By Don Moss, Senior Director and Grant Miller, Senior Director, Colliers
How It All Started and How the World Changed
Before 1956, most cargoes were loaded and unloaded by hand. After studying ship sizes and cargo volumes across multiple industries, Malcolm McLean, owner, and founder of McLean Trucking, determined that certain dimensions would work very well for shipping containers. In the article, “Evolution of a Box” (Winter 2009), C. E. Ebeling states, “In 1956, hand-loading a ship cost $5.86 a ton. Using containers, only cost 16 cents a ton, 36-fold savings. Containerization also greatly reduced the time to load and unload ships.”
In 1956, Malcom McLean, invented and patented the shipping container. The maiden voyage of the first container ship was in April 1956, but the real growth in container shipments occurred during the Vietnam War where SeaLand delivered 1,200 containers a month to support the war effort.
As the cold war ended in 1991, a “peace dividend” in developed economies, which allowed them to reduce military expenditures and boost investment in other areas. The birth and development of the internet occurred when the TCP/IP standard was changed from ARPANET so all computer networks could use a universal language. This development of new digital economy has boosted international trade. Finally, large developing economies such as China and India embraced economic reform and initiated a process of catch-up growth in which trade transformed their economies.
China and Increasing World Trade
China’s first industrial revolution occurred from 1988-1998 when it became the world’s largest producer and exporter of textiles, furniture and toys. Since 1998, when its second industrial revolution began, China now produces fifty percent of the world’s major industrial goods.
One would ask, why does this matter? Ports and logistics are the answer. We are seeing an explosion of international trade as much of the textile, furniture and electronics industries moved operations to China.
On March 16, 2022, the Wall Street Journal reported that China’s latest Covid-19 crackdown is starting to touch shipping operations amid fears of new disruptions to supply chains. Freight forwarders and Maersk Line said warehouses across the key exporting city of Shenzhen were closed until March 20, the WSJ’s Sha Hua reports, and companies are warning that truck movements around major hubs including Shenzhen, Shanghai, Tianjin and Qingdao are likely to slow as drivers are screened for Covid. Shenzhen is requiring freight trucks entering from neighboring hard-hit Hong Kong to change drivers at three designated border checkpoints in an effort to curb the spread of Covid-19. Operations at Shenzhen’s big container terminals are moving, but the shutdown of warehouses and stalled truck operations suggest the flow of goods may slow in the coming days. Major manufacturers including Apple supplier Foxconn and Toyota have already idled some factories, shutdowns that will reverberate across global supplies.
From the report above, four of the top ten ports in the world that handle 110.4 mm containers are hobbled due to Covid-19. It is important to note that Shanghai is the world’s largest port with 43.5 million containers moved per year; Shenzhen is the world’s fourth largest port with 26.55 million containers moved per year; Qingado is the world’s sixth largest port with 22 million containers moved per year and Tianjin is the world’s ninth largest port with 18.35 million containers moved per year. These four ports handle fourty-five percent of all of China’s container volume and China handles thirty percent of the world’s container volume.
By comparison, the United States only handles seven percent of the world’s container volume.
Logistics, Ports, and the Backlog
As you can see from the recent Wall Street Journal and the idling of factories, supply chain interdependence is just a fact. During the 2000’s and 2010’s the majority of the United States companies adopted a “just in time” model of supplying our warehouses and factories.
Covid-19 and now the war in Ukraine are causing major supply chain disruptions that most of us would not have imagined back in 2019.
This supply chain interdependence came with risk that was both ignored and not fully appreciated. In an article posted on Procurios.com in September of 2019, the author states, “Governments are also taking action by engaging in an escalating global competition to maintain and improve national competitiveness in the 21st-century digital economy. While such cross-border competition is by no means new, the geopolitical undertones in this battle for dominance raise the risk that the digital economy will continue to fragment, complicating global supply chains and the operations of international companies, and acting as a drag on economic growth.”
This transformational statement was six months before, then, President Trump declared a National Emergency due to the Covid -19 pandemic.
The supply chain and port backlog really came to light in the fall of 2021, when goods might not reach stores in time for the Christmas holidays. As of early December 2021, there were 96 ships with an aggregate capacity of 732,263 TEU’s waiting to dock at Southern California ports.
Short Term and Long Term
According to Phil Levy, chief economist at Flexport, a freight forwarding company based in San Francisco on easing of port congestion and the supply chain issue, “It’s unlikely to happen in 2022,” said Levy. “My crystal ball gets murky further out.”
Most of you who keep up with supply chain issues, the concept of any return to normalcy has given way to an understanding that a new normal may be unfolding.
The ports are just a cog in the wheel of the logistics challenge – if you cannot get it off the ship to a rail car or warehouse then everything backs up.
As ports work through the backlog, they are contending with structural problems – climate change, aging and overtaxed infrastructure, a shortage of chassis used to haul containers with trucks, and not enough drivers, even as trucking companies increase pay.
Many ports will continue to confront challenges. “We’re beginning to see more emphasis on planning for future sea level rises. Given that ports depend on waterborne traffic, many are beginning to assess these risks and adopt mitigation measures,” Jeff Massengill, PE, ports and maritime director with HDR Inc. stated in an article written by Karen Kroll in October 2021 in Inbound Logistics.
The bipartisan federal infrastructure bill, as outlined in July 2021, included about $17 billion for port infrastructure. If approved, it will direct significant funds to projects that include consideration for sea level rise, sustainability, zero emissions technology, and benefits to disadvantaged communities.
The $17.1 billion for ports will go through the U.S. Army Corps of Engineers, and sixty-eight percent of it – more than $11.5 billion – will be focused on new construction. That money appears set to literally reshape ports in the years ahead with projects on the docket like dredging to allow bigger boats to enter or allow more boats to dock at once.
However, on a sober note, the Army Corps currently has an estimated backlog of $109 billion in construction projects, according to the Congressional Research Service, as well as other authorized but unfunded maintenance projects that are awaiting money and could potentially get out the door more quickly.
As Kevin DeGood, director of infrastructure policy at the Center for American Progress discusses in Yahoo Finance, “But even as the Biden administration pushes to get funds out quickly, the process can often be slow.” New construction projects in ports can be 10 or 15 years in the making. The process historically involves “four congressional authorizations in order for you to go from idea conception to finalized project,” he said.
Some good news on the horizon is an announcement from the Biden-Harris Administration on January 12, 2022. At the nation’s largest Port in Long Beach, California, there will be an $8 million investment to improve commercial navigation and allow larger and more ships to pass. The investment will support design work to widen the port’s main channel, deepen the entrance channel, and build an approach channel and turning basin. It adds to the current $52 million grant that was previously announced to support the Port of Long Beach’s on-dock rail facility.
For the east coast, the Administration will invest $69 million to improve navigation and expand capacity at Norfolk Harbor, Virginia, which handled 67 percent more containers in 2021 than it did 10 years ago. Work will include deepening and widening the harbor’s shipping channels to improve navigation and enable safer access for larger commercial and naval vessels, and to provide significant new economic opportunities to the region.
Easing of the Bottleneck
Given the recent news of the 96 ships that were backlogged at the Port of Los Angeles and Long Beach in California this past December has continued the push to develop alternative ports on the East Coast. The ports in the United States Southeast have seen a dramatic growth in TEU activity over the past five years. The port of Savannah has seen a 8.2 percent rate in growth; Norfolk has seen a 4.2 percent growth; Charleston has had a 5.1percent growth and Miami and Mobile’s growth has been 10.2 percent and 11.5 percent respectively.
Much of this growth in the Southeastern’s ports is due to the willingness of the port authorities to invest in their own infrastructure. For example, in March of 2021 the Georgia Ports Authority approved capital improvement projects to increase the container capacity by twenty percent.
“In recent years, leadership at South Carolina Ports Authority, which owns and operates the Port of Charleston, Port of Georgetown, Inland Port Greer, and Inland Port Dillon, has invested more than $2 billion to enhance capacity and handle the influx of retail goods and cargo volumes,” says Liz Crumley, manager of corporate communications at the South Carolina Ports Authority.
“Another reason is the basic physics of land scarcity matters quite a bit,” said Chris Caton, managing director of global strategy and analytics at Prologis, a real estate investment trust focused on warehouses. “If you look at Southern California, you look at the greater New York/New Jersey area, there’s just no more land in the most sought-after locations.”
Contrast that with the growth of warehouse space in three port cities in the Southeast.
Recent announcements in Charleston, Savannah and Houston confirm continued growth in the Southeastern port cities. In November of 2021, Capital Development Partners announced it would be developing a 135-acre industrial park named Shipyard Creek Logistics Center valued at $250 million. CA Industrial broke ground in November of last year on a nine-building industrial park which will total four million square feet near Savannah. In Houston’s Cedar Port Industrial Park, two new warehouses – Cedar Port DC 2 (496,421 square feet) and Cedar Port DC 3 (150,000 square feet) – will be developed.
Another example of Chris Caton’s statement is to follow the growth of Walmart’s distribution network and movement to diversify themselves into multiple ports to combat supply chain issues in any one location. Note the Walmart distribution centers over one million square feet in port cities around the United States.
Inland or Intermodal Ports
With the congestion getting out of port cities and away from terminals, many states have turned into inland ports as a way to relieve the truck traffic in an around the ports to push the containers inland. This will not only relieve the bottle necks in port cities but relieve the great pressure on land for industrial warehouses in and around the ports.
Taking advantage of technology for efficient information exchange between all parties involved in a shipment. There are numerous parties from the private and public sector are interacting in the any shipment of goods. All these players represent a link in the successful delivery of a container. As we navigate to improve cargo through our ports, it is imperative that all players be connected globally through technology. If connected, the players can know what is happening at every stage of the container move, when a container left the dock of a factory or warehouse, when it was loaded on a ship, and if delays, what happened, and when issues can be resolved.
Dominique Lebreton in his October 2016 article, “Cargo Becomes Intelligent So Do Ports,” gives some examples on what can be done to improve port efficiency thanks to new technologies.
- Connection to smart containers. Embedded tags deliver information on the container’s location, logistics status and condition. The integration of this information in intelligent cargo systems will help make delivery and container collection from terminals more reliable and will help anticipate customs operations to secure shipments.
- Global positioning or geofencing. Using GPS from lorries can create alerts. For instance, lorries will receive a message informing them during delivery whether the port is expecting the container they are transporting and during charging whether the goods have been customs cleared and all fees paid to leave the maritime terminal.
- Smart objects and intelligent cargo. RFID tags on pallets or QR codes on products can communicate information to intelligent IT systems and vice versa. For example, a recent e-port project with a Chinese port aims to ensure that European products, such as luxury or high-value goods, for Chinese consumers, are not counterfeit. The QR code is added by the exporter on goods when being prepared for shipment, then information is added to the QR code by an intelligent IT system, such as port of departure, container number and seals, and the customs declaration. When scanning the QR code with a mobile phone, Chinese consumers can then be sure that the product was shipped from a European port and it is not a counterfeit.
Lebreton concludes by saying, “Developing port infrastructure and connection to the hinterland is one of the pillars of port competitiveness. Having all supply chain players connected to an intelligent cargo system is the second pillar since it will help maximize the use of port infrastructure and keep everyone informed on the ‘where is my cargo?’ question. Accessing and sharing information on cargo through new technologies will not only smooth flows but it will also secure them.”
The Wall Street Journal on Monday, March 21, 2022 featured an article titled, “Shipping Around Turmoil; CP Railway Standstill; China’s Vessel Backlog.” The article begins, “U.S. importers are taking steps to adjust their supply chains to get around potential labor disruptions this summer.”
The issue with the backlog of the ports is going to take time and the manufactures and consumers are going to be in for some pain in the short term. While not perfect, the infrastructure bill passed by Congress and signed by the President on November 15, 2021 will provide some assistance to our ports infrastructure.
In addition, many of the Southeastern states, Georgia and South Carolina, to name two, are putting state resources into improving the ports.
This along with the growth of inland ports and private developers building warehouse facilities in and around the ports should ultimately help with the port congestion.
Don Moss specializes in industrial real estate, site selection, incentive negotiations and economic development consulting. As part of a combined 30 years of site selection, economic development, product development and brokerage experience, Don brings to Colliers International 15 years of brokerage experience, 15 years of local economic development experience and 6 years of development experience constructing industrial parks and buildings.
Grant Miller, SIOR is a top industrial real estate broker based in the Charlotte, NC office, having begun his real estate career in 2001. Grant focuses his expertise on all faucets associated with industrial | corporate real estate and enjoys creating solutions and solving issues pertaining to his client’s needs. Throughout his career, he has been involved in hundreds of transactions totaling more than 20 million square feet.
Grant and his business partner, Don Moss, have been recognized as Top Producers within the Charlotte office in 2013, 2015-2016 and 2018-2019.