A Decade of No Growth and Lost Marketshare Hangs Over the Ports of LA and Long Beach, the CAAP Update, and the Potential for New State Regulations

By Mike Jacob, Vice President, Pacific Merchant Shipping Association

No one is happier to see container throughput volumes hit new record highs in 2017 than the tenant marine terminals and ocean carriers who have suffered through the past decade of lost growth in San Pedro Bay. The good news is that the Ports of LA and Long Beach are on a growth clip this year which will finally eclipse their previous all-time record high container throughput volume of 15,759,218 TEUs.

The bad news is that the previous record peak came over 10 years ago, in 2006.

2006 wasn’t just a busy year on the docks. It was also when the California Air Resources Board (CARB) adopted its Goods Movement Emission Reduction Plan. The plan was adopted with tremendous urgency, as the state “expect[ed] to see almost a doubling of trade by 2010 and a tripling by 2020.” CARB then acted to arrest the anticipated correlated increase in air emissions from this growth at the Ports, and adopted the most sweeping and aggressive suite of waterfront emissions regulations in the world.

Also at this time, and also in anticipation of future emissions impacts, the Ports of LA and Long Beach developed their first iteration of the Clean Air Action Plan. The CAAP was a series of measures meant to break through the political stalemates facing the Ports regarding investment and growth so long as the issue of degraded air quality was left unresolved, and the CAAP went even further and more aggressive than CARB to address waterfront emissions.

As a result of these unprecedented efforts by CARB and the Ports in the original CAAP, the Ports have reported unprecedented successes in improved port air quality: for example, drayage truck and marine terminal operator’s combined Diesel Particulate Matter emissions are down 96% from 2005, ocean-going vessel SOx emissions are down 98% from 2005, and overall port operations NOx emissions are down 57%. These are tremendous successes, and they are rightfully celebrated by the maritime industry, the ports, and the state.

But, before we go running headlong into the next round of CARB rulemaking or adopt the proposed CAAP update proposed by the Ports, these successes must be put in the context of growth. Or to be more precise, the lack of growth.

Recall CARB’s projected rates of growth, whereby container volumes in the state would double by 2010 and triple by 2020; these rates anticipated that the Ports of LA and Long Beach would have expanded from volumes of 15.8 million TEUs in 2006 to approximately 30.4 million TEUs in 2016.

When the Ports of LA and Long Beach adopted the CAAP in 2006, they weren’t just at their TEU volume peak, they were also at their peak of total market share. The San Pedro Bay ports in 2006 moved 35.5% of all containers in the United States and 30.7% of all containers in North America. And, the trend was that this would continue to grow, as San Pedro Bay had increased its U.S. and North American market share nearly every year from 1993 – 2006.

The actual San Pedro Bay port complex volume in 2016, of 15.6 million TEUs, was almost the same as the volume handled by the ports in 2006. This was not what was predicted or expected:

  • 2016’s 15.6 million TEUs are -48% below CARB’s projections for 2016.

  • Actual 2016 San Pedro Bay ports’ U.S. market share: 32.1%. -11% drop from the ports’ U.S. market share in 2006.

  • Actual 2016 San Pedro Bay ports’ North American market share: 26%. -18% drop below the ports’ North American market share in 2006.

In terms of overall container volumes, the San Pedro Bay port complex underperformed the CARB projections by 14.8 million TEUs. And, when compared to 2006 market share, the San Pedro Bay ports lost 1.6 million TEUs to competitors across the U.S. and lost 2.8 million TEUs to competitors across North America.

To evaluate the economic impacts and consequences of these losses of cargo volume, we can rely on the “Economic Impacts of the Port of Los Angeles” study prepared by the Port of LA in 2007, which was also based on 2006 data and a baseline business operation which handled 8.5 million TEUs (remember, this was just for one side of the harbor). The Port Economic Impact Study attributed to the Port’s Marine Terminal Operations economic impacts of 1.1 million total jobs, $45 billion in total personal income and consumption, $159.8 billion of total economic activity, $1.9 billion in local purchases, and $5.1 billion in total state and local taxes. To get a rough estimate of the cumulative impacts for both San Pedro Bay ports, including the economic impact Port of Long Beach, double these numbers.

Annualized per TEU, these Economic Impacts as of 2006 in the Port of LA were:

  • 1 total job for every 8 TEUs (0.125 jobs/TEU)

  • 1 local job for every 70 TEUs (0.014 jobs/TEU)

  • $230 in local purchases per TEU

  • $600 in state and local taxes per TEU

  • $5,316 in total income and consumption per TEU

  • $18,869 in total economic activity per TEU

Applying these yardsticks to the total loss of market share by San Pedro Bay ports as of 2016 to all North American competitors when compared to 2006, a diversion of a total 2.8 million TEUs, the resulting costs to the local economy are staggering:

  • 40,000 jobs created somewhere other than in Southern California

  • $642.5 million fewer local purchases in Southern California

  • $1.7 billion lost in state and local tax revenues in California

Moving forward, there are also additional environmental impacts associated with cargo diversion which need to be accounted for. For example, a recent study completed for PMSA confirmed that, in addition to the usage of California ports resulting in a tremendous reduction of localized criteria pollutants linked to public health and smog impacts, cargo utilization of West Coast ports resulted in significant reductions in total Greenhouse Gas emissions when compared to that same cargo utilizing Gulf and East Coast ports. In short, there is a GHG Emissions benefit to using West Coast ports.

On average, greenhouse gas emissions are 24% higher when shippers bypass the San Pedro Bay for East Coast or Gulf Coast ports. These emissions are 31% higher for shipments from Asia to U.S. Gulf Coast ports via the Panama Canal. Therefore, loss of market share by the Ports of LA and Long Beach to non-West Coast competitors will result in greater climate change impacts and higher GHG emissions.

Moreover, the environmental consequences of diversion are not limited to Greenhouse Gases. As the industry, ports, and regulators contemplate the next generation of cargo handling equipment technology, there has been one point of consensus amongst all the parties: the transition to a zero and near-zero waterfront in Southern California will inevitably cost over $10 billion. Neither the state nor the ports have the cash, internal financing capacity, or any other identified and viable sources of funding for this transition at this scale. This leaves the industry and private financing as the only logical sources for the huge cash infusion which will be necessary to facilitate the new, large, and unprecedented capital costs associated with this program.

Of course, the traditional basis upon which to underwrite such massive new debt would be the new marginal revenues associated with growth in the business seeking the new round of financing. But that’s exactly what we just spent an entire decade without.

The unfortunate fact is that we all collectively lost the battle of 2006-2016 in the war of port competitiveness and the resulting lack of additional cargo has real-world consequences – both economic and environmental.

These conditions must be honestly appraised, soberly analyzed, exhaustively evaluated, and frankly discussed by regulators, ports, and public officials before embarking on the next round of updates to the existing CARB regulatory suite and CAAP efforts. Should we continue to fail to grow, then we will very likely perpetuate poverty for thousands of Californians by failing to create good blue-collar jobs, we will keep billions of dollars from circulating in the local economy and onto our tax rolls, and we will increase GHG emissions in the process.

One old adage says that those who fail to study history are doomed to repeat it. Another says that the road to hell is paved with good intentions. Let’s not avoid the conversation about market share, realistic projections, port competitiveness, and necessity for growth, otherwise we know where we are headed and how we will get there – because we’ve seen it all before.

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The Clean Air Action Plan – Can Ports Compete If It Is Enacted?