Saturday, February 16, 2013

Destructive (and Costly) Competition

Jaxport aspires to be one of the leading East Coast ports. Unfortunately, so does Miami, Savannah, Charleston, Norfolk, Baltimore, Philadelphia, and New York/New Jersey.

Therefore, we now have a “war between the ports” -- intense competition among East Coast ports for the anticipated increase in cargo associated with the expansion of the Panama Canal. Almost every port is making significant investments in infrastructure and seeking Federal funding for coastal engineering projects. For Jaxport this involves the request to deepen the St Johns River channel to 50 feet at an estimated cost of $1 billion.  In New York/New Jersey they are actually planning to raise the Bayonne Bridge -- for another $1 billion.

Many of these infrastructural re-engineering plans were first conceived prior to the Great Recession. At that time there was a unique set of unsustainable conditions responsible for the massive consumption of imported goods from Asia; namely, a housing bubble and debt-driven consumer demand. Those days are long gone.

Today one must consider the extent to which current overcapacity will continue to plague the shipping industry even if the global economy recovers. The future of Jaxport may depend on the simple matter of supply and demand. An oversupply of container ships and port terminal space and infrastructure, in the face of depressed global trade and commodity imports, could result in widespread underutilization or excess capacity for all maritime ports.

Observers of the maritime port industry are beginning to highlight the irrational and dysfunctional situation of multiple East Coast ports competing and expanding for limited and continuing depressed levels of container cargo.  The Journal of Commerce notes the “serious overhang of unused terminal capacity” and the fact that major East Coast ports such as Savannah, Charleston, and New York/New Jersey are all currently operating at less than 60% container capacity.  In spite of this, East Coast ports are still projecting $15 billion in infrastructural upgrading over the next ten years.
Investment in, and the building and expansion of, maritime port facilities does not generate its own demand. In the language of economics, the demand for these services is “derived”, meaning that it is a consequence of the demand for something else, namely goods that are either imported or exported.  In a global recession, where the demand for goods is severely depressed, port economies will suffer regardless of the modernized state of the port terminal facilities or the depth of their channels.  And the losers will not just be the ports that are unable to attract the cargo, but also the taxpayers who are financing these port mega-projects.

All of this has led inquisitive observers to ask why there is no national policy that would evaluate the various ports and allocate scarce resources based on a rational assessment of the costs and benefits of each project in relationship to each other.  This would inevitably necessitate picking winners and losers and creating a division of labor among the ports as well as a hierarchy of prominence. But it would also avoid the wasteful duplication and redundancy of a current system that seems intent on building a greater number of deep channel ports than are needed to accommodate the given level of cargo.
Such concerns recently prompted Congress to ask the Army Corp of Engineers “how the Congress should address the critical need for additional port and inland waterway modernization to accommodate post-Panamax vessels.”  In response, the Army Corp recently released its report titled “U.S. Port and Inland Waterways Modernization: Preparing for Post-Panamax Vessels”. While acknowledging the great uncertainty in predicting the volume or direction of global cargo flows, the report also emphasized that the “expanded canal could provide a significant competitive opportunity for U.S. Gulf and South Atlantic ports and for U.S. inland waterways – if we are prepared.”

More specifically, with regard to the issue of an East Coast port hierarchy, the report makes a distinction between “post-Panamax ready” and “cascade ready” ports. Post-Panamax ready ports would have a depth of 50 feet and accommodate the largest vessels. . Cascade-ready ports would include lower-tier ports and accommodate the re-deployed smaller vessels.

This Corps report does not indicate which ports will be post-Panamax and which will be cascade, but it clearly suggests a movement toward planned port differentiation as individual port infrastructure projects are evaluated.

Based on conversations with knowledgeable observers of the port logistics industry, there is considerable opinion that Jacksonville will fall into the lower or second tier. This does not mean that Jaxport and the port-logistics sector will play an insignificant role in the regional economy. It simply means that a more realistic scenario must be acknowledged. This position was recently advanced on the pages of the Jacksonville Business Journal where it was suggested that Jaxport modify its mega-port aspirations and pursue “Plan B” involving a focus on niche markets and “trade with the fast-growing countries of South and Central America, Brazil first and foremost.”

Taken together, these recent developments would indicate that there is an emerging consensus toward a more rationalized and strategic plan for East coast ports, an acknowledgement that not all ports can aspire to post-Panamax status, and that Jaxport would be a likely candidate for “cascade” status. 
Given the dollar and potential environmental costs of deepening the St Johns, this might be the best strategy for Jaxport, Jacksonville, and the region.

No comments:

Post a Comment