Bill Mongelluzzo, April 18, 2014, Journal of Commerce
The Port of Tacoma has five container terminals handling international cargo, and CEO John Wolfe says that is too many terminals given the port’s annual container volume.
Marine terminal consolidation in Tacoma over the next three to five years is inevitable, but how that will happen exactly is still very much up in the air, Wolfe said. What he can say for sure is that when the consolidation effort is completed, Tacoma will have fewer but larger terminals.
Thirty miles up I-5 at the Port of Seattle, the situation is not much different. Its terminal operators are also looking at opportunities for consolidation, said CEO Tay Yoshitani. “One thing we can say now, as this process is beginning, is that when it is completed, things will look different,” Yoshitani said.
With the Puget Sound region struggling to compete against Canada and Southern California, there is growing talk of regional consolidation. The Federal Maritime Commission recently approved an agreement whereby the two ports will share information, while Yoshitani told a local radio station WNCN last week, “Nothing is off the table. The shipping lines are consolidating to form alliances, and it might be worthwhile for the ports to look at it.”
The Puget Sound ports face a problem that all West Coast ports are dealing with today.
The larger alliances being formed by the ocean carriers to reduce operating costs result in fewer but larger vessels, and the vessel calls are occurring at fewer terminals. For the ports of Seattle and Tacoma, this translates to marine terminal utilization of less than 50 percent of total capacity, and just 38 percent currently at Seattle, according to the WNCN report.
While there will inevitably be winners and losers among terminals, some terminal operators support consolidation, seeing it as a way to end the cycle of terminal operators being in a dangerous rate-cutting war to attract business from the powerful carrier alliances, a scenario that has played out elsewhere, including at New York-New Jersey.
“The terminal operators are killing each other by quoting rates that are way below costs, just to reduce their losses,” said Ed DeNike, chief operating officer at SSA Marine, which operates two container terminals at Seattle.
If overcapacity in the Pacific Northwest sounds familiar, it is because shipping lines are in the same fix, facing overcapacity that analysts say will last through 2015 at the earliest. According to Alphaliner, carriers by the end of 2016 will introduce into their global fleets 285 new, fuel-efficient vessels with capacities ranging from 7,500 to 19,000 TEUs. Global vessel capacity each year will increase about 7 percent, while demand is projected to increase about 5 percent per year, Alphaliner said.
Overcapacity on the water starts the vicious cycle: Retailers leverage their freight volumes to get even lower rates from the carriers — as many are doing in the current frenzy to sign 2013-2014 service contracts that will likely result in lower rates for many shippers compared to last year. Pressure on freight rates and the need for carriers to respond by cutting their own costs have driven the formation of mega-alliances like the G6, P3 Network and CKYHE, which enable the shipping lines to leverage their cargo volumes to force down marine terminal rates. This in turn leads terminals to petition ports to lower lease rates.
For the Puget Sound ports, they are waging war on two fronts for market share. They are losing market share to Los Angeles and Long Beach to the south and to Vancouver and Prince Rupert, Canada, to the north.
According to port-published data collected by the JOC, Seattle-Tacoma’s share of the North American West Coast containerized shipping market dropped to 11.7 percent in 2013 from 12.6 percent in 2011, while the market share of Vancouver-Prince Rupert increased to 14.8 percent last year from 13.5 percent in 2011. The market share of Los Angeles-Long Beach dropped to 62.7 percent in 2012 from 63.7 percent in 2011, but rebounded in 2013 back to 63.7 percent.
Growth in the Los Angeles-Long Beach gateway is carrier-driven. The lines have introduced a number of strings of 8,000-TEU to 14,000-TEU ships into their Pacific Southwest services, and they are pricing those services aggressively to maximize the savings inherent in the big ships. The result is that discretionary intermodal cargo that could theoretically move through any of several gateways is moving through Los Angeles-Long Beach.
Competition from Canada is driven mostly by the Canadian railroads, which are pricing their intermodal services through Prince Rupert and Vancouver into the U.S. market much more aggressively than the U.S. railroads are pricing their intermodal services through Seattle-Tacoma to the Midwest.
Seattle and Tacoma therefore face a quandary. With a couple of exceptions, their container terminals are old and small.
Tacoma has the ability in a physical sense to merge facilities into fewer but larger terminals better suited for today’s mega-ships, but modernizing those terminals will be costly.
Seattle’s two largest facilities, Terminal 5 at 172 acres, and Terminal 18, at 196 acres, are each underutilized, and they could do some rearranging within their facilities to optimize cargo-handling potential, Yoshitani said. Seattle, like Tacoma, must spend millions of dollars to purchase post-Panamax cranes, and to reinforce foundations so they can support heavier cranes and cargo loads.
The Catch-22 in pulling off the consolidation is that the ports will not invest in facility upgrades unless the terminals commit to more container volume, but carriers will not commit to bringing higher volumes to Puget Sound terminals while their services to Southern California are underutilized.
On the other hand, carriers will continue to introduce bigger ships, and these vessels require larger, more modern terminals than most of the facilities Seattle and Tacoma can currently offer. If the ports don’t invest in larger, modern terminals, the ships won’t come.
“Every port must make a decision — will we accommodate large ships, or we will not?” Yoshitani said. While investing in larger terminals when there is already too much capacity sounds contradictory, it is not. “We must invest strategically,” Wolfe said.
Wolfe envisions a scenario similar to what unfolded last summer in Oakland. APL and Total Terminals International were losing money, so they exited the port. SSA, which operated a terminal adjacent to those two, combined the three smaller facilities into one 350-acre terminal.
However, Tacoma, like other West Coast ports, is a landlord port, so it has limited options to force its private-sector terminal operators to merge or form joint ventures. The port authority can work closely with its terminal operators and adjust its lease rates to make it more attractive for the companies to consolidate operations.
Glen Eddy, director of APM Terminals’ Tacoma terminal, said terminal operators are receptive to such discussions because they are not making money, and they are finding it increasingly difficult to increase their business in a competitive environment where powerful carrier alliances are calling the shots.
APMT, which is part of the Maersk Group, is a prime example of the problem terminals face. Horizon Lines is the main tenant at the Tacoma facility, but APMT’s sister company, Maersk Line, which is much larger than Horizon, calls with its alliance partners at Terminal 18 in Seattle.
Terminal operators that wish to cooperate with each other have a variety of options. They can merge, they can sell their operations to a competitor, or they can form a joint operating venture. “We are open to just about everything,” Eddy said.
The ports of Tacoma and Seattle are doing what they can to foster greater cooperation with each other and with the terminal operators. The discussion agreement approved by the Federal Maritime Commission will allow the ports to discuss such issues. In a separate filing, Seattle and its terminal operators formed a discussion agreement. Both filings have been approved.
The port directors said it is too early to say what will develop from the discussion agreements, but the agreements will certainly allow the two Washington ports to work more closely on inland infrastructure projects that will benefit the region.
“Absolutely,” Yoshitani said. In fact, U.S. Sen. Patty Murray, D-Wash., has told the ports that when it comes to attracting federal assistance for transportation projects, a regional approach is invariably more effective than if each port goes it alone, he said.
The ports of Seattle and Tacoma view this period as a time of transition. Carriers are figuring out what they must do to survive and prosper in an environment dominated by mega-vessels, mega-alliances and a relentless drive to be cost-competitive, especially versus the largest carriers, like Maersk and CMA CGM, whose profits last year showed the advantages of scale. Carriers are selling assets, including chassis and marine terminals, expanding alliances and choosing those ports and terminals that will best serve their interests.
Seattle and Tacoma know there will always be a role for their ports because the Puget Sound is a wealthy region of 4.1 million people, and some retailers use the ports as part of “four-corner” supply chain logistics strategy that includes the Pacific Northwest, Southern California, the South Atlantic and New York-New Jersey.
The biggest challenge the Puget Sound ports face is to develop a regional strategic plan that best utilizes their deep water and efficient intermodal rail assets in such a way that the ports and their tenants all prosper. “A simple, efficient model where it is easy to do business is our sweet spot,” Wolfe said.