Under Pressure
By Thomas Jelenić, Vice President, Pacific Merchant Shipping Association
Competitive pressures have been an ongoing theme in this monthly newsletter. Look no further than Jock O’Connell’s commentary this month discussing the strength of East Coast and Gulf Coast gateways that continue to chip away at San Pedro Bay’s market share and the potential challenges the updated Clean Air Action Plan bring. But there are also opposing winds blowing from Sacramento.
Earlier this year, the California Air Resources Board (CARB) directed their staff to expand their At-Berth Regulation. The regulation already covers containerships, cruise ships, and refrigerated vessels, requiring 80% emission reductions by 2020. That 80% requirement apparently falls short in CARB’s eyes, but reflects the practical limitations of connecting and disconnecting a vessel after arrival and prior to departure and the need to accommodate vessels that do not visit California routinely. Nonetheless, industry is complying with the rule, and ports and ocean carriers have spent hundreds of millions of dollars to meet the rule’s requirements at California’s major ports.
The recent regulatory concepts put forward will require every vessel to control emissions at berth for every call. This is worrisome on two accounts. First it would preclude vessels that do not routinely visit California from using California ports because the incremental cost of compliance will be so high – and remember California ports operate in a globally competitive environment. It is not just other North American gateways competing for imports. It is also competitive on the export side; California competes not only with other North American gateways to export American products, but California exporters compete against the products and ports of exporters in other nations in the global marketplace.
This global competitiveness leads to the second concern. The every-vessel/every-call regulatory concept put forward would also capture vessels currently outside the rule like break-bulk and dry-bulk. Break-bulk, dry-bulk, and other non-container vessels are often shipping commodities with razor thin margins like scrap metal, aggregate, or agriculture. As a result, the commodities are extremely sensitive to small changes in cost. And these vessels are not the mega-ships we have grown accustomed to in the container trade. Instead, they are smaller, have a tiny fraction of the emissions, and the typical non-container vessel will call California maybe once a year, once every five years, or once ever. The nature of this type of shipping and the fact that it is not a liner service visiting the same ports repeatedly means that the cost of compliance could drive much of this business from California, hurting California businesses that rely on raw materials for production or export raw materials across the globe.
Most of California’s eleven publicly-owned ports are smaller ports specializing in this type of international trade. As smaller ports, they also have less access to resources to implement new mandates from Sacramento. Despite their smaller size, these ports have an enormous beneficial impact to their communities. The Port of Hueneme recently estimated that auto operations through their port generate 2,770 jobs and $300 million in economic value.
Depending on how this rule amendment is crafted that community that relies upon the Port of Hueneme for the jobs and economic activity that it generates could be at risk. Even at the giant ports of Long Beach and Los Angeles nearly half of all vessel visits are by non-containerships like smaller bulk vessels. This regulatory expansion could impact San Pedro Bay on all their commercial traffic. As a result, what happens in Sacramento will likely increase the competitive pressures facing California ports. There is no doubt that CARB staff is working to understand these complexities. Depending on their final solution, California ports can continue to serve as economic engines of the State or they can begin to take on a diminished role.
Some, but certainly not all, have been dismissive of these competitive pressures and loss of market share and have even gone as far to claim strong growth over the past decade. As a gateway, San Pedro Bay will finally surpass its 2006 pre-recession peak in 2017, primarily on the strength of the Port of Los Angeles. Port of Long Beach is also expected to exceed their own 2007 pre-recession peak (7.31 million TEUs), forecasting a calendar throughput of 7.39 million TEUs. Such heady volumes would put Port of Long Beach on course for 1% growth over the past decade. As comparisons with the past decade are inevitably made, one can only hope than this is not what the next decade holds.