Bill Mongelluzzo, March 1, 2015, JOC.com
Cargo interests undoubtedly are relieved that the International Longshore and Warehouse Union and the Pacific Maritime Association reached a tentative contract deal on Feb. 20 after more than nine months of unexpectedly difficult negotiations, but now it’s time for importers and exporters to reassess their commitment to West Coast ports.
Many of these same shippers struggled through the 2002 contract negotiations, which were marked by ILWU work slowdowns and a 10-day employer lockout of the union. Back then, some of the retailers and larger importers said they would never again be held hostage by a militant waterfront union and a hard-nosed employers’ group that held their cargo hostage for weeks at a time.
Indeed, the 2002 contract negotiations were the trigger for importers with a national presence to establish large import warehouses and distribution centers close to ports in New Jersey, Virginia, South Carolina and Georgia. East Coast ports gained market share at the expense of West Coast ports.
Also since 2002, the Port of Prince Rupert, British Columbia, opened a container terminal with direct intermodal service to Chicago provided by Canadian National Railway, and Port Metro Vancouver also took market share from West Coast ports with intermodal rail service to Chicago.
In 2012, however, coastwide contract negotiations between the International Longshoremen’s Association and United States Maritime Alliance on the East and Gulf coasts also turned into a contentious affair marked by work stoppages and federal mediation. East Coast ports’ reputation took a hit as contract negotiations dragged into 2013, and some cargo that had been diverted from the West Coast ports after 2002 returned there.
East Coast ports sustained another blow in the frigid, icy winter of 2013-14, when marine terminals, truckers and intermodal rail services suffered through one of the worst winters on record for freight movement.
Although these labor and weather events were disruptive for importers and exporters, the long-term decisions as to how their supply chain logisticians route freight in the future will be influenced in large part by several factors: cost, infrastructure, and port and labor reliability. In a survey published on Feb. 25, 65 percent of shippers surveyed by JOC.com said they plan to divert cargo away from the West Coast, nearly an identical percentage as those who responsed to the same question in December.
Shipping lines in the Asia-U.S. trade, the nation’s largest, have determined that most of the cargo they carry will be shipped on vessels capable of carrying 8,000 to 14,000 20-foot containers. According to maritime research firm Alphaliner, carriers during the three-year period ending Dec. 31, 2016, will have taken delivery of 285 ships into their global fleets, with capacities exceeding 7,500 TEUs each.
Those large vessels already dominate the trans-Pacific trade to the West Coast. Furthermore, West Coast ports generally have the deep water, relatively large container terminals and extensive intermodal rail infrastructure needed to accommodate the big ships and the vessel-sharing alliances that operate the vessels.
West Coast ports also have a robust warehouse and distribution network. Southern California boasts 1.5 billion square feet of industrial space within about 50 miles of Los Angeles-Long Beach. The second-largest industrial real estate hub is Chicago, with slightly more than 1 billion square feet, and West Coast ports are the logistical choice for most shipments to Chicago.
East Coast ports are spending billions of dollars to develop the infrastructure necessary to handle the big ships. All of the major load centers there will be able to handle 10,000-TEU vessels and larger fully laden within a few years. Vessels of 9,000 TEUs already are calling at those ports on some services via the Suez Canal routes from Asia.
The big game changer will occur in early 2016 when the Panama Canal expansion project is completed and vessels of up to 13,000-TEU capacity can transit the canal. The Panama Canal route is considered superior to the Suez route for shipments originating in northern Asia, especially China.
Big ships will be the workhorses in most of the U.S. trades in the future because, compared to a 4,800-TEU Panamax ship, the 8,000- to 13,000-TEU ships offer slot-cost reductions of 47 to 60 percent, according to Alphaliner. Shipping containers on a large vessel can reduce costs by $300 to $400 per 40-foot container compared to a Panamax ship.
West Coast ports handle about 48 percent of the total U.S. container trade. That’s down from 50 percent as recently as 2007, according to PIERS, the data division of JOC Group. When 2014 numbers are released, the West Coast is likely to show further deterioration in market share.
More than 60 percent of the containers moving through West Coast ports are considered discretionary, meaning they can move through any number of ports. Because two-thirds of the U.S. population lives east of the Mississippi River, ports on the East and Gulf coasts come to mind first as the beneficiaries of cargo diversions from the West Coast.
But East Coast ports currently don’t have the capacity or inland infrastructure to handle a double-digit diversion of cargo from the West Coast. That 40 to 50 vessels have been anchored off the West Coast for the past three months, rather than going directly to the East Coast, demonstrates that East Coast ports were operating close to their limits.
Therefore, the damage caused to West Coast ports by this second round of unexpected and unnecessary labor disruptions in the past 12 years will probably be in the single digits, although that still will mean tens of thousands of lost man-hours for members of the ILWU.
The logical question to be asked, then, is, “For what?” The tentative contract calls for a 14 percent wage increase over the five-year life of the contract, on top of average earnings for full-time longshoremen that the PMA lists at $147,000 a year. Employers would have offered that wage increase, and probably more, on day one of the negotiations last May if they thought it would have produced a contract agreement. Pensions will top out at about $90,000 a year. Employers will continue to pay 100 percent of the premiums in the ILWU medical plan, and longshoremen will pay only $1 co-pay for medicine.
The PMA also gave in to the ILWU’s demand that longshoremen inspect and repair chassis before they leave the marine terminals. The only exceptions, according to the PMA, are terminals that have contracts with the International Association of Machinists, and chassis that are owned by truckers.
Chassis issues could be an Achilles’ heel in the proposed contract because the PMA’s member carriers no longer own most of the chassis. They are owned by chassis-leasing companies that aren’t members of the PMA. Therefore, legal challenges are possible. Did the PMA give to the ILWU jurisdiction that wasn’t the PMA’s to give?
The chassis jurisdiction issue also could play a prominent role in the next ILA contract negotiations on the East Coast in 2018. Because chassis-leasing companies now own the vast majority of the chassis used at all U.S. ports, will they choose to go to war with the longshore unions to protect their right to maintain and repair chassis at their own facilities, or will they absorb the higher costs involved in ILWU and ILA chassis maintenance and repair in order to keep peace with the unions?
The issue that for weeks held up a successful conclusion to the negotiations was a late ILWU demand that the union and the PMA be able to unilaterally fire an area arbitrator, even though those arbitrators are approved by both parties. The PMA said the ILWU wanted to fire the arbitrators in Southern and Northern California because they occasionally ruled against the union.
Arbitrators play a key role in resolving the hundreds of labor-management disputes and health and safety claims that arise each year at West Coast ports. The absence of the arbitration process when the ILWU refused to extend its previous contract on July 1 dealt a heavy blow to West Coast ports in the latest round of negotiations. When crane productivity in Seattle, Tacoma and Oakland plunged by more than 40 percent in late October, and the ILWU in Los Angeles-Long Beach slashed its dispatch of skilled yard crane operators by 60 percent, employers were defenseless because the grievance machinery expired with the previous contract.
The ILWU denied it engaged in illegal work slowdowns, but when the tentative contract was approved on Feb. 20, the grievance and arbitration process was reinstated, and productivity immediately returned to normal levels. Longshoremen in Oakland that weekend tested the process, and the area arbitrator ruled that Local 10 was engaging in an illegal work stoppage and the “hard-timing” was over in less than a day.
All of these issues surrounding the arbitration process sent a chill down the spine of importers and exporters. The ILWU had proved again that without a fair and impartial grievance machinery in place, longshoremen had no qualms about engaging in job actions that delayed the delivery of cargo by weeks.
Does the same fate await cargo interests in 2019 when the next contract negotiations are held? Conversely, will the PMA and ILWU use the next five years to begin working on a new contract that reflects the realities of ocean shipping in the 21st century?
Terminal operators on the West Coast are systematically replacing facilities designed to handle 5,000-TEU ships with terminals that can handle the 18,000-TEU ships already operating in the Asia-Europe trade. These modern facilities will fail to do the job, though, if current work practices and abuses of health and safety claims don’t reflect the reality that even a temporary disruption in the handling of today’s big ships is enough to disrupt supply chains for weeks.
Reliability of the marine terminal and labor force, rather than freight rates and speed to market, will therefore be the main forces that dictate cargo routing in the years ahead.