A Sea Change in Ocean Shipping

by Luke Rich

The year is 2008 and the newest and largest container ship on the seas – with more than 10,000 fully loaded containers, their goods to be delivered to the Midwest and Eastern Seaboard of the United States – is setting sail from China.Which way does it go? Across the Pacific to the U.S. and Canadian West Coast ports, or through the Panama Canal to U.S. East Coast ports, or around India and through the Suez Canal, the Mediterranean and across the Atlantic to Halifax and New York?

In 2006, there are three choices, the most likely being a U.S. or Canadian West Coast port. However, they are overcrowded, so maybe the route chosen is through the Panama Canal. The last choice for today’s container ship would likely be the long trip through the Suez and across the Atlantic. In 2008, however, the Suez route may be the only choice.

What is happening to ocean shipping and why? What are the implications for existing U.S. logistics hubs, and the opportunities for other communities to capture a business they have not pursued in the past?

To borrow a phrase from Thomas Freidman’s book The Earth is Flat, there is a triple convergence happening. This article explores the trends and some of the implications of this momentous shift in global logistics for communities in the United States.¹

An explosion in world trade

Most experts agree that containerized cargo volume will nearly triple over the next 20 years. As more of the goods bought in developed nations are made in developing nations, the need to get them to market will grow rapidly. The vast majority of that growth will originate in Asia. About 4 million TEUs (twenty-foot equivalent units, the standard used for container measurement) are to be shipped this year from Shanghai’s brand new satellite container terminal at Yangshan.Within 10 years it will be 10 million TEUs. That figure takes into account the fact that some of the volume will move to places like Vietnam and Bangladesh as China’s east coast becomes a more expensive place to manufacture.

Another factor contributing to the growth in shipping volume is the movement of manufacturing to Asia from Mexico, Central and South America. North American companies that once sourced low-end consumer goods in those countries are now purchasing those goods from the Far East. While the disruption in manufacturing employment in Mexico and Central America is a challenge for those nations, Mexico, at least, is looking toward distribution as a possible mitigation of this trend – but more on that later.

Moving that freight

The current fleet of container ships has taken 30 years to be produced. Industry estimates, based on orders placed and construction commenced, are that container shipping capac- ity will increase by 50 percent in the next five years. The ships being constructed today are capable of carrying 8,000 to 10,000 TEUs and those on the drawing boards will carry up to 15,000 TEUs.

The vast majority of those ships will be too big to fit through the Panama Canal, as it can only accommodate vessels with about 3,600-TEU capacity. Even if TEUs were simply placed on a greater number of smaller ships, the Panama Canal could handle only a few more of them, as it is currently at 93 percent capacity. But why would Asian shippers not use the traditional West Coast ports of the U.S. and Canada?

Since the disastrous congestion experienced in 2004,West Coast ports have moved rapidly to address the problems. The improvements they instituted should keep congestion at bay for a few years, but “the question is not if, but when, the system becomes congested,” Doug Tilden, President of Marine Terminal Corp., told the Journal of Commerce’s Trans- Pacific Maritime conference in July of 2005. The big productivity gains achieved after 2004 have been effective; however, future gains for existing ports will be incremental. According to Tilden, the improvements that can be gained at existing ports will not be able to keep pace with the annual 4 millionper- year increase in volume of containers being added to the current annual volume of 44 million TEUs.

In addition to tight capacity, the ability of ports to handle the ships that carry those containers is limited as well. The 8,000-TEU container ships now plying the Pacific ride so deep fully laden that they cannot fit into some West Coast ports, putting increasing strain on the ports that can handle them. Furthermore, it takes up to three days to unload these ships using the fastest of cranes, which adds to wait times that now reach 14 days. Counting salaries and fuel, a ship at anchor in port costs its owners about $300,000 a week just to wait.

Big changes are underway in the West. Most experts say it will help, but not be the sole solution.

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¹Much of the data and concepts laid out in this article are based on the excellent research and publications advanced by the Atlantic Institute for Market Studies (AIMS), a Halifax, Nova Scotia-based think tank led by Dr. Brian Lee Crowley.