West-Coast Port Fiasco Does ‘Permanent, Irrevocable Damage’
by Wolf Richter, Wolf Street
The labor dispute that wreaked havoc on West Coast ports and on shippers for months was tentatively settled on February 20. By then, it was too late.
Cargo had been delayed for weeks. Perishable goods with sell-by dates were stuck in refrigerated containers somewhere. Companies around the country spent endless working hours to keep the supply chain from collapsing. Cargo was shipped by air at a big additional cost. Demurrage charges and other costs piled up. Manufacturers, like Honda, ran out of parts and had to cut production…. It was a fiasco shippers won’t forget.
Growers in the Central Valley of California, when they want to export their produce to Asia, don’t have a choice. Shipping these goods across the country to ports on the East Coast or the Gulf or to Canada is too costly and takes too long. Other companies have the same problem. They’re captive customers of the West Coast ports. But not every company has that problem.
There is the near-term impact.
“Damage to the first quarter is done, and there’s nothing we can do about it,” Journal of Commerce economist Mario Moreno told the annual TPM Conference in Long Beach.
In January, the volume of US containerized imports was down 10% from a year ago. West Coast ports, which handled about 54% of the imports last year, weighed heavily. For instance, at the Port of Los Angeles, volume plunged 28%, at the Port of Oakland 32%!
And February, Moreno said, doesn’t look a lot better. It will drag down the whole year, with total US containerized imports inching up a crummy 1.7% in 2015, rather than the 6% he’d projected earlier.
Exports look even crummier. It’s not just the West-Coast port problems, but also the strong dollar and, worse, lackluster demand in Asia and Europe that are expected to drag down total US containerized exports by 4.4%, Moreno said. It would be the second year in a row of declines.
Exports add to GDP. Goosing exports is how everyone in the world wants to fix their economies, in a zero-sum game. But it’ll be tough for the US.
Industry analysts and port executives project it might take another two to three months to clear out the backlog. According to the JOC, “The congestion is so severe that it will tax the ability of marine terminals, longshore labor, truck drivers, and equipment providers to clear out the backlogs while attempting to handle new vessel arrivals each week.”
Then there is the long-term damage.
“Completely unnecessary and completely man-made” congestion has caused “permanent and irrevocable damage,” explained Adam Hall, senior director international logistics at Dollar General, which ranked 33rd on the 2013 JOC Top 100 Importers list. “The reason I say that is that we have figured out better ways to move our cargo that don’t involve the West Coast.”
Dollar General will shift more of its Asian imports from its centers in Southern California to its centers near Savannah, Georgia. “We have a bicoastal strategy that enables us to move back and forth,” he said. Shipping from Asia via the West Coast is faster and cheaper than the southern route via the Panama Canal, but reliability is more important than speed for some cargo, Hall said. “We will not be married to any one port.”
The biggest shippers – importers in the import-dependent US – such as Wal-Mart, Home Depot, and Target, use the so-called four-corner strategy with facilities at the northern and southern ports on the West Coast, the East Coast, and the Gulf. They’re not married to one port either.
And the fiasco has taught even smaller companies to look for alternatives to West-Coast ports.
In a JOC survey of 138 shippers, 65.4% said they would reroute cargo to avoid West Coast ports this year and in 2016. Of those, 22.7% said they’d reroute 10-30% of their cargo, 11% said they’d reroute 31-50%, and 9.5% said they’d reroute over 50%. In other words, over 20% of the shippers said they’d reroute over 31% of their cargo to avoid West Coast ports!
That’s a lot of business that will be lost.
And shippers will source some of their merchandise closer to the US, or even in the US, to avoid the eternal “cycle” of labor disputes, said Steve Wolfe, VP of global supply chain and logistics at Stanley Furniture.
“Not only is it getting old, it’s more and more disruptive and raising costs to the point that bringing manufacturing back may end up being break-even, though it’s probably commodity specific,” he said in his survey response. “Our company is certainly beginning to look for alternatives as well as many of my peers in various commodity segments.”
This is good news for parts of the US, including ports on the East Coast and the Gulf Coast, and for ports in Canada, and it may be good news for manufacturing if it pans out. But its bad news for West-Coast ports and the industries that have sprung up around them, and for warehouse facilities, truckers, railroads, etc. that are focused on the West Coast.
It comes on top of the expansion of the Panama Canal – to be completed no later than next year – that will allow even larger vessels to squeeze through, which would bring down shipping costs of the southern route and make it more competitive with truckers and railroads in the US.
This is what happens when the two sides in a dispute hold the already struggling economy of an entire nation hostage to further their own goals. They played a sordid blame game in the media here for months. Every time an article on the port congestion appeared, it seemed to contain propaganda from one side that the propagandists at the other side fiercely denied by issuing their own propaganda. The idea was to eke out an advantage by holding a big gun to the nation’s head.
But the gun backfired. It caused permanent damage to all involved, for the benefit of the same sectors in other parts of the country, in Canada, and even in Panama. And now the whole world marvels how such a convoluted, spread-out, French-like disruption of commerce by a small number of actors could happen in the US.
Americans are borrowing like never before to buy cars. The industry is already dreaming about new all-time highs. Auto lending to subprime customers has soared. But now the spigot is getting turned off.