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Mar 30, 2015 | 09:15 GMT

7 mins read

A Labor Dispute Adds to U.S. West Coast Ports' Troubles

Labor Disputes at American Ports
( Justin Sullivan/Getty Images)
Summary

U.S. West Coast ports are emerging from prolonged contract negotiations worse for wear. More than a decade of intermittent labor negotiations, punctuated by sporadic strikes and work slowdowns, has eroded the reputation of these ports. The most recent disputes serve only to emphasize impressions of unreliability and inefficiency. Just as in any other industry, reliability factors into a business's competitiveness. However, much of the traffic that could switch to the Atlantic and Gulf coasts has already done so over the course of the past decade. Numerous factors in the supply chain beyond the ports themselves influence the decision to switch. Some of these are nuances about how supply chains and infrastructure work, but others — specifically, increased low-end manufacturing in select countries that Stratfor has identified as the PC-16 — are geopolitical. The West Coast ports will remain important gateways into the U.S. market but will lose some cargo destined for the central Midwest, where there is still competition between routes.

U.S. trade and infrastructure are in many ways global issues. The United States is one of the world's largest consumer bases, and producers around the world will rely on U.S. consumption patterns to enable growth. Unlike Europe and China, the other two major components of the international system, the United States is not in a structural decline. Rather, the U.S. economy is expected to continue growing in the coming years, which only emphasizes the country's importance as a global consumer and trade partner with any number of nations.

More than nine months of negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association contributed to massive congestion; more than 30 ships were anchored in San Pedro Bay in February because of backed-up port traffic. As a result, some retailers scrambled to switch supply chains while others coped with the financial losses from delayed shipments. The longshoremen's union will vote on approving the tentative agreement at a caucus beginning on March 30. A negative vote would further erode the reputation and reliability of the ports all along the West Coast, but the extent to which the U.S. supply chain will be altered is limited. There has already been a steady decline in traffic to U.S. Pacific ports for more than a decade. Fifty percent of container imports were handled on the West Coast in 2002, but by 2013 that share had fallen to 43.5 percent. The market share that remains up for grabs is the central portion of the country, including the metropolises of Chicago, St. Louis, Atlanta, Dallas, Columbus, Nashville and Indianapolis.

Choosing a Supply Chain Route

Each shipper will decide which supply chain offers the greatest financial benefit based on several factors, including the specific product, final destination and benefit of timeliness. The subsequent discussion focuses on the larger subset of container shipping. A survey conducted by American Shipper in late January and early February, during the latest contract dispute, indicated that on average responding shippers plan to move 20 percent of the trade volume that currently uses U.S. West Coast ports to the Atlantic or Gulf coasts.

Although there is inherent bias in a survey conducted during work stoppages or slowdowns, some traffic is likely to switch routes permanently, especially in the central United States, where numerous supply chain routes compete with each other. But alternative routes have their own capacity limitations and will have to invest accordingly to attract additional traffic. Congestion at the Los Angeles/Long Beach port complex, the largest container port in the United States, stems from more than just prolonged negotiations. A shortage of chassis — a piece of equipment used to move the containers — is often cited as one of the main contributors to congestion at the port. Eastern ports are not immune to such issues, either. The recent surge in traffic during the contract negotiations seems to have been a factor in congestion at New York/New Jersey and Virginia ports, indicating the difficulties of sudden changes in supply chains. However, industry insiders have been impressed by the Port of Savannah's foresight and ability to deal with the growth well, indicating that such ports would likely fare better handling permanent shifts in trade volume.

But supply chains go beyond ports, which is ultimately why U.S. West Coast ports will remain relevant. Once the containers leave the port, there are numerous other points along the route between coming off the ship and store shelf that contribute to competition.

Supply Chains and Rail Development in North America

The U.S. intermodal supply chain relies on a series of fragmented rail corridors that serve all major metropolitan areas, though not contiguously. While the rail physically connects the country from coast to coast and almost everywhere in between, the landscape shapes how cargo moves and where the connections exist. The corridors are routes that are optimized to handle specific trade patterns. For example, the TransCon Corridor has one terminus at Los Angeles/Long Beach and serves Chicago, Memphis and Dallas, while the Heartland Corridor has one end at the Port of Virginia and the other in Chicago, with service to Columbus along the way. Class I railways are private organizations, and investments have been made or are being made on nearly all of the main corridors to ensure efficiency and competitiveness in the future. Distribution centers placed along transport routes then service a retail customer base. As some imports destined for the Midwest move to new points of entry, investment in new distribution centers will be necessary.

U.S. Retail Distribution Centers

Costs incurred from rails, trucks, inventory and drayage (the short movement of goods as part of a longer trip) all factor into the calculations made in choosing a supply chain route. The port is only one consideration.

The Panama Canal and the PC-16

The Panama Canal expansion project will be complete within the next year, opening the isthmus to the transit of larger ships. This has long been considered a boon for the same Atlantic and Gulf ports that are poised to benefit from the loss of trust in ports on the West Coast. But the Panama Canal could have its own issues — specifically, there are concerns that the piloting method will cause additional congestion or even be hazardous, though many in the industry consider this claim to be a pilot's bargaining tactic. Furthermore, there will still be ships that are either too large for many ports on the Atlantic and Gulf coasts to handle or are too large to transverse the expanded canal. As competition increases for traffic destined for the Midwest, West Coast ports will continue to benefit as ports of call for giant container ships that are unable to enter the canal. Moreover, container imports to the United States are expected to increase in terms of total volume. This means that although the West Coast is losing some of its share of port traffic, the amount of port traffic is growing, and the West Coast will be able to reap some of the benefits of this growth.

Many ports and supply chain infrastructure elements in the United States are ill-prepared for some of the coming changes in supply chain logistics. Thus, the ports on the Pacific Coast will retain some advantages in many interior markets in terms of sheer cost. This is especially true as U.S. infrastructure spending fails to keep up with repair and growth needs and as regulations, such as recent and upcoming rules for trucking safety and low-sulfur fuel requirements for ships, increase transport costs. Adding distance to trips is becoming more expensive than it was in the past.

Perhaps the biggest factor in the reduction of traffic at West Coast ports would be any further shift in manufacturing away from China. All water routes to the Atlantic and Gulf coast ports — whether through the Panama Canal or Suez Canal — are more competitive with the West Coast when goods originate from South Asia and parts of Southeast Asia, including Vietnam, Cambodia, southern China and India. As wages continue to rise in China and more goods are manufactured in other locations — a process already underway — the Atlantic and Gulf coasts will see more traffic.

The March 30 vote on the tentative labor agreement will be vital for short-term supply chain decisions. A failure to approve the tentative agreement could result in a renewed work stoppage or slowdowns. But in the long run, union efficiency and reliability are only a part of several factors in determining retailers' supply chains. U.S. East Coast port traffic will likely increase in the coming years, a trend that has been in motion for more than a decade. West Coast rail corridors will continue to invest to maintain competitiveness with alternative routes that are investing in their own ability to attract traffic, and eastern routes will have their own congestion issues to deal with. There will be a shift, but a significant number of shippers simply have no other option but to use West Coast ports. Ultimately, economic factors beyond the labor unions — such as low-cost manufacturing centers moving away from China — will dictate the change in port traffic more than the ongoing labor disputes on the U.S. Pacific Coast.

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