Category Archives: Shipping

Maybe We Have Too Much Infrastructure

Not far from where I used to live, in New Jersey, a light rail line rumbles between Newark Penn Station and the much smaller Broad Street Station, on the other side of downtown. This line, about a mile long, opened in 2006, and it cost more than $200 million to build. It was projected to serve 13,300 riders a day by 2015. Actual ridership, though, is just a few hundred. You won’t have trouble finding a seat.

The Broad Street extension is an example of a problem people don’t much like to talk about: misguided infrastructure spending. We constantly hear complaints about inadequate infrastructure, from the archaic main terminal at LaGuardia to the all-day traffic jams at Chicago Circle, and armies of consultants roam the world helping justify yet more projects. The truth, though, is that a great deal of our existing infrastructure is poorly used, and taxpayers often are on the hook for new projects that don’t produce the expected returns.

This isn’t just an American problem. Last week, I was in Europe, where there has been massive investment in container ports to handle the extremely large vessels now coming on line. These ships carry the equivalent of 9,000 truck-size containers, and to accommodate them ports are deepening their channels, lengthening their wharves, expanding their storage areas, and installing bigger cranes. Every port wants the mega-ships to call. The ship lines that own these vessels, though, don’t want to stop in every port; they want their ships to spend as little time in port as possible. Moreover, as these giant ships replace smaller vessels, most ports will see fewer containerships, not more. The bottom line: Europe’s ports now have far more container-handling capacity than required. That overcapacity increases the ship lines’ ability to play one port off against another to force port charges down, making it even harder for port operators to recover the cost of their investments and increasing the likelihood that taxpayers will be forced to pay up.

Container ports are not the only place where there’s excess infrastructure. In the United States, several relatively new toll roads are attracting far less traffic than projected. Pittsburgh airport demolished one of its concourses after passenger numbers plummeted, and the near-empty terminals at Kansas City airport can be spooky. Japan’s high-speed trains are wonderful–but while some carry extremely heavy traffic, others appear to be rather underutilized. There seems to be a surplus of convention centers almost everywhere, and the world is full of stadiums that receive only occasional use.

So while there may be many places where today’s infrastructure is inadequate, claims of an infrastructure crisis deserve careful scrutiny. Often enough, users of infrastructure, such as transportation companies or sports teams, want governments to bear the risk of building facilities that the private sector may, or may not, choose to use. Governments have a hard time saying no to such demands: what politician wants to face accusations that his or her inaction caused a business to leave town? But building too much infrastructure may well leave tomorrow’s taxpayers facing the bill for today’s mistakes.

The Panama Canal’s Next Century

This month marks the hundredth anniversary of the Panama Canal. Work on a major expansion is in full swing. If all goes well, deeper channels and a third set of locks, wider, longer, and deeper than the two constructed in the early 1900s, will enable larger ships to cross the isthmus by the end of 2016. As I saw on a recent visit, the $6 billion or so being spent on canal construction and the billions more going to build a new metro system are fueling an economic boom. Yet as Panamanians celebrate the canal’s centennial, concerns about the future are not far below the surface. The canal’s next century may be a challenging one.
To start with, it’s no sure bet that enough ships will use the enlarged canal to cover the cost of construction. The expansion was conceived at a time when world trade was growing about 7 percent per year, as it had done since the aftermath of World War II. But the growth of trade has slowed considerably since economic crisis arrived in 2008, meaning that there will be far fewer ships passing through the expanded canal than its promoters envisioned. In addition, a growing number of manufacturers are concluding that Mexico is a better location from which to serve the North American market than Asia. While many ships carrying Japanese-made cars to the U.S. East Coast transit the Panama Canal, Japanese models produced in Mexico will move to U.S. and Canadian dealers by road or rail.
Then there is the matter of competition. For many decades, the Panama Canal had no competition. Starting in the 1970s, large volumes of cargo bound for the East Coast began moving through West Coast ports, and the water/rail route became a direct competitor to the canal’s all-water route. More recently, some ocean carriers have been moving cargo between Asia and the U.S. East Coast via the Suez Canal, which can accommodate larger vessels than the Panama Canal. According to some estimates, more than one-third of the container traffic between Asia and the East Coast now moves through Suez rather than Panama, a shift encouraged by steep increases in Panama Canal tolls. And now there is serious discussion of a Chinese-backed canal through Nicaragua. While it seems unlikely that such a canal could be completed by 2019, as its promoters promise, a Nicaraguan canal could siphon off Panama’s traffic at some point in the next decade.
How will Panama respond? One possibility would be to cut tolls. The Panama Canal Authority has yet to disclose how much vessels will have to pay to transit the enlarged canal, but comparatively low rates could draw carriers back from the Suez route and also make life hard for the sponsors of the costly Nicaragua project. Trouble is, lower tolls could squeeze the Panamanian government, which receives a large share of the Canal Authority’s profits.
Another option would be to give ship lines inducements to use the canal. The canal is now 100 percent owned by the government, and selling shares to ship operators seems to be out of the question for political reasons. Nor are there discussions about offering bargains to carriers that would sign contracts guaranteeing to use the canal; the Canal Authority has never done this. But the Canal Authority is toying with the idea of offering volume discounts, so that carriers moving large amounts of cargo through the canal would enjoy lower tolls per unit of cargo. This concept involves some complications. For example, many carriers participate in alliances in which they book blocks of space on other carriers’ ships in addition to running their own vessels, and it would have to be decided which cargo would count in determining the volume discount. But volume discounts might be a way to tie some ship operators more closely to Panama and to discourage them from using a competitive routing.
It is the third response, though, that seems most promising. Manufacturers are making increasing use of Panama not just as a transit location, but as a place to do final manufacturing of products destined for multiple markets in the Caribbean and Latin America. Shoes from Vietnam and drugs made in Mexico are offloaded in the port of Colon, at the Atlantic end of the canal, and the products inside are then customized for individual markets within the region. This can mean anything from adding price tags in Venezuelan bolivars or inserting warranty documents compliant with Costa Rican law to making physical modifications. In many cases, the cargo is repacked on pallets for individual retail outlets. The pallets headed to each country are then stowed in separate container, so that when the container arrives in-country, the local distribution center needs only to load the pallets aboard delivery trucks. This kind of value-added work creates jobs in Panama. But it also gives shippers reason to insist that their cargo move through the Panama Canal, assuring that the expensive new facilities will see a steady flow of freight.

The World’s New Workshop

Sometimes a single number can reveal a great deal about economic change. Last week, I learned of one such number from Tsuyoshi Yoshida, the head of the American business of the Japanese ship line MOL: in 2013, more than half the waterborne cargo from Asia to the U.S. East Coast passed through the Suez Canal.

Why is this important? For the past 20 years or so, China has been the world’s workshop, shipping out tens of millions of containers stuffed with everything from acrylic resins to zippers. If they are destined for the Eastern United States and traveling by ship, almost all of those containers cross the Pacific Ocean and pass through the Panama Canal to ports along the Atlantic and Gulf coasts. Cargo from China to North America doesn’t move via Suez, because the Pacific route is much faster.

But now, China’s manufacturing sector is struggling, with factory output at an eight-month low. As wages in China rise and credit gets harder to come by, makers of labor-intensive goods such as clothing and toys are relocating to cheaper locations in Southeast and South Asia. From newly industrializing countries like Cambodia and Bangladesh, the fastest route to the U.S. East Coast is through Suez, not across the Pacific. In just four years, according to Mr. Yoshida, the proportion of East Coast-bound cargo from Asia that transits the Suez Canal has risen from 39% to 52%, indicating how quickly the shift away from China has proceeded.

This shift has to be worrying to the Panama Canal Authority, whose ongoing expansion project will allow larger ships to pass through the canal by 2015 or 2016. The canal widening, which may end up costing $6 billion or so, is premised on an increasing flow of cargo from Asia to the East Coast. But if other Asian countries supplant China as sources of U.S. imports, the Panama Canal may face a challenge meeting its traffic forecasts.

 

Link

The Kansas City Star ran an article today about a 1,300-acre logistics center southwest of KC recently opened by BNSF, Warren Buffett’s railroad. What’s particularly interesting about the article, which you can find here http://www.kansascity.com/2014/01/13/4750127/hail-the-humble-container.html, is that the author, Kevin Collison, treats the massive new facility not as a railyard but as a transfer point on global supply chains.  The article quotes me, but perhaps the most important quotation is from a BNSF spokesman, who says, “We’re in the transportation business.” No railroad guy would have said such a thing in pre-container days; back then, railroads thought they were in the railroad business. Since then, they’ve figured out that their job is moving cargo. Trains are merely a tool to help do that, not the railroad’s reason for being.

So BNSF looks at its logistics center as a port. A seaport, after all, is nothing more than a point where transportation modes come together; it has massive cranes that move containers between oceangoing vehicles and land-based vehicles. The logistics center serves the same function, using massive cranes that move containers between vehicles that travel on rails and vehicles that travel on roads. As they travel internationally, containers will make a switch in Kansas City, another in a West Coast ocean port such as Long Beach or Oakland, another at a foreign seaport, and perhaps a fourth at an inland logistics center in China or India. BNSF’s new facility  is expected eventually to handle 1.5 million containers a year, more than all but a handful of U.S. seaports. Although the ocean is not close at hand, the logistics center really does make KC a port on the plains.

Cooperation at Sea

Capitalists, in my experience, are often less than enthusiastic about competition. To be sure, they (and their speechwriters) know to praise the virtues of market forces. But the reality is that competition can be bad for business: all other things equal, it erodes profits, costs jobs, and drives firms to failure. It is always tempting to cooperate with the enemy.

How much cooperation to tolerate was one of the subjects of an unusual event today in Washington. The discussions at the first-ever joint meeting of shipping regulators from the United States, the European Union, and China were private, but it’s a good bet that a proposed collaboration among the world’s three largest container shipping lines was the major topic of conversation.

Between them, Maersk Line of Denmark, Swiss-based Mediterranean Shipping Company, and the French line CMA CGM control close to 40% of the world’s container shipping capacity. These companies have battled for market share for many years, to the benefit of freight shippers and consumers. But now, if the various governments agree, they would like to work together. They propose to create something called the P3 Network, through which the three companies would share space on up to 180 containerships sailing between East Asia and Europe, Europe and North America, and North America and East Asia. The companies would not share price information, and each would strike its own agreements with customers. But by working together, they could squeeze capacity out of the market, which might help prop up shipping rates.

The container shipping industry is awash in excess capacity, which is great for shippers but terrible for ship owners. A number of major carriers have been bringing very large vessels on line at a time when demand is growing slowly; the largest of these can carry more than 9,000 standard 40-foot containers. All this capacity has depressed rates and driven most ship lines into the red.

Given the economic importance of container shipping, cooperation among the three largest sip lines would be no small deal. Shippers could obviously face higher rates, but ports, stevedoring companies, railroads, and trucking companies might be even more severely affected. As part of their proposed agreement, Maersk, MSC, and CMA CGM would be able to consolidate the land side of their operations. This could mean that their vessels would stop serving some ports and expand at others. They would be able to bargain jointly with stevedores and land transportation companies, using their very large combined market share – the three companies jointly carry about 41% of container traffic between Europe and North America, for example – to demand lower prices. On the plus side, shippers might benefit from more frequent service between certain ports. Also, the three carriers may try to establish joint barge or feeder-ship services to move containers among U.S. ports, something none of them alone has enough traffic to do profitably.

As they weigh the P3 proposal, competition authorities and shipping regulators will be very much aware that it is not the only collaboration in the works. The six carriers in a competing group, the G6 Alliance, have shared vessels between Asia and the East Coast of North America since last May, and now they are seeking permission to cooperate on services between Asia and U.S. Pacific coast ports.  Meanwhile, several container lines are rumored to be seeking merger partners.

All of this is very much in line with the history of the container shipping industry. Since its earliest days, it’s been a treacherous business; each time rates rise, shipping lines order new vessels, overcapacity returns, and the most troubled companies exit. That’s the way capitalism is meant to work, but it’s a tough way to make a profit.