Industries supporting international trade are going through some major changes – shifts that Port of Long Beach Chief Executive Officer Jon Slangerup keeps a watchful eye on as he assesses future cargo growth and plans the “Port of the Future.”
For now, the port is benefiting from what Slangerup calls “healthy” cargo growth, and just closed out its best quarter since 2007. In the first quarter, cargo shipments at the port increased by 6.1 percent from the same period last year, a time when cargo movement was heavily stalled due to congestion and contentious longshore labor negotiations.
“We’re anticipating somewhere in the range of 3.5 to 4.5 percent [cargo] growth for the year. And it could be higher than that, but it’s marginally depending on how things shape up,” Slangerup told the Business Journal. “There’s going to be changes to things in the industry that may dictate where ships go between the L.A./Long Beach complex. And that’s impossible to predict at this moment. But, generally speaking, I think we’re healthy and growing.”
Port of Long Beach CEO Jon Slangerup said he expects healthy cargo volume gains this year despite upsets in the shipping industry. (Photograph by the Business Journal’s Larry Duncan)
The changes Slangerup referenced are being driven almost entirely by shifts in the ocean carrier industry. “The ocean carriers are struggling right now with record low container rates, and that’s driving financial stresses and resulting in consolidations,” he explained. Mostly recently, COSCO and China Shipping merged in February, and published rumors indicate that South Korean ocean carriers Hanjin Shipping and Hyundai Merchant Marine may be next to merge, Slangerup said. “We hear the same thing related to the Japanese carriers,” he added.
The primary stressor causing these mergers is that the rates ocean carriers are able to charge to ship individual containers have been decreasing steadily. About two years ago, the rate to ship a container from Asia to the San Pedro Bay was about $2,000. At the start of 2016, it was $1,000 – and now it’s just $700, according to Slangerup.
“You would think that would be terrible, and it is, but it’s still much better than what they’re getting elsewhere,” Slangerup said. “The rates for Europe have dropped through the floor, literally well below $200 a container,” he said, adding that sometimes the cost to ship a container to Europe is as low as $50.
This change in pricing is creating a ripple effect that’s not only leading to mergers, but is also in turn shifting the deployment of vessels by ocean carrier lines, Slangerup said.
“You might ask the question, ‘Why is that happening?’ And the simple answer is that the ocean liner business and the industry in general coming out of the last Great Recession saw growth, and growth was projected to be strong,” Slangerup said. As a result, they began investing in mega-ships able to carry 18,000 twenty-foot equivalent units of cargo or more.
While the market for Asian goods in the U.S. continues to grow, throughout the rest of the world that demand has been “very soft to declining,” Slangerup said.
“I liken it to the transformation that occurred in the world’s airline business,” Slangerup said. “They had the same fundamental problem of overcapacity and spotty demand, and they weren’t able to adjust capacity to meet demand in an efficient way.” To solve that dilemma, several major airlines have consolidated or formed alliances – the same strategy ocean carriers are now pursuing.
In essence, “The economic issue here is that the liner companies have invested heavily in capacity and were probably hit by surprise by the softness in the consuming markets around the world,” Slangerup said.
“I know that’s a mouthful, but the truth of it is it’s a very dynamic time for us,” Slangerup said. “That makes predicting what the year’s going to look like very difficult. . . . I think we’re in a very strong position. But it’s impossible to guarantee that, or see that, until you see the outcome of this ocean liner dynamism that’s happening right now.”
When considering the port’s future business growth, Slangerup also looks closely at worldwide manufacturing trends. About 97 percent of the port’s business is from Asian countries, so those are a key area of focus, he said.
China’s exports have decreased by about 3 percent in the past year, which, considering the country’s immense manufacturing sector, translates to a lot of volume, Slangerup said. “When you look at who’s picking up the slack, it’s Vietnam, Thailand, Indonesia, Malaysia. And even South Korea remains in double-digit growth,” he explained. Because of the ramp-up of manufacturing in these countries, Slangerup still expects increasing cargo volumes, despite China’s slowdown.
It’s a pattern that has occurred in Japan, then Korea, and now China, Slangerup observed. “They develop their industrial manufacturing capacity, they build their workforces around that, they begin becoming extremely dominant in a particular series of markets or products, and then their wages start to rise . . . and [become] more comparable to other manufacturing environments worldwide,” he said. “And then guess what happens? The costs go up and then they’re no longer attractive.”
In the near future, Slangerup expects more manufacturing to shift to Mexico and other Latin American countries. “Today, in a couple of different segments, China’s hourly labor cost structure is higher than Mexico by double digits,” he pointed out. “In some cases, Mexico is half the cost in certain types of traditional Asian commodities or products. So shifts will occur.”
Ford Motor Company recently announced it would be moving major American manufacturing operations to Mexico, and last year Apple moved the manufacturing of its iPhone to Brazil, he noted.
Stabilizing the supply chain and developing better efficiencies in the future is a major component in ensuring the port remains competitive. Through a supply chain optimization group sanctioned by the Federal Maritime Commission, the ports of Long Beach and Los Angeles have worked with stakeholders to stabilize the supply chain and avoid another congestion crisis. Now, they’re examining “specific program changes in the way the port complex operates,” Slangerup said.
“It starts very much at the center, which would be terminal operations,” he said, particularly in respect to maximizing efficiency and velocity. The ultimate goal is to enhance all aspects of the supply chain to ensure reliable and efficient movement of goods from source to end market. U.S. Secretary of Commerce Penny Pritzker recently appointed Slangerup to the Advisory Committee on Supply Chain Competitiveness, where he is able to put these issues on a federal platform.
Building up rail capacity may be one method to create better supply chain efficiencies while at the same time cutting back on harmful air emissions. While building capacity at the ports and developing short-haul rail to inland counties wasn’t always attractive to rail lines, a decrease in their “bread and butter” shipping of coal and oil has led them to focus more on cargo movement, Slangerup said.
Burlington Northern Santa Fe (BNSF) Railway was ready to make such an investment with its Southern California International Gateway intermodal facility, a project that had been planned adjacent to West Long Beach. A judge recently ruled the project’s environmental impact report was faulty after the City of Long Beach and other entities brought suit.
“The reality is that, in our view, technically it was an important project for both ports,” Slangerup said. He added that he would have preferred that the project had been handled differently so legal troubles wouldn’t have occurred.
“I’m hoping BNSF gets to the other side of this with a plan that drives the kind of velocity and intermodal integration that is needed to increase their efficiency and reduce pollution,” he said.
The port itself is heavily investing in infrastructure with a $4 billion-plus capital improvement program primarily consisting of projects related to mega-ship readiness. The Middle Harbor Redevelopment Project, which involves combining two older terminals into a state-of-the-art facility running mostly on zero emission equipment, just debuted its first phase in early April. Long Beach Container Terminal, a division of Orient Overseas Carrier Line, runs the facility, which features massive cranes and deep waters able to accommodate 18,000 TEU vessels. The Gerald Desmond Bridge Replacement Project, which involves replacing an aging bridge with a new, higher bridge that mega-ships can pass beneath, is also well on its way.
Another main point of focus moving forward is Slangerup’s Energy Island concept, a proposal to run the port on self-sustaining, green energy so that its facilities would be able to operate independently of the regional power grid.
“We spent this fiscal year doing all the white papers, analysis and feasibility work on the various concepts,” Slangerup said. “Next year, fiscal year 2017, we will fund three demonstration projects under the concept of Energy Island.” Those projects will demonstrate the use of proven sustainable, green technologies for port operations.