Arguments regarding funding of port related investments - Nation sPort

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Strategic Trends in Maritime Containerized Shipping
         Adjusting to Current and New Realities

                    October 15, 2009

            Strategic Trends in Maritime Containerized Shipping
                     Adjusting to Current and New Realities

Executive Summary

The emergence of the global economy has and will continue to create quantum shifts
in the flow of goods, services and wealth between nations. Containerized ocean
transportation remains the most cost efficient method for moving the majority of
finished goods, component parts and many raw materials. Waterborne and inland
logistics systems have been forged in recognition of this reality and have created
significant economic prosperity for their participants. Because of its market size and
wealthy population, the Port of NY/NJ and its regional economy have benefited greatly
by securing a major place in this goods movement system.

The just released NYSA economic impact study for 2008 shows the importance of the
Port to the regional economy:
      165,000 direct jobs – with a total of 270,000 jobs
      $11.2 billion in total personnel income – $36.1 billion in total business income
      $1.6 billion in total state and local taxes
      85% of the above activity is related to containerized trade
      This represents a total growth of over 16 % since 2004 and 62% since 1993

This document summarizes the system shifts that have occurred in the last 15 years, but
more importantly, it projects what is expected to happen in the near to mid-term time
horizon. Such developments will have profound implications for the freight
transportation system, investment decisions and the regional economy. Unfortunately,
the shifts are occurring at a time when both economic growth and investment capital
are constrained.

During the last 15 years, the global goods movement system has been oriented
primarily to handling Asian imports to affluent US and European consumer markets. The
extraordinary growth in Asian production to satisfy US demand alone nearly
overwhelmed all of the US goods movement system. During this period, excess US
transportation capacity has been absorbed and the resulting constraints that emerged
shifted routing economics to favor all-water services to the east coast ports, much to
their economic benefit.

The anticipated creation of wealth and consumption by the burgeoning economic
giants of China and India will fundamentally change the global transportation supply
and demand equation. These regions will generate their own unique import and export
trade flows – thereby fostering a demand for the most efficient transportation assets.
China and India also will create new demands for US finished goods. Thus, more growth
opportunities will take place on the other side of the planet and compete for efficient
maritime assets. Pressure will be placed on our region to keep the cost advantages of

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            Strategic Trends in Maritime Containerized Shipping
                     Adjusting to Current and New Realities

traditionally sourced imports while at the same time contributing to the competitive
pricing and service quality for export to these new, expanding markets. In short, the US
and the Port of NY/NJ will need a flexible, efficient goods movement system oriented
toward two-way trade in competition with other world trading blocks.

If this region is to maintain its existing share of these global market opportunities, it must
make the necessary investment in an efficient goods movement system. Experience in
other east coast ports has shown how quickly and radically economic prosperity can
shift to competing ports if the necessary investments in assets and services are not

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           Strategic Trends in Maritime Containerized Shipping
                    Adjusting to Current and New Realities

Current Realities: 1995 - 2009
Cargo Routing
In the mid 1990's the hub port concept was postulated as the most likely development
scenario in global containerization given the then relatively low cargo growth rates,
prevailing competitive routing economics and the need for increased economies of
scale. It was argued that these three forces would dictate the emergence of a few
hubs while other ports would see their volumes diminish and be relegated to local
cargo only via relay. However, the actual development path differed in three critical

   1) World trade and cargo growth exploded, often at double digit rates, driven by
      the entry of China, India and Southeast Asia into the world economy as major
      producers. This resulted in an import-oriented system driven by demand in the
      western nations‟ economic systems;
   2) For the US, severe capacity constraints, along with attendant cost increases in
      West Coast ports and on the transcontinental rail corridors, shifted the traditional
      routing economics; and
   3) All-water routes via Panama and Suez brought cargo directly to the East Coast
      at reduced costs, filling the voids in the old west coast-transcontinental rail
      routing system.

These three dynamics quickly saturated the East Coast ports with cargo, mostly for local
consumption. However, there has been no wholesale relaying of cargo by ships from
US hubs to outlying ports, such as one sees in Europe and Asia, which was postulated in
the 1990's. This central tenet of the hub port never materialized in the US.

Instead, inland distribution centers have emerged to serve "natural" inland markets and
creating competition among ports for cargo within these discretionary markets.
“Natural” inland markets are typically defined by prevailing inland routing economics,
transit time, and availability of quality services. It is the economies of scale associated
with the added bonus of discretionary cargo that has allowed, in part, the Port of
NY/NJ to maintain its market position. Without the discretionary cargo, there would be
less reason to make NY/NJ the first port of call.

It has been the growth of the local market that has driven the Port‟s growth, much of
which previously used to come via transcontinental rail. The consistency in the mix of
containers moving through the Port of NY/NJ over the last decade, as demonstrated in
the following table, shows that the port has a long-term market share in the hinterlands
of approximately 20 percent. This cargo helps offset the ocean carriage costs of locally
destined freight.

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            Strategic Trends in Maritime Containerized Shipping
                     Adjusting to Current and New Realities

    Port of NY/NJ Trends In Loaded TEUs
                                  2000                 2005            2008
    Total TEU’s Handled           3,050,000            4,785,000       5,266,000
    Loaded TEU’s                  75%                  73%             79%

    Loaded TEU Profile
    Inside 260 Miles                 73%               73%             74%
    Beyond 260 Miles                 19%               20%             19%
    Relays                           2.3%              .09%            .05%

The New Realities: Major Shifts Are Coming In Global Trade

Panama Canal

The Panama Canal Authority is investing $5.3 billion to widen and expand the canal‟s
capacity to service the current generation of 8000+ TEU container ships. The opening of
the additional locks in 2014 will usher in a new era that will significantly change global
trading patterns for years to come, just as the initial canal opening did in 1914. There
are estimates that as much 25% of the current West Coast current cargo base could be
transferred to East and Gulf Coast ports as global trade growth resumes. There will only
be one chance to gain control of the initial surge, and it will be the deepest East Coast
ports with corresponding intermodal connections and warehousing capacity that will
capture this shift in market share.

Consumer Demand

There is a significant shift underway in national and individual wealth from America and
Europe to the Far East and India. This increasing demand for goods is driven by two
phenomena: population growth and economic convergence. The world population
(currently at 6.8 billion) is expected to reach 7 billion in late 2010 and 8 billion within 20
years, or sooner. Much of this growth will be in Asia and Africa, and by 2050 it is
projected that India will be the world‟s most populous nation.

The emerging middle classes in China and India will become primary global goods and
services consumers during the decades to come as western-populations age and
increase their savings rates to provide for their retirement years. China already has a
middle-class of 300 million, approximately the same number as the US total population.
Approximately 80% of these new middle class individuals will have discretionary
incomes nearly equal to their western counterparts because of increasingly convergent
economic patterns for most nations. In short, the major growth in demand for goods will
be on the other side of the planet.

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           Strategic Trends in Maritime Containerized Shipping
                    Adjusting to Current and New Realities

With this global economic shift, the primary end-consumer of manufactured goods is
shifting from western countries to those in the east, and the volume of goods flow will
increase accordingly in the decades to come. Therefore, it is going to be as just as
important for US ports to be an efficient “export port” in the coming decade as it was to
be an efficient “import port” in the last decades. To participate in these new trade
flows, the Port of NY/NJ must be competitive in both the quality and scope of its
container services as well as its economies of scale.

Environmental Concerns

Environmental compliance is often viewed as an essential but expensive maritime
requirement. However, as it was demonstrated many times before (e.g., the oil spill in
Prince William Sound and public concerns over the port associated air emissions in the
LA/LB Basin), poor environmental performance whether on the waterside or the
landside can have a devastating impact on the success of maritime business. Today‟s
environmental concerns can not only stall port and logistics infrastructure development
but also cost millions of dollars to mitigate, if not dealt with proactively.

Probably the chief case in point is the issue of climate change, and how future global
agreements may impact the international maritime industry. In fact, as climate change
concerns increase, clearly the pressure to address Green House Gases (GHG) will
become enormous. This issue could impact US port performance and operating costs
from two perspectives: US emission reductions and transportation emission reductions.

The US contributes 20% of the world‟s emissions from burning fossil fuels; India contributes
4%. Other nations are demanding that the US implement stringent emission reduction
standards before they will act accordingly. The methods chosen in the US to drive
emission reductions could take the form of a carbon tax, a carbon tax or some other
mechanism, particularly in regions with high petroleum usage per capita. The fact that
NY/NJ is rather energy efficient, offers the opportunity to make the case for this
regional‟s contributions to national objectives. In any case, national GHG emission
reduction protocols will have to be considered from a business perspective by US ports
because they will have cost implications thus business implications.

From the second perspective, the transportation sector generates approximately one-
third of global GHG emissions. The emissions from ships and cargo movement are
coming under increased scrutiny by the IMO and regulators worldwide. These concerns
and anticipated costs will certain impact carrier and shipper market practices. Ports
and vessel owners prepared to proactively address the „carbon‟ concern and seek
approaches to increase their competiveness versus other competing ports playing
catch-up can reduce their liabilities and look for opportunities to profit as these new
„carbon‟ markets open.

There are other environmental issues that are emerging, which also have potential to
impact costs and carrier market practices include noxious air emissions, consumption of

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           Strategic Trends in Maritime Containerized Shipping
                    Adjusting to Current and New Realities

non-renewable resources, bio-hazards (pesticides, carcinogens, wastes), and species
redistribution and extinction. These issues may have even greater impacts on port costs
for doing global maritime business, particularly if dealt with reactively. On the other
hand, if dealt with from an anticipatory perspective, there may be a possibility of
improving a port‟s competitive position while reducing costs to shippers and carriers.
Environmental issues can no longer be considered only as added costs but need to be
actively treated as business opportunities as well.

The Price of Non-Competitiveness

There is no escaping that we live in a global economy and herein lay the opportunities
for growth and prosperity; it is our economic imperative. Otherwise, business and
support industries quickly migrate away from those who believe, or demonstrate, that
they can not adjust and compete in this global economic system.

Charleston is the best example of what happens when you miss out on these trends and
opportunities. While the US south Atlantic has a number of factors that are not
analogous to the North Atlantic port range, it is instructive to look at what can happen
to a port that does not compete. In the mid 1990's Charleston was, by far, the
dominant south Atlantic port and pre-ordained by most as the south eastern hub.
Savannah was much smaller and written off by the conventional wisdom. From 1995-
2000 their respective market shares were stable. But, for a variety of reasons, Charleston
has not able to accommodate growth and now Savannah handles more cargo than
Charleston. A look at cargo trends between the two ports in the table below paints a
vivid picture of what can quickly happen to cargo volumes in less than 10 years.

    Success and Failure In the South Atlantic Ports
                              2000                    2005           2008
    Combined TEU Volume 2,580,000                     3,887,000      4,261,000
    Share Charleston          63%                     50%            37%
    Share Savannah            37%                     50%            63%
    Market Shift                                                     50%

    Charleston’s Loss
    Percent                                                          <18%> from peak
    TEU‟s Lost                                                       1,000,000

    Savannah’s Gain
                                                                     78% of Imports
    Asia Market
                                                                     50% of Exports

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           Strategic Trends in Maritime Containerized Shipping
                    Adjusting to Current and New Realities

Simply put ─Georgia has pre-empted South Carolina jobs, revenues, prosperity etc. The
same can happen to this region. Logistic businesses most often locate where the
physical transportation activity takes place. There was a demand for the World Trade
Center because the Port of NY/NJ was a major transportation center serving a major
consumer market. Not the other way around. The lessons to be learned from the south
Atlantic are applicable to the Port of NY/NJ. The implications for our region‟s
investment decisions are clear.

      PONYNJ is the economic underpinning of a significant portion of the entire
       metropolitan economy. Loss of port activity and revenues would undercut the
       value of the trillions already invested in the region in all spheres – not just in
       freight. This would include land values and building rents, taxes, jobs as well as
       other economic activities.

      Large scale private investments are based on assumptions about future public
       support. Major private investments in this region will depend heavily on the
       confidence they have that the underlying transportation system will support
       them.   Failure to make these investments would discourage the private
       investments on which the system depends for growth and modernization.

      Numerous players in the supply chain are currently evaluating their positions in
       light of changes in global economic contraction. It must be demonstrated that
       the region will commit to the necessary transportation infrastructure, support
       facilities and services.

Competing in the world economy is an imperative for this region. And to compete, you
must plan for future needs and requirements and make the necessary investments in
the transportation system.

Economic Impact

Achieving ocean transportation economies of scope and scale will determine the
mega-players in the world‟s marketplace in the future. It started with increasing ship
size first among the bulk carriers and then emerged with the container carriers in the
later part of last century. Because margins have become razor thin, only ports and their
supporting infrastructure systems (whether as supply chains or export corridors) will
sufficient capacity and efficiency will be able to compete and perform in the
marketplace among the major “port poles” forming in Asia, India, and Europe.

These port poles, which combine the infrastructure systems of more than one port into a
mega-region logistics system, have the ability to be cost-effective and resilient when
shocks occur such that they are seen as reliable systems to shippers. Time and reliability
are the new watch words for global business. And competitiveness in service and cost
is an imperative to handle such emerging markets as China and India – and the
competition will be fierce.

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           Strategic Trends in Maritime Containerized Shipping
                    Adjusting to Current and New Realities

Enhanced Vessel Operating Economics

The US Army Corp of Engineers‟ recent report on the cost benefit ratio of enhanced
vessel operating economics versus the cost of replacing the Bayonne Bridge
demonstrates the positive economic impact major infrastructures investments can
generate. The report concludes that a positive benefit ratio of between 1.4 and 3.0 will
result, depending on the replacement option chosen. This would translate to a national
net savings of some $54 million per year from net reductions in transportation costs over
the next 50 years (on a discounted basis) for the two likely scenarios, a new bridge or a
new bored tunnel.

Cargo Growth Opportunities

The NYSA‟s recent 2008 Economic Impact Study further reinforces the value of
continued growth in the maritime sector of the region‟s economy. Long-term growth
(1993-2008) has shown an increase of 62% in direct, indirect and induced jobs related to
the industry. Short-term growth (2004 to 2008) has been 16% in jobs despite the
economic downturn in 2008.

Lost Cargo without the Bayonne Bridge Replacement

Conversely, an NYSA study demonstrates the potential magnitude of economic loses
stemming from failure to replace the Bayonne Bridge due to severe constraints on the
future vessel size serving the Port. At the very minimum, 25% of the cargo wound be lost

   –   “…equating to 12,000 jobs and $2.2 billion in overall economic activity, with 50%
       the mid -point of the estimated losses (44,000 jobs and $8.3 billion in activity). The
       Charleston experience discussed above suggests that the loss could be closer to
       40%. When juxtaposed against past growth experience, the negative impact on
       the regional economy is significant.”
The Bottom-line

US ports planning to participate in the international trade and transportation business
will have to be agile, two-directional (serving both imports and exports),
environmentally sound operations, and create the economies of scope and scale to
compete in the 21st Century. This will require regional investments in logistic systems and
the supporting infrastructure if import costs are to remain low and export products are
to be competitively priced in emerging global markets. The economic analysis
conducted by a number of the parties cited above clearly demonstrates the
magnitude of the benefits to be derived from investment and growth in this industry
versus the losses from failing to remain competitive.

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          Strategic Trends in Maritime Containerized Shipping
                   Adjusting to Current and New Realities

Nation’sPort is a nonprofit membership organization representing businesses that
comprise the Port of New York and New Jersey and its related logistics system in the
region. Its mission is to advocate for the Port of NY/NJ.

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