Panama project threatens West Coast ports' lock on Asia trade

The past seven years have been interesting times at the ports of Los Angeles and Long Beach.

In October 2002, a management lockout of waterfront labor led to a 10-day shutdown during the peak shipping season. In 2004, an avalanche of Asian imports clogged the ports almost beyond recognition, creating supply chain nightmares for shippers, carriers, and retailers. For the past two years, the ports have been the battleground between local officials and the trucking industry over the constitutionality of the ports' clean air plan, a sweeping initiative that truckers see as unlawful interference in interstate commerce by a local government. And the ports have borne the brunt of the worldwide economic downturn and the sharp fall-off in Asian import traffic into the United States.

Despite high costs, regulatory burdens, and the congestion issues that have plagued the two ports, about 60 percent of all U.S. seagoing containerized traffic still moves through their gates. To many, the twin ports remain the barometer by which the health of domestic and global commerce is measured.

Now, the ports face a new challenge to their competitive position, one that could not only lead to a significant and permanent diversion of cargoes but could also have implications for the warehousing and distribution center infrastructures in the Los Angeles basin and across the nation.

The Panama Canal is in the midst of its biggest expansion since its completion in 1914. The megaproject will create a new lane of traffic along the canal by constructing two lock complexes, one on the Atlantic side and another on the Pacific side. The work also calls for the widening of existing navigational channels, excavating for access channels to the new locks, and a deepening of the channel system to about 60 feet.

The project, which is expected to double the Panama Canal's total capacity, will enable the canal to accommodate ships built to carry a maximum of 12,600 twenty-foot equivalent unit (TEU) containers, up from a ceiling of 4,400 TEUs today. According to the Panama Maritime Authority, 8.4 million TEUs will transit the canal in 2015, a sharp increase from the 6.6 million expected to move through in 2010.

More traffic routed through the Isthmus could mean less cargo entering the West Coast ports. Retailers and other importers with operations along the East and Gulf coasts may prefer an all-water routing that delivers containers to facilities relatively near their destinations and does so at a lower per-unit cost than the traditional method of offloading containers on the West Coast and moving them hundreds or even thousands of miles via rail intermodal service.

In a summer 2009 study, Jones Lang LaSalle Inc., a Chicago-based real-estate company with a supply chain practice, predicted the ports of L.A./Long Beach, Oakland, Seattle/Tacoma, and Portland would lose up to 25 percent of their existing cargo base to East and Gulf coast ports in the decades to come. JLL says traffic diversion will be caused by the expansion of the canal and escalating competition from Eastern ports seeking to leverage that expansion to attract more of the trans-Pacific container trade.

One port that appears ready to rumble is the Port of Charleston, S.C. Port officials believe the canal's expansion will put up to 2 million TEUs in play and that its 47-foot drafts at the entrance channel will be more than sufficient to handle containerships carrying up to 8,000 TEUs.

To meet anticipated demand, Charleston says it is building a container terminal at the city's former naval base that will increase container handling capacity by 50 percent. The 60-mile area around the port will gain more than 20 million square feet of production and distribution capacity over the next few years, with 3 million square feet expected to come online in 2009 alone, port officials say.

Fears overblown
Not everyone believes the canal's expansion spells big trouble for Los Angeles and Long Beach. Curtis Spencer, president of IMS Worldwide Inc., a Webster, Texas-based industrial property firm, says the ports will suffer no more than 10 percent market share erosion, a figure that includes traffic diversion of 5 percent that has already occurred since the 2005–2007 peak.

Spencer says share losses will be capped by the ports' favorable geographic proximity to Asian production centers and the ability of railroads serving the Los Angeles basin to slash intermodal rates to discourage cargo diversion.

"The Western railroads will lower their rates in an instant if they see market share erosion get to 10 percent," Spencer says. He adds, however, that the ports are unlikely to ever recapture the tonnage diverted elsewhere.

Port officials say they don't expect to lose much additional business due to the canal expansion, noting that some large retailers have already added distribution centers on the East Coast that could be fed by the canal.

"If retailers have the need to send goods all-water, they're most likely already doing so today and don't need to wait for the larger ships," says Rachel Campbell, a spokeswoman for the Port of Los Angeles.

Campbell says the lower per-unit costs of an all-water movement through an expanded canal could be offset by the higher tolls that could be imposed on operators of the larger vessels. "How much diversion occurs will still depend on rates and service times," she says.

APL, the container shipping and logistics giant, shares the same wait-and-see attitude. As spokesman Mike Zampa puts it: "Some cargo diversion is likely. But it's difficult to say what the level of activity will be."

Zampa says any shifts in tonnage will depend on market conditions, port and rail pricing strategies, and the "ability of East and Gulf coast ports to accommodate the larger vessels that will transit the Panama Canal after expansion." The ports' capability to handle the biggest of those ships remains an open question. Currently, Los Angeles/Long Beach, Norfolk, Va., and Mexico's Lázaro Cardenas are the only North American ports with drafts of 50 feet or deeper. The Port of New York & New Jersey and the Port of Mobile, Ala., have tapped the public markets for financing to pay for berth widening and deepening projects.

A ripple effect
Any shift in traffic patterns is likely to have a knock-on effect on the industrial properties that surround the nation's ports. A flurry of building during boom times has led to a glut of industrial space around seaports, according to the Jones Lang LaSalle report. The firm cites Houston, Jacksonville, Fla., and Savannah, Ga., as three of the markets where space is especially abundant.

Spencer of IMS Worldwide doesn't see much oversupply of warehousing and distribution center space around seaport facilities. However, he acknowledges that market share erosion at Los Angeles and Long Beach is likely to put pricing pressure on the facilities that surround the ports.

It appears some markets are already feeling the pressure. John Talhelm, head of JLL's Houston office, says oversupply at Houston has "shifted the leverage to the tenant," with creditworthy businesses able to negotiate perks ranging from free rent to substantial improvements to the property. In northern New Jersey, an abundance of industrial space surrounding the Port of New York & New Jersey has created "wonderful opportunities" for importers, exporters, and 3PLs seeking to snatch up prime real estate at reasonable prices, according to Stephen F. Blau, director of corporate services for NAI Mertz, an industrial property developer in Mt. Laurel, N.J.

Still, there seems to be an allure to waterfront property that has historically insulated it from market fluctuations. Blau cites the example of New York City's Manhattan waterfront, once ringed by docks and warehouses but now home to high-end residential and commercial development. "We live in a world in which yesterday's sweat shops are today's trendy loft apartments," he says. "Although the use may change, there will always be demand for waterfront properties."