Looking ahead, supply chain professionals anticipate

Transcription

1 Fall 2010 Capital Improvements Bolster the East Coast s Intermodal Rail Network By Leonard Sahling and Paul Nuzum Looking ahead, supply chain professionals anticipate that the East Coast ports will gain market share of the nation s container traffic, at the expense of the West Coast ports. This projection is based on the following trends and developments: The Panama Canal is being expanded. When completed in 2014, the enlarged Panama Canal will accommodate the new generation of larger container ships and also facilitate the migration of container traffic to the East Coast ports. All of the major East Coast ports either are preparing or have already launched ambitious redevelopment programs designed to enable them to handle larger container ships and to increase their TEU-handling capacities. Lingering concerns about congestion, delays, rising user-fees, and labor strife at the Ports of Los Angeles and Long Beach have spurred shippers to diversity the ports that they use. Within the supply chain community, this is known as the Four Corners Strategy. For many years now, the East Coast ports have been less prone to labor strife. The labor union representing East Coast dockworkers, the ILA, is widely seen as being assertive but much less combative and confrontational than its West Coast counterpart, the ILWU. (Recent flare-ups by the ILA, however, have raised eyebrows.) As oil and fuel prices continue to climb, so do the freight transport efficiencies proffered by the super post-panamax steamships with their huge containercarrying capacity. The bigger the container ship, the greater the savings in fuel consumption per TEU from using the all-water route. With the West Coast railroads (the BNSF and Union Pacific) continuing to exert upward pressure on the pricing of cross-country, intermodal rail shipments from West Coast ports to Midwestern and Eastern destinations, the alternative all-water route through the Panama Canal and East Coast ports has become more competitive. Mounting congestion at the Midwestern rail yards especially Chicago has introduced a new element of risk and uncertainty into supply chains. Nearly 60% of the continental U.S. population resides east of the Mississippi River, and they account for a roughly equal 60% share of the nation s GDP. The two Class-1 railroads that dominate rail freight in the eastern half of the country the Norfolk Southern and CSX have also recognized an opportunity to benefit from those same trends and developments. With the East Coast ports maneuvering to increase their market shares, the two eastern railroads are attempting to position themselves to bolster their market shares of the nation s intermodal double-stack rail freight traffic. Additionally, the Port of New York-New Jersey has launched its own port-redevelopment program which will upgrade its double-stack, intermodal rail service to the major Midwestern markets. When completed, these capital improvements in the East Coast s intermodal rail service should all further enhance the competitiveness of the East Coast ports. All-Water Route Container ships traveling between the U.S. and Asia can call at West Coast, East Coast or Gulf Coast ports. Those that call at the East Coast or Gulf Coast ports must pass through the Panama Canal. This is known as the all-water route.

2 Container ships use this route today to handle the lion s share of transpacific container traffic destined for the Southwest and Eastern seaboard markets. Increasingly of late, container ships carrying cargo from Asia are also using the all-water route to handle container traffic to and from major Midwestern markets. Shippers find that there are pluses and minuses to shipping containers from Asia to the Midwest via the all-water route and East Coast ports. On the plus side, it is less costly to ship containers to the Midwest; and the East Coast ports and rail networks appear to have fewer bottlenecks, so that delivery schedules tend to be more reliable. The biggest minus is that the all-water route involves longer delivery periods. It can take up to a week longer to ship containers from Asia to the Midwest via the East Coast ports. Looking ahead, many supply chain professionals foresee that the East Coast ports will gain market share of the nation s container traffic, at the expense of the West Coast ports. Given a choice, many shippers today are leaning toward a delivery service that costs less and is more reliable, even if the delivery time were slightly longer. But not everyone concurs. Many other shippers perhaps even the majority still prefer a delivery service offering the shortest delivery times, even at premium prices. Panama Canal Expansion In 2006, Panamanians approved a referendum for a $5.25 billion expansion of the Panama Canal. The project is reportedly on schedule to be completed in It involves the construction of a third set of locks, sized to accommodate the newest generation of super post-panamax ships with container-carrying capacity of up to 12,000 TEUs. When completed, this expansion project will double the canal s existing annual capacity to 24 million TEUs and facilitate the migration of container traffic to the East Coast ports. In fact, the Panama Canal has been operating close to, if not at, capacity for the past several years. The scheduling calendar for ships transiting through the Panama Canal has been totally full. Nonetheless, the volume of container traffic transiting through the Panama Canal has continued to increase in recent years, because the Panama Canal authority has been able to shift the mix of ships toward container ships and away from other kinds of vessels. Following completion of the expansion project, the Panama Canal authorities are expected to raise their fees for container ships to use the canal. However, because the container ships will be bigger and carrying many more containers, the transit fee per TEU will rise by less than the fee increase per vessel and could even decline from what it is today. Heartland Corridor The Norfolk-Southern Railroad launched the Heartland Corridor project to provide improved intermodal rail service between the Hampton Roads Port and major Midwestern markets. It was completed in September 2010 at a cost of $311 million, with funding from a private-public partnership. The project has upgraded the Norfolk Southern s intermodal service in two respects: Provides double-stack service between the Hampton Roads Port and Chicago via Columbus OH, Reduces transit time between Hampton Roads and Chicago by one and a half days, and shaves 200 route miles from the distance that each Chicago-bound container must travel. The Heartland Corridor project targeted two separate sections of the Norfolk-Southern s eastern rail network for improvement its Central Corridor and its Western Freeway Rail Corridor. The Central Corridor project eliminated 24 overhead obstructions and raised the vertical clearances of 28 tunnels and bridges along the Norfolk Southern s mainline between Roanoke VA and Columbus OH so that the rail lines can accommodate double-stack railway cars. The Central Corridor project also includes three new intermodal terminals (IT) i.e., Roanoke VA, Pritchard WV, and the Rickenbacker IT in Columbus OH. The Western Freeway Rail Corridor project was completed in October 2009 and eliminated 13 grade-level rail crossings that had impeded rail service to and from the Hampton Roads Port. These 13 rail crossings occurred along a 20-mile stretch of rail line that extended from the port and ran through a densely populated portion of the city of Portsmouth. The Western Freeway Rail Corridor project relocated the existing rail-line so that it now runs along the medians of the Western Freeway (Route 164) and I-664 and then re-connects with the existing mainline. This improvement allows freight trains to travel at much faster speeds and supports port operations at both the Maersk Terminal and the Craney Island Marine Terminal. (Work has just begun on the Craney Island Terminal and is scheduled to be completed in 2020.) 2

3 National Gateway In May 2008, the CSX railway launched its National Gateway project. When completed in 2015, it will create an efficient double-stack rail network linking three mid- Atlantic ports Baltimore, Norfolk/Hampton Roads VA, and Wilmington NC and the Midwest; and also link the nation s eastern and western rail networks. It will cost an estimated $842 million, with funding provided by a privatepublic partnership. The National Gateway project can be divided into three broad initiatives. The first consists of raising the vertical clearances of 61 tunnels and bridges and thus preparing three major CSX rail corridors for double-stack service the Carolina Corridor between the Port of Wilmington NC and Charlotte NC, the I-95 Corridor between North Carolina and Baltimore, and the I-70/I-76 Corridor between Washington DC and northwest Ohio. These three rail corridors span six states plus the District of Columbia. Rail Express Program The Port of New York-New Jersey (NYNJ) lies within a day s drive of about 100 million people, including residents of New York City, Boston, Philadelphia, Baltimore, Washington DC, and their wide-ranging suburbs. Given the high density of population in the Northeast, no one will be surprised to learn that the Port of NYNJ is currently the nation s third largest port and accounts for about 30% of total East Coast container traffic. At present, the Port of NYNJ serves mostly the Northeastern markets. The vast majority of the inbound containers unloaded at the port are hauled by truck to their final destinations in the Northeast. Only 13% of inbound containers now leave the port by rail, destined for major Midwestern markets. In the past, port officials periodically attempted to expand their market share of container shipments to the Midwest, but the port s subpar intermodal rail service always frustrated those efforts. The second major initiative involves upgrading the Virginia Avenue railway tunnel located in northwest Washington DC. Its aim is to square off the century-old, curvedwall Virginia Avenue tunnel running through Capitol Hill, and bring it up to double-track stacktrain standards [John D. Boyd, Railroads Redraw the Intermodal Map, Journal of Commerce, August 9, 2010, p. 16]. This tunnel will create a critical link to CSX s double-stack network, connecting the two legs of its coastline rail corridor the one that extends north from Baltimore to New York and the Port of New York- New Jersey, and the other that extends south from Baltimore all the way down to Florida. The third initiative consists of the construction or expansion of six intermodal terminals at key points along the National Gateway Corridor. One of these six facilities is located in northwest Ohio and is a state-of-the-art, 185-acre hub that will enable CSX to integrate freight flows from its network with those from the West Coast and Chicago. Indeed, CSX contends that this new facility will allow shippers to bypass the congested Chicago container-sorting facilities in moving goods from the West Coast ports to the Midwest or East Coast, thereby saving one-to-two days on these cross-country moves and, as a result, also improving the competitiveness of the West Coast ports. Port officials have realized, however, that the port s future success hinges on improved rail service. With the scheduled The Norfolk-Southern Railroad s Heartland Corridor Minneapolis Des Moines Kansas City Little Rock Springfield St Louis Baton Rouge PORT OF HOUSTON Milwaukee Chicago Memphis Indianapolis Jackson Louisville Mobile Detroit Newark New York PORT OF NEW YORK/NEW JERSEY Cleveland PORT OF PHILADELPHIA Pittsburgh PORT OF WILMINGTON Columbus Rickenbacker Intermodal PORT OF BALTIMORE Terminal Washington DC Cincinnati Prichard Intermodal Terminal PORT OF NORFOLK Lexington-Fayette Roanoke Intermodal Terminal Greensboro Raleigh Nashville Birmingham PORT OF GULFPORT PORT OF NEW ORLEANS Montgomery Atlanta Toronto Columbia Charlotte Orlando Tampa PORT OF CHARLESTON PORT OF SAVANNAH PORT OF JACKSONVILLE PORT OF MIAMI Boston Legend Heartland Corridor Norfolk Southern Intermodal Rail Network New Intermodal Terminal Major East Coast Port 3

4 opening of the expanded Panama Canal in 2014 and the likely diversion of container traffic to the all-water route, much of the increased container traffic through the East Coast ports will be destined for the Midwestern population centers. Port officials realized that the Port of NYNJ was at risk of losing market share of this Midwest-destined container traffic to other East Coast ports unless it upgraded its intermodal rail service. Port officials have thus launched a $2 billion port redevelopment program. Its three objectives are to enable the port to handle super post-panamax ships, to improve and expand its double-stack intermodal rail service, and to increase the port s TEU-handling capacity. Their redevelopment plan includes two different kinds of improvements to the port s rail service. [See text-box for details covering the non-rail facets of the port s redevelopment program.] One set of improvements involves a multi-phase, $600 million Rail Express Program that is designed to expand the port s on-dock rail service and is scheduled to be completed by The second set of improvements consists of two projects intended to enhance intermodal double-stack rail service to the Port of NYNJ. One of the projects is the North Jersey Railroad Double-stack Program, aimed at improving the vertical clearances on the Conrail railroad route between the Port of NYNJ and the CSX mainline that is part of its national rail network. The other project involves reconfiguring the CP Port Reading Junction to provide double-track train operations between the CSX-Trenton line and the Norfolk Southern Lehigh line to the shared-assets doubletrack Lehigh Line. This project will eliminate a choke point along the Lehigh Line where it connects in New Jersey with the rest of the North American System. When completed in 2011, these improvements in the Port of NYNJ s rail service should go a long way toward upgrading the intermodal rail network connecting the port to the Midwest population centers. Additionally, the improvements should also bolster the competitiveness of the Port of NYNJ vis-à-vis the other East Coast ports. Real Estate Implications However much the East Coast ports and their railroad allies succeed in wresting market share from their West Coast rivals, the shifts in market shares are likely to have no more than a minor, muted impact on the derived demand for nearby distribution facilities. Most of the inbound containers arriving at all U.S. ports are destined for inland population centers, and it is this portion of the transpacific container traffic that is most vulnerable to being rerouted from the West Coast to the East Coast ports. It will never be cost effective to reroute the inbound containers from Asia that are destined for West Coast population centers through East Coast ports. As a rule, about half or more of the inbound containers arriving at U.S. ports that are destined for distant inland popula- The Port of New York-New Jersey s Redevelopment Plan A key element of the port s redevelopment program consists of deepening the channel depths from 40-feet to 50-feet. The Army Corps of Engineers is currently in the process of dredging the channels to the desired depth. The dredging should be complete by 2014, in time for the opening of the enlarged Panama Canal. For the Port of NYNJ, air draft is as important to the port s future success as channel depth. The 78 year-old Bayonne Bridge spans the Kill Van Kull tidal strait, connecting Bayonne NJ and Staten Island NY. The bridge s 151-foot air draft (at high tide) stands as a major impediment preventing taller super post-panamax container ships from calling at the port s main marine container terminals in Newark and Elizabeth NJ as well as in Staten Island. Today, only the Jersey City terminal and the Global Marine Terminal can be accessed by the tall container ships. In 2008, the Port Authority of NYNJ (PATH) commissioned the Army Corps of Engineers to study and assess the possible solutions to the bridge s clearance problem. The four main options are to jack up the bridge s current road deck, to create a lift-bridge at the center of the span, or to demolish the current structure and then replace it with either a new bridge or a tunnel. Whatever the solution, it will be expensive. In September 2010, the PATH announced that it had allocated $1 billion in its capital budget to finance a solution to the clearance problem. (This allocation is separate from the port s $2 billion redevelopment program.) 4

5 tion centers are transshipped to their destinations. That is, these containers will be unloaded from the ships, immediately reloaded onto dockside railroad flatcars or tractor-trailers, and then shipped directly to their inland destinations. In the case of these transshipped inbound containers, shippers have no need to own or lease distribution facilities near the ports because they literally don t handle the inbound containers there. Not until these inbound containers arrive at their inland destinations e.g., Chicago or Atlanta will they be emptied. These inland population centers are where shippers will have to own or lease distribution facilities. (They ll also have to own or lease such facilities at the population centers located along the East or West Coasts.) Here at these inland facilities, the shippers will empty the containers, palletize the imported goods, and then reload them onto trucks for delivery to their customers distribution centers or stores. The shippers, we note, will calculate their space needs based on the total volume of imports arriving at these inland destinations irrespective of whether they entered the U.S. via a West Coast or East Coast port. Not all of the inbound containers destined for inland population centers, however, will bypass port-side distribution facilities. Situated near all U.S. ports, even those in less densely populated areas, are a number of import-driven warehouses or distribution facilities dedicated to so-called transloading operations. Some of the inbound containers will be drayed from the port-docks to these import-driven warehouses (also called transloading centers). There, the contents of the ocean containers are unloaded, palletized, and then reloaded into domestic containers or 53-foot road trailers, for transshipment further inland. The foremost mission of these import-driven warehouses is to consolidate imports from various origins and deliver them as full truckloads or full container-loads to domestic distribution centers, to stores, or even directly to consumers. Hence, insofar as the East Coast ports do succeed in winning market share from the West Coast ports, there is likely to be a corresponding increase in the derived demand for nearby transloading facilities. But the incremental demand for them is likely to be fairly modest. The share of inbound containers diverted to these transloading facilities varies Some of the inbound containers arriving at the seaports are destined not for inland population centers, but instead for those consumers who live in close proximity to the port; and these containers will have to be drayed from the ports to local distribution facilities. For example, an estimated one-fourth or so of all inbound containers arriving at the Ports of Los Angeles and Long Beach are targeted for the 21 million people who live in Southern California. The vast majority of the warehouses and distribution facilities located throughout Southern California are used to serve the local population. CSX Railroad s National Gateway Toronto Minneapolis Milwaukee Detroit Cleveland Chicago Pittsburgh Des Moines Columbus Washington DC Indianapolis Cincinnati Kansas City St Louis Louisville Lexington-Fayette Newark Boston New York PORT OF NEW YORK/NEW JERSEY PORT OF PHILADELPHIA PORT OF WILMINGTON PORT OF BALTIMORE PORT OF NORFOLK Most other U.S. ports serve much smaller local population bases than do the Ports of LA and Long Beach, and the proportions of the other ports inbound containers destined for inland population centers are commensurately higher. This is particularly true of the East Coast ports. With the notable exception of the Port of NYNJ, the major East Coast ports (e.g., Norfolk/ Hampton Roads, Savannah, and Charleston) are located in less densely populated areas; and 80-to-90% of their inbound containers are destined for distant, inland locations and, as such, typically bypass port-side distribution facilities. Springfield Little Rock Baton Rouge PORT OF HOUSTON Memphis Jackson Nashville Birmingham Mobile PORT OF GULFPORT PORT OF NEW ORLEANS Montgomery Atlanta Greensboro Raleigh Columbia Tampa Charlotte Orlando PORT OF CHARLESTON PORT OF SAVANNAH PORT OF JACKSONVILLE PORT OF WILMINGTON Legend National Gateway Corridor CSX Doublestack Rail Network New Intermodal Terminal Major East Coast Port PORT OF MIAMI 5

6 from port to port; but it probably ranges somewhere between 25-to-40%, with the Ports of LA and Long Beach at the high end. In any event, such import-driven transloading facilities are still something of a novelty, although the number does appear to be growing. Following the expansion of the Panama Canal, the East Coast ports should also see pickups in the volume of outbound container traffic. For the most part, this container traffic does not require any near-port distribution facilities. Rather, outbound containers typically are moved by rail or truck directly to the port-docks where they are dropped awaiting the arrival of the container ships that will transport them to their overseas destinations. In a few cases, however, goods destined for export will be routed to port-side consolidation centers where shippers will aggregate less than full-container loads from multiple vendors or factories into full container loads. And from there, these ocean-going containers will then be drayed to the ports. Concluding Remarks After having grown used to losing market share in the nation s container traffic to their West Coast rivals, the East Coast ports and their railroad allies anticipate that the competitive balance will soon shift in their favor. The major catalyst for change is the current $5.25 billion expansion of the Panama Canal. When completed in 2014, the enlarged Panama Canal will accommodate the larger super post-panamax container ships and facilitate the migration of container traffic to East Coast ports via the all-water route. Additionally, the two Class-1 eastern railroads and the Port of NYNJ are also investing billions of dollars to fund capital improvements in the intermodal rail service between the East Coast ports and the major Eastern and Midwestern population centers. These capital improvements in the East Coast s intermodal rail service are all mutually complementary, and should further enhance the competitiveness of the East Coast ports. Looking ahead, as these ambitious capital improvement projects are completed, things should get interesting. In all likelihood, the East Coast ports will gain market share from the West Coast ports, and the East Coast railroads should also gain market share of the nation s intermodal container traffic. Just how big the migration of container traffic will be, however, remains to be seen. There are lots of moving pieces to be considered. One of them, for example, will be the new fee schedule for the expanded Panama Canal. Everyone expects that the PC authorities will jack up the fees for vessels passing through the canal, but the ships will also be bigger and carry many more containers so that the cost per container will either not rise as much or could actually fall. Another involves the shake-out of intermodal freight rates for east-to-west versus west-to-east service. As the East Coast railroads begin to market their intermodal freight services from the East Coast ports more aggressively, the West Coast railroads (Union Pacific and the BNSF) will most likely respond to the increased competition with rate adjustments of their own. Shippers are looking forward to lower intermodal rail freight costs, regardless of whether they route their imports through East Coast or West Coast ports. A third involves the CSX s new intermodal facility in northwest Ohio. It has been designed to provide a bridge that will allow the two West Coast railroads (the BNSF and Union Pacific) to move their intermodal trains from the West Coast to Midwest and East Coast destinations, bypassing the congested Chicago train yards and saving one-to-two days in the cross-country trip. If this bridge works as promised, it will enhance the competitiveness of the West Coast ports and their railroad allies. The wild card for the East Coast ports and their railroad allies will be what happens when the ILA s current contract expires on September 30, The East Coast ports have not had a major union contract dispute or strike for the past 30 years; and the United States Maritime Alliance, the organization of terminal operators and steamship lines that negotiates the master contract with the ILA, hopes to extend this record beyond However, last fall, the ILA abruptly called a two-day strike against the Port of New York-New Jersey, and the incident has left many observers wondering whether it is a harbinger of a more aggressive ILA-stance toward union prerogatives. In short, the jury is out about how well the billions of dollars of capital improvements will succeed in bolstering the market shares of the East Coast ports and their railroad allies, and the jury will probably remain undecided until much later in the decade. In closing, we would to add three final thoughts: 1. In coming years, no one expects to see a massive shift of transpacific container traffic to the East Coast ports. 6

7 Rather, the shift will more likely occur at the margin, with a disproportionately large share of the incremental growth in this container traffic being diverted to the allwater route and East Coast ports. 2. Certain East Coast ports are likely to benefit more than others from a diversion of container traffic from the West Coast ports. At present, only two East Coast ports have channels that are deep-enough (50-feet) to accommodate the super post-panamax container ships the Norfolk/ Hampton Bay port and the Port of NYNJ. Moreover, these two ports are also the ones benefiting directly from the improved intermodal rail services provided by the CSX and Norfolk Southern railroads. Insofar as the East Coast ports do succeed in winning market share from the West Coast ports, it is likely to be these two East Coast ports that end up with the biggest gains. 3. However big the shifts in market shares of the East Coast ports and their railroad allies do turn out to be, they are likely to have only a modest impact on the derived demand for nearby distribution facilities. The vast majority of inbound containers arriving at all U.S. ports are destined for inland population centers, and it is this (and only this) portion of transpacific container traffic that is vulnerable to being rerouted from West Coast to East Coast ports. And in turn, the vast majority of the inbound containers from Asia that are destined for inland population centers will be unloaded at the ports (East Coast or West Coast) and then transshipped directly to inland destinations. Shippers do not need to own or lease any distribution facilities near the ports to accommodate these transshipped inbound containers. Rather, it is at the inland population centers where shippers will need to own or lease distribution facilities to handle these shipments. 7

8 Author Leonard Sahling, First Vice President, ProLogis Research Group, , Paul Nuzum, President of Supply Chain Insights and Adjunct Faculty at the University of Denver ProLogis Research Reports Additional ProLogis research reports are available to download from the ProLogis Research Center. Go to to view our full library of research reports. About ProLogis ProLogis is a leading global provider of distribution facilities, with more than 475 million square feet of industrial space (44 million square meters) in markets across North America, Europe, and Asia. The company leases its industrial facilities to more than 4,400 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises with large-scale distribution needs. Copyright 2010 ProLogis. All rights reserved. This information should not be construed as an offer to sell or the solicitation of an offer to buy any security of ProLogis. We are not soliciting any action based on this material. It is for the general information of ProLogis customers and investors. This report is based, in part, on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. No representation is given with respect to the accuracy or completeness of the information herein. Opinions expressed are our current opinions as of the date appearing on this report only. ProLogis disclaims any and all liability relating to this report, including, without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, this report. Any estimates, projections or predictions given in this report are intended to be forward-looking statements. Although we believe that the expectations in such forward-looking statements are reasonable, we can give no assurance that any forward-looking statements will prove to be correct. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. These forwardlooking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein to reflect any change in our expectations or any change in circumstances upon which such statement is based. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of ProLogis. ProLogis Corporate Headquarters 4545 Airport Way, Denver, CO