Will the expansion of the Panama Canal in December 2014 be a disaster
for West Coast distribution buildings?
"Likely Not" said Curtis
Spencer, President of IMS Worldwide Inc., one of the leading consultants to
ports, shippers and big retailers on logistics strategy.
I attended a
presentation by Curtis Spencer at the Spring
ULI meeting in San Diego. His presentation countered much of the doom and gloom
that is out there regarding the impact of the Panama Canal expansion on West
Coast demand for distribution buildings.
He kindly agreed to
allow me to share this with my readers. Click here for copy of his slides.
West Coast
Competitive Advantages
Price
Because of
the large ships that can be accommodated, the Panama Canal expansion will drop
sea cargo costs to the East Coast by 30%. IMS is telling their clients that
much of the current cost advantage of West Coast shipping is absorbed by the
railroads (that is why Mr. Buffet bought Burlington Northern Santa Fe Corp.)
and they are predicting that after the Panama Canal expansion the railroads
will drop their pricing to keep intermodal shipping competitive to most of the
East Coast. IMS Worldwide estimates only a 1 in 10 chance that the railroads
will stick to their current pricing and the West Coast will lose significant
market share of the import/export business.
Time
The recent
economic downturn resulted in a glut of container ships. As a result the
shipping lines shifted to a slow-shipping system. With excess ships sitting
around, it cost them less to run their ships as slower speeds than to dock
these ships. This resulted in such large fuel savings that IMS is predicting
the industry will not shift back to maximum speeds even as shipping demand
picks up. If slow-speed shipping stays the norm, the intermodal system used by
West Coast ports to get product to the East Coast will still have about a one
week advantage over the improved speeds after the Panama Canal Expansion to the
East Coast.
West Coast’s
Biggest Area of Concern
Labor
The
International Longshore and Warehouse Union (ILWU) has a strangle hold on West
Coast ports. The organized slowdown in 2002 in LA and Long Beach disrupted
logistics for the entire nation. As a result, the union usually gets everything
it wants. The typical crane operator in LA/Long Beach makes over $300,000 per
year and is not required to punch in and out. A skilled operator can meet
his/her weekly quota working about 20 hours a week.
Watch Mexico
Also, an
important driver for increasing demand for distribution buildings in the US
Southwest is the growth of manufacturing in Mexico. This demand growth is
expected to continue due to the increased competitiveness of Mexican wages
versus China: See the attached slide presentation for details
