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Despite slowdown, L.A./Long Beach ports still reign

When the global economy improves, will congestion in the two San Pedro Bay ports return, or will shippers and carriers be wary of replicating the conditions that led to congestion in the early part of the decade?

With the global financial crisis pushing international trade to the lowest levels we've seen in a decade, the congestion that plagued the U.S. West Coast ports of Los Angeles (L.A.) and Long Beach in 2004 may seem like a distant memory. Each month in 2008, year-over-year import volumes were below those for the same periods in 2007, and import levels for 2009 are shaping up to be even lower. According to IHS Global Insight's Port Tracker report, there is no threat of congestion at either Los Angeles or Long Beach. In fact, the extremely weak traffic has eliminated any capacity pressures.

Still, it is worth asking the question: When the global economy improves, will congestion in the two San Pedro Bay ports return, or will shippers and carriers be wary of replicating the conditions that led to congestion in the early part of the decade? Are the ports of Los Angeles and Long Beach threatened now that shippers and carriers are under even more pressure to find cost savings, or is there something exceptional about those ports that can protect them from a loss of market share?

Article Figures
[Figure 1] Containerized imports by U.S. port and distance to ultimate destination
[Figure 1] Containerized imports by U.S. port and distance to ultimate destination Enlarge this image
[Figure 2] Ultimate destination of containerized imports entering at Los Angeles/Long Beach
[Figure 2] Ultimate destination of containerized imports entering at Los Angeles/Long Beach Enlarge this image

Local demand attracts carriers
To answer these questions, it is instructive to look at the import patterns for the San Pedro Bay area before the slump took hold. In 2007, nearly 25 percent of the 54.5 million tons of containerized imports coming into Los Angeles and Long Beach remained within 100 miles of the port, according to IHS Global Insight's U.S. Inland Trade Monitor. That same year, fully one-third of the containerized cargo entering the United States through those ports never traveled more than 500 miles away.

As shown in Figure 1, no other U.S. West Coast port boasts such high freight demand in its immediate vicinity as does the L.A./Long Beach complex. Roughly one out of every five containers imported through West Coast ports is destined for this region, making it more economical for both shippers and carriers to serve Southern California markets through Los Angeles or Long Beach. Local demand in Southern California acts as an anchor, keeping the shipping lines locked into the two ports.

What about the two-thirds of the traffic passing through Los Angeles and Long Beach that ventures beyond 500 miles? This segment represents the "discretionary cargo"—shipments that may be diverted to other ports. Much of that traffic passes through the enormous distribution centers (DCs) in California's Inland Empire region in San Bernardino and Riverside counties. These facilities form a sort of feedback loop with the ports. The DCs were built in that region because so many imports flowed through Los Angeles and Long Beach; now shipping lines call on those ports because they are close to the retailers' giant distribution centers.

During the boom times of strong economic growth, the Inland Empire was close to reaching its distribution capacity. But according to the Los Angeles Times, industrial vacancy in that region doubled in the last year, from 6.2 percent in the fourth quarter of 2007 to 12.4 percent at the end of 2008. The potentially good news in those statistics: The decline in international trade has freed up commercial space for the distribution centers, leaving room for expansion when trade picks up again.

However, the increase in available commercial property has a negative side. Those facilities represent entities that are no longer operating in the region, and there is no guarantee that they will come back. Large retailers have developed multi-port strategies, and it's conceivable that the Inland Empire's mammoth distribution centers will become a thing of the past as shippers limit their dependence on certain ports.

Diversion scenarios
There are three possible diversion scenarios for the discretionary container imports into Los Angeles and Long Beach: diversion to other U.S. West Coast ports; diversion to ports in Canada and Mexico; and allwater diversion through the Panama or Suez canals.

All-water options have always been available, but they are price-sensitive and are only suitable for certain market segments. All-water is unlikely to pose a significant threat, as only a small percentage of imports that leave the San Pedro Bay for inland destinations are bound for the U.S. East and Gulf coasts. (See Figure 2.) The cargo best suited for the Panama Canal is already moving through there, and piracy concerns make the Suez an even less attractive option.

The pre-crash volumes at L.A./Long Beach were so high compared to the other U.S. West Coast container ports that none of those other harbors has the capacity individually to make a major dent in San Pedro Bay's market share. L.A./Long Beach may lose market share to its neighbors as a group, but these ports are relatively mature and no game-changing expansions are expected in the near term.

In Canada, the Port of Vancouver handles some imports that are destined for the United States. It is a fairly mature port, and few changes that would make it more attractive to importers and carriers are scheduled. Indeed, Vancouver is the same distance from Shanghai, China, as the ports of Seattle and Tacoma (in the state of Washington, USA), and thus does not offer significant time savings. An intriguing potential competitor is the Port of Prince Rupert near the British Columbia/Alaska border. It is roughly 1,000 miles closer to Shanghai than Los Angeles and Long Beach and offers single-carrier intermodal service to Chicago via the Canadian National Railway. Competitive rates and transit times to the U.S. Midwest could divert some of the 25 percent of L.A./Long Beach traffic that is bound for the U.S. East North Central region.

While the Port of Lázaro Cárdenas in Michoacán, Mexico, is eight days further away from China by sea than Prince Rupert, it has the advantage of being able to serve Mexico City and Mexico's populous Central Valley as well as Texas and Louisiana via the Kansas City Southern rail line. Another potential competitor in Mexico would be Punta Colonet, which is to be built roughly 150 miles south of San Diego. Financing for the port complex has fallen through, however, and development is on hold.

This analysis assumes that Asian trade with the United States will rebound to its peak levels. IHS Global Insight predicts that trade growth will gradually recover. We expect a steep decline in 2009 followed by an upswing in 2010. There should be noticeable growth in 2011 and then slower long-term growth rates from that point onward. We expect the San Pedro Bay area to recover its 2006 freight volumes around 2012. However, the market shares of Los Angeles and Long Beach will likely decline slightly, as importers will diversify their port choices and all-water service will gain a greater (but still limited) share.

Despite the current decline in freight volumes and the potential diversion of some cargoes to other ports, their natural advantages will ensure that Los Angeles and Long Beach remain the premier entry points to the United States for the foreseeable future.

Steve Owens is a senior consultant with IHS Transportation.

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