Best Years Ever? Let’s see about that.
By Jock O’Connell
January has brought the belated clamor of trumpets from California port officials proclaiming 2017 as their “Best Year Ever.” Down in San Pedro Bay, the neighboring Ports of Los Angeles and Long Beach each boasted of handling record high numbers of TEUs last year. Same for the Port of Oakland. And, while the recently forged Northwest Seaport Alliance did achieve a new high of 3.67 million TEUs as a joint enterprise, the Ports of Seattle and Tacoma actually handled more containers (4.15 million TEUs) in 2005 when they operated independently.
“In 2017, the Port of Los Angeles moved just over 9.3 million twenty-foot equivalent units, which broke our own record, set just last year, for the largest amount of cargo moved in the history of the Western Hemisphere,” Executive Director Gene Seroka announced at a January 10 State of the Port luncheon speech.
Over at the neighboring Port of Long Beach, port chief Mario Cordero declared that the port had “finished its busiest year in our 107-year history” with a throughput of over 7.54 million TEUs.
Maritime industry curmudgeons will naturally respond by pointing out, as Exhibits 4 reminds us, that the huge Southern California ports are only now exceeding the levels of container traffic they saw a decade earlier, before the Great Recession sent maritime trade (not to mention my retirement portfolio) reeling.
There is no denying the cogency of the complaint, even though the ports did handle some 1.26 million more TEUs last year than in the previous year. As a single maritime gateway, the two San Pedro Bay ports saw their combined TEU throughput crest in 2006 at 15.76 million TEUs before plummeting 25% to 11.82 million TEUs in 2009. Volumes bounced back briskly the next year, but growth then remained uninspiring for the next couple of years.
And then any prospects for a robust jump in container volumes ran afoul of a labor-management dispute that slowed traffic through all U.S. West Coast ports from the Fall of 2014 through the following Spring. Since then, though, TEU numbers have increased steadily…but not, as we shall see below, in every respect. If anything, the celebratory focus lavished on the total number of TEUs handled in 2017 diverts attention from some other numbers that are far less flattering.
For one thing, the San Pedro Bay ports have not been operating in a vacuum the past several years. Nearly every other major U.S. container port was much quicker to rebound from the recession. New York/New Jersey eclipsed its pre-recession high in 2011. Savannah bounced back even earlier in 2010. Although the Port of Charleston did not do so until 2016, Virginia recovered its former volumes in 2013, while Houston maintained a remarkable string of uninterrupted annual increases in TEU volumes throughout the recession.
Not surprisingly, the San Pedro Bay ports, while now handling more containers than ever before, have seen their share of America’s maritime container trade gradually diminish as their East and Gulf Coast rivals grabbed off a growing portion of the nation’s maritime trade with East Asia.
This is not how things were supposed to be. In a forecast published in December 2007, the base-case scenario for the Ports of Los Angeles and Long Beach expected TEU volumes growing from 15.8 million TEUs in 2006 to approximately 31.04 million TEUs by 2017. Clearly, that estimate badly missed the mark. But then virtually no one anticipated either the abrupt onset of the recession, or its severity, or its global reach. (In what’s probably the most astonishing example of forecasting ineptitude from that period, Fitch, one of the three major bond rating services, gave Lehman Brothers a thumbs-up just three days before the financial giant imploded into the largest single bankruptcy in American history on September 15, 2008 and triggered the worst global economic crisis since the 1930s.)
The recession sent the ports’ forecasters back to the drawing board to produce a revised bit of guesswork that was published in July 2009, when the global economic downturn was just hitting bottom. The update was prescient in one important respect: “Recovery will be slow, without the sharp rebound that has characterized some previous recessions.” Still, the revised outlook expected the two ports to regain their previous peaks of container trade in “about 2013” and that 2017 would see the ports handling some 18.88 million TEUs. In the end, 16.89 million TEUs passed through the two ports last year.
Reality, often in the form of black swans, has a way of upsetting the best-laid forecasts. The updated forecast, for example, could not have foreseen the setback of a coastwide labor dispute that sullied the ports’ reputations as reliable conduits for maritime trade and doubtless led numerous shippers to take their business to other maritime gateways in the U.S. and Canada.
But the report also underestimated the impact of another development then on the horizon, if dimly. Perhaps it was sheer serendipity, but in the same year the two San Pedro Bay ports jointly reached the apex of their pre-recession growth, the citizens of Panama voted overwhelmingly in a national referendum to authorize construction of a new set of locks that could accommodate vessels with triple the container capacity of those Panamax ships then squeezing through the existing, nearly century-old locks. That development did not factor much in the ports’ revised forecast. Indeed, other than a brief episode of political hysteria in Southern California (“Beat the Canal”), the initial consensus among trade economists was that the new locks would have a relatively minor net impact on container traffic at the San Pedro Bay ports. The possibility that a substantial volume of imported goods might be diverted through the expanded canal to East and Gulf Coast ports tended to be dismissed. As one analyst cavalierly argued: “Goods that will go to East and Gulf Coast ports through the new canal are already going there through the old canal.”
That assessment proved more comforting than accurate in terms of market share as shipping lines responded to the opening of the Bigger Ditch through Panama by accelerating the deployment of vessels able to carry upwards of 14,000 TEUs to Atlantic and Gulf Coast ports that had spent mightily to ready themselves for unprecedented volumes of maritime trade.
To be sure, one important reason transpacific container traffic has been increasingly shifting toward ports from Maryland to Houston is that the states that constituted much of the Confederacy have seen higher than average rates of population and industrial growth. Militantly resistant to unions and excessive local regulation and taxes, they have become meccas for investment in manufacturing, most notably in the automotive and aerospace sectors. So, it should shock no one that shippers would seek out ports nearer these markets, especially if enabled by a broader path through Panama.
Still, there is more to competitiveness than tallying up the total containers handled each year. In fact, a closer look at the San Pedro Bay numbers reveals a brace of disturbing concerns. First, with respect to imports, the two ports have not been keeping pace with local growth. Second, as the ports featuring the largest number of sailings to East Asia, the San Pedro Bay ports have been unable to sustain a consistently strong export trade.
Remarkably, until 2017, the total number of inbound loaded TEUs entering the two ports never exceeded the 2006 record of 8,127,865 TEUs. Even the new high in 2017 was only 5.6% higher than the number of inbound loaded TEUs handled in 2006. That is especially noteworthy because, despite a severe recession, the Southern California region immediately served by the two ports was hardly in stasis.
From 2006 through 2017, the population of the four-county region surrounding the ports increased by 7.7% to 17,980,341, according to the Demographic Research Unit of the California Department of Finance. Over the same period, data from the U.S. Bureau of Economic Analysis show that real (i.e., inflation-adjusted) Gross Domestic Product for the Los Angeles-Long Beach-Anaheim metro area rose by about 17.5%. The adjoining Riverside-San Bernardino-Ontario metro area meanwhile saw its real GDP rise by 16.2%. In other words, the pace of growth in inbound containerized goods through the Ports of Los Angeles and Long Beach failed to keep pace with the economic growth of the ports’ immediate service area.
On the export side, the story is even more disappointing. The 3.37 million loaded outbound TEUs in 2017 were not only below the pre-recession high set in 2006 but were also less than the ports handled in every year from 2010 through 2014. So, although the value of U.S. merchandise exports has increased in real terms by 43.1% since 2006, you wouldn’t know it by looking at the statistics of the Ports of Los Angeles and Long Beach.
The commentary, views, and opinions expressed by Jock O’Connell are his own and do not reflect the views or positions of the Pacific Merchant Shipping Association. PMSA does not endorse, support, or make any representations regarding the content provided by any third party commentator.