The Port of New York and New Jersey is standing on the threshold of a major milestone. In just a matter of days, the $1.6 billion project to raise the roadway of the Bayonne Bridge will achieve its primary goal with the complete removal of the remainder of the original, lower roadway, thereby opening up the bulk of the port to container ships capable of carrying up to 18,000 TEU. However, will this be a game-changer in terms of port routings?
Plenty of market share shifts have occurred among ports in recent years. Ports in the Northeast and the Southeast increased their share of imports significantly through the end of 2015, primarily because of instability and labor issues on the West Coast. Market shares have stabilized recently, however, with little change during the past 18 months.
The same cannot be said for the Port of New York and New Jersey, which has seen its volume share ebb in recent quarters.
It is interesting and perhaps revealing that the June 2016 opening of the enlarged Panama Canal has had no discernable effect in terms of share shift. One plausible reason may be that the deployment of the new ships was delayed because of the lack of access to New York harbor, a must port for most East Coast ship rotations. With the bridge being raised, the Port of New York and New Jersey is about to open for mega-ship business. Will a new round of market share shift be unleashed?
For containers coming from China to the United States, all-water rates to the East Coast are running about $1,000 higher than the rates for shipment directly to the West Coast, according to the Shanghai Containerized Freight Index. Volume bound for interior US points moves inland, with each mile of intermodal or truck service adding cost. Starting out with a $1,000 cost advantage, West Coast moves can support more inland miles than East Coast moves. These calculations must be adjusted for the slower service and higher inventory-carrying costs of the East Coast routing, but the basic principle remains.
Under current conditions, the point of economic indifference — where the costs of East and West Coast routing are about the same — is roughly along a line running north-south between Columbus, Ohio, and Atlanta, basically along Interstate 75. What might cause this line to shift?
There are two potential reasons: service and price. It is difficult to spin the advent of mega-ships as a service improvement. Less frequent departures and the potential for port congestion during the adoption period are reasons why one might expect shippers to choose to avoid the Northeast, at least during the period of transition. That leaves price as the major potential motivator.
The key question is not whether mega-ships offer better economics to the ocean carriers. They do, provided the carriers can manage their business to ensure a decent load factor. From a shipper standpoint, the question is whether the carriers will pass the savings along in the form of lower rates, thereby increasing the rate differential between east and west. That may happen. Despite consolidation of vessel strings, the conversion to mega-ships to the East Coast is resulting in a net capacity increase of 6 to 10 percent. History says carriers may end up fighting to increase their market share and fill that excess capacity, with consequent damage to rates. How much volume could they generate?
For discussion purposes, let us say rates to the East Coast decline 10 percent, which would be about $220 under current conditions. Reaching farther west would involve trucking — either long-haul or local dray, at an additional cost of $1.70 to $3.50 per mile, depending on whether the return move is empty or not. At the same time, the cost for moving via the West Coast is dropping by a similar amount for every mile farther west one travels, essentially doubling the effect. Running the numbers, a savings of $220 would be sufficient to shift the line of indifference westward by 30 to 65 miles, hardly a game-changer in terms of market volumes.
The message is that a rate war on the East Coast will not be particularly effective at raising volumes, and any volume increases that do occur will simply come from the West Coast. The ocean carriers would be much better off to hold rates up and pocket any savings the mega-ships generate, but I would not bet on it.
Still, I think there is more short-term downside than upside regarding East Coast share. With the Northeast ports largely untested in terms of their ability to handle a steady diet of mega-ships, beneficial cargo owners have reason to fear congestion and disruption as the new mega-ships are deployed. It would not surprise me to see at least a temporary dip in share as the kinks are worked out. For me, the surprise would be if the East Coast ports see a big near-term bonanza in terms of additional volume when the mega-ships come calling.
Lawrence J. Gross, president of Gross Transportation Consulting