In the age of the megaship, container carriers wield unprecedented power. For proof, look no further than recent news items about two major ports - one a winner, the other a loser:
• At the Port of New York/New Jersey, Maersk Sealand, the world's largest container line, will expand its marine terminal from 266 acres to 350 acres over the next three years. The move is likely to result in fewer calls by Maersk Sealand at rival East Coast ports, as the carrier looks to maximize the efficiencies of its larger ships.
• At the Port of Singapore, Maersk Sealand is shifting some 85 percent of its cargo volumes to the Port of Tanjung Pelepas in Malaysia, four nautical miles away. Singapore, which will lose the equivalent of more than a million twenty-foot containers a year, had refused to grant Maersk Sealand its own dedicated terminal.
Both developments were the result of intense negotiations between the ports and Maersk Sealand. Increasingly, though, the balance in such deals is shifting in carriers' favor. Their dependence on ships that can carry more than 3,000 forty-foot containers means ports must respond with terminals of commensurate size. Yet in order to reap economies of scale, carriers need to reduce the number of ports they call, relying on land transport to serve other areas. Hence the notion of enormous port "load centers," a 20-year trend which shows no sign of reversal.
Carriers today wield more clout than ever before. According to an October 2000 report by World Liner Supply, the three largest carrier alliances controlled 58 percent of vessel capacity in the trans-Atlantic container trade. That compares with 44 percent in July. The grouping of lines into vessel- and terminal-sharing alliances has forced ports into a frantic game of musical chairs. Ultimately, each coast may contain one or two load centers per carrier, with other ports relegated to niche markets.
The big keep on getting bigger. New York/New Jersey expects to see a doubling of cargo volumes over the next 10 to 15 years, says Bill Fallon, general manager of trade development and industry relations at the Port Authority. The port is planning a new Express Rail Facility to supplement its existing intermodal yard, which will handle an estimated 180,000 lifts this year.
Others must match those efforts just to stay in the game. Many ports have had to dredge their harbors in order to handle the big new ships. On the land side, carriers are demanding marine terminals of 300 acres or more, versus the old standard of 100 acres for a state-of-the-art facility. Often they must include sophisticated intermodal yards that can shift containers quickly between ships and trains.
As federal funds for dredging and road improvements become harder to obtain, ports must find other sources of capital. Fallon says New York/New Jersey is seeking partnerships with private interests, including carriers and terminal operators, to help make up the difference. Project funding is the number one issue facing ports today, according to Kurt Nagle, president of the American Association of Port Authorities. They are spending a collective $1.5bn a year on infrastructure improvements, he says.
The Price for Shippers
The rise of the megaport can have a serious impact on shippers, according to a consultant who used to be one. Edward D. Root, a partner in Dallas with Arthur Andersen LLP, previously managed transportation for glassmaker Libbey-Owens-Ford. He says shippers may end up paying more for inland transport in order to reach distant load centers. Although LOF was closer to North Carolina ports, it ended up going to Charleston, S.C. "because of the number of lines calling there."
Some shippers are fighting back. At the urging of the Port of Boston, several New England-based companies, including Staples Inc. and Reebok International Ltd., recently threatened to reduce worldwide bookings with Maersk Sealand if it stopped direct calls at Boston as part of its trans-Atlantic service. "We [told shippers] that this would determine the level of service, rates and the future location of your company," says Frank Sheehan, director of sales and marketing for the Maritime Department of the Massachusetts Port Authority.
"[I]t remains to be seen that hub ports are
It's unclear whether those efforts were a success. Maersk Sealand's big commitment to New York/New Jersey suggests that the line will mostly be serving New England out of that complex, not the smaller Port of Boston. Barge service from New York already accounts for 40 percent of Boston's business, says Sheehan. In any case, Boston lacks the kind of direct rail links that are a critical component of an intermodal supply chain. And if Maersk Sealand offers the most efficient service on a global basis, few shippers will balk at using it.
Only a handful of ports qualify as hub ports in the Maersk Sealand network, according to Communications Manager Tom Boyd. In the U.S., they include New York/New Jersey and Long Beach. The California hub will shift to Los Angeles when work is completed on a 485-acre container terminal - largest in the world - at the newly built Pier 400. In addition, the line will soon select a South Atlantic hub from among Charleston, S.C.; Savannah, Ga.; and Florida.
In Europe, Maersk Sealand concentrates operations at Rotterdam, the Netherlands; Gioia Tauro, Italy; and Algeciras, Spain. Rounding out the roster of hubs are Tanjung Pelepas in Malaysia; Kaohsiung, Taiwan; Yokohama, Japan; and Salalah, Oman. Additional ports are served by smaller ships or through Maersk Sealand's growing number of alliances with other carriers.
Boyd disputes the notion that the load center concept has hurt smaller ports or shippers. "We haven't seen a falloff in service to other ports," he says. "And it remains to be seen that hub ports are reducing available avenues for trade."
Carriers argue that there's plenty of business to go around. No one port can serve as a load center for every line; any attempt to do so would result in unacceptable congestion. New York/New Jersey may have grabbed the prize of Maersk Sealand's East Coast megahub, but that doesn't mean other ports in the region can't make a similar offer to another carrier or alliance. Most lines would prefer not having to compete for favors with their rivals at a given port.
The Small Port Dilemma
Smaller ports, meanwhile, are caught in the grip of an identity crisis. Realizing they can never match the resources of a New York/New Jersey or Los Angeles/Long Beach, they are searching for ways to remain a part of vessel deployment plans.
The Port of Portland, Ore., is offering itself as an answer to the lines' equipment imbalance problems, says Bob Lipscomb, general manager of marine marketing. In theory, Portland could relieve some of the pressure on Southern California ports by transloading imports into domestic trailers, thus keeping oceangoing containers on hand for exports to Asia.
Portland has its own imbalance dilemma, weighted heavily toward exports. Because of a small local population, it rarely serves as first port of call for inbound trans-Pacific services. Carriers are drawn instead to the huge population base of Los Angeles and Long Beach, and, to a lesser degree, Seattle and Tacoma. Once there, they offload containers destined for interior points as well. Locations like Portland end up serving primarily as export gateways - a situation Lipscomb would like to correct.
The recent partial deregulation of U.S. ocean shipping may help. Until recently, Lipscomb says, carriers rarely looked beyond the obvious ports in crafting deployment strategies. Now, with the advent of confidential service contracts and less powerful ratemaking cartels, they may be willing to explore options. The Pacific Northwest, for example, might serve as a relief valve for Southern California during peak shipping seasons.
Carriers will never totally abandon smaller ports with container facilities, says Lipscomb. The reason, ironically, is bigger ships. To fill them, lines must draw from multiple port regions. They may even be willing to absorb certain inland charges, equalizing freight rates regardless of a shipper's distance from the load center.
At some point, the economies of size begin to clash with practicality. Dan Westerlin, manager of strategic marketing at the Port of Oakland, sees ships of 5,000 to 6,000 twenty-foot equivalent units (TEU) dominating the trans-Pacific trade. By 2004, he says, 70 percent of cargoes moving in that trade will be on ships too big to fit through the Panama Canal.
How much bigger they can get is open to question. Futurists have conjured up images of massive containerships hauling 15,000 TEUs at a time. Westerlin says tradeoffs on the land side are simply too great for that ever to happen. Carriers make money by getting their ships in and out of port as quickly as possible. A containership that dwarfs a supertanker could spend days in berth, causing serious delays for shippers. "Nobody wants [theirs] to be the last container off the ship," says Westerlin.
Every port has its limit as to how much business it can efficiently handle. Often that point is decided not by facilities at dockside, but by connections with inland carriers. The service meltdown at Southern California ports in late 1997 was caused at least partly by railroads' inability to handle an unanticipated flood of imports from Asia during the Christmas shipping season.
Such events are likely to increase in frequency as bigger ships spill thousands of additional containers onto local streets, highways and rail tracks. "The more you hub," says Mark Kadar, vice president of Mercer Management Consulting in Boston, "the more you have to move out of the hub."
In the Big Leagues
Nevertheless, many ports see the ability to handle the biggest ships in service as the key to staying competitive. Oakland spent years gathering regulatory approval to deepen its channels to 42 feet, and is now awaiting funding to go to 50 feet. Its Vision 2000 master plan includes larger marine terminals and a new intermodal rail yard near the docks. Recently the port took delivery of four giant cranes, each costing $5.5m, for the new marine terminal of Hanjin Shipping Co. Ltd.
With its largest container terminal at just over 80 acres, Oakland has no illusions about matching Los Angeles or Long Beach in terms of infrastructure. Yet it views itself as one of the U.S. West Coast's three major gateways, with Seattle/ Tacoma making up the third. Oakland's current annual volumes of 1.6m TEUs - less than half what Los Angeles handled in 1999 - could easily approach 4m TEUs by 2010, according to Westerlin.
The port is gambling on a combination of its intermodal facilities and the San Francisco Bay Area's large population base as a lure to carriers. "We don't feel the port will be shut out," Westerlin says.
Some experts say small ports and shippers have little to worry about. "The tendency to 'loadports' has been greatly exaggerated," says Dan Smith, a principal with the Tioga Group in Moraga, Calif. "Through the use of alliances, carriers are actually offering service to more ports than they used to."
Major carriers are maintaining up to six or seven vessel strings across the Pacific, says Smith. Recent months have seen the addition of port calls in Mexico and mainland China. Moreover, vessels that are replaced by larger versions rarely disappear from view. They go into secondary lanes, supplementing linehaul service between megahubs.
According to Smith, shippers may not know or care that the carrier with whom they booked isn't the one moving the goods. Root disagrees. "You do not get the same level of service as with the carrier you contracted with," he says. That's especially true for cargo that requires special handling, such as LOF's fragile sheets of glass. If the underlying carrier doesn't have a direct relationship with that shipper, Root says, it's more likely to leave a container on the dock when space gets tight.
The impact of load centering on a shipper depends on the location of its distribution centers, says John Reeve, president of Reeve & Associates in Yarmouthport, Mass. Few importers and exporters require gateway ports in every region of the U.S. Instead, they control distribution from a central point, using one agent or customs broker for the entire country.
As for the cost of drayage or rail to a loadport, ocean carriers may or may not absorb it, depending on distance, equipment imbalances, and the relative importance of the shipper. "They never did it from the goodness of their hearts," Reeve says.
If shippers are still receiving a high level of service, it could be due to offsetting factors. Maritime deregulation has allowed carriers to be much more flexible in their contracts, permitting a customized approach to service. Advances in information technology have given shippers greater visibility into the location of product, and sped up movements.
"It's all been pretty positive for the shipper," claims Reeve. "I don't think hub ports are affecting them."
All that could change as ships grow in size and further transform the way containerized ocean cargoes are moved. Root urges shippers far from load centers to seek out cheaper inland transportation, as well as do a better job of planning. "You may have to add time to the supply chain in order to make it work," he says.
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