Port activity is expanding and many ports, especially on the west coast, are overcrowded and offering slower and more expensive service. The country's major ports are facing congestion as the inbound volume of goods manufactured abroad continues to rise. Projections for the next five years indicate that some ports will triple their containership capacity and freight throughput.
The recent congestion at LA/Long Beach, the country’s largest container port gateway, is due to equipment shortages (e.g., chassis), labor shortages and labor contract negotiations, and the challenge of adjusting terminal operations to larger container ships deployed in the transpacific trade. Ongoing congestion has raised the issue of shifting some cargo to alternate gateways. Options for available for importers and exporters to use other U.S. West Coast ports, Mexican ports, and all-water services via the Panama Canal to Houston and other Gulf ports. However, all these options would likely be more costly and less timely and have their own challenges.
To accommodate the rise in global imports, the industry is shifting more to an "inland port" model, where inbound goods are quickly off-loaded from ships and moved to inland distribution centers for subsequent handling and redistribution within the country.
According to the Center for Transportation Research, The University of Texas at Austin, an inland port is defined as:
“A physical site located away from traditional coastal borders with the vision to facilitate and process international trade through strategic investment in multi-modal transportation assets and by promoting value-added services as goods move through the supply chain.”
Why Inland Ports?
The advantages of inland ports are numerous. Ideal inland ports have efficient access to logistics services, transportation systems, and consumer markets; and may be in close proximity to a "traditional" port. Furthermore, the best locations also support large, flexible buildings and have extensive parking for containers and trailers, as well as easy access to mature transportation infrastructures.
Alternatives for the transport of oil/gas products are limited to pipeline, rail, and truck. Pipeline is, by far, the low-cost alternative, but offers little flexibility as to where the product goes (it flows from point A to point B). Trucking is the most flexible, yet very expensive. Rail can offer both flexibility and competitive costs.
So, more and more, oil products are moving via rail today, and these volumes are growing rapidly. However, oil must be transloaded from truck to rail at strategic intermodal centers, like the Port of North Dakota (see below).
Important elements of a successful inland port/intermodal project include:
- Access to regional market commodities;
- Access to a railroad mainline or shortline connecting to a mainline;
- Physical ability/permission to spur off of the mainline with loop tracks;
- Good Interstate or 4-lane highway connections;
- Transloading equipment/infrastructure; and
- Fully improved industrial sites.
The United States has become a major buyer of manufactured goods from around the globe. Consequently, our domestic manufacturing base is declining and imports are increasing. Even with this shift, industrial real estate demand continues to expand at a rate of six to ten percent annually. This expansion is being driven by the real estate needs of importing companies, which must find strategic locations that can support the many functions of the new distribution patterns required for foreign-made goods.
Inland ports can help to alleviate shipping issues. Mexican ports are facing growth of trade between Mexico and Asia, security concerns, and inefficiencies (e.g., custom broker influence on port selection). All-water service via the Panama Canal into Houston cannot match the transit time and service frequency offered over LA/Long Beach, although recent port delays of over a week in some cases at LA/Long Beach are making all-water service options more attractive. All-water service is more suitable for lower-value less time-sensitive goods rather than higher-value perishable products (e.g., refrigerated cargo, electronics, and seasonal consumer products).
For shippers, other challenges include efficient inland connections, both rail and highway for the shipment of international-containerized cargo. The selection of inland transportation mode is part of the supply chain decision process for shippers. In general, rail deliveries are considered to be a lower cost inland mode than trucking, but other factors (e.g. transit time and inventory stock requirements) drive the decision process. The highest cost portion of an international supply chain is the trucking to the final destination, or so-called “last-mile” transportation.
The intermodal rail sector has expanded over the past decade driven by increasingly-competitive rail costs versus trucking. Included in this analysis are driver shortages in the trucking industry investments by the railroads, shipper willingness to incorporate rail into supply chain strategies, penetration of shorter haul corridors, and the growth of intermodal-friendly international container volumes. Important developments supportive of intermodal rail have been:
- Operating costs of over-the-road truck service have risen rapidly relative to rail and are expected to increase further, due to continued shortages of truck driver labor, hours of service rules and until recently, the high price of diesel fuel. The recent decline in fuel prices will likely not stop the truck-to-rail conversion in the short term, as persistent driver shortages are expected for the foreseeable future. The threat of a labor shortage is particularly prevalent in medium- and long-haul traffic lanes, and could create spot shortages of truck service, particularly in peak months. Location strategies for distribution centers and other warehouses to address these shortages are emerging, that reduce the need for long-haul trucking.
- Rail service (e.g., transit speed and reliability, terminal dwell times, service frequency and coverage of origin-destination pairs) continues to improve due to major rail investments in infrastructure, such as expanded terminal facilities and improved right-of-way.
- Investments are being made by railroads, industrial real estate companies, and shippers in the development and expansion of co-located intermodal rail yards and logistics facilities. These hubs act as regional distribution and consolidation points for international, cross-border, and domestic containerized cargo. Local and regional truck services connect the hubs with smaller markets. Intermodal hubs are typically located along strategic rail corridors. We have recently completed a site selection that chose a site on Navajo Chapter land outside of Gallup, New Mexico close to I-40, the BNSF railroad and near a rail loop that can efficiently transload shale oil.
The supply of truck drivers has been the major constraint on the trucking industry over the last several years, and this remains a significant challenge for the industry, particularly in the medium- to long-haul lanes. Developments on the regulatory front continue to impede on the growth of the industry’s capacity – for example, increased emphasis by the U.S. Department of Transportation (DOT) on safety and truck driver performance and hours-of-service regulations. A further constraint is the more stringent financial requirements placed on borrowers, which particularly impacts poorly-capitalized firms and owner-operators in the long-haul segments of the market.
Rates have trended up in the trucking sector due to the supply constraints at the time of a growing economy. This has eroded some of the trucking sectors competitive position against rail service. The effect on shippers has varied by traffic lane and the lengths-of-haul, and the presence of viable competition from rail in a particular lane. In cases where rail competition exists, over-the-road service may continue to face eroding market share, especially as railroads continue to invest heavily in the infrastructure for intermodal.
Shortages of drivers and over-the-road equipment will put highway trucking at an increased disadvantage, particularly for longer length-of-haul traffic lanes and during periods of peak seasonal demand. Rail competition will limit price increases in these lanes. For traffic lanes not well-served by rail, however, truckers will have significant pricing power and rates should rise.
Inland Port Success Story – Minot, North Dakota
We have good experience in the assessment of inland ports. Let’s first look at our experience in Minot, ND—one of the most successful inland port projects in the country.
“It was a cold, snowy morning” in early 2005 in Minot, ND; members of the Minot Chamber of Commerce and the City of Minot had gathered to hear the results of an intermodal development feasibility study of which we were a part. Our advice to them had been to proceed with the development of the project, which would initially load and move regional grain products and other products such as oil—as the market would warrant—to the West Coast ports of Seattle and Vancouver.
The rest is, as they say, history. The Port of North Dakota (www.ndportservices.com) has become one the most successful intermodal projects in the world, moving more oil-related products than any project of its size. It is located in the heart of the Bakken oil patch – one of the richest finds of shale oil ever discovered in North America. The mining of shale oil/gas using fracking technologies has transformed this industry, and the massive new volumes are rapidly helping lead America toward oil independence.
The Port has aggressive growth plans too. It had 72 employees in 2012, far more than the 40 employees that officials figured the Port would have four years into its operation. This year, the Port will have, in the neighborhood, of 200 to 250 employees. As the proposed expansion gets built out, that number will grow. Future employment is unknown, but could be as high as 2,000 workers. Plans call for increasing the Port’s capacity to handle more business and larger trains. The Port would add about 3,000 acres to the north.
The flexibility of moving oil products via rail has become a Godsend; thanks to the community leaders in Minot, showing that vision for success, back on that “cold, snowy morning.”
FTZs Can Help
Many inland port projects offer the benefits available through the Foreign Trade Zone (FTZ) program. Distribution center sites that have FTZ program benefits offer significant advantages over non-FTZ sites. For example, in an FTZ, the importer (or the importer's logistics provider) may consolidate the U.S. Customs and Border Protection entries into a single weekly filing. This change alone has the potential to save large tenants hundreds of thousands of dollars annually. Furthermore, inland ports are located in "second-tier" nonurban markets and overall labor and property costs are lower.
Foreign Trade Zones (FTZ) and subzones have been growing in importance in recent years. They have become one of the prerequisites for successful inland ports and many industrial parks due to their customs duty savings capabilities. FTZs are secure areas under supervision of U.S. Customs and Border Protection (CBP) that are considered outside the customs territory of the United States for the purposes of duty payment.
Duty deferral occurs since customs duty is not due until the merchandise enters the commerce of the United States. This allows sellers to store merchandise for as long as it takes to sell the product without having to carry the cost of import duty.
Manufacturers can assemble lower-duty imported components into final products, thus saving on duty costs. Additionally, no Customs duty is ever due on imported merchandise that is exported back out of the country without entering the U.S.
commerce. Imported materials that are lost or destroyed in the production process never reach the commerce of the U.S. and therefore are exempt from duty fees.
FTZ regulations and paperwork are complex, and expertise is required to fully realize allowable cost savings; however, proper understanding and use of a FTZ within the confines of the site may attract certain manufacturers and distributors that are able to take advantage of FTZ benefits.
Inland ports offer many cost and logistics advantages to shippers. They also provide substantial economic development advantages to communities where they locate. Cost benefit studies show significant job and economic development growth.
Look at potential locations where an inland port might locate. Showing that vision for success my help your economy and create jobs for the future!
About the Author
Deane C. Foote, CEcD, is President/CEO of Foote Consulting Group, LLC (www. footeconsulting.com), a site selection and economic development consulting company located in the Phoenix area. Deane has over 30 years of development experience, and is a founding member and former Treasurer of the Site Selectors Guild (www.siteselectorsguild.com), a company of the top site selectors in the world.
Deane has worked on dozens of projects in recent years, including corporate site selection related projects for MeadWestvaco; Staples; Simplot; TranSystems; Wal-Mart; Coca-Cola; Forest City; Navajo Chapters, and Sisener, a Spanish renewable energy company; and economic development projects for the States of Tennessee; Arizona; New Mexico; Ohio and Oregon; Wayne Co (Detroit), MI; Rockford, IL; Roswell (NM); Iowa City Area Development; EDC of Wayne Co (IN); City of Moraine, OH; Gallup, NM; Town of Queen Creek, AZ; Mesquite, NV and Jamestown, ND. He has over 30 years of experience.