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Columna De Expertos US LA/LB Port Strikes and Their Impact on Logistics Market (Supply Chain)_Part 1

Fecha de registroAUG 24, 2023

US LA/LB Port Strikes and Their Impact on Logistics Market (Supply Chain)_Part 1
Ⅰ. ‘Direct’ Impact and Result of LA/LB Labor Disputes 1. Overview of LA/LB Ports The ports of Los Angeles (LA) / Long Beach (LB) are two ports built on San Pedro Bay in the southern part of Western California, United States. Los Angeles International Airport is located about 32 kilometers west of the ports, and the Los Angeles & San Pedro Railroad, which was built about 160 years ago, was extended to connect to all parts of the U.S. The LA/LB ports are currently operating independently. The two ports are important commercial ports, ranking first in cargo throughput among U.S. ports, serving trade between the U.S. and the rest of the world. Furthermore, they are the largest and most important logistics centers in the U.S., with numerous container ships arriving and departing with cargo destined for or originating in the U.S., especially for the East Asian trading countries including China, South Korea, Japan, and Taiwan, performing mainline loading and inland intermodal transportation.

Carriers calling at the Port of LA/LB mainly import cargo from Asia, but the ports have been experiencing congestion due to the rapid increase in import cargo from Asia since the early 2000s, and the LA Harbor Commission has implemented various policies and systems to expand the ports’ infrastructure and improve cargo handling productivity, such as introducing advanced yard equipment and using terminal inbound rail facilities. The Port of LA/LB are the only ports in the top 10 global container ports in terms of cargo volume, excluding major ports in Asia, especially China, the Port of Singapore, and the Port of Busan in Korea. This is due to a surge in U.S. imports during the pandemic, which led to a significant increase in containerized traffic. In addition, the recently emerging ports of Port Klang and Tanjung Palepas in Malaysia, Dubai, Kaohsiung, Lam Chabang, Rotterdam, Antwerp, and Hamburg are in the top 20 ports.
[Global Top 20 Port Container Throughput in 2022] Global Top 20 Port Container Throughput in 2022 (Source: Alphaliner 2023)
2. Progress of U.S. West Coast LA/LB Port Workers' Union Strike Tensions have risen amid protracted labor negotiations at U.S. West Coast ports. The union pulled out a 24-hour work stoppage card from the evening of April 6 to the afternoon of April 7, and the employer group criticized the union for fear of cargo diverting from the ports. The 24-hour work stoppage by workers at the LA/LB ports resulted in the closure of all seven berths at the LA port during the period, while four of the six berths at the LB port were also closed. The International Longshore and Warehouse Union (ILWU) represents 22,000 workers at 29 ports on the U.S. West Coast, and the Pacific Maritime Association (PMA) represents 70 companies, including West Coast port terminal operators and the shipping lines that use the terminals. The labor and management have been negotiating for a new collective bargaining agreement since May 20 last year, when the existing one expired on July 1. On June 14, they signed a new six-year labor agreement, which took effect on July 1, 2022 at the end of the previous agreement. The next step is to have 29 union representatives from each of the West Coast regions convene and vote to ratify the agreement, a process that will take several months to complete. Details of the tentative agreement will remain confidential until the ratification process is complete.

When looking back at the history of the U.S. West Coast strikes, there was a strike at U.S. West Coast ports in late 2014 and early 2015 that resulted in disruptions to loading and unloading at the ports, followed by a labor-management agreement in February 2015 that extended the contract through June 2019, with an additional three-year extension through the end of June 2022.

Recently, North American routes avoided congestion with the settlement of labor negotiations at the West Coast ports, but the market is expected to remain weak due to lack of demand. However, due to the prolonged labor negotiations at the West Coast ports, carriers concerned about logistics shortages are increasingly changing routes to the East Coast instead of the West Coast. In April this year, container throughput at seven ports on the North American West Coast retreated 18.4% year-on-year to 2.037 million TEUs, and fell by 6.9% compared to 2019 (2.237 million TEUs), the pre-pandemic period. In particular, overall throughput at the three ports on the Pacific South West (PSW) fell by 18.3% year-over-year to 1.58 million TEUs, with the ports of Los Angeles and Long Beach both experiencing more than a 20% decline in throughput compared to the same time a year ago. Import volumes at the seven West Coast ports also declined for the fourth consecutive month, recording 915,000 TEUs (down 23% year-over-year). The Port of Los Angeles led the decline with 347,000 TEUs (down 24.7%) and the Port of Long Beach with 313,400 TEUs (down 21.8%).

According to the Journal of Commerce (JOC), the share of West Coast ports in Asia-North America route fell from 62% in 2021 to 58.6% in 2022 and 56% in 2023. In fact, although disruption in logistics process was prevented due to the settlement reached at the labor negotiations, ocean freight rates have been declining sharply as the post-endemic demand for ocean freight transportation continues to weaken, with the Shanghai Container Freight Index SCFI fluctuating between 950 and 1,000.
[Major North America West Coast Port Container Volumes in 2023] Major North America West Coast Port Container Volumes in 2023 (Source: Korea Shipping Gazette)
[LA/LB Port Import Container Throughput in April 2023] LA/LB Port Import Container Throughput in April 2023 (Source: Pacific Merchant Shipping Association (PMSA))
3. Disruptions in Logistics Caused by Congestion and Demurrage at LA/LB Ports Different from the time when 109 vessels waited to berth at the U.S. West Coast ports at the peak of the COVID-19 pandemic in 2022, less than 10 vessels waited to enter the port in June last year. However, if the port closures are repeated, the damage and losses to import and export shippers could increase exponentially, as they would cause major disruptions to intermodal transportation, such as trucking and rail transportation of cargo that needs to be transshipped from container terminals to major inland ports and cities, as well as vessel berthing, loading and unloading operations around the U.S. West Coast, leading to disruptions in logistics. 4. Reasons for U.S. West Coast Port Workers’ Union Strikes The ILWU, representing the union, recently pressured the company by going on a strike, refusing to dispatch employees to port terminals, delaying operations, and filing unfounded health and safety complaints. The union has argued that shipping lines and port terminals, which have made huge profits during the pandemic, should raise workers' wages. Over the past two decades, ports on the U.S. West Coast, particularly LA/LB ports, have been plagued by labor strikes, especially during the COVID-19 pandemic, when major global shipping lines such as MSK, MSC, CMA-CGM, COSCO, and Hapag Lloyd, all calling at LA/LB ports, realized extraordinary operating profits in 2021 and 2022 exceeding expectations.
[Global Conatiner Lines’ Performance in 2022] Global Conatiner Lines’ Performance in 2022 (Source: Korea Shipping Gazette)
The strike was triggered by the employer's rejection of the wage increase proposed by the union. The union has reportedly asked for a USD 7.5 increase in hourly wages each year over the contract term, given the high profits that ships and port terminals have made during the pandemic, which would double the wage increase over the full six-year contract. One of the most central and important factors of the ILWU and PMA's labor negotiations is wages. Currently, the wage level of ILWU-affiliated port workers is very high, and according to the PMA data, the average wage of port workers in 2022 was about USD 200,000, which is more than 260 million in Korean won.

According to the U.S. Bureau of Labor Statistics, the annual mean wage for Transportation, Storage, and Distribution Managers is USD 108,910, which is the highest level in Korea at about KRW 141 million (at an exchange rate of KRW 1,300/USD 1), but the wage for ILWU dockworkers is about USD 200,000, which is also very high.

In June 2019, Maersk applied to the city of Los Angeles to fully automate its APM terminal among the LA container terminals, but the application is currently on hold due to opposition from unions at the terminal. While the LA city authorities have little reason to oppose Maersk's application, the ILWU union seems to have no choice but to oppose it, as automation of the APM terminal will inevitably lead to a reduction in personnel. As the terminal operator's main negotiation agenda is "port automation," which can reduce the jobs of dockworkers, the union's position that it cannot reduce jobs is standing against the employer's position that it will improve terminal operating costs and productivity. Given this backdrop, there is a risk that the strike will recur at any time in the future.

Some of the reasons for the severe congestion at U.S. West Coast ports during the recent COVID-19 pandemic involved that the supply and demand of labor for dockworkers and truck drivers was not smooth due to the coronavirus infection, and the shortage of labor caused delays in the handling of container cargo at the ports. In addition, as the recent economic boom in the U.S. has led to inflation, employment indicators showed that the demand for jobs has increased significantly, but the shortage of related workers such as port workers and truck drivers has caused problems in the supply and demand of their labor, along with significantly increased labor costs. In particular, unlike in the past, the number of truck drivers required for the same volume of cargo has inevitably increased due to the legal regulation of the driving time and working hours of truck drivers in the U.S. This strictly limited the driving time of truck drivers and guaranteed rest breaks, and the inability to supply truck drivers in a short period of time has caused delays in the intermodal transportation of imported cargo from ports to major cities and bases in the U.S.

During the three years of the pandemic, the so-called global top 10 carriers, including MSK, MSC, CMA-CGM, COSCO, Hapag Lloyd, Evergreen, HMM, and others, reaped tremendous revenue growth and huge operating profits by forcing shippers to pay ocean freight rates that were approximately three to six times higher than pre-pandemic rates. Furthermore, due to congestion and demurrage at the LA/LB ports, carriers and container terminals were forced to charge shippers DEM & DET (Demurrage & Detention: Demurrage and equipment delay charges) indiscriminately. Nonetheless, as the world was faced with the risk of epidemic and the lockdown of ports and airports during the pandemic, shippers were forced to keep a low profile on the policies of carriers and terminal operators temporarily. In other words, large shipping companies with large volumes of cargo are usually in a superior position to carriers such as forwarders and shipping lines, but during the pandemic, the relationship between these carriers and shippers has been reversed. 5. Port Congestion and Ship Owner-Shipper Conflict Caused by LA/LB Port Strike In response to the surge in purchasing activity by U.S. consumers during the pandemic, major retailers such as Walmart and Amazon ordered large quantities of goods from Asian countries such as China, South Korea, Taiwan, and Vietnam to ensure sufficient inventory of goods. On the other hand, the movement of goods was hampered due to the disease infection of port workers and related companies, the shift system of port work, the increasing shortage of truck drivers, and various regulations and restrictions imposed by the U.S. federal and state governments. In particular, the number of ships entering the ports of Los Angeles and San Francisco were overwhelmed by the capacity of the LA/LB ports to load and unload cargo, causing difficulties for ships to berth at the ports for loading and unloading operations, as well as giving rise to a situation where nearly 100 ships had to wait at anchorages or even in outer harbor to enter the ports.
[LA/LB Port Monthly Container Throughput and Average Handling Time of Import Container] LA/LB Port Monthly Container Throughput and Average Handling Time of Import Container
[Percentage of Cargo Staying 5+ Days at LA/LB Ports] Percentage of Cargo Staying 5+ Days at LA/LB Ports (Source:PMSA)
As a result, the congestion at LA/LB ports became increasingly severe, and despite the unilateral imposition of demurrage charges by many carriers, shippers had to pay the demurrage charges to the carriers without being able to take any action due to the booming shipping market, which made it very difficult to book vessels during the pandemic. According to the graph above, the monthly container throughput and the average handling time of imported cargo at LA/LB ports have been reduced by about half since September 2022, and the percentage of demurrage cargo has also been sharply reduced to within the 10% range. 6. Other Factors that Caused Congestion at U.S. West Coast Ports If we look at the causes of port congestion in relation to the cases of logistics disruption and supply chain collapse over the past 20 years, there are five main reasons: first, there is work stoppage at ports due to strikes by port unions, truck and railroad unions, and a decrease in cargo throughput due to a shortage of workers including truck drivers in intermodal transportation such as trucks and railways that connect ports and inland areas. For example, break time of truck drivers is guaranteed by law in the U.S., which strictly regulates drivers’ work/break time, including 14 hours of work, 11 hours of driving, and 10 consecutive hours of break, resulting in a severe shortage of truck drivers. This shortage of truck drivers could pose a problem for inland transportation of container cargo in ports.

Second, there have been cases in the past where port functions were temporarily suspended, such as the 1995 Great Kobe Earthquake in Japan or the invasion of Typhoon Maemi at Busan Port in 2003, resulting in the suspension of container import/export and the suspension of mainline operations.

Third, due to the global spread of infectious diseases such as COVID-19, countries have closed their ports, or laborers such as port workers have been lacking due to infectious diseases, resulting in a sharp decrease in the processing of cargo at ports.

Fourth, there are cases of political, military, and economic conflicts, such as the Russo-Japanese War, the Iranian blockade of the Strait of Hormuz, the US-China trade dispute, and the Korea-Japan trade dispute.

Fifth, there have been incidents that could affect the entire supply chain from the source to the destination of cargo, such as the stranding of Taiwanese carrier Evergreen's 'Ever Given’ in the Suez Canal in March 2023, or the bankruptcy of Korean flag carrier Hanjin Shipping in 2016, when a large number of container ships operating on long sea routes around the world were unable to enter the port of destination due to fears of seizure, causing delays in the operation of certain vessels and refusal to unload caused by vessel seizure.

If the chronic congestion on the U.S. West Coast is not resolved, some of the West Coast cargo could eventually be shifted to the East Coast, where ports are less congested. However, if U.S. ocean freight demand does not increase significantly even when the pandemic is over, the shift of cargo volume to the East Coast hardly seems likely.
Port Image (Source: Getty Image Bank)
The reasons are as follows: first, when selecting a port of shipment or port of arrival for an import or export shipper, the contract usually specifies the point of delivery and the cost allocation according to Incoterms 2020, the standard terms of trade. Shippers as well as forwarders and warehousemen, who are the contract party, usually prefer a port or warehouse that is geographically close to the company.

Second, logistics contracts between shippers and carriers, such as shipping lines, forwarders, warehousemen, and 3PLs, are effective for at least one to five years, so it can be difficult to change the contracted shipping line/forwarder or change the port of entry/departure.

Third, in the case of carriers and terminal operators on both the West Coast and the East Coast, they employ marketing strategies to maintain their port volumes, and the interests and trading relationships of many related companies exist such as loading/warehousing/railroad/trucking companies, consolidators, forwarders, and inspection & testing companies. Given that, it is unlikely that West Coast volumes are rapidly shifted to the East Coast in the near future.

Fourth, due to the recent U.S.-China trade dispute and conflict, China's exports to the U.S. have fallen significantly, and in the medium to long term, the volume of Asian exports is expected to decrease due to U.S. sanctions on many countries and near-shoring, re-shoring, and friend-shoring policies, which will likely to ease port congestion at LA/LB ports.

From the viewpoint of East Asian countries, U.S. West Coast ports have very favorable transportation routes and freight competitiveness. This is because the freight rates are cheaper than other routes, and the Land Bridge is actively used in transporting the cargo that have entered the LA/LB ports by rail using DST (double-stack train) to major rail freight stations such as Chicago, and then to the final destination via multiple transportation routes such as truck, rail, and river to major inland cities and bases in the U.S. where the shipper is located. In comparison, in the case of U.S. East Coast ports such as New York, Charleston, and Savannah, ocean freight rates between these ports and major hub ports such as Shanghai Yangshan Port and Busan New Port in East Asia are relatively higher than those on the West Coast, and transit times are significantly longer than those on the West Coast, being an all-water service route. In particular, South Korea is an export shipper that handles about 60% of its exports to the U.S. at U.S. West Coast ports, so it is difficult to take measures in a short period of time to transfer shipments to the U.S. If the labor dispute is prolonged, South Korea’s exports to the U.S. will likely suffer a huge blow. 7. Recent Decline in Import and Export Container Volume at LA/LB ports The total import and export container volume at LA/LB ports in May was 779,140 TEUs, down 19.5% year-on-year. In detail, full import container volume was 409,150 TEUs, down 18.16% year-on-year, and full export container volume was 101,741 TEUs, down 19.03% year-on-year, for a total import and export full container volume of 510,891 TEUs. Empty container volume decreased 21.63% year-on-year to 268,249 TEUs. Thus, the LA port’s April 2023 throughput was 688,110 TEUs, down 22% year-on-year, and its January-April 2023 throughput was 2,525,204 TEUs, down 29% year-on-year. In addition, total import and export container and empty container traffic at the LA port in May 2023 was 779,140 TEUs, down 19.5% year-on-year.
[Recent Container Volume at LA Port (May 2023, YoY)] Recent Container Volume at LA Port (May 2023, YoY) (Source: LA port homepage)
The decline in container volumes at the LA port is attributed to two factors: first, as U.S. consumers spent less time out and more time at home during the pandemic, purchases and consumption of consumer goods surged, and food & beverages orders placed through online commerce led to a sharp increase in the imports of goods at home compared to pre-pandemic levels. As a result, containerized cargo arrivals through the LA/LB ports totaled 10,677,610 TEUs in 2021, the peak year of the pandemic, compared to 9,213,396 TEUs in 2020, an increase of 15. 9% compared to 9,213,396 TEUs in 2020. However, from the second half of 2022, due to factors such as the continuous decline in ocean freight rates, the decline in goods orders due to companies' inventory depletion, and the slowdown in consumer purchasing growth due to the US Federal Reserve's interest rate hike to control inflation in the country, container volume decreased by 7.2% year-on-year to 9,911,159 TEU. In 2023, due to the steep decline in ocean freight rates and the Shanghai Container Freight Index (SCFI) falling to 950, the volume of US-bound cargo has been gradually declining. 8. Post-pandemic Container Volume Outlook for the U.S. West Coast First, the decline in U.S. import container volumes is likely to continue for some time, given the easing of inflation in the U.S., the delay in the global economic recovery, fears of reduced trade volumes due to conflicts between economic blocs such as the U.S.-China trade dispute, and concerns about a slowdown in the shipping market. Given these trends, the congestion at LA/LB ports is expected to almost disappear and return to pre-pandemic conditions.

Second, China, which has played a central role as the world's factory for the past half-century in helping American consumers buy and consume cheap goods to increase their economic benefits, is now entering its third term of Xi Jinping's era, accelerating the realization of the Chinese Dream, which is the realization of a comfortable life for the entire Chinese people. This means that China will no longer serve as a global factory for the U.S. and Europe, as it has done in the past by enriching American consumers with cheap Chinese goods. In this context, China's bilateral trade with the U.S. is likely to stagnate or even decline rather than grow continuously. This is also in line with the fact that from the second half of last year until recently, the volume of Chinese containers entering the U.S. West Coast has plummeted.

Third, due to the enactment of various laws and policies of the Biden administration that prohibit or restrict trade in key strategic materials and intermediate goods such as semiconductors, electric vehicle batteries, and rare-earth elements, the trade volume between China and the U.S. is likely to decrease unlike in the past. In addition, U.S.-China trade war and political and economic conflicts have been intensifying for several years, meaning the volume of cargo from China to the U.S. West Coast is likely to decrease. In fact, from January to May 2023, containerized cargo volumes on the U.S. West Coast dropped by nearly 30%. Globally, the U.S.-China trade war has led to a number of measures to hinder trade and reduce ocean cargo volumes, such as the IRA law on subsidies for electric vehicles, the European Parliament's Core Commodities Law, the Carbon Border Tax, and the inclusion of rare-earth technology regulations in China's revised list of banned technologies. Therefore, it was difficult to expect an increase in cargo volumes during the pandemic, but a decrease in cargo volumes was expected instead. Eventually, the trade dispute and hegemonic rivalry between the U.S. and China will likely escalate the conflict between the two economic blocs, which will lead to a decrease in global trade volume as well as ocean cargo volume.

Fourth, with sharp reduction of inventory levels of goods by U.S. companies after the pandemic, the suppression of consumer spending due to the Fed's continuous interest rate hikes to control inflation, and the decrease in demand for imported goods due to the inflation control policy, the overall cargo volume as well as that of LA/LB ports will decrease, easing congestion at LA/LB ports. Fifth, the U.S. FMC has announced that it will waive the application of demurrage and detention charges in future port closures. As the U.S. government blames shipping companies for supply chain disruption and collapse, such as the President Biden blaming the surge in ocean freight rates as a major cause of inflation due to rising prices of imported goods in the U.S., it is expected that the extreme congestion at LA/LB ports will be resolved to a large extent in the future due to the FMC's strong sanctions on shipping companies, in addition to the enforcement of OSRA 2022 (U.S. Overseas Shipping Reform Act). 9. Reduced Cargo Volume due to Reshoring and Friendshoring Policies In response to business disruptions caused by U.S.-China trade disputes, the pandemic, wars, and conflicts between economic blocs, companies are adopting new sourcing strategies such as nearshoring, reshoring, and friendshoring, centering around the U.S. The idea is to realign existing supply chains and diversify the sources of raw materials, ingredients, and intermediates to increase flexibility and resilience. As the global supply chain is reorganized around the U.S. due to the rise of nationalism and protectionism, it is expected that cargo from Asia such as China will gradually decrease to U.S. West Coast ports, while cargo from Asian ports to U.S. ports and from Europe to U.S. ports will increase. According to the Wall Street Journal (WSJ), citing data from the University of Michigan's Department of Supply Chain Management, the share of containerized cargo at the Ports of Los Angeles and San Francisco reached 25% in October 2022, the lowest in 20 years. The decline on the U.S. West Coast has shifted cargo to the ports of New York, New Jersey, and Savannah in the East and Houston in the South.
[April 2023 Import Container Throughput at Southeastern North American Ports] April 2023 Import Container Throughput at Southeastern North American Ports (Source: PMSA)
10. Increased Demand for Transportation of Goods Due to Large-scale Plant Expansion in Texas and Georgia According to shipping research firm Clarkson Research, the global container fleet is expected to reach 30 million TEUs by 2025, with a total of 6.4 million TEUs scheduled for delivery from 2023 to 2025. In the end, while the supply of container ships is expected to increase significantly, demand is expected to slow down, making a supply chain disruption unlikely similar to the pandemic.

Among the U.S. West Coast ports, the one most closely aligned with the shift in the cargo volume to the East Coast is the Port of Savannah in Georgia located in the southeastern part of the U.S. In the case of Georgia, which is ranked as the No. 1 favorable state in the U.S. for doing business, Korean companies such as Kia Motors, SK Energy, and SKC are planning to build factories, and major electric vehicles companies including Tesla and Rivian are also establishing factories in Georgia. In particular, Georgia has adopted a right-to-work law that prohibits employers from forcing employees to join unions or pay union fees, resulting in a stable employment supply with a very low unionization rate compared to other states. In addition, its geographical proximity to the Panama Canal makes it easy to access the Port of Savannah, the largest port in the country, for global companies to transport their products. The Port of Savannah, the largest port in the state of Georgia, is the fourth largest port in the U.S. by volume and is a fast-growing container port. For Korean companies Kia and Hyundai, it is easy to maximize their geographical advantages by utilizing the Port of Savannah or the Port of Mobile. Therefore, in the future, U.S. East Coast and Southeastern ports are emerging as alternatives to the U.S. West Coast ports, and the chronic union strikes in the U.S. West Coast are expected to gradually decrease due to competition between the ports.

According to the PMSA's data below, LA/LB ports' share of containerized cargo throughput imported from East Asian countries was 51.9% in April 2023, down 3% year-on-year, which is believed to have been impacted by continuous port strikes.
[Major USWC Ports Shares of Container Throughput (as of April 2023)] Major USWC Ports Shares of Container Throughput (as of April 2023) (Source: PMSA)
# Reference [1] Alphaliner 2023
[2] Journal of Commerce (JOC)
[3] Korea Shipping Gazette(www.ksg.co.kr)
[4] Pacific Merchant Shipping Association (PMSA) homepage
[5] LA port homepage
[6] Port of LA Annual Container Statistics
[7] Wikipedia https://en.wikipedia.org
[8] KOTRA data: US Container Shipping Status and 2023 Global Outlook
[9] Descartes Systems Group
[10] Mail Business News (2022.12.11)
[11] Cargo News(www.cargonews.co.kr)

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Ph.D. in Logistics Kyohoon KooPh.D. in Logistics Kyohoon Koo