More businesses are reorganizing their supply chains to avoid the West Coast entirely, shipping goods to East and Gulf Coast ports instead.
More businesses are reorganizing their supply chains to avoid the West Coast entirely, shipping goods to East and Gulf Coast ports instead.
W est Coast supply-chain infrastructure is so inefficient and unreliable that businesses are deciding they’d be better off shipping their products to the opposite side of the continent instead.
The shift to East Coast ports in response to West Coast congestion is not new (I wrote a post on it last October) but it’s getting more attention now that the line of ships waiting off the coast of southern California has essentially disappeared. As the Wall Street Journal reported on August 17:
Backups of dozens of container ships have formed off ports in New York, Houston and Savannah, Ga., authorities said, even as the lineup of vessels waiting to get into the neighboring ports of Los Angeles and Long Beach has dwindled from an armada that once counted more than 100 ships.
No single line is likely to be as long as the triple-digit backup we saw off the coast of Los Angeles/Long Beach because there are many more port options on the East Coast and Gulf Coast for shippers to choose from. Additionally, East Coast and Gulf Coast ports are generally much more efficient than West Coast ports.
A CNBC story makes clear what this shift means in practice:
In January, ocean carrier Hapag Lloyd, Norfolk Southern, the Port of Virginia, and Union Pacific, collaborated in creating a triangle of trade where West Coast bound freight would be brought into the Port of Virginia and loaded onto Norfolk Southern rail cars. The containers would then be loaded onto a UP railcar in Chicago bound for the West Coast.
“At the end of the first quarter, we began to see the service develop,” said D’Andrae Larry, group vice president of international intermodal at Norfolk Southern. “Since then we’ve seen that service continually grow. So the first and foremost thing was this service was accepted by the marketplace.”
Larry said the idea originated with Hapag Lloyd, which was looking to move West Coast trade more efficiently.
“The market continues to think through ways to find optionality. We believe there are a lot of opportunities out there,” Larry said.
Got that? The way to “move West Coast trade more efficiently,” given the circumstances, is to put it on a boat in Asia, send it through the Panama Canal, sail it to anywhere from Houston to New York, put it on a train to Chicago, and then switch to a different train in Chicago to reach the West Coast. Rather than, you know, putting it on a boat in Asia and sailing to the West Coast.
On the one hand, this is a fine example of price signals in the market solving a problem in an unusual way. Businesses are seeking stability and effectiveness, and East Coast and Gulf Coast ports are providing these in ways that West Coast ports are not. Without any government ordering people to do so, businesses are responding to incentives and finding better ways to serve their customers.
One particularly good example of this from the CNBC article is that Norfolk Southern is paying truck drivers bonuses for completing a “dual mission.” That means each time they drop off and pick up a container in the same trip, they get an extra $200. Norfolk Southern says it’s been effective at moving containers more efficiently in key intermodal cities such as Chicago and Kansas City.
On the other hand, the problem that the market is solving is largely inflicted by bad policy, and we shouldn’t need to use this kind of transcontinental Rube Goldberg machine to ship goods to a place that could have perfectly good ports.
PHOTOS: Cargo Ship Traffic Jam
The CNBC story is not the only example of this phenomenon. 3M has opened what it’s calling an East Coast Consolidation Center near the Port of Charleston to get around West Coast congestion. SupplyChainDive reports that, “Since becoming operational in mid-May, the site has contributed to one- to two-week reductions in average cycle times for initial shipments to Singapore, Australia and New Zealand.”
Container prices have also reflected shippers’ preferences, with Asia-to-West Coast prices dropping far more than Asia-to-East Coast prices. According to this week’s Freightos Baltic Index email newsletter, shipping prices to the West Coast are down by 79 percent compared to twelve months ago, but shipping prices to the East Coast are only down by 61 percent. That means the gap between them is becoming larger as well. The price of shipping to the East Coast from Asia is usually higher than shipping to the West Coast, but now it’s roughly twice as high, at $8,688 per container, compared to $4,345. Those prices are still astronomical compared to the pre-pandemic norm, at roughly triple their September 2019 levels, the newsletter says.
At some point, that price differential should encourage some shippers to opt for the West Coast again. But the fact that they are not taking advantage of it and seem to be committing evermore to the East Coast could signal something else: uncertainty over both the short-term and long-term future of our West Coast ports.
It’s hard to blame them for being skeptical. In the short term, the dockworkers’ labor agreement expired on July 1, and they can legally go on strike whenever they want. Parties are reportedly far from a deal, and the union has been perfectly willing to strike in the past, economic consequences be damned. The port security-guard local, which negotiates separately from the dockworkers, voted to authorize a strike at Los Angeles/Long Beach earlier this week.
If they’re taking cues from around the world, dockworkers in Germany were able to use labor action to secure a larger pay raise, and dockworkers in the U.K. are currently using labor action to try and do the same. Neither of those countries have seen labor action on this scale among dockworkers in three decades, and unions have shown they have no qualms making supply-chain problems worse around the world this year.
That on its own is not justification for long-term changes to strategy, but when combined with various other problems, the shift away from the West Coast begins to make more sense.
California is phasing out diesel-powered trucks with no effective replacement in hand. A.B. 5, California’s worker-classification law which in large part exists to serve the Teamsters, has made one of the most common trucking-industry business models effectively illegal in the state, leading to trucker protests that have blocked port traffic. In the Los Angeles area, criminals have taken advantage of incompetent law enforcement to raid freight trains. Environmental regulations have stood in the way of attempts to expand intermodal capacity.
East Coast and Gulf Coast ports are filling the gap, processing more freight than ever, and doing it well enough that businesses are willing to pay higher rates in exchange for the increased reliability. Given current circumstances, more businesses see shipping east to ship west as a counterintuitive and roundabout solution.