to serve the largest vessels. Turning Potential Into Reality The Port of Halifax has grown much more slowly than many other North American East Coast ports over the last 5-15 years (Chart 8). Are conditions now ripe to turn this around? Despite the trends favouring the growth of East Coast ports and Halifax s favourable location and capabilities, shippers and shipping lines still need to be convinced to add Halifax to their ports of call or to make a major shift in favour of Halifax. The Port of Halifax believes that it is ready for this opportunity and is aggressively trying to market itself. 77 Knowledge abroad about what Halifax can offer is limited and the Halifax Port Authority has been addressing this issue, for example, though trade missions to China and India. The Halifax Port Authority recently announced a new partnership with the Jeena Company, a premier logistics company in India, to market the port to manufacturers and exporters in India. 78 Removing Regulatory Barriers A number of regulatory issues need to be addressed if the full potential of an Atlantic gateway is to be realized. 79 A relaxation of CMA port financing restrictions is an important step to support infrastructure development and was strongly recommended by the CMA Review Panel in its 2003 report. The CMA s financing stipulations limits the Halifax Port Authority s capacity to borrow. Even so, as already discussed, direct government funding for port infrastructure will still be needed, in addition to private capital, because of the high risk profile of attracting traffic to the port. 73 Butcher, Paul (2006), Prince Rupert North America s New Gateway, presentation to the Transportation Research Bureau Summer Conference. 74 MariNova Consulting (2006). 75 Cerescorp (2006), Cerescorp purchases two new super post panamax cranes for the Fairview Cove container terminal facility in the Port of Halifax, news release, March. 76 Halterm Income Fund (2006), Quarterly Report (Second Quarter). Macquarie Infrastructure Partners, of New York, recently reached an agreement with the Halterm Income Fund to buy Halterm for $173 million. The transaction is expected to close in January Oldfield, Karen (2006), Port Days 2006 State of the Port Address, September 15, Halifax. 78 Karen Oldfield (2006). 79 See Chapter 1 and Appendix B for details. 37

50 Chart 8: Top North American East Coast Container Ports (thousands of TEUs) New York/New Jersey Charleston, SC 4000 Virginia (Norfolk) Savannah, GA 3000 Houston, TX Montreal 2000 Miami, FL Jacksonville. FL 1000 Port Everglades, FL Halifax, NS Source: Containerisation International Yearbook. Regulations affecting the viability of short sea shipping will need to be addressed if the port is to become more of a transhipment hub. Working Together Many stakeholders have an interest in the development of an Atlantic gateway but its success will depend upon their ability to work together with a clear vision, commitment and coordinated action. There has already been some evidence of this in last year s participation of the Halifax Port Authority and both terminal operators on a trade missions to China, Taiwan, Korea and Japan. Preliminary discussions with provincial transportation departments indicate a generally favourable view of the development of an Atlantic gateway with the Port of Halifax as a key asset. They recognize the potential benefits of increased market access and the potential for related transportation infrastructure improvements in the region. However, they are concerned that any federal funding for an Atlantic gateway may detract from other transportation infrastructure funding programs. As noted in Chapter 2, there are other transportation priorities for the region. Funding for an Atlantic gateway would need to be incremental. 38

51 Chapter 7 Summary and Conclusions Atlantic Canada s transportation system consists of a complex array of infrastructure, services and flows. The key elements include the Port of Halifax which acts as a marine gateway for container traffic destined for or originating from central Canada and the U.S. Midwest; a rail corridor, operated by CN, that links the Port of Halifax to these markets; two truck corridors, one between Atlantic Canada and the Northeast United States and a second linking the Atlantic region with central Canada, with trucking companies operating a triangular service pattern to improve margins; dedicated port infrastructure and international and domestic marine services for crude oil and refined energy products; and other ports and marine service for non-energy shipments to and from U.S. and international markets. This transportation infrastructure has facilitated a significant expansion in Atlantic Canada s international trade but the global economy is changing with rapid growth in international trade and changing patterns of trade, driven in large part by the development of global supply chains. In Atlantic Canada there has been rapid growth in exports of raw materials and unprocessed goods to fast-growing Asian markets. On the other hand, factors such as increased competition from low cost competitors in Asia and elsewhere, a huge appreciation of the Canadian dollar driven in part by high global energy prices, higher energy and transportation costs, weak or shifting product demand, and supply constraints in some industries have highlighted the competitiveness changes facing Atlantic industry. These pressures are reflected in current output, export and employment trends in the region. Decreased demand could have significant implications for the cost and availability of transportation services. Yet, as Atlantic businesses continue to manage their global supply chains, offshoring and outsourcing to improve their productivity or to take advantage of new market opportunities, they will require better marine and other transportation services to bring supplies to the region or to ensure rapid delivery of products to key markets. Several trends in global trade and shipping point to the potential for East Coast ports in North America to play an increased role in terms of international transportation services including rapid growth in Asia-North America trade, the deployment of larger (post-panamax) container ships; congestion at West Coast ports in North America; and congestion and ship size constraints at the Panama Canal which offer a window of opportunity for East Coast ports to capture overflow from West Coast facilities. These trends point to the increased possibility for the use of all-water services via the Suez Canal to the East Coast of North America. In Eastern Canada, the Port of Halifax is the best positioned port at the current time to take advantage of these potential opportunities. The most obvious opportunity for the Port of Halifax is to strengthen its role as a container gateway for Asian imports destined for central Canada or the U.S. Midwest. Other related opportunities for the Port of Halifax could include increased gateway trade between Europe and North America, and perhaps, a greater role as a transhipment terminal. While the development of Atlantic gateway depends upon several key global developments that are largely outside of its control, there are several key factors that can be influenced by regional stakeholders that will affect the likelihood of increased gateway activity. In particular, there is a need to ensure strong connections to inland markets, boost port efficiency, ensure sufficient port capacity, turn potential into reality by aggressive marketing, remove regulatory barriers and for stakeholders to work together with a clear vision, commitment and coordinated action. Although the Port of Halifax is currently operating below capacity, the long-term viability of the port as a gateway depends upon its capacity to expand. Port capacity is fragile and can change 39

52 quickly if shipping lines alter their ports of call or new services are added. However, if a port cannot accommodate such shifts, they will miss out on the opportunity. As such there is a need to build capacity ahead of demand. These factors make port and terminal investments inherently risky with a lack of security for private lenders. It is the practice of the governments of most countries to provide financial support for the development of port infrastructure because many governments view common user port infrastructure as a public good. Canada is one of very few countries that expects common user container ports to be financially self-sufficient. The economic benefits of increased gateway activity through the Port of Halifax would include increased revenues and personal incomes at the Port of Halifax; increased personal income tax, sales tax and corporation taxes revenues for provincial and federal governments and increased demand and opportunities for trucking and tertiary transportation services, including distribution and logistics. An enhanced Atlantic gateway would improve access to markets, particularly in Europe and Asia, for both Atlantic exporters and importers. There may be potential spillover effects to other Atlantic ports to provide complementary services. Nationally, an enhanced and more efficient Atlantic gateway would complement both the Pacific gateway (through the Port of Vancouver and Prince Rupert) and the Port of Montreal (especially as container ships increase in size), ensuring that all Canadian businesses have more competitive marine transportation options. Enhanced marine services from Asia through the Port of Halifax would provide Canadian importers with additional transportation options to West Coast ports, which would assist them in managing risk in their supply chains. Moreover, as Canadian imports from Southeast Asian countries such as India, Malaysia and Thailand grow, Halifax is better suited than Vancouver to be the main gateway to central Canadian markets. Similarly, exporters, particularly those from Ontario and Quebec, would benefit from improved marine access to markets in Asia and eastern/mediterranean Europe While the development of an Atlantic gateway presents a real opportunity, particularly for the Port of Halifax, other Atlantic transportation priorities, that are not necessarily critical to the gateway concept, should not be neglected. In particular: It is vital to ensure that Atlantic exporters can move goods quickly and easily across the U.S. border. The United States accounts for about 80% of the region s exports by value and 66% of its non-energy exports. Key issues that need to be addressed include issues such as adequate infrastructure and resources at border crossings to eliminate congestion; ensuring the efficiency of advance notification procedures; addressing ways to help SMEs comply with new security standards; and liaison with U.S. authorities on development and implementation of border security measures. Adequate funding mechanisms are vital to maintain and upgrade key road corridors within the region. Trucking accounts for a majority of flows to the U.S. Northeast (as well as the majority of non-energy freight movements within the Atlantic region). The Atlantic region has one of the highest road densities in the country in terms of kilometres of roads per person but lacks the tax base to support it. Despite significant improvements to the region s road network in recent years, the ability of provinces to participate in federal cost-shared programs remains a concern. Regulatory convergence should be another top priority, in particular, working with U.S. counterparts to harmonize regulations within NAFTA. Differing equipment standards and other regulations (including cabotage) restrict the efficiency of cross-border truck movements. Other regulatory barriers include those affecting short sea shipping. Finally, consideration should be given as to how to assist small Atlantic shippers that lack the volumes to ensure capacity on ships, planes, railcars and trucks and the bargaining power to influence rates and service levels. Is there scope for a shipper s cooperative or similar venture to improve transportation access for smaller players? 40

53 Appendix A Transportation Infrastructure and Trade Flows in Atlantic Canada Chapter 1 of this report presented an overview of Atlantic Canada s trade flows by transportation mode. This Appendix provides a more detailed analysis of these trade routes (such as key products) and a more detailed description of the region s transportation infrastructure. Ports and Marine Services The marine mode accounts for an estimated 62% of the tonnage loaded in Atlantic Canada and 67% of the tonnage unloaded in the region. However, it is particularly significant for international cargo, accounting for about 90% of international cargo originating in Atlantic Canada and about 95% of the international shipments to the region. The marine mode accounts for a similar share of the value of Atlantic Canada s non-u.s. international merchandise exports, estimated at about 91% in For merchandise exports to the United States, the marine mode represented about 42% of Atlantic exports in 2002, but a much higher proportion of exports from Newfoundland and Labrador (84%) and very little from Prince Edward Island where road access dominates. Marine shipments are dominated by energy products such as crude oil and refined petroleum which account for about 80% of total marine tonnage to, from and within the region. A majority of the remaining tonnage shipped from Atlantic ports are mining and forest products. (Table A1). Table A1a: Commodity Detail on Atlantic International Marine Cargo, 2003 Tonnage (000s) % of total Loaded Crude petroleum 20, Gasoline and aviation turbine fuel 8, Other non-metallic minerals 6, Fuel oils 6, Stone, sand, gravel and crushed stone 3, Newsprint 1, Potash Wood pulp Other refined petroleum and coal products Other metallic ores and concentrates Total 54, Unloaded Crude petroleum 23, Coal 2, Fuel oils 2, Gasoline and aviation turbine fuel 1, Crude petroleum 1, Coal coke and petroleum coke 1, Other basic chemicals Other refined petroleum and coal products Other manufactured and miscellaneous goods Machinery Total 38,

54 Table A1b: Commodity Detail on Atlantic Domestic Marine Cargo, 2003 Tonnage (000s) % of total Loaded Fuels and basic chemicals 21, Manufactured and miscellaneous goods Minerals Agriculture and food products Total 24, Unloaded Fuels and basic chemicals 22, Minerals 3, Manufactured and miscellaneous goods Agriculture and food products Total 26, Source: Statistics Canada, Shipping in Canada. The largest commercial ports in Atlantic Canada are identified in Chart A1 and described below: 80 Chart A1: Largest Commercial Cargo Ports in Atlantic Canada Note: Total tonnage loaded and unloaded by port in 2003 shown in million of tonnes. Source: Statistics Canada, Shipping in Canada. 80 There are other small ports owned by Transport Canada. A map identifying these ports is available at 42

55 Whiffen Head, NL The Whiffen Head Transshipment Terminal serves as a crude oil transfer and storage facility servicing the Hibernia, Terra Nova and White Rose oil fields. Oil is shipped from the Newfoundland offshore to the terminal on shuttle tankers and taken from the terminal to market on conventional tankers. The terminal currently consists of six tanks with a capacity of three million barrels. Saint John, NB The port mainly handles bulk cargo including energy products, potash, other minerals and forest products. 81 Energy products account for over 90% of tonnage handled at the Port with a majority destined for Irving Oil s refinery in the city. Energy tonnage is expected to expand dramatically over the next few years with the opening of a liquefied natural gas (LNG) facility. Irving Oil has also recently proposed building a second refinery in Saint John. The Port is served by the NB Southern Railway. Port Hawkesbury, NS The Strait of Canso Superport has facilities for a number of clients, handling 23 million tonnes of cargo in 2003: Statia Terminals owned by Valero runs a transhipment terminal that brings in cargos of crude oil and refined fuels on ships that are too large to enter U.S. ports. The fuels are then pumped onto smaller tankers that can enter U.S. waters. Crude oil and refined fuels accounted for about 70% of the total tonnage loaded and 89% of the total tonnage unloaded at the port in Nova Scotia Power recently completed a new coal terminal for its Point Tupper power plant. The port has terminals dedicated for the Stora Enso mill for exports of newsprint and supercalendar paper, for Federal Gypsum s wallboard and Georgia Pacific gypsum. Other terminals at the Port are used to ship granite aggregate from the Martin Marietta aggregate quarry, highway salt from the Canadian Salt Company and fish products. Stone, sand and gravel accounted for about 18% of the tonnage loaded at the port in Port Hawkesbury is also the planned location for the Bear Head LNG facility but this project is currently on hold. Newfoundland Offshore, NL Crude oil is loaded from the three producing offshore fields and shipped to the Whiffen Head transhipment terminal. Halifax, NS Halifax is Canada s third largest container port. The Halifax Port Authority offers 18 berths and 10 large warehouses. Many other wharves are maintained by private companies including Imperial Oil for shipping its petroleum products and National Gypsum Limited (180,000 metric tonne capacity) for the loading of gypsum. Autoport in Dartmouth operates one of North America's largest automotive terminals handling up to 100,000 vehicles per year. The Halifax Grain Elevator handles grain and feed products destined for local and global markets and has a capacity of 140,000 metric tonnes. Come-by-Chance, NL Unloaded crude oil for the North Atlantic Refinery and the loading of refined products are the only products moved at Come-by-Chance. 81 Potash accounted for 6% of the tonnage loaded at the port in

56 Corner Brook, NL Tonnage shipped from the port is mainly from the Corner Brook Pulp and Paper Company s mill although product is also shipped by St. Lawrence Cement, Ultramar and fish processors. Belledune, NB The Port of Belledune has three terminals and a liquid bulk storage compound. The two main customers of the port are Falconbridge (now Xstrata) which ships zinc, lead and copper concentrates and NB Power which imports coal for its Belledune generating station. The Port is served by the NB East Coast Railway. Sydney, NS The main tonnage flowing through Sydport is coal for Nova Scotia Power s Lingan power plant. The adjoining Sydport Industrial Park is serviced by the Cape Breton and Central NS Railway. Bayside, NB The Bayside Terminal has two berths with most of the tonnage coming from gypsum and potatoes. A new private temperature sensitive foods storage facility was recently added. St. John s, NL The Port of St. John s is the largest offshore oil supply and service centre on the east coast of Canada and the largest fish-handling port in the province. Hantsport, NS The Port of Hantsport is mainly used to export gypsum that is mined in nearby quarries and transported to the port by rail on the Windsor and Hantsport Railway. Energy Flows and Marine Infrastructure Energy products account for over half (51%) of the value of Atlantic Canada s international exports have jumped from $3 billion in 1999 to $12 billion in As already noted, 80% of marine tonnage shipped to and from the region. The main energy flows are as follows: Oil produced in the Newfoundland offshore is sent to the Whiffen Head transhipment terminal and then shipped to international and domestic refineries. These shipments have climbed rapidly with the ramping up of oil production from Hibernia, Terra Nova and now the White Rose fields. Oil and gasoline imported from abroad is re-exported to other international (mainly U.S.) destinations through the transhipment terminal at Port Hawkesbury. Port Hawkesbury, is one of the world s largest petroleum product terminalling & bunkering facilities and flows have grown as demand for energy products in the United States has increased. The region s three refineries import crude oil from other countries and then export fuel oil and gasoline to international and domestic markets. The Port of Saint John has experienced a significant increase in tonnage over the last decade due to an expansion at the Irving oil refinery. The region s (mainly oil fired) electricity plants import fuel oil from other countries to generated electricity. The major energy facilities in the region are identified in Chart A2. The volume of shipments of energy products (in millions of tonnes) at these ports in 2003 is as follows: 82 APEC (2006). Energy Sector Masks Challenges Facing Atlantic Exporters, Report Card, September. 44

57 Chart A2: Major Energy Ports in Atlantic Canada Newfoundland Offshore outflows of crude oil to Whiffen Head (16.2) and other locations (0.5) Whiffen Head inflows of crude oil from the Newfoundland offshore (16.2) outflows of crude oil to international (13.6) and Canadian (3.0) markets Come-by-Chance inflows of crude oil from international markets (5.3) outflows of refined fuels to international markets (5.4) Port Hawkesbury inflows of crude oil from international markets (7.0) outflows of crude oil to international markets (6.6) inflows of refined fuels from international markets (1.9) outflows of refined fuels to international markets (2.1) Halifax inflows of crude oil from international (2.7) and Canadian markets (1.1) inflows of refined fuels from international markets (0.9) outflows of refined fuels to Canadian markets (1.1) Saint John inflows of crude oil from the international (10.0) and Canadian markets (2.2) inflows of refined fuels from the international markets (1.5) outflows of refined fuels to international (10.1) and Canadian markets (1.0) 45

58 Container Ports Ports play an important role in the transport of containerized cargo in and out of the country. Containerized are used for a majority of miscellaneous manufactured goods, machinery, food products and paper (Table A2). About 32% of wood pulp and 22% of newsprint exported from Canada s ports was also in containers in Wheat, salt, stone and gravel, coal and crude and refined fuels are carried as bulk cargo. Halifax is the third largest container port in the country and the main entry and exit point in the region. St. John s, Saint John, Corner Brook and Shelburne also transport containerized cargo (See Chart A3). Chart A3: Existing Container Ports in Atlantic Canada Halifax, NS Cerescorp Company and Halterm Limited each operate container terminals with a combined capacity of more than 500,000 containers (or 1 million TEUs) per year. Zim, Costa, Melfi Lines, Oceanex and China Shipping call the Southend Halterm terminal. Ceres Fairview Cover terminal receives ships from members of the Grand Alliance (Hapag Lloyd, P&O Nedlloyd, NYK Line and OOCL), Atlantic Container Line, and until this summer, a short sea feeder service to New England operated by Halship Inc. Nearly half of the port s container business services the European market, accounting for 47% of its volumes. Asia is the next largest market, accounting for 27% of the total. In 2004, approximately 80% of the containerized cargo was destined for or originated from Montreal, Toronto and the U.S. Midwest, The largest containerized imports are machinery, manufactured goods, chemicals and furniture while the largest exports are forest products, vegetables, machinery and fish products

59 Table A2: International Marine Cargo Handled at Canadian Ports, 2003 Loaded Unloaded Tonnes (000s) % containerized Tonnes (000s) % containerized All Commodities 191, Commodity Groups Machinery and Transportation Equipment , Primary and Fabricated Metal Products 1, , Pulp and paper Products 10, Manufactured and Miscellaneous Goods 9, , Forest and Wood Products 7, Agriculture and Food Products 22, , Fuels and Basic Chemicals 50, ,138 1 Minerals 60, ,583 1 Detailed Commodities Mainly containerized cargo Alcoholic and non-alcoholic beverages Other manufactured and miscellaneous goods 1, , Plastic and rubber Vehicles and parts and accessories , Machinery , Prepared foodstuffs (not elsewhere classified) Paper and paperboard, except printed products Fresh, chilled or dried vegetables 1, Containerized and bulk cargo Feed, cereal, straw, eggs and other animal products 1, Meat, fish, seafood, and preparations Wood pulp 7, Newsprint 2, Other non-metallic mineral products , Other basic chemicals 3, , Iron and steel, primary or semi-finished 2, Metallic waste and scrap 2,738 9 Largely bulk cargo Other non-metallic minerals 7, ,464 2 Other metallic ores and concentrates 1,099 3 Other refined petroleum and coal products 1, ,611 1 Wood chips Stone, sand, gravel and crushed stone 9,345 1 Sulphur 5,643 0 Wheat 10,832 0 Salt 4,025 0 Crude petroleum 21, ,285 0 Fuel oils 8, ,382 0 Gasoline and aviation turbine fuel 8, ,129 0 Potash 5,902 0 Coal 21,543 0 Coal coke and petroleum coke 3,023 0 Source: Statistics Canada, Shipping in Canada 47

60 St. John s, NL St. John s is served by one container line, Oceanex, which operates a weekly run to Halifax and a bi-weekly run to Montreal. Saint John, NB Saint John has one weekly container service with Tropical Shipping which offers weekly service to Florida, the Caribbean, and South America. This service handles 40,000 containers annually and specializes in frozen containers (or reefers) to transport food products such as aquaculture. The port s container business has declined over the past two decades. Several factors contributed to this trend including CP Rail s decision to stop service in the Maritimes and the use of bigger vessels by shipping lines that exceed the capacity of the port s infrastructure. Corner Brook, NL Corner Brook is served by one container service, Oceanex, which has a weekly run from Halifax via St. John s. Cargos are also shipped to Montreal via St. John s. The main products being loaded are newsprint and fish products destined for Asia. The containers being unloaded are mainly consumer goods. Shelburne, NS Eimskip is an Icelandic Shipping company that ships about 500 containers of mainly fish products weekly from Shelburne to Massachusetts. In October, 2006, Halterm, operator of Halifax s south-end terminal, announced that Eimskip was moving from Shelburne to Halifax. How well placed are East coast ports to take advantage of increasing trade volumes with Asia and the trend towards larger vessels? Table A3 summarizes some of the key parameters for the three largest Atlantic container ports along with Montreal which is Canada s second largest container port. Montreal currently handles the largest volume of containers with Halifax having the highest volume in Atlantic Canada. Halifax has a variety of international and short sea services to Europe, Asia and the United States while Montreal is mainly focused on the European market. St. John s currently only handles domestic containers and Saint John only has one shipping line. Halifax is the closest port to Europe, the Mediterranean and Asia via the Suez Canal. Shipping times to Saint John are higher because of the large variation in tides in the Bay of Fundy. Montreal has a Class 1 doublestack rail service provided by CP and CN to markets in Central Canada and the U.S. Midwest. Halifax has a CN rail service to the same locations and already operates as a gateway to these markets. Saint John lacks a Class 1 rail service while St. John s has no land access to major inland markets. Halifax is the deepest port which is also ice-free all year round. Montreal is limited by the depth of the St. Lawrence Seaway which would prevent it handling larger post-panamax ships and also requires ice-breakers during winter. Saint john and St. John s also have limited water depth. Based on this assessment, Halifax is the best positioned port in Eastern Canada at the current time to take advantage of increased gateway traffic from Asia. 48

61 Table A3: Comparison of Major East Coast Container Ports Halifax Saint John St. John's Montreal TEUs ,462 49, ,995 1,254,560 Markets Served Container lines served Major Markets Europe/Asia/N.A. Florida/Carib. Hfx & Mtl Europe Cranes (Container Terminals) Post-Panamax Other (i.e., gantry, yard) Terminals Total number Number of container terminals Size of main terminals (acres) Berths (Container Terminals) Number of berths Length (m) 1, ,565 Depth (m) Storage (Container Terminals) TEUs 21,500 8,500 1,200 38,000 Sq. feet 29,924 n/a n/a n/a Times to Major Markets by Water* New York 1d 3h 1d 0 h** n.a. 2d 21h*** Rotterdam 5d 6h 5d 18h** n.a. 6d 6h*** Valencia 5d 21h 6d 7h** n.a. 6d 18h*** Singapore 18d 6h 18d 16h** n.a. 19d 3h*** Mumbai 14d 13h 14d 23h** n.a. 15d 10h*** Note: * Times calculated assuming speed of 22 nautical miles/hour. ** Because of the tides in the Bay of Fundy, shipping times to Saint John will be longer than illustrated. *** Shipping times to Montreal will be longer than illustrated because 22 knots is too fast for the latter part of the inland voyage and in winter the St. Lawrence can only be transited in daylight. Source: Containerisation International Yearbook 2006, World Ports Distances Calculator ( Rail Aside from the 19 million tonnes of iron ore that was shipped by rail from Labrador to Quebec port for export to international markets, rail accounts for about 33% of Atlantic Canada s nonenergy volumes to Central Canada and about 50% of the tonnage from Central Canada. For non-energy movements to the United States, rail represents 18% of tonnage to the United States and about 38% of tonnage from the United States. Rail accounted for about 15% of U.S. total merchandise exports by value from Nova Scotia and New Brunswick in Forest products (lumber, pulp and paper) are the main products shipped by rail to the United States (65% of total rail shipments in 2003) while mixed freight is the main item sent by rail to Central Canada (54% of total rail shipments in 2003). Within Atlantic Canada, the major products moved are non-metallic minerals, potash (to the Port of Saint John) and coal. 49

62 Intermodal (containerized) cargo accounts for about 67% of the rail tonnage to Ontario, 41% to Quebec and 15% to the United States, For inbound rail movements, containers represent 47% of the rail tonnage from Ontario, 33% from Quebec and 28% from the United States. Rail shipments from Atlantic Canada to the United States have increased much faster than interprovincial shipments over the last decade. The expansion of the an underground rail tunnel linking Sarnia, Ontario with Port Huron, Michigan, to accommodate double stacked rail cars, contributed to a doubling of volumes between 1995 and In 2004 there was 2,356 km of rail lines in Atlantic Canada with about half of that total (1,139km) in New Brunswick (Chart A4). There are no active rail lines in Prince Edward Island or on the Island of Newfoundland. CN s mainline accounts for about 38% of the total rail track in the region. Chart A4: Active Rail Lines in Atlantic Canada CN operates four long distance trains through the region (along with several short line trains): Halifax-Toronto (container traffic) Halifax-Chicago (containers and boxcars) Saint John-Toronto (boxcars, tank cars, autoracks and some containers) Dartmouth-Toronto (boxcars, tank cars, and autoracks). 50

63 CN's main yard in New Brunswick is in Moncton. All of CN's long-distance trains make a stop in Moncton and many of the local trains also originate here. The two Halifax-based CN lines provide service from the port of Halifax, seven days per week and have a transit time of at 3-4 days to Toronto and Chicago. 84 The New Brunswick Southern Railway (NBSR), the New Brunswick East Coast Railway (NBEC) and a small portion of the Montreal, Maine & Atlantic Railway (MMA) all operate in New Brunswick along with CN. The biggest users of the 211km of rail line operated by NBSR are the port of Saint John and the major industries in Saint John area including J.D. Irving Limited and Irving Oil. 85 NBEC services communities in eastern and northern New Brunswick including Miramichi, Campbellton, Bathurst, Dalhousie, and Belledune. Products carried include, pulp and paper, fuel, lead and chemicals. NBEC runs 13 locomotives and 44 freight cars. The line handles 32,000 carloads of traffic annually. 86 In Nova Scotia, 1,048 km of rail line are in service including the CN main line, the Cape Breton and Central NS Railway (CBNS) and the Windsor & Hantsport Railway (WHR). CBNS operates 12 locomotives and 175 rail cars which move 26,300 carloads of freight annually over 392 km of track. The major products shipped include forest products, coal and chemicals. WHR operates 90 km of track from Kentville to Windsor Junction where it links up with the CN mainline. WHR runs nine locomotives and 68 freight cars which moves 22,300 carloads of freight per year. The main commodities shipped are gypsum, rock, grain, and lumber. 87 There are 528 km of rail lines in Labrador run by Quebec North Shore & Labrador Railway (QNS&L) and Wabush Lake Railway (WLR). QNS&L operates 395 km in Labrador, hauling iron ore concentrate from the Iron Ore Company of Canada s mines near Labrador City and from Wabush Mines' Scully Lake property to Sept-Isles, Quebec. The company runs 41 locomotives and 2, ton capacity cars shipping 13 million tonnes per year. WLR operates six locomotives and ships 55,400 carloads of freight per year. WLR hauls more than six million tons of iron ore concentrates a year for its parent company Wabush Mines to Pointe Noire, Quebec where it is shipped to international markets. 88 Roads and Border Crossings For-hire trucking accounts for the majority of tonnage moved within the Atlantic region 67% of the total (excluding marine energy shipments). Almost 30% of the intraregional truck movements were wood products for home building and renovation. Other forest products such as pulp, newsprint and logs and food products also are major contributors to traffic within the region s highways (although this would include movements to port and rail terminals). For-hire truck movements to and from Central Canada are of similar volume to rail tonnage. Wood products are the top good shipped by road and other forest and food products are also important. For movements from Central Canada, consumer products account for the largest volumes. About 75% of the truck volumes to the United States are to the Northeast region. Forest products accounted about 44% of the tonnage trucked to the United States in MariNova Consulting Ltd (2005), p There are also connecting rail lines through Maine to markets on the east coast of the United States

64 Roads accounted for about 90% of the total value of Prince Edward Island s merchandise exports to the United States in 2002, about 60% of Nova Scotia s exports and about 37% in New Brunswick, although the trucking share for non-energy exports will be much higher. There are 52,500 two-lane road km of paved and 31,400 km of unpaved road network in Atlantic Canada. Of that total about 3,100 km are part of the national highway system s core network and another 1,600km are feeder roads (Chart A5). Chart A5: Atlantic Canada s Major Road Network There are two main truck corridors, one between Atlantic Canada and the U.S. Northeast and one linking the Atlantic region with central Canada. The main path into central Canada is through north-western New Brunswick into Quebec. Because of the lack of an east-west corridor through Maine, goods shipped to and from central Canada have to travel a considerable distance north. The most important exit points for shipments to the United States are the Woodstock and Milltown border crossings in New Brunswick which rank 12 th and 18 th respectively in terms of truck traffic in Canada in 2005 (Table A4). Overall New Brunswick accounted for 4.2% of truck crossings into the United States. Truck movements along these corridors are distinctly unbalanced. Southbound truck movements are 3.5 times greater than northbound movements. Eastbound shipments from 52

65 Central Canada are 1.5 times larger than westbound movements. Atlantic trucking companies have therefore developed triangular network strategies, taking loads south to the United States, picking up goods from the New York region and transporting them to Toronto or Montreal, and then bringing goods back from central Canada to the Atlantic region. Table A4: Largest Border Crossings for Truck Traffic, 2005 Rank Border Crossing Crossings (thousands) 1 Sarnia, ON Fort Erie, ON Niagara Falls Queenston, ON Pacific Highway, BC Lacolle Route 15, QC Lansdowne, ON Emerson-West Lynne, MB Phillipsburg, QC Rock Island Route 55, QC Coutts, Alberta Aldergrove, BC Woodstock Road, NB North Portal, SK Sault Ste. Marie, ON Armstrong, QC Huntingdon, BC Osoyoos, BC Milltown, NB Cornwall, ON Kingsgate, BC St. Leonard, NB St. Stephen, NB Edmundston, NB Andover, NB 21 Source: Statistics Canada. The largest for-hire trucking companies in the region include Armour Transportation System Inc., Conrad s Transport Ltd., Clarke Transport, Day & Ross Transportation, Maritime-Ontario and Midland Transportation Group (including Sunbury Transport and RST Industries). Many private companies have their own trucking divisions. Some of the larger companies operating in the region include Sobeys, Loblaws, Kent Building Supplies, Home Hardware, Sears and Connor Brothers. Air cargo Air cargo data are limited as they are based on a survey that only captures the larger volume carriers. This means that the international air cargo volumes are more accurate whereas cargo volumes in Atlantic Canada may be understated. Air accounted for 8% of the value of Atlantic Canada s total merchandise exports to non-u.s. countries in 2002 but less than 1% of exports to the United States. The cargo loaded and unloaded at Atlantic Canadian airports is quite small compared to other modes of transportation and well below the big three of Toronto, Vancouver and Montreal (Table A4). Cargo handled at Atlantic airports totalled 2.7% of the Canadian tonnage in

66 Table A4: Air Cargo at Atlantic Canadian Airports, 2003 (tonnes) Loaded Unloaded CAN Other Loaded Other Unloaded Rank Domestic U.S. Internat. Total Domestic U.S. Internat. Total Total 7 Halifax Int. 8, ,850 3, ,585 12, St John s , ,536 2, Gander Int ,737 1, , Goose Bay Moncton Charlottetown Saint John Deer Lake Fredericton All Atlantic 9, ,691 12,185 4, ,685 17,870 1 Toronto 33,895 42,804 52, ,165 38,471 50,866 69, , ,666 2 Vancouver 28,621 12,250 34,063 74,935 15,746 14,864 37,251 67, ,797 3 Montreal (2) 6,371 2,487 23,416 32,274 12,230 2,738 34,889 49,858 82,132 All Canada 84,756 94, , ,856 83, , , , ,008 Source: Statistics Canada, Air Carrier Traffic at Canadian Airports, 2003 Halifax was the largest cargo centre in the region in 2003, ranking 7 th in the country and capturing 70% of the region s total (Chart A6). St. John s and Gander were the next largest centres for cargo handling in the region in Chart A6: Air Cargo at Atlantic Canadian Airports, 2003 (thousands of tonnes) Key destinations for Atlantic-originated air cargo include; 54