NEW BALANCE OF POWER?

The past two years have seen a radical change in the distribution of container trades serving North American markets. What will the position look like when (and if) the market stabilises?

Andrew

Penfold

surveys the issues

With comprehensive data now available for 2022, total container port volumes for North America (the US and Canada but excluding Mexico) reached 66.3m TEU. This represents a decline of around 1.4 per cent over 2021. The Covid and post-Covid complications make it difficult to determine underlying trends in demand, but several points nevertheless emerge:

4 Demand growth was slow in pre-COVID-19 2019 at just 1.4 per cent – way below the long-term average.

4 As was to be expected, demand contracted in 2020 as economies around the world slowed.

4 There was a massive expansion of 13.4 per cent in 2021 as latent demand bounced back.

The development of demand since 2015 by seaboard is summarised in Table 1.

It’s very difficult to see what is going from the past three years of data, but what is clear is that some long-term trends are underway and that these are likely to be reasserted in the short to medium future.

When analysing the North American market as a whole it’s clear that the centre of demand gravity is the Midwest –although significant local coastal markets, particularly in California and the northern Atlantic markets, are also very important. When serving the USA it is the overall costs of container delivery (shipping + port + inland delivery) that is the key driver of market share.

Within these costs the inland component is usually the key determinant of route choice. Changes in these cost structures are the driver of a port’s competitive position and its relative demand.

Some History

The development of demand since 2000 is summarised here. In addition to the pace of demand growth over the period, several points need to be noted.

In the 2000s the market share of the southern West Coast – especially California – recorded steady growth, with this representing a continuation of a trend funded by the shift towards Chinese demand and the effectiveness of low-cost double stack intermodalism. However, the market share of these ports has been falling since 2010 – with a decline in share from 37.5 per cent to just 32.7 per cent in 2022. This decline was to some degree offset by an increase in market share for Canadian ports as volumes at both Vancouver and Prince Rupert increased with greater penetration of the US Midwest markets.

The major beneficiary of these trends has been the East Coast. The share of northern ports has recovered significantly – primarily driven by New York/New Jersey – but it has been the southern region of the Atlantic market that has been the clear winner. Market share for these ports – Virginia and south – have increased from 21.4 per cent in 2010 to 26.2 per cent last year. See Figure 1.

WHY HAS THIS HAPPENED?

This has been the result of the interaction of several trends:

4 The development of the Panama Canal is a key driver. With 15,000TEU+ vessels able to transit the new locks since 2016, the shipping cost driver for East Coast ports has been reworked. The linking of large vessels with key Atlantic gateway ports allows a highly cost-effective option for the Midwest. This is a trend that still has further to develop.

4 The costs of shipping via the West Coast have consistently increased. Detailed data is scarce but it is widely known that stevedoring charges in San Pedro (Los Angeles/Long Beach) are regularly around 10 per cent higher than for New York and around 15 per cent more than in the southern Atlantic ports – a significant difference. Intermodal charges have also increased despite competitive pressures. There is little sign of any change in either sector of the cost chain. The repeated periods of uncertainty with the ILWU/PMA negotiations will directly impact long term decisions on distribution centre and transload locations. The tide is going out for the West Coast.

4 Covid uncertainties caused a reappraisal of established priorities. The port delays were far worse on the West Coast and equipment inventory difficulties came to a head during the panic peaks in freight rates noted last year. None of this inspired confidence for long term strategic investments.

4 Superimposed on all this have been geopolitical shifts. The reliance on the Chinese imports model may well be broken for good. If the Pacific trades are to increasingly emphasise south-east Asian suppliers or Indian sources, then the East Coast via Suez route looks competitive. If Korea and Japan increase share, then the Pacific Northwest – especially Canadian ports – become a very good option.

The compounding of all these factors means that established West Coast Interests must look very carefully at their actions if the golden goose is not to be (at least) pensioned-off!

New Alternatives

At the same time as this shift, we are also seeing increased emphasis on other routeings. The Gulf Coast has been a neglected aspect of continental distribution for some time. The former limitations of the Panama Canal and the diversion costs for Gulf calls have long limited demand in this sector with Houston being the major exception with its local oil economy-driven markets driving volatile year-on year developments in containerised goods flows.

As the new Panama Canal dimensions have asserted themselves the combined market share of the US Gulf Coast ports has increased from 6.3 per cent in 2015 to 7.7 per cent in 2022. As port capacity improvements accelerate and larger vessels are deployed this market share can only increase. The long-neglected potential of the Mississippi as a potentially low-cost gateway to the Midwest will also see demand accelerated via these ports.

Another major feature of the North American container trades has been their imbalance, with the emphasis on imported consumer goods there has been a massive and continuing problem of repositioning empty boxes. Equipment inventory issues were one of the major problems driving the delay crisis of 2021-2022. San Pedro ports have seen empty container moves account for around 37 per cent of all demand in recent years, with similar levels recorded in New York.

As lines seek to lower overall transport costs by looking for backhaul opportunities the Pacific Northwest and Gulf

Coasts offer far more in the way of potential cargoes. This will be a further driver in modifying continental demand patterns.

WHAT WILL BE THE NEW NORMAL?

So how will all of these complex factors play out? It seems that there will be at least a significant modification of the China model, with other Asian suppliers coming forward. At the same time, the relative cost inefficiencies of the major California ports and their intermodal connections will see further declines in market share. Also influential, the boost noted in the southern Atlantic ports can only increase, with the Gulf ports also moving ahead in terms of market share –albeit at the margin.

The North American market is massive and will remain the dominant import zone of the world economy. Given the volumes involved, even marginal shifts in market shares will have farreaching impacts and port investment will follow this trend.

Investment Implications

There is a real requirement for accelerated capacity investments in these regions. This will be focused on additional berths and equipment but also require improved water depth and expanded intermodal connections.

These investments are now coming forward. The real drag on development has been (and will continue to be) the timelag between identifying demand and delivering new capacity. The example of Vancouver is highly pertinent here.

The expansion of Roberts Bank for further capacity has been under discussion for (at least) 20 years and remains as controversial as ever. It would be a very brave man who would bet on when containers will actually move through the proposed terminal. We are also seeing delays in Gulf port projects, although not to the same extent.

There is a contradiction between economic realities and vested interests. These factors will delay progress but –eventually – comparative cost and macro-factors will drive the market, as has happed in some ports such as Savannah and Virginia where real progress has been made.