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U.S. Ports Need Investment to Handle Growing Volume of Cargo Traffic
The Washington Diplomat / October 2014

By Larry Luxner

From Norfolk on Virginia’s Chesapeake Bay to New Orleans on the Gulf Coast and Seattle in the Pacific Northwest, U.S. ports are handling record cargo volumes — with international trade now accounting for more than a quarter of the nation’s GDP.

Yet seaport operators and their private-sector partners, who together plan to invest $46 billion over the next five years in port infrastructure, complain that the federal government isn’t upholding its end of the deal.

“We as a nation have been resting on our laurels for years,” warned Kurt Nagle, president of the American Association of Port Authorities (AAPA), based in Alexandria, Va. “Our roads, bridges and tunnels are in deteriorating condition. We’re not even adequately maintaining our channels to the depth and width they’re supposed to be, much less investing to improve them to be able to accommodate the larger vessels that are comng in the near future.”

Panama, Brazil, China and Canada are all outspending the United States on a per-capita basis when it comes to port expenditures, he said.

“We are lagging behind,” Nagle told The Washington Diplomat. “On the water side, it’s the responsibility of the U.S. Army Corps of Engineers to maintain the navigational channels leading into and out of our ports. But this has been woefully underfunded for many years, and it’s been getting progressively worse.”

Barely half of the $1.7 billion raised by the federal harbor maintenance tax is actually used for maintenance, he said — a situation he hopes will improve with the recent enactment of the Water Resources Reform & Development Act, signed into law by President Obama last June. Among other things, WRRDA gives a green light to 34 water infrastructure projects across the country, including one to deepen Boston Harbor and another to enlarge the Port of Savannah.

“Canada has established a very focused program to improve its freight transportation infrastructure to serve North America,” said the AAPA chief. “What need to do here in the U.S. is develop our own national freight transportation policy and strategic plan that will enable us to compete internationally.”

He noted that the American Society of Civil Engineers recently gave a C grade to U.S. seaport infrastructure, “primarily due to the generally poor condition of the connections into and out of U.S. seaports, and the knowledge that the nation’s growing trade volumes will exceed the capacity of current port-related infrastructure.”

In 2013, U.S. ports handled just over 44.5 million twenty-foot equivalent units (TEUs) of containerized cargo, up from 43.7 million in 2012 and 42.7 million in 2011, according AAPA statistics. The peak year for traffic was 2007 — right before the U.S. economy tanked — when just over 45 million TEUs of goods passed through U.S. ports.

Even so, the amount of containerized cargo has doubled since 1994, when U.S. ports handled 20.5 million TEUs. Growth over the last year has been particularly strong in Philadelphia, which saw traffic jump by 34.5 percent in 2013, Long Beach (up 11.3 percent), Tacoma (up 9.8 percent) and Charleston (up 5.7 percent).

The busiest Pacific ports, in descending order, are Los Angeles, Long Beach, Oakland, Tacoma and Seattle, while on the East Coast, volumes are highest at New York/New Jersey, Savannah, Norfolk and Charleston. Along the Gulf Coast, Houston is the cargo leader, and San Juan — which falls under U.S. jurisdiction since Puerto Rico is an American commonwealth — is the leading Caribbean port (see chart and map).

The twin ports of Los Angeles and Long Beach alone account for 32.8 percent of all containerized cargo moving by ocean in or out of the United States, while the Port of New York/New Jersey handles another 12.3 percent of the total.

“For a long time, ports like ours have been advocating for a greater percentage of the harbor maintenance tax that’s collected. It’s always frustrated us that we collect far more money than we’ve been allowed to use,” said Rick Larrabee, director of port commerce at the Port Authority of New York & New Jersey.

Larrabee estimated that his agency was allowed to retain only $15 million of the $160 million it took in last year from that tax.

“We’re considered a donor port, in that other ports don’t collect as much money but get to keep a higher percentage,” he said, estimating annual port revenues at around $250 million. However, with passage of WRRDA, that percentage should rise incrementally until by 2023, ports will get back 100 percent of all collected taxes in federal funds to be used for actual dredging and other harbor maintenance.

Despite cargo volumes falling by 1 percent in 2013 to around 5.47 million TEUs, Larrabee said business is up by 3 to 4 percent this year.

“Ships are getting larger and larger,” he said, explaining that ocean carriers can slash the cost of moving an individual container by 25 percent simply by doubling the size of the vessel that container moves on.

“A port like New York traditionally sees ships with capacities of 4,500 to 5,500 TEUs. Now we’re seeing ships twice that size, so now instead of a ship coming in and exchanging 2,000 to 3,000 boxes, it’s offloading and reloading 5,000 to 6,000. That ship — which now costs an operator substantially more to operate — is interested in getting in and out of port as quickly as possible.”

In addition, he said, “because of increased [labor] costs in China, manufacturing is beginning to migrate west to Malaysia, Vietnam and Pakistan. If a ship is leaving that part of the world, its best route to the U.S. is west to the Mediterranean and the Suez Canal, as opposed to the Panama Canal. Some of that is already visible in the supply chain.”

Yet one of the biggest impediments keeping post-Panamax containerships from calling on Larrabee’s port is the Bayonne Bridge, which links New Jersey to Staten Island. The bridge — completed in 1931 — is the fourth longest steel arch bridge in the world, but the roadway itself sits only 151 feet above the water. That prevents huge vessels from crossing under it to reach Port Newark, Port Elizabeth and Staten Island’s Howland Hook marine terminals.

To address the problem, the port authority recently authorized a $1.29 billion project to raise the bridge by 64 feet to a height of 215 feet. Work is already underway and the massive overhaul should be completed by 2016, said Larrabee.

“That’s a critical factor for us,” he said. “We’re limited to ships carrying 9,500 TEUs because of the depth of the water, but it’s the air draft on the Bayonne Bridge that’s a bigger issue. Until the bridge is raised, a big ship is not going to come to the East Coast and make just one or two port calls. They want to make at least three calls to justify the big ships, otherwise it’s not economically viable for them. Once that bridge is raised, we’re going to see an influx of those larger ships.”

In 2010, the Virginia Port Authority — with operations in Norfolk, Portsmouth and elsewhere in the Hampton Roads area — acquired the rights to one of the world’s most modern, technically advanced container terminals when it signed a 20-year lease with APM Terminals, a Dutch consortium that runs 50 container facilities in 34 countries.

“Last year turned out to be the best year on record, and we think we’re going to break that record in 2014,” VPA spokesman Joe Harris told The Diplomat. “Companies are using the Port of Virginia because of the service they get here.”

Harris said the improving economy has boosted traffic by 7.8 percent this year compared to 2013, when Norfolk handled 2.22 million TEUs. That makes it third among all U.S. East Coast ports in container traffic, outranked only by New York/New Jersey and Savannah, Ga.

“If Virginia is the vessel’s first stop on the East Coast, it will arrive fully laden and take advantage of our 50 feet of water. It will also leave fully laden. These companies can maximize their vessels by loading them heavy. If it goes into a shallower harbor, you can’t fill at as much. Companies are using this port because of the service they get here.”

Norfolk’s biggest rivals are New York — because of that city’s excellent rail connections — and to a lesser extent Charleston and Savannah. The port of Baltimore is less of a competitor because of the extra 12 hours to sail up Chesapeake Bay, whereas Norfolk is only 18 miles from open water.

Norfolk plays a vital role in supporting the growth of distribution centers throughout Virginia. These include everything from Dollar Tree stores in Chesapeake to the Home Shopping Network in Roanoke. Other major users of the port: Walmart, Food Lion, Sara Lee Coffee & Tea Co., Target, Hanes, Volvo and Stanley Furniture.

The 285-acre port complex handles mainly agricultural cargo, raw materials and recyclables. It generates $41 billion a year in economic impact for Virginia’s 8.2 million inhabitants as well as 343,000 jobs (or 9 percent of the state’s workforce), according to a 2006 study by the College of William & Mary’s Mason School of Business.

“The biggest issue affecting all ports is whether we, as a nation, have the necessary infrastructure to handle the growth. Our volumes are at record levels, and all the ports are extremely busy,” he said, hinting that the $5.25 billion expansion and widening of the Panama Canal, now nearing completion, won’t have as big an impact on business as some industry experts have suggested.

“There’s been a misperception that as soon as the Panama Canal expansion opens, a flood of huge ships is going to inundate the East Coast,” Harris said. “The expansion was supposed to have finished awhile ago. They did not, and nobody’s suffering for it. I don’t think it’s going to be the game-changer people think it’ll be. The canal expansion will benefit some ports, but it’ll take time for that to mature.”

He added that VPA hasn’t invested heavily in capital or equipment lately, but rather in technology, because it already had what it needed. “Some of our equipment was mothballed during the really difficult years,” he said, referring to the recession that began in 2008 and sent cargo volumes plummeting nationwide as consumer spending dropped.

Yet when it comes to “difficult years,” perhaps no port has seen worse times than New Orleans. In 2005, Hurricane Katrina caused $283 million worth of damage at the port alone, destroying one-third of its infrastructure. But like the city itself, the port rebounded, seeing containerized cargo traffic double between 2009 and 2011.

“Over the last 20 years, ships have gotten much bigger, more than doubling in volume from 5,500 to around 13,000 TEUs. So everybody has to make themselves ready,” said Gary LaGrange, port president and CEO since 2001.

To that end, LaGrange’s agency has authorized a $300 million project to deepen the channel from its current 45-foot depth (with a two-foot overcut) to 50 feet. A recent study showed that the cost-benefit ratio would be 89.4 to one, meaning that every dollar spent on the project — whether by the federal government or the state of Louisiana — would yield $89.40 in benefits. Some 90 percent of that dredging activity will take place right at the mouth of the Mississippi River.

All told, more than $1 billion has been invested in the port, said LaGrange.

Latin America accounts for 60 percent of all imports and exports going through the Port of New Orleans. Volumes will ramp up significantly with the announcement earlier this year by Chiquita that the banana giant will return to New Orleans following its merger with Irish conglomerate Fyffes. That means a jump of 50,000 to 78,000 TEUs of bananas, translating into a 15 percent increase in overall containerized traffic per year.

Besides bananas, other commodities are arriving in increasing numbers from Central America including coffee and low-priced textiles manufactured in maquila plants. In 2004, when the port opened its container terminal, annual capacity has jumped from 366,000 TEUs to 640,000 today. By the end of 2015, that’ll be up to 840,000 TEUs.

“The future of this area is our export business in chemicals,” he said. “Last year, Louisiana had $81 billion in foreign direct investment in our chemical plants alone. Those companies are beefing up because everybody in the industry recognizes the low cost of natural gas here in Louisiana, and the industry is projecting that market to continue for at least another 10 to 15 years.”

In April, TCI Plastics announced it would build a 500,000-square-foot logistics facility at the port — a $36.5 million capital investment that would create 340 direct and indirect jobs and translate into an additional 12,000 to 24,000 TEUs of cargo volume. The project, unveiled by Louisiana Gov. Bobby Jindal and CEO Jack Jensen of Jensen Companies — TCI’s parent firm — will increase TCI’s ability to package and ship PVC resin and polyethylene while adding the manufacturing capability of producing plastic film onsite to package the products.

“We have 92 chemical companies located between New Orleans and Baton Rouge, producing polymers, resins and plastic pellets. That cargo has been going in bulk to Houston, but now it’ll be coming to New Orleans,” said LaGrange. “Since Katrina, we’ve taken an area that used to be utilized for other things and retrofitted it as an international logistics center, which means we’re putting people here to work.”

New Orleans already boasts one of the lowest unemployment rates in the nation. At present, 5,000 people work at the port, of which 280 are Port Authority employees.

But it’s not all containerized traffic in and out of the Big Easy.

“Breakbulk cargo has proliferated this year,” said LaGrange. “We are the largest single U.S. importer of non-ferrous metals like copper and zinc, and the fifth-largest importer of plywood. We’re also the largest importer of raw rubber and the top exporter of poultry, and we have the largest blast freezing facilities in the Northern Hemisphere.”

Of the 50 states, none depends on international trade more than Washington. In 2011, exports came to $64.6 billion, meaning that 40 percent of jobs in that state are tied to international trade. Washington is a top national producer of at least 10 commodities including apples, pears, sweet cherries, potatoes, onions, red raspberries, hay and hops. It also exports more fish than any other state in the nation.

Last year, the Port of Seattle exported $3.2 billion in agricultural products and $4.1 billion in non-agricultural products (including paper, logs, lumber, cellulose, iron, steel, frozen fish and plastics).

“This speaks to the economy of the Pacific Northwest. This is why it’s one of the hottest economies in the United States,” said port spokesman Peter McGraw. “We’ve got high-tech. We’ve got manufacturing. We’ve got resource-intensive industries. And we’re able to do all of this because we have a deep-water port, access to class-one railroads and a world-class airport.”

China is the source of 65 percent of the value of goods shipped into Seattle, as well as the destination of 30 percent of the goods exported from Seattle. The port’s other top trade partners include Japan, South Korea, Vietnam and Malaysia.

The Port of Seattle employs 1,700 people and operates on an annual budget of $900 million. Around 33,000 people work on the waterfront, with a yearly payroll of $3 billion. Along with nearby Tacoma, the two ports provide direct and indirect jobs for 200,000 people in Washington state. Seattle is also the main gateway for passenger cruises to Alaska, a growing industry that pumps hundreds of millions of dollars into local businesses (see related story).

McGraw said four of Seattle’s container terminals — T-18, T-30 and T-46 — can already handle super post-Panamax ships. A fourth terminal, T-5, is now being upgraded at a cost of $200 million so that it, too, will have the capacity to load and unload these giant new vessels now coming onstream.

Over the last decade, Seattle has spent a total of $1.2 billion on container terminal infrastructure. But in 2013, the port handled 1.57 million TEUs, down 16.5 percent from 2012 figures. A big chunk of that drop, he said, had to do with the decision by the Grand Alliance (consisting of NYK, OOCL, Hapag-Lloyd and Zim) to switch operations to Tacoma. But it also has to do with competition from Canada, he said.

“In the past 10 years, U.S. Pacific Northwest ports have lost 10 percent of their market share to Canadian and southern California ports. When Prince Rupert [north of Vancouver] came online in 2007, the market share for West Coast ports took a nosedive.”

The reason: Canada’s multibillion-dollar investment in its own seaports, railroads and highways, as well as the lack of a tax similar to the U.S. harbor maintenance tax.

“Our concern is the fact that boxes coming into Seattle get charged an average $109, and they don’t get charged that at Canadian ports. Our two senators have introduced legislation that seeks to level that playing field,” McGraw said. “Prince Rupert has flourished at the expense of our growth. This has been going on for some time, but with all this cargo being diverted, it’s already happening. That’s our big competitive threat here, and it could mean the loss of thousands of jobs in the Pacific Northwest.”

He added: “We’re not as concerned about the Panama Canal as much as Canada’s national freight strategy. I think the U.S. should have one too, even if it means spending billions of dollars in infrastructure upgrades.”

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