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Canal expansion sets up battle of the ports

For the first time since its completion a century ago, the Panama Canal is being widened, setting up a long and costly battle among U.S. ports for the business of handling supersized container ships filled with goods from Asia.

When the project is completed in 2015, ports on the East Coast and Gulf Coast will be able to compete for business that until now has been dominated by West Coast ports. 

At stake are thousands of jobs and billions of dollars in federal and local investment.

The case of the MSC Fabiola — a hulking mass of steel and containers nearly as long as the Empire State Building is high — illustrates what those stakes are.

When the Fabiola pulled into the Port of Long Beach on a foggy Friday morning this spring after a 13-day trip across the Pacific Ocean from China,  it was a major event, although it received little attention.  The ship's arrival marked the first time in history that a ship of its size had docked at a U.S. port.

Khalid Bachkar, a professor at the California Maritime Academy, said the shipping industry is shifting toward megaships. “This is the new trend,” he said.

 Massive vessels like the Fabiola carry two to four times the number of containers as older vessels, which means fewer trips for shipping companies and bigger savings for manufacturers and importers.

What happens in the future of the shipping industry will affect millions of working Americans, as well as the economies of states throughout the country — with the strongest consequences affecting California.

The Fabiola represents the highly competitive, highly secretive and highly lucrative business of international shipping. Ocean-faring transport companies such as the Fabiola’s Mediterranean Shipping Company constantly seek to establish themselves as a shipper’s best choice for moving a product from Point A to Point B. The battles they wage on land and sea can ripple out to affect secondary industries across an entire continent.

The thousands of points they travel between are called ports of entry. The United States has 329 official land, sea and air ports that compete with one another — just like the shippers — for their piece of a market valued annually in the trillions of dollars.

The West Coast has reaped the benefits of container traffic in the U.S. since the mid-1990s,  led in no small part by California’s giant neighboring ports of Los Angeles and Long Beach. Ports on the East and Gulf coasts, with their more limited water depths and rail connections, haven’t been able to keep pace.

Yet a development occurring now in the heart of Central America will crack this solid foundation in a few short years — as it once did in 1914 — affecting global trade routes and the economies of states and countries worldwide.

The Panama Canal

On Oct. 22, 2006, Panamanian voters across the country voted overwhelmingly to approve a plan presented by then-President Martin Torrijos for expanding their canal.

Such a plan had been undertaken before. In 1939, the U.S. began construction on a new set of locks that would have allowed for larger ships to pass through the canal — which connects the Atlantic Ocean and the Pacific Ocean.  The outbreak of World War II brought a halt to those construction efforts, and it wasn’t until Sept. 3, 2007— after the vote and approval — that the work began once again.

An estimated $5.25 billion is now being spent to deepen and widen the Panama Canal’s Pacific and Atlantic entrance channels, to raise the water level of Gatun Lake — through which all ships must pass — and to install new locks on both sides of the waterway. It’s due to open in April 2015.  

The project is a response to a problem.

The canal is reaching its maximum capacity. It’s carrying more traffic than it was designed for and is unable to handle the Fabiolas of the world. Termed “post-Panamax” vessels, these huge ships carry more than a quarter of the world’s containerized maritime shipments.

Today, cargo crossing the Pacific bound for the Midwest and Eastern United States must offload at a U.S. Pacific Coast port if the ship carrying it is too large to pass through the canal’s 50-mile waterway. These goods are then routed across the country using the U.S. “land bridge,” the network of highways and railways linking East and West.

Once the widened canal is navigable, many megaships will no longer need the land bridge. Instead, they will pass through the canal’s wider locks to offload their cargo at a Gulf or East coast port, such as Houston, New Orleans or New York.

“Trade will shift,” Bachkar said. “Instead of coming to the West Coast, it will go directly to the East Coast and on to Europe.”

These eastern ports are hoping the canal expansion will signal the end of an era — the end of the so-called West Coast Empire.  Ports such as Savannah, Ga., New Orleans, Houston and New York City are preparing for this change by pouring billions of dollars over the next few years into infrastructure development, while the ports of the West Coast walk a fine line between confidence and caution in the face of what may be the single largest threat to their livelihoods ever.

“The West Coast has done well with Asian trade over the last 30 years,” said Port of New Orleans spokesman Matt Gresham. “This will make things more competitive.”

And in an industry where one port can generate billions of dollars in state and local tax revenues and affect the lives of more than 3 million industry-related employees throughout the U.S., any change is a big deal.

The stakes

Despite experiencing the worst recession in modern times, U.S. trade has not only recovered since 2008, but has reached record levels. According to an analysis of trade data from the U.S. Census Bureau’s Foreign Trade Division, the values of both U.S. imports and exports in 2011 were higher than any year in history — $2.21 trillion and $1.48 trillion, respectively.

This does not appear to be an aberration. Even the most conservative of analytical forecasts show trade activity — and therefore port activity — booming in the near future. The U.S. Department of Transportation’s Maritime Administration expects port container traffic to double by 2020 and triple by 2030. The effects of this increase in trade will inevitably trickle down, creating millions of jobs and billions in tax revenues for states throughout the country.

“Ports are the heart of logistics,” Bachkar said. “There are many direct and indirect jobs associated with the activity of the port.”

“You’re talking about shippers," he explained, “you’re talking about freight, you’re talking about brokers, you’re talking about banks, you’re talking about warehouses — and all those stakeholders are related to the activity of the port.”

For example, the Port of Los Angeles generates 919,000 regional jobs and $39.1 billion in wages and tax revenues each year, according to the port’s marketing division.

The Port of New Orleans claims around 380,000 jobs and $37 billion in national economic output are related to cargo passing through the port each year.

The Port of Houston, according to a 2006 economic impact study, reported that more than 785,000 jobs in Texas and nearly $118 billion of annual statewide economic activity were in some way related to cargo moving through the port.

With numbers like those, it’s not hard to understand why port authorities and their respective boards are scrambling to prepare for the potential economic windfall from the Panama Canal expansion.

But the amount of cargo and the ports to which it will be shipped pose multimillion-dollar questions — and they’re questions causing a flurry of speculation among ports and billions of dollars in spending.

The first line of “Shifting Trade Routes” —  an internal Port of New Orleans PowerPoint presentation from Jan. 19, 2012 — is a simple, declarative statement:

“Know that Panama Canal will have an impact.”

The rest of the presentation is an attempt to figure out exactly what that the impact will be, and whether the port’s current plan to spend more than $1 billion in short- and long-term projects is justified.

New Orleans, along with other ports on the Gulf Coast and East Coast, is heavily invested in what’s coming. With more than $10 billion in development projects planned ahead of the Panama Canal expansion, ports from Houston to Boston are busy lobbying Congress for federal funding while digging deep into their own pockets.

It makes perfect sense for the ports on the Gulf Coast and East Coast ports seize this opportunity to secure federal dollars. It makes even more sense when the ports’ district-level data is analyzed.

An analysis of Foreign Trade Division data shows that between 2010 and 2011, 13 of the top 20 fastest-growing port districts in terms of the overall value of imports were either a Gulf Coast or East Coast district. Not one of the remaining seven is located on the West Coast.

To be fair, none of the districts compare to Los Angeles in terms of overall volume — which accounts for around 40 percent of all the container traffic in the country.

Similarly, 12 out of the top 20 fast-growing districts in terms of overall value of exports during that same time period were either a Gulf or East coast district.  Only one of the remaining eight districts was on the West Coast; that was Seattle.

The Panama Canal Authority, noticing the potential for increased traffic from Asia, has entered into 22 separate formal alliances with ports along the Gulf Coast andthe  East Coast  — and only one on the West Coast — the Port of Long Beach. 

Kraig Jondle, the director of business and trade development at the Port of Los Angeles, said these alliances “are not anything that’s obligatory to anybody,” adding that they are “merely public relations.

Other factors appear to favor the shift to the east as well. These include greater land availability for retailers looking for warehouse space and less contentious labor organizations like the International Longshore and Warehouse Union — a West Coast union that, after bringing West Coast shipping to a halt in 2002 over a labor dispute, is widely cited as the reason importers have shifted to a “four-corner strategy,” according to Aaron Hunt, the director of corporate relations and media for Union Pacific Railroad.

Jonathan Gold, vice president of the National Retail Federation — the world’s largest retail association — agreed that the 2002 labor dispute caused many shippers to sit back and reevaluate their strategies, “so they’re not stuck using one port,” he said.

But he doesn’t think the expansion will have an immediate effect

“I don’t think that there are (companies) making immediate changes to their supply chains,” he said.  “I think it’s going to take some time for the issues to work out.”

“You’ve got some serious dredging issues for East Coast ports,” he said.

East Coast problems

The process of dredging is an expensive and time-consuming undertaking, and one that East Coast and Gulf Coast ports must deal with if they hope to accommodate the newer, massive ships that will pass through the Panama Canal.

At the Port of Los Angeles, Jondle said that this is a key area where West Coast ports excel.

“If you’re not at 53 feet, or at least 50 or more,” he said, “then you’re going to be really challenged in staying competitive in the port industry.”

As of July 2012, only the East Coast ports of Norfolk, Va., and Baltimore can handle the post-Panamax vessels.

The Port Authority of New York and New Jersey has initiated plans to raise the Bayonne Bridge — which connects Staten Island with New Jersey — 64 feet to allow passage of post-Panamax vessels into the ports. As of today, the Fabiola wouldn’t clear it.

This is a source of pride for Los Angeles and Long Beach.

“We are far ahead of other ports when it comes to being in a position to handle bigger ships,” said Jondle,

Bigger ships

The MSC Fabiola isn’t a solitary giant. It has three identical sister ships — the Faustina, the Fillippa and the Filomena — all owned by MSC.

Ships of this size are expected to carry more than half of the world’s containers by December 2015, according to fleet forecasts from Alphaliner, a Singapore-based company that monitors shipping data.

Bachkar says using these bigger ships is a more economically efficient and environmentally friendly option than transporting the same number of containers on smaller ships.

“This is a very, very competitive industry,” Bachkar said.

“You have to be well-prepared, you have to do your homework pretty well, and you have to predict the future.”

And inevitably, in the prediction business, someone is going to be wrong.

Kraig Jondle — seated in a conference room in the Port of Los Angeles’ administration building — is a master of his craft. One of Jondle’s jobs right now is to reduce any Panama-related apprehensions that current and potential port customers may have

He treads a fine line between downplaying and overstating the significance of the widening of the canal.

“The Panama Canal is really good for this country — we need the Panama Canal,” he said. “We’re not out to destroy the Panama Canal by any means.”

“But certainly,” he continued, “we will do all we can to defend the cargo that comes today to the port. We don’t want that to go to the East Coast.”

“In Southern California, out to Las Vegas and down to Phoenix, there is a 50-million-person population that these ports feed into,” Jondle said. “You’re always going to have that base of cargo here, and when people want to talk about the Panama Canal, they want to talk about discretionary cargo … bound for Kansas City, Chicago, Columbus, Memphis …”

Los Angeles will spend approximately $1.2 billion on capital improvement projects over the next five years, including the expansion of terminals and the development of hundreds of acres for maritime use. The Port of Long Beach will invest nearly $4.5 billion during the next decade. 

However, Jondle admits that despite all of Los Angeles’ advantages, the port will lose some business in 2015.

“There’s been several studies done,” he said. “They range from showing the Port of L.A. losing 25 percent to the Port of L.A. losing 1 percent. So it’s such a broad perspective that we decided let’s stay on the side and let’s fortify our customers … . Let’s expand, let’s build, and that will keep people here, overall.”

Peter Hall, a professor at Vancouver’s Simon Fraser University and an expert on port cities, believes that the truth of the matter “is probably somewhere in the middle."

“I don’t think there’s any reason to think that all of the cargo that’s currently coming to the West Coast is going to suddenly follow (the Panama Canal) route,” he said.

But, “if there was solid evidence that (the shift) was happening,” he said, “there’d be some kind of response from those (West Coast) ports very quickly.”

Gresham at the Port of New Orleans, and many others at ports across the U.S., believe that despite the coasts’ battles for trade, overall, the Panama Canal expansion is a good thing.

But who benefits most from the canal's expansion will, according to Hall,  "be a result of how these guys play the game.”   

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