Keeping its head above water

If vocal cadence is evidence of a person's demeanor, J. Christopher Lytle, executive director of the giant Port of Long Beach, is a calm customer. Lytle's even-handed replies to a reporter's phone queries about his port's relevance suggest the temperament of a man not likely to lose his head even if everyone else around him does.

That's a good thing, because Lytle is running the 102-year-old port, the nation's second busiest, at a time of unprecedented change in North America's competitive seafaring landscape. To the north, the Port of Prince Rupert in British Columbia has positioned itself as the fastest way to deliver goods from Asian manufacturing centers to consuming markets in the U.S. Midwest and mid-South. Prince Rupert officials claim that goods arriving there can reach Chicago three days faster than if they were routed through Long Beach.

To further enhance Prince Rupert's geographic advantages, Canadian National Railway Inc., which provides rail service linking the port to the U.S. heartland, has been aggressively cutting freight rates on service to Chicago and Memphis, according to David Howland, vice president of land services for third-party logistics giant APL Logistics.

To the south on Mexico's Pacific Coast lies the Port of Lázaro Cárdenas, located within hailing distance of Houston and Kansas City. Lázaro Cárdenas holds itself out as a cost-effective alternative to Long Beach and its big sister, the adjacent Port of Los Angeles, especially in serving the vast Texas market. Lázaro Cárdenas's lone container terminal handled 1.2 million twenty-foot equivalent unit containers, or TEUs, in 2012 and currently has enough capacity to process 2.2 million TEUs a year. The port plans to build a second container terminal that will increase overall TEU capacity to 3.4 million by 2015 and 6.5 million by 2020.

Though Lázaro Cárdenas is closer in rail miles to key Texas points than is Long Beach, the substandard track conditions in Mexico have always been a drag on transit times. However, due to track improvements by Kansas City Southern, the exclusive rail provider between the port and the U.S., transit times to Texas through the center of Mexico are now about the same as they are from Long Beach, according to Howland. Shippers and beneficial cargo owners (BCOs) using Lázaro Cárdenas realize savings from the shorter distance in rail miles as well as the lower operating costs at the Mexican port, he said.

Further south and to the east of Lázaro Cárdenas is the well-publicized Panama Canal expansion project, set for completion in 2015. The widened and deepened passage will accommodate the "megaships"—vessels capable of carrying up to 12,500 TEUs—seen as the future workhorses of global trade. It has also fueled a multiyear debate as to whether an all-water route through the canal to the East and Gulf coasts will be more cost-effective for U.S. importers than having their goods offloaded on the West Coast and trucked or railed inland.

Jones Lang LaSalle, a Chicago-based logistics and industrial services giant, caused a stir in mid-2009 when it predicted the canal's expansion would result in West Coast ports' losing up to 25 percent of their existing traffic base to eastern rivals over the next few decades. The firm still stands by that projection, said John Carver, director of port, airport and global infrastructure, in a February interview.

Besides the growing competition from Canada and Mexico, there are the "doing business" issues like cost, congestion, and labor that Lytle wakes up to every day. Shippers and carriers have grown accustomed to the expensive and crowded conditions that are part of life in Southern California. They've also coped with three labor-related disturbances at Long Beach in the past decade, the latest being an eight-day strike late last year by a clerical workers unit that curtailed operations at Long Beach and effectively shuttered Los Angeles after union dockworkers honored the picket lines.

Carver said users of the twin ports face a myriad of obstacles that seem to coalesce into one big and constant headache. As a result, they have been searching for alternatives, he said.

Cathy Burrow, global transportation manager for Kansas City-based Hallmark Cards, said Hallmark today uses Long Beach and Los Angeles for about 60 percent of its waterborne imports from Asia. The other 40 percent transits through the Panama Canal to the East and Gulf coasts. About 10 years ago, 90 percent of Hallmark's imports entered through the West Coast. Hallmark imports about 10,000 TEUs a year.

Burrow said Hallmark diversified its import gateways because the many challenges at the Southern California ports threatened the reliability of the company's supply chain. "We knew we had to create more consistent leadtimes for our inventory in order to do a better job of managing it," she said.

Burrow said she has toured Lázaro Cárdenas, but as of now, Hallmark doesn't ship through the port. "It's on our watch list," she said.

DEFENDING THE CASTLE
In a mid-February interview with DC Velocity, Lytle said that Prince Rupert and Lázaro Cárdenas represent "critical threats" to Long Beach and acknowledged that shippers and beneficial cargo owners have more choices than ever before. Yet he believes Long Beach remains the prime location for those seeking to get international cargoes from Asia to their destinations in a cost-effective manner.

In Lytle's view, no other North American port provides shippers and BCOs with so many options to get their goods to multiple U.S. markets. "You need a gateway that gives you the ability to get to other inland destinations," he said. In a jab at Prince Rupert, Lytle added, "there's a lot more to goods movement than the ocean transit times and to get to Chicago."

Long Beach has 96 weekly ship calls—about 19 of those being containerships—and operates 60 train departures a week. It is also surrounded by a population of between 25 million and 40 million, and one of the world's great distribution rings: the so-called "Inland Empire" directly east of Los Angeles. The Inland Empire is home to 1.7 billion square feet of warehouse and distribution center space, and currently has a 2-percent vacancy rate.

Lytle said the port is in the second year of a multibillion dollar program to upgrade its facilities. It is spending $1 billion to expand and improve its on-dock rail capabilities. It is nearly two years into a nine-year, $1.2 billion project known as the "Middle Harbor" container terminal, designed to renovate and combine two aging container terminals into one modern facility. Last April, Hong Kong-based ship line Orient Overseas Container Line (OOCL) signed a 40-year, $4.6 billion lease to be the terminal's sole occupant. It is the largest deal of its kind in seaport history, according to the port. The terminal will also have the most sophisticated IT system ever installed at any port, according to Lytle.

Lytle said the U.S. supply chain is undergoing a subtle yet profound change that bodes well for both Southern California ports. About three-quarters of all containerized imports entering Long Beach are bound for points outside the region. However, fewer containers are being loaded on intermodal trains at the port for direct transit to markets like Chicago. Instead, more shipments are being trucked to a DC in the Inland Empire, where they are eventually transferred from a 40-foot ocean container to a 53-foot domestic box for delivery to a local DC, and then onward distribution to the store or the customer.

As this trend intensifies, it will be a boon to a port like Long Beach that enjoys direct access to a leading distribution network, Lytle said.

Howland said Long Beach and Los Angeles benefit from the economies of scale afforded by their geography. It is very cost-effective to build full truckloads at the ports, deliver goods locally in the Southern California region, and continue on with cargo to interior points in the U.S. Southwest and Midwest, Howland said. The ability to commingle local and regional shipments is a value proposition that's "very hard for any other port to match," he said.

As for competition from an expanded Panama Canal, Lytle seems unconcerned. Every week, Long Beach handles ships with a 13,500-TEU carrying capacity, vessels too wide to transit through even an expanded canal. "People ask me all the time if we're afraid of the canal taking our business," he said. "The answer is no."