Winter 2015/2016 OUTCOME OF WEST COAST LONGSHORE STRIFE A Cushman & Wakefield Logistics and Industrial Services Special Report
Outcome of West Coast Longshore Strife It s now been over six months since the longshore labor dispute affecting US West Coast ports was resolved. What can we say at this point about the lasting impact of the disruption? In particular, do we see evidence of significant cargo volume shifts away from the US West Coast gateways? Spoiler alert: The ongoing impact appears to be modest, based on the evidence through the now-completed 2015 holiday shipping season. But there is work to be done by the ports to improve productivity and regain shippers confidence. A quick recap of the events that unfolded: The contract between US Pacific Coast port employers (the Pacific Maritime Association, or PMA) and longshoremen (the International Longshore and Warehouse Union, or ILWU) expired after its six-year term, on July 1, 2014. Port productivity suffered through the fall of 2014 and into the early months of 2015, as both workers and employers imposed slowdowns and restrictions. This occurred against a backdrop of port operational struggles with larger ships, chassis management changes and container availability issues within terminals. The parties reached agreement on February 20, 2015, following White House pressure. A new five-year contract was ratified by union members on May 22, 2015. 2
The US Pacific Coast ports were generally impacted from July 2014 through February 2015. The San Pedro Bay ports of Los Angeles and Long Beach, leading gateways for US imports from Asia, were modestly impacted through October-November, but then hit hard: Long Beach was down 22% in January and 24% in February (total loaded TEUs, vs year-earlier month), while Los Angeles dropped 27% in January and 11% in February. Oakland and Seattle/ Tacoma were impacted as well, with sharp declines in January and February. Container handling issues had a sharp impact on exporters and importers. The New York Fed estimated that the West Coast disruption likely reduced real export growth by 1.5 percentage points during the first quarter of 2015. Delays were devastating for individual cargo owners, whose products could not make it to market on time. At one point, as many as 30 container ships were waiting off the Ports of Los Angeles and Long Beach this in an industry where fixed weekly sailings are tracked by the hour. Shippers and industry representatives complained in a late-january Wall Street Journal article: It s devastating; We re running out of storage space; We have lost business because all of that product has a shelf life; and It s been a nightmare for us. Long Beach Los Angeles 22% 27% Long Beach was down 22% in January and 24% in February (total loaded TEUs, vs year-earlier month), while Los Angeles dropped 27% in January and 11% in February. Response by Shippers American Shipper magazine conducted a survey of irate shippers in January and February 2015 regarding their future plans for port gateways. Nearly all responded they had been significantly or moderately affected (99% of retailers and 95% of manufacturers). Not surprisingly, half of those who already use ports on both coasts stated they would shift more volume to Atlantic Coast ports. The concerns expressed had more to do with operational issues at the West Coast ports than with labor negotiations. And some have acted on these intentions. US ports have now reported container shipping volumes through the first ten months of the year. This data shows that shippers did divert cargo to the East Coast ports, particularly during the worst of the unrest and in the next few months, roughly through April 2015. Under Armour, for example, shifted its US gateway for East Coast DC-destined Asiansourced products from Long Beach to Baltimore in May 2015. Under Armour, long an advocate for economic stimulus in its home state of Maryland, noted that this change would mark a return to use of the Port of Baltimore for its Shanghaisourced shipments. While not necessarily a direct response to challenges experienced during the West Coast Ports labor slowdown, Under Armour did note that this change would present no detrimental impact to the 27-day transit time it was currently experiencing bringing goods in through the West Coast, and then shipping by ground to their East Coast distribution and store facilities. As Under Armour s U.S. sales have grown, they also announced a new, 1-million square foot distribution center in Mount Juliet, Tennessee (just outside Nashville). This DC, set to open operations in early 2016, will also be able to leverage inbound shipments to East Coast ports, including Baltimore and Miami. FIGURE 1 PEAK IMPACT OF US WEST COAST PORT DISRUPTION PORT Change in market share vs 10 selected US WC and EC ports, % points Jan-Feb 2015 Change vs. yearearlier, total TEUs PCT TOTAL TEUs CHANGE Los Angeles & LB -416,699-18.2% -5.4% Oakland -114,230-30.5% -1.8% Seattle- Tacoma -49,084-9.7% -0.3% Sub Total USWC -580,013-18.3% -7.5% US East Coast 227,587 +11.1% +7.5% * USWC ports: Los Angeles, Long Beach, Oakland, Seattle, Tacoma; USEC ports: NYNJ, Baltimore, Virginia, Charleston, Savannah. Source: New Harbor Consultants analysis of AAPA and port website data. But despite some diversion of cargo, West Coast ports have now largely recovered their lost momentum. And many shippers did not change port gateways Costco, for example, the third-largest retailer in the country, stated in May that it did not plan to shift any imports to East Coast ports. 3
Outcome of West Coast Longshore Strife The latest container data show the US Pacific ports on the road to a recovery in share. Who were the winners of the cargo that was diverted? East Coast ports picked up much of the slack (up 11%), especially Savannah. While Charleston also did extremely well, its recent good fortune seems more broadly-based than just related to West Coast problems. In addition, the British Columbia ports (not part of the ILWU labor negotiations) gained volume, especially Prince Rupert, which saw its volumes skyrocket during the disruption. Houston, on the Gulf Coast, benefited as well. Road to Recovery While still lagging their re-disruption average level, the latest container data (Sept-Oct 2015) shows the US Pacific ports on the road to a recovery in share (Figure 2). Indeed, in a sign of health, Long Beach reported that its third quarter volume of more than 2 million TEUs was the largest quarterly tally in its history. Moreover, marketing and operational efficiency initiatives by the West Coast ports are likely to support continued reversion to historical patterns. For example, the recent launch of the Northwest Seaport Alliance in Puget Sound should help raise competitiveness. FIGURE 2 TRENDING BACK TO NORMAL ON THE US WEST COAST Los Angeles & LB 2103 Average Seattle-Tacoma Jan 15 - Feb 15 58.4% 53.2% 10.2% 61.0% Oakland 9.4% 10.3% 6.1% 7.0% 5.3% 42.2% 43.7% WC ports share of 10 selected US WC and EC ports, total TEUs 38.5% 80 70 60 50 40 30 20 10 0 Sub Total USWC Sept 15 - Oct 15 * WC: Los Angeles, Long Beach, Oakland, Seattle, Tacoma; EC: NYNJ, Baltimore, Virginia, Charleston, Savannah Source: New Harbor Consultants analysis of AAPA and port website data. Shifts in Container Services The trend in ocean container services by port paints a somewhat nuanced picture. Overall, the US West Coast ports have lost 7% of their ocean services versus the pre-disruption period (Figure 3). This is partly the result of continued carrier consolidation and introduction of larger ships. Yet on the East Coast, subject to these same industry trends, the number of services has increased 7%. By overseas region, this increase is all attributable to new Asian services, some of which transit the Suez Canal. Overall, the US West Coast ports have lost 7% of their ocean services. 4
FIGURE 3 WEEKLY CONTAINER SHIPPING SERVICES Total Selected East Coast Seattle 21 19 134 143 38 40 New York/ New Jersey Oakland 34 32 31 7 8 33 Baltimore Norfolk Los Angeles & LB 45 42 25 27 Charleston 33 35 Savannah Total Selected West Coast 100 93 Pre-Disruption (Apr 14) Post-Disruption (Aug 15) Note: Regularly-scheduled pure container services, with weekly call frequency. Source: New Harbor Consultants analysis of BlueWater Reporting data. Labor disputes will continue to arise, particularly around contract expiration dates. Looking Forward What does the future hold? Ports operate in a highlycompetitive, capital-intensive, fixed-asset business. Life will not get any easier, as shipping lines consolidate into a small number of alliances that wield enhanced bargaining power with ports, megaships require ever-deeper channels and mightier gantry cranes, and congestion of trucks on local highways and at terminal gates demands constant infrastructure investment. Efficient planning and movement of boxes within terminals, in relation to huge peak load/ discharge volumes from new vessels, is a challenge for all US ports. Labor disputes will continue to arise, particularly around contract expiration dates. But dock labor strife has bedeviled ports on all US coasts, including the East and Gulf Coasts, which experienced issues in 2013. Legislation was introduced in the Senate in June to try to head off future port disruptions by making it easier for the President to halt port labor slowdowns as well as strikes, and allow state governors to initiate federal back-to-work injunctions. The Government Accountability Office also launched an 18-month analysis of West Coast ports service disruptions, announced in April. The East Coast ports will benefit, at the margin, from the anticipated Panama Canal expansion, due for completion in April 2016, and from harbor deepening projects to accommodate the larger vessels. Gains, though, will likely be limited to container flows between Asia and a relatively narrow band of US inland points, particularly for lowervalue and less-urgent shipments. 5
Outcome of West Coast Longshore Strife Southern California remains a large and growing regional market with massive distribution capabilities that will ensure continued container traffic growth. 6
Key Initiatives to Watch Planning considerations The West Coast ports are on the move: Shippers, meanwhile, are well-advised to bear in mind the need for port diversification and continuity planning: Los Angeles and Long Beach have taken the initiative in creating seven joint working groups, under an FMC-approved agreement earlier this year, to tackle peak operations and terminal competitiveness. Southern California remains a large and growing regional market, with massive distribution capabilities that will ensure continued container traffic growth. Oakland is expecting more longshoremen and clerks, as well as Saturday gate hours, to raise productivity and clear the remaining vessel backlog. Seattle and Tacoma are busy consummating their alliance by planning new megaship terminals, expanding on-dock intermodal rail yards and revitalizing marketing efforts. Spread cargo flows across multiple port gateways and coastal ranges Work with supply chain partners to identify alternatives, especially when disruption risk rises Cultivate ocean carriers, freight forwarders, terminal operators and Class I railroads to stay up to date on potential logistical bottlenecks and viable alternatives Arrange air freight options, if feasible, should the need arise Employ skilled logistics managers and software tools to manage supply chain operations and any needed diversions 7
About Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. The firm s 43,000 employees in more than 60 countries provide deep local and global insights that create significant value for occupiers and investors around the world. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter. About New Harbor Consultants New Harbor Consultants is an independent, multi-specialty management consulting firm. We help our clients translate their vision into positive results via clear strategies, targeted marketing, effective operations and empowered organizations. We work in selected industries where our partners bring deep knowledge, including distribution, logistics and transportation. Clients value our distinctive consulting model, using small teams of senior consultants to help address tough management issues. New Harbor is pleased to collaborate with Cushman & Wakefield s Logistics & Industrial Services on issues related to ports and associated transportation links. Learn about us at www.newharborllc.com. our Group more Bethany Bailey Managing Director, Strategy & Operations Logistics & Industrial Services, Americas Tel: +1 206 521 0236 bethany.bailey@cushwake.com cushmanwakefield.com David Bovet Managing Partner Tel: +1 978 610 6490 dbovet@newharborllc.com newharborllc.com Copyright 2015 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy.