It Wasn’t the Recession and It’s Not the Panama Canal Expansion

The fault dear Brutus, is not in our stars, but in ourselves.
By Thomas Jelenić Vice President

This year is shaping up to be a milestone year for San Pedro Bay. It will be the first year since 2006 that the San Pedro Bay port complex will set a new record throughput volume. In 2006, the ports of Long Beach and Los Angeles handled 15.7 million twenty-foot equivalent units (TEUs) of containers. In 2016, these two ports barely missed that prior high, tallying 15.6 million TEUs. Undoubtedly, there will be much talk of all the hard work that will have taken place to get us to this point and there will be press releases galore celebrating the milestone. But a decade on, what took so long to get here? And what does it say about the Southern California gateway’s competitiveness?

Often the discussion surrounding the past decade centers on platitudes defending market share and preparing for a doubling of cargo volumes. There has been no serious discussion about how the competitiveness of San Pedro Bay and California ports in general stand up to the competitiveness of other ports. Often the lack of growth has been chalked up to the Great Recession or the opening of the expanded Panama Canal. Unfortunately, these meaningless responses are so oft-repeated that policy makers throughout the state have taken them for fact and ascribe competitive weakness to things outside their control.

Even a cursory look at cargo volumes since 2006 show that, while most ports suffered a dip from the recession, most bounced back immediately and continued to grow. East Coast and Gulf Coast ports have gained cargo at the expense of California ports; Savannah is at 169% of its 2006 volume. And for all the talk of the expanded Panama Canal, that discussion ignores two critical points: (1) most other ports captured growth well ahead of the expanded Canal’s opening last year, and (2) the Panama Canal has been there for 100 years – San Pedro Bay successfully competed against east coast ports even before vessel size was a significant issue. Regardless of an expanded Panama Canal, San Pedro Bay also faces stiff competition from West Coast Canadian and Mexican ports that have excellent rail connections to the U.S. Midwest. Canada, with a population smaller than California, has seen its West Coast ports grow to 161% of its 2006 volume.

That is not to say that the expanded Panama Canal is not real and serious competitive threat to San Pedro Bay – it clearly is – it just cannot explain the past decade of no growth in San Pedro Bay. So, if it wasn’t the Great Recession and it wasn’t expanding the Panama Canal, why didn’t these two ports grow?

Three factors are often cited in choosing a gateway for discretionary cargo: cost, speed, and reliability. To those three, another more nebulous factor should be considered: reputation. As you would expect, San Pedro Bay performs as the world-class gateway it is against many of these metrics. It remains one of the fastest gateways to inland destinations for cargo. In addition, a focus on addressing supply chain issues has resulted in improving dwell times, improving turn times, transitioning the chassis model, and successfully addressing the failure of Hanjin Shipping. To buttress these achievements, the ILWU will consider a contract extension this summer that should assure the reliability of this gateway for three more years until 2022.

But, while billions and billions have been spent over the past decade building infrastructure, expanding capacity, and improving the environment, so far those billions have not resulted in a single additional container of throughput.

Shippers are not choosing this gateway and are choosing others; the question is why.

Is it one of the metrics that can be measured? We know that capital and operating costs – particularly with respect to environmental mitigation – are higher in San Pedro Bay. We also know that cargo owners have been vocal about a lack of reliability given the labor situations of several years ago and past congestion issues. And these factors have had an impact on Southern California ports’ reputation. In all, the job of competing for discretionary cargo has become much harder.

One thing is clear; it is not due to events far away, like the expanded Panama Canal, or events beyond our control, like the Great Recession. The answer is here, in San Pedro Bay. Policy makers, not just locally but throughout the state, need to understand that the cause is not in our stars. Once that is understood, there is chance that we can find the answer to why and tackle it head on, as we have so many other problems, and regain this gateway’s competitiveness.