Analyst calls further diversion of import cargo to East Coast ports "unlikely"

A long-time intermodal analyst said the days of diverting inbound trans-Pacific ocean freight from West Coast to East Coast ports have come to an end because shippers are finding they save little money in return for accepting longer voyage times to Eastern ports.

The opening of the expanded Panama Canal, slated for 2014, has been expected to siphon away Asian import traffic from West Coast to East and Gulf Coast ports, as larger vessels carrying more containers would be able to transit the Isthmus of Panama on an all-water route to East Coast destinations. In 2009, real estate and logistics giant Jones Lang LaSalle raised eyebrows when it forecast that the expanded canal could result in West Coast ports' losing as much as one-quarter of their current traffic base to East and Gulf Coast ports in the decades to come.

However, Ted Prince, who runs his own transportation-consulting firm in Richmond, Va., said on Friday that the unfavorable economies of scale for shippers argue against any further meaningful diversion from west to east.

"Our belief is that for most shippers, the decision to route over the East Coast has already been made and that further diversions are unlikely," Prince said in a webcast sponsored by investment firm Stifel, Nicolaus & Co.

As an example of the comparative transit times, Prince cited an all-water routing from Shenzhen, China, to Columbus, Ohio, a U.S. market considered susceptible to diversion to East Coast ports. Prince estimated that in an environment of "slow steaming," where vessels reduce their speeds to save fuel, it takes 20 days to move freight from Shenzhen to Columbus over the West Coast, with 15 days spent on the water and an additional five days to get to Columbus. By contrast, it takes an estimated 28 days for the same shipment to arrive at Columbus over an East Coast port, with 25 days of voyage time and three more days spent in inland transportation, Prince said.

Yet Prince estimates that the typical shipper would save only $100 per forty-foot equivalent unit if it opted for the longer East Coast trip. For most shippers, such meager savings represent an unacceptable trade-off, Prince said.

"It's just not a very good deal," he said.

The beneficiaries of an East Coast routing would instead be the steamship lines, which would reap much greater gains than their customers would because of less-expensive rail pricing from the East Coast versus rail rates off of the West Coast, Prince said. However, vessel operators would be loath to pass along those savings to shippers by dramatically lowering their East Coast sailing rates for fear of cutting too deeply into their own profit margins, Prince said.

"Topsy-turvy" economics
Prince and another intermodal industry veteran, Tom Finkbiner, have formed a consultancy called Surface Intermodal Solutions LLC. In the webcast, Finkbiner said the "slow steaming" practice would become the rule for vessel operators as long as bunker fuel prices stay at current elevated levels or go higher.

Finkbiner estimates that with bunker fuel prices at today's levels of about $700 per ton, slow steaming will reduce the cost of operating an 8,000-TEU (twenty-foot equivalent unit) vessel by about $425 per 20-foot container.

The executive said fuel has replaced the purchase or lease of equipment as the single biggest cost driver for intermodal users. The industry's economics have "gone topsy-turvy with fuel prices" at current levels, Finkbiner said.

Finkbiner, who serves as senior chairman of the board of directors at the University of Denver's Intermodal Transportation Institute, downplayed the role of a harbor's draft depth in an importer's port selection process, saying a port's access to rail connections, its wharf capacity, and its attitude toward importers are more important factors.

For example, Georgia's Port of Savannah offers access to two major Eastern rail lines, CSX Corp. and Norfolk Southern Corp., and has built large warehouses near the port to attract importers as well as vessel operators. Not surprisingly, Finkbiner said, Savannah's share of East Coast traffic has risen to 13 percent today from 5 percent 20 years ago.

"Savannah has grown by focusing on the actual importers rather than the lines," he said.

Savannah's qualities will stand it in good stead as increasingly larger containerships ply the ocean trades and cut back on the number of U.S. ports they visit. Finkbiner said the mega-containerships will likely call on two West Coast ports and two East Coast ports, one in the North Atlantic and the other in the South Atlantic.