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Heading for Another Capacity Crunch?

Will North America's Pacific ports be ready for more business as China, Korea and Singapore implement aggressive multi-billion-dollar investment plans to increase their container capacity in the near future? American importers have begun to look beyond their borders for solutions, and Canada may stand to gain with its Gateway Strategy plans to increase freight capacity at Canadian ports.

by Peter Hall

Current news flashes are perhaps causing us to forget that the world economy has recently been expanding significantly. Following two years of global rebuilding, growth vaulted to a stellar 5.2 per cent pace in 2004 - a 20-year high. From there, global performance decelerated, but only moderately, expanding by 4.5 per cent in 2005, and a repeat is all but certain in 2006.

Not a bad run at all, but it gets better. Trade intensity - the share of Canadian (or U.S.) Gross Domestic Product (GDP) accounted for by imports and exports - has risen markedly since the early 1990s, a trend that has continued in recent years. In other words, as fast as GDP growth has been, it has been outpaced - in fact, doubled - by growth in international trade.

Heady growth like this is hard to keep up with. A crunch occurred in fall 2004, when west coast ports were jammed to capacity, and goods flow was seriously delayed. All modes of transport were responsible. There weren't enough ships to go around. Demands on rail capacity was past its limit, stranding containers on the dock. Clogged road networks prevented the trucking industry from filling the gap. Cargo handlers were in short supply in some cases. As containers piled up in ports, laden ships idled in harbours, in some cases waiting weeks to offload.

Clearly, a crisis for a just-in-time world. Retailers panicked, contemplating empty shelves in the pre-Christmas shopping season. Facing long port lineups, shipping companies diverted their west coast cargoes through the Panama Canal to less busy Gulf and east coast ports. Los Angeles-Long Beach (LA-LB), the largest west coast port by a wide margin, hired thousands of new cargo handlers. Other west coast ports embarked on aggressive expansion plans. American railway companies increased investment, committing $8.1 billion to new tracks and additional equipment. Back-orders for rail cars are at their highest level since 1979.

The investment is impressive, and has helped to stave off capacity problems - for now. North American ports are expected to operate smoothly through the fall rush, and the freight industry has assured U.S. politicians that logjams will not occur this year. So far, so good.

Doomsayers might add here that slowing global growth is timely, taking the pressure off capacity limitations. However, the consensus is that global growth will slow, but remain relatively robust. Export Development Canada (EDC) is forecasting growth will moderate to 4.1 percent - enough to cause a ripple across world markets - but trade growth will still tip the scales at twice that pace. In addition, Asian markets will be well above average, powered by growth in China and India.

Asian ports are preparing for future trade growth. China, Korea and Singapore have aggressive multi-billion dollar investment plans that collectively will increase container capacity by 3.7 million Twenty Foot Equivalent Units (TEU) each year through 2011. Add to this other regional expansions and India's export aspirations, and the tally could go well beyond 5-6 million TEU per year.

Will ports on this side of the Pacific be ready? Granted, Asian containers won't all end up on U.S. shores, but given current trade flows, large amounts will. Los Angeles-Long Beach, destination for 80 percent of all U.S. imports from Asia, is critically important. However, post-2004 capacity has only increased marginally. Extra hiring has helped, but productivity at the port is a fraction of the Asian average, even after accounting for trans-shipments. To handle present and future flows, it is estimated that the rail and highway systems supporting LA-LB require an estimated $20-$25 billion investment.

At best, this investment will only be partly met. Significant funds will be diverted in the near term to security refits and ongoing maintenance activities. In addition, public funds are likely to be tight and private investment has been stymied by the recent Dubai Ports World debacle.

Can other U.S. ports handle the overflow? Not likely. Diversion of LA-LB traffic has been a successful short-term stop-gap, but has key long-term limitations. Size dictates that other west coast ports would have to expand radically to handle LA-LB overflow effectively. East coast and Gulf ports are similarly constrained, and the Panama Canal, itself a choke-point, won't be able to handle the new, larger container ships for about 10 years.

American importers have begun looking outside their borders for solutions, and Canada stands to gain. Canada's Gateway Strategy plans to increase freight capacity at British Columbia's ports by 5 million TEU through 2020, a significant addition to west coast capacity. The plan calls for expansion of Vancouver, but a key element is development of Prince Rupert, a low-maintenance deep-water port with large capacity potential. Previously a liability, Prince Rupert's small domestic economy is now viewed as an asset. Free of local congestion, the port can whisk freight to U.S. Midwest cities as quickly as from LA-LB, despite the considerably longer distance. In addition, Prince Rupert is two days closer to Asian ports by sea. Expansion is underway - capacity will hit 500,000 TEU by 2007, and could rise to 2 million TEU in the medium term.

Canada clearly has potential as a Pacific conduit to the U.S. market. However, winning the business is not guaranteed. Mexico already has similar plans for its Pacific coast, although they appear further from realization. U.S. interests may also thwart cross-border plans by playing the security card. However, with careful planning and timely investment, the prospects for Canadian port activity are bright.