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Columna De Expertos US LA/LB Port Strikes and Their Impact on Logistics Market (Supply Chain)_Part 2

Fecha de registroAUG 29, 2023

US LA/LB Port Strikes and Their Impact on Logistics Market (Supply Chain)_Part 2
Ⅱ. Fundamental Causes of Labor and Management Conflicts in Ports 1. Calls and Port Congestion Issues of Mega Containerships Recently, port congestions are occurring as never before. The reason behind this is the new variable, the call of mega containerships. Denmark-based company Maersk constructed and input an 18,000 TEU megaship around 2014 for the first time around the world and triggered a destructive competition between global liners. The revenue per TEU for the same shipping time is bigger by multiples when comparing the newly input 24,000 TEU mega containership with the 6,000-10,000 TEU ship used in the Asia-U.S. or Asia-Europe route in the past. But since many containers can be loaded at once, people can expect economies of scale where the transport unit cost per TEU reduces tremendously.

For the past 10 years, the global top 10 liners made use of policies that enabled them to relatively easily raise funds including vessel finance because of the low interest rates in each country. They input sailed megaships to regular routes and executed the cascading effect together with destructive competitions. The cascading strategy is analogous to a cascade where water from the very top flows to the bottom, and the bottom water flows to the lower bottom. Just like this phenomenon, if liners input mega containers in large routes, the total revenue from rates for each voyage increases proportional to the vessel size compared to the existing rival liners. In addition, sailing costs per TEU including fuel costs, labor costs, and port charges decrease compared to the rival companies, securing a competitive edge.

Additionally, if the vessels that were used in large routes are input again in small routes, they can secure a competitive edge over rival liners that were sailing in those routes due to economies of scale. Because of this, large liners with megaships can have a competitive edge over large and small/medium-sized liners in these routes depending on the size.

If this situation continues and a certain amount of time passes, large liners that input megaships in all routes will have a competitive edge. As a result, liners that are unable to do this will lag behind the competition and will no longer be able to compete, causing destructive competition to occur. This kind of action endangered rival companies that were inputting a fleet of less than 6,000-8,000 TEU vessels and triggered destructive competition. The first scapegoat was probably Hanjin Shipping that input and sailed small-sized ships.
Image of a vessel loading a container at a port (Source: Getty Images Bank)
Global liners recently focused on constructing megaships (24,000 TEU). These vessels have a length of 400m, a width of about 62m, and can load up to a maximum of 25 containers. HMM, South Korea’s national liner, newly constructed 12 megaships (24,000 TEU) at Korea Ocean Business Corporation and directly used them in the Asia-Europe route. This way, the company was able to gain revenues from rates and sales profits.

However, for mega containers (20,000 TEU) to smoothly load and unload at a container port where vessels enter and sail, the length and the width of berth, possible rows of loading/unloading with quay-side container cranes, and the number of input equipment are extremely important. For example, a Neo-Panamax vessel (length: 366 m, beam: 49 m, height: 57.91 m, draft: 15.2 m 19-20 rows, 12,500 TEU) was able to load about 20 rows. However, a megamax containership, a large ship that has the capacity of more than 20,000 TEUs, can handle an outreach length of a crane worth more than 24 rows.

In addition, if the container crane increases, other factors should increase proportionally: the capacity of the transfer crane (a yard crane used for performing stacking, loading, and unloading work in the container yard of a container terminal) and the number of input equipment such as yard tractors, yard chassis, reach stackers, and empty container handlers. Of course, if the capacity and number of various equipment used in the container terminal increase, the area of the terminal should increase much more. Besides, the depth of water should be a minimum of 18 m to 20 m in order for containerships to smoothly dock and undock. This is closely related to the draft line of the ship and it is a mandatory condition for safe port entry/departure and mainline operations.
[Key Specifications for Each Type of Containership] Key Specifications for Each Type of Containership (Source: Wikipedia)
However, in reality, even key ports around the globe are unable to appropriately respond to the advent and urgent increase of mega containerships. This is because the terminals that were built and operated before the calling of mega containerships had to expand their dock facilities but were unable to do so because an astronomical amount of money had to be invested beforehand for the construction and input of port constructions. Therefore, this led the mega containerships to concentrate their cargo on the calling ports and port congestions occurred despite the fact that people knew the port will be full. Due to the sailing of mega containerships, the calling ports’ berth size, yard area, size of input equipment, etc. have a severe impact on the productivity of the mainline and yard work. Ocean carriers would not encounter issues with the actual transit time during maritime transportation. However, if the processes at the ports, including arrival, berthing, mainline operations, loading and unloading, yard operations, customs clearance, and inland transportation, are not smoothly integrated, it can create bottlenecks and lead to problems with ships arriving on time. 2. Port Congestions and Supply Chain Issues Linked with Global Multimodal Transportation The above-mentioned optimal dispatch and utilization of equipment are important. However, the most important aspect is to allow the supply chain, including inland transportation and shipment of exporting countries, maritime transportation, port entry, mainline work, and inland transportation, to function smoothly, as water smoothly passes through a pipe. If bottlenecks get worse in a certain section or point of the multimodal transportation, the end-to-end section, the overall flow of the supply chain will be delayed or collapse. Generally, an optimization of a part rather than the overall optimization is very important in the supply chain management perspective, and the most important and essential hub of the supply chain is ports. Therefore, if the West Coast continuously experiences congestions and demurrage, a certain point in the supply chain will be blocked due to bottlenecks, and the logistical disturbance can lead to the collapse of the global supply chain.

Delays or breakdowns in the supply chain can lead to longer lead times for order, production, and delivery from a company's perspective. This can result in slower cash turnover for exporters and importers, leading to financial pressure on working capital. For ocean carriers, the agent of maritime transportation, the decline in on-time performance can lead to deteriorating cargo services. Delays in vessel operation times, port entry, and mainline operations can reduce the port around time of ships, potentially harming profitability. For terminal operators, due to the limited terminal area, aligning mainline operations, yard activities, and loading/unloading operations for inland transportation within a short period becomes challenging. This difficulty can result in reduced services for ocean carriers, forwarders, and shippers, leading to decreased revenue and profitability. Additionally, companies and workers associated with the port can also experience losses due to these port congestions and demurrage.
Images of ships, containers and trucks at ports (Source: Getty Images Bank)
The past congestion at the Ports of LA and LB (LA/LB ports) on the U.S. West Coast was caused by a significant event in 2002, when the port labor union went on a 10-day strike. During this strike, over 100 ships waited to dock, and around one-third of the ships intending to enter the LA/LB ports lacked available berths. As a result, the ships had to wait for several days to berth, leading to a severe situation of congestion. Certainly, even after the ships berthed, the unloading operations took more than twice the usual time, turning the congestion into demurrage in the terminal. In the normal course of operations, imported cargo at the LA/LB ports is usually moved out of the yard terminal within 24 hours using truck or rail transportation. However, due to the congestion, cargo has been left stranded within the terminal yard for an extended period. As a result, truck drivers have had to wait for extended periods for mainline operations and yard activities. Due to these berthing and demurrage issues at the LA/LB ports, the time it takes for a ship to berth after entering the port, unload import cargo, load export cargo, and depart again has extended to over one week, which is more than twice the usual time. In recent years, the road and rail networks around those ports have been unable to function properly due to the chronic port congestions at the LA/LB ports. The severe congestion on the roads connected to the port is exacerbating the port congestions in a recurring vicious cycle.

For imported containerized cargo to be delivered to the final customers, it must undergo an inland transportation process involving multimodal means such as trucking, railroads, and inland waterways. This intermodal transportation is necessary to ensure smooth and efficient transit. Especially in the case of the United States, being a vast continental country, it is interconnected by an extensive network of railways and highways. Therefore, if cargo brought into container terminals isn't swiftly loaded and unloaded using terminal equipment and transported to major inland hubs or final customer destinations, and instead bottlenecks occur, it can indeed lead to critical delays or even the collapse of the supply chain. 3. Increase of Transported Cargo Volume Passing through the Panama Canal and Vessel Draft Issues Due to continuous chronic port strikes and labor disputes on the U.S. West Coast, the share of the following multimodal transportation route decreased: cargo from Asian countries to the United States that passes through the LA/LB ports on the West Coast and transported with a combination of rail and truck into the U.S. On the other hand, as the usage of the All Water service, which involves transiting through the Panama Canal to reach ports on the U.S. East Coast or South, increases, it is expected that land bridges leading to major hubs within the United States will activate entering ports like New York, New Jersey, Charleston, and Savannah on the East Coast, port on the Southeast, as well as Houston, New Orleans, and Mobile on the South. According to the Pacific Merchant Shipping Association (PMSA), as of January to September 2022, import containerized cargo at the Port of LA decreased by 6.5% year-on-year. On the contrary, ports like New York and New Jersey experienced a 10.4% increase in import containerized cargo year-on-year. These statistics indicate a shift in cargo volume from the West Coast to the East Coast.

Also the Panama Canal can hold up to 14,000 TEU containerships as the Canal was extended in 2016. In the past, cargo moved in multimodal transportation by passing through the LA/LB ports and to major cities/hubs in the land via trucking or DST (Double Stack Train). Now with the help of the Panama Canal, cargo can move to the East Coast and the South Coast to key cities by multimodal transportation linked with the ALL WATER service. Therefore, due to the scale of economic benefits, the operation of a 14,000 TEU container ships are expected to secure a relatively advantageous position in the competition with the ports in the West Coast by reducing transportation costs. However, the Panama Canal toll increase measures by the Panamanian authorities, aiming to leverage the growth in cargo passing through the Panama Canal for revenue enhancement, could potentially influence the decision-making of shippers.
Image of a ship passing through the Panama Canal (Source: Getty Images Bank)
The maximum draft of a ship refers to the depth of the hull submerged in the water when the ship is fully loaded with cargo and afloat. This maximum draft line, known as the load line, is crucial for ensuring the ship's sufficient buoyancy to maintain a minimum freeboard, which establishes the necessary reserve buoyancy to secure seaworthiness and safety in wild seas. However, due to a record-breaking drought causing a decrease in the water levels of Gatun Lake, measures have been taken to restrict ship drafts. If future water shortages arise due to climate change, it could pose issues for the utilization of the Panama Canal route, limiting its use and potentially causing problems in using the East Coast. Ⅲ. Conclusion Due to chronic strikes in the U.S. West Coast LA/LB ports, there have been delays in handling the volume of cargo within the ports, as well as delays in multimodal transportation connections such as inland roads, railways, and inland waterways for transshipment. This has led many shippers experiencing severe logistical bottlenecks to gradually shift their focus to the Eastern and Southern U.S. ports, fearing delays or disruptions in their supply chains. Additionally, the ongoing trade disputes and tensions between the US and China are anticipated to increase the likelihood of expanded imports of goods from Europe.

Ports serve as both the forefront infrastructure of the logistics supply chain and the starting point for interconnecting various transportation modes such as trucks, railways, aviation, and inland waterways. Particularly, there are plans to modernize, upgrade, and automate the aging facilities of the LA/LB ports. However, concerns have been raised regarding job losses and wage reductions due to the automation of ports by the port unions. During the current strike, there have been unprecedented demands for substantial wage increases as well. This appears to be a strategy employed by the labor unions, as they demand a substantial share of the profits generated by global major carriers that call at the U.S. West Coast. By proactively demanding high wage increases during negotiations, they aim to delay the automation of port facilities and secure a favorable position in the negotiations.

Recently, along with the decline in maritime freight rates, there has been a recovery in the supply chain, leading to a moderation of inflation within the United States. The Global Supply Chain Pressure Index (GSCPI) announced by the U.S. Federal Reserve shows a significant drop to -1.2 in June, down from the all-time high of 4.31 in December 2021 when the peak of the COVID-19 pandemic was reached. Due to the recovery of the supply chain and the decrease in freight rates, shipping companies are experiencing a substantial decline in profitability this year, and they are implementing measures to intentionally reduce shipping capacity. Recently, in the maritime industry, 10 ships bound for Busan New Port to the Americas were canceled. This indicates a decrease in demand for rerouting to the U.S. East Coast when congestion in the U.S. West Coast is severe. It also demonstrates the efforts being made to maintain the volume of cargo throughput at least in the LA/LB ports.

The logistical turmoil caused by the strikes in the U.S. West Coast LA/LB ports can lead to a cascade of issues across multimodal transportation, including maritime shipping, trucking, and rail transportation. This can result in delays and disruptions in the supply chain. From the perspective of importing shippers, these disruptions not only cause delays in deliveries between companies within the country but also affect inventory management, depreciation of goods, and losses for related companies along the supply chain. This situation can potentially lead to a multitude of problems, both legally and from a marketing standpoint. Fortunately, a positive aspect is that as the COVID-19 pandemic comes to an end and the bullwhip effect in terms of companies' product purchasing and inventory levels diminishes, there is a decrease in the likelihood of supply chain disruption or collapse. The U.S. domestic economy is entering a phase where inflation is stabilizing, and the impact of high interest rates on investments in assets and goods is being curbed. This trend suggests a reduction in the potential for disruptions or collapses within the supply chain.

Furthermore, with the rapid increase in global container shipping capacity, starting from 2025, the dissolution of one of the alliances, the 2M Alliance (MAERSK+MSC), will contribute to intensified competition within the shipping industry. This competition will be between comprehensive logistics-focused carrier groups like MSK, CMA-CGM, EVERGREEN, and shipping-focused carrier groups like MSC, ONE, HMM, YML. As a result, concerns arise about a potential downturn due to the intensified competitive landscape in the shipping industry, and this downturn in container shipping conditions could directly impact the cargo throughput at the LA/LB ports.

Moreover, it is expected that the significance of U.S. West Coast ports will decrease, and the importance of ports in the U.S. Southeast will increase. This suggests that congestion issues in the LA/LB ports might alleviate over time. However, it's important to note that localized logistical disruptions due to strikes in the LA/LB ports could recur at any time. The situation can also affect the Canadian West Coast ports, creating a ripple effect where similar port union strikes could repetitively emerge.

While strikes by maritime unions in South Korea have rarely paralyzed logistics, the potential impact of solidarity strikes by freight unions or in coordination with other transportation sectors, such as railway unions, is a concern. Particularly, strikes affecting Busan New Port, the major port for processing the highest volume of import and export containers, could lead to significant disruptions in trade for shipping companies. Furthermore, beyond labor strikes, events like earthquakes, floods, natural disasters, conflicts, or the recurrence of events like the COVID-19 pandemic could lead to logistic disruptions or even the collapse of global supply chains. The possibility of such disruptions remains a notable consideration in managing supply chain risks. # 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