1
Final Report
Port and Modal Elasticity Study
Prepared for
Southern California Association of Governments
818 West Seventh Street, 12th Floor
Los Angeles, CA 90017- 3435
By
Dr. Robert C. Leachman
Leachman & Associates LLC
245 Estates Drive
Piedmont, CA 94611
In Association with
Theodore Prince
T. Prince & Associates LLC
Thomas R. Brown
Strategic Directions LLC
George R. Fetty
George R. Fetty & Associates, Inc.
Sept. 8, 2005
Funding: The preparation of this report was financed in part through grants from
the United States Department of Transportation ( DOT) – Federal Highway
Administration and the Federal Transit Administration – under provisions of the
Transportation Equity Act of the 21st Century
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TABLE OF CONTENTS
EXECUTIVE SUMMARY ................................................................................................ 6
1. OVERVIEW ................................................................................................................... 7
As- Is Scenario............................................................................................................... 14
Congestion Relief Scenario........................................................................................... 16
Excluded Factors........................................................................................................... 19
Short- Run vs. Long- Run: Proper Interpretation of Model Results............................... 19
Container Fee Collection .............................................................................................. 20
Conclusions................................................................................................................... 21
Recommendations......................................................................................................... 22
Further Study ................................................................................................................ 22
2. CONTAINER FEES AND OTHER FUNDING SOURCES ....................................... 23
Alameda Corridor Fees ................................................................................................. 23
Financing Transportation Infrastructure for Port Access.............................................. 25
3. MARITIME TRADE FLOWS ..................................................................................... 27
Comparison of West Coast Port Facilities.................................................................... 27
Transpacific Container Vessel Service ......................................................................... 28
San Pedro Bay Ports’ Traffic Shares ............................................................................ 31
Intermodal Share of Imports ......................................................................................... 37
Shares of Asia – U. S. Containerized Trade .................................................................. 39
4. STAKEHOLDER INTERVIEWS................................................................................ 47
5. INVENTORY COSTS.................................................................................................. 48
Types of Inventory........................................................................................................ 48
Inventory Holding Costs............................................................................................... 51
Distribution of Values of Asian Imports....................................................................... 52
Large Retail Merchant Importers.................................................................................. 55
The Economic Impact of Consolidation and De- consolidation.................................... 58
Assumed Values of Lead Time Parameters .................................................................. 65
6. TRANSPORTATION CHARGES............................................................................... 71
Alternative Ports of Entry ............................................................................................. 71
Destinations................................................................................................................... 71
Transportation Modes ................................................................................................... 74
Components of Transportation Costs............................................................................ 76
Transportation Unit Costs ............................................................................................. 77
Transloading vs. Direct Shipment................................................................................. 82
7. INTANGIBLE FACTORS ........................................................................................... 84
Port Terminals as Virtual Warehouses ......................................................................... 84
Diversification of Congestion Risk............................................................................... 85
Other Cost Factors ........................................................................................................ 86
Regional Importers........................................................................................................ 86
Short Run Vs. Long Run Factors.................................................................................. 86
Capacity and Congestion .............................................................................................. 87
Panama Canal................................................................................................................ 88
Larger Vessels............................................................................................................... 88
Deconsolidation Capacity ............................................................................................. 89
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Port Capacities .............................................................................................................. 89
Productivity Differences Among Ports......................................................................... 89
Vessel Operator- Port Contracts and Other Inertia ........................................................ 90
Container Repositioning Surcharges............................................................................. 90
8. ELASTICITY CALCULATIONS................................................................................ 91
Modeling Procedure...................................................................................................... 91
The As- Is Scenario........................................................................................................ 92
The Congestion Relief Scenario ................................................................................... 95
Model Limitations and Proper Interpretation of Results .............................................. 98
9. FUNDING POTENTIAL OF CONTAINER FEES..................................................... 99
Level of Fees Required for Congestion Relief ............................................................. 99
Fee Domain................................................................................................................. 101
10. RECOMMENDED POINT FOR FEE APPLICATION .......................................... 102
Voluntary Contract...................................................................................................... 102
Directed Fee Payments ............................................................................................... 103
Current Status.............................................................................................................. 104
Recommendations....................................................................................................... 104
11. CONCLUSIONS AND RECOMMENDATIONS FOR FURTHER STUDY......... 106
Conclusions................................................................................................................. 106
Recommendations for Further Study.......................................................................... 106
APPENDICES. ............................................................................................................... 108
Safety Stock Formulas for the General Case of Lead Times and Volumes Varying by
Region......................................................................................................................... 108
Formula for Pipeline Stock ......................................................................................... 108
Formula for Safety Stock ............................................................................................ 108
NOTE: The contents of this report reflect the views of the author who is responsible
for the facts and accuracy of the data presented herein. The contents do not
necessarily reflect the official views or policies of SCAG or U. S. DOT. This report
does not constitute a standard, specification or regulation.
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LIST OF FIGURES
S- 1. Distribution of Declared Values for 2003 Asian Imports Through
US West Coast Ports…………………………………………………………………… 11
S- 2. Elasticity of Imports via the San Pedro Bay Ports, As- Is Scenario……………….. 16
S- 3. Elasticity of Imports at the San Pedro Bay Ports – Congestion Relief
Scenario………………………………………………………………………………… 18
1. Container Traffic Shares at West Coast Ports……………………………………….. 33
2. Shares of Inbound Loaded Containers at West Coast Ports………………………… 34
3. 2004 Distribution of Containers Handled at the San Pedro Bay Ports……………… 35
4. 2004 Distribution of Containers Handled at Oakland……………………………….. 35
5. 2004 Distribution of Containers Handled at Seattle- Tacoma………………………... 36
6. 2004 Distribution of Containers Handled at Vancouver…………………………….. 36
7. Percent Intermodal Movement of Inbound Containers……………………………… 38
8. Distribution of Declared Values for 2003 Asian Imports Through
US West Coast Ports…………………………………………………………………… 54
9. Structure of Ordering Lead Times for Direct Shipping and
Transloading Alternatives……………………………………………………………… 60
10. Elasticity of Imports via the San Pedro Bay Ports, As- Is Scenario………………... 94
11. Elasticity of Imports at the San Pedro Bay Ports – Congestion Relief
Scenario………………………………………………………………………………… 97
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LIST OF TABLES
S- 1. Import Strategy as a Function of Declared Value – As- Is Scenario……………… 14
S- 2. Import Strategy as a Function of Declared Value – Congestion Relief
Scenario………………………………………………………………………………… 17
1. Container Handling Facilities at West Coast Ports………………………………….. 28
2. Rail Intermodal Facilities at West Coast Ports……………………………………… 29
3. 2003 Weekly Container Vessel Strings, Asia – North America…………………….. 30
4. West Coast Port Volumes, 1994 – 2004……………………………………………... 32
5. Inbound Loaded Containers, West Coast Ports, 2001 – 2004……………………….. 34
6. Mix of Loaded and Empty Containers at the San Pedro Bay Ports,
2001 – 2004…………………………………………………………………………….. 38
7. 2003 Containerized U. S. - Asian Trade by U. S. Port……………………………….. 40
8. 1996 Total Containerized Cargo Shares - U. S. West Coast Ports…………………... 42
9. Relative Purchasing Power by Region………………………………………………. 44
10. Comparison of Actual and Expected Regional Shares of U. S. – Asia
Containerized Trade……………………………………………………………………. 44
11. Total Volume and Average Declared Value by Commodity For 2003
Asian Imports Through US West Cost Ports…………………………………………... 53
12. Largest US Importers of Asian Goods Via Ocean Container Transport…………... 55
13. Assumed Lead Time Parameters…………………………………………………... 66
14. Assumed Mean Transit Times for Inland Truck and Rail Movement……………... 66
15. Transportation Costs – Charges Separately Billed to Customer vs.
Charges Absorbed by Carrier…………………………………………………………... 73
16. Assumed Distribution of Import Volumes by Destination Region………………… 75
17. Space Capacities of Containers and Trucks………………………………………... 77
18. Transportation Rates Per Cubic Foot, Shanghai – Selected North
American Destinations…………………………………………………………………. 78
19. Domestic Container Fleet, 1998 to 2007…………………………………………... 84
20. Assumed Distribution of Import Volumes by Declared Values for
Proxy Miscellaneous Importers………………………………………………………... 91
21. Efficient Supply- Chain Strategies as a Function of Avg. Declared Value
for Large Nation- Wide Importers – As- Is Scenario…………………………………… 92
22. Efficient Supply- Chain Strategies as a Function of Avg. Declared Value
for Regional and Small- Scale Importers – As- Is Scenario…………………………….. 92
23. Efficient Supply- Chain Strategies as a Function of Avg. Declared Value
for Large Nation- Wide Importers – Congestion Relief Scenario……………………… 96
24. Efficient Supply- Chain Strategies as a Function of Avg. Declared Value
for Regional and Small- Scale Importers – Congestion Relief Scenario……………….. 96
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EXECUTIVE SUMMARY
This study determined the economic viability and impact on demand for San Pedro Bay
Port services of assessing additional port user fees to fund the improvements to
transportation infrastructure likely required to insure efficient and environmentally sound
access to the ports. Today such user fees already exist in the form of fees for the Alameda
Corridor rail line. Other major infrastructure improvements may be required to
accommodate further traffic growth, and user fees are one possibility for funding such
improvements. The Port and Modal Elasticity Study analyses the long- run elasticity of
port demands as a function of access fees, determining what levels of fees would induce
traffic diversion to other ports or induce shifts in modal shares ( truck vs. rail) at the San
Pedro Bay ( SPB) Ports. These shifts also may depend upon the point in the overall
logistics supply chain at which user fees are assessed.
Methodology and Observations:
1. A long- run elasticity model was developed for imports at the SPB Ports. This
model allocates imports to ports and modes so as to minimize total inventory and
transportation costs from the point of view of importers. Current capacities,
contractual obligations and other short- run impediments to shifting traffic among
ports and modes are not considered in the long- run model.
2. The long- run model was exercised for two scenarios: As- Is, and Congestion
Relief. In the As- Is Scenario, fees are assessed on imports at the SPB Ports
without any improvements to access infrastructure. In the Congestion Relief
Scenario, average transit time from the SPB Ports to store- door delivery points in
the hinterland of the ports is assumed to be reduced by one day, and the standard
deviation of this transit time is assumed to be reduced by 0.4 days. The standard
deviations of transit times for intermodal rail movements out of Southern
California are assumed to be reduced by 0.1 days.
3. A container fee of $ 192 per forty- foot equivalent unit ( FEU) applied to imports
over 30 years would be sufficient to retire bonds funding $ 20 billion in
improvements to SPB Ports access infrastructure. Dedicated truck lanes from the
SPB Ports to the trans- loading warehouse districts are estimated to cost $ 16.5
billion. Improvements to main- line rail infrastructure adequate to accommodate
2025 traffic levels at year 2000 transit times are estimated to cost $ 3.4 billion.
Thus a container fee in the range of $ 190 - $ 200 per FEU is relevant for the
Congestion Relief Scenario.
We conclude that:
1. San Pedro Bay import volume is much more elastic with respect to congestion
than with respect to container fees. Import volume is nevertheless elastic with
respect to container fees.
2. Without congestion relief, in the long run even a small container fee would drive
some traffic away from the San Pedro Ports.
3. A $ 60 per FEU fee on inbound loaded containers at the SPB Ports would cut both
total import volume and total trans- loaded import volume at the SPB Ports by
approximately 6%.
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4. With congestion relief, San Pedro Bay imports are relatively inelastic up to an
import fee value of about $ 200 per FEU. At this fee level, total imports via the
SPB Ports are estimated to decline by 4% or less, while total trans- loaded volume
would rise by an estimated 12.5%. The latter suggests a significant increase in
economic activity in Southern California.
5. Fees greater than $ 200 per FEU will significantly diminish imports via the SPB
Ports, even if predicated upon congestion relief.
We recommend that:
1. A complete and comprehensive list of effective infrastructure projects be
formulated to determine construction cost.
2. The financing cost and term be calculated for these intended investments.
3. Should other ( direct) funding be unavailable or inadequate to fully cover cost, that
a container fee exclusively used for retiring the bonds for said improvements be
uniformly imposed on all imported containers.
4. The practical point of collection is at the dock to be paid by the importer.
5. Further research on this subject be carried out by the consultant. More
engagement with importers to confirm or correct model parameters would
improve the accuracy of the analysis. It also is desirable to develop a short- run
elasticity model, accounting for capacity and congestion at other ports and in
various channels.
The Project was financed in part through grants from the United States Department of
Transportation – Federal Highway Administration and the Federal Transit Administration
– under provisions of the Transportation Equity Act of the 21st Century and additional
funding was provided by the California State Department of Transportation.
The analyses and conclusions expressed herein are solely those of the consultant and do
not necessarily reflect the views of SCAG, other agencies sponsoring this project, nor any
stakeholder in Asian – US maritime trade.
1. OVERVIEW
In February, 2003, the Southern California Association of Governments ( SCAG)
contracted Leachman and Associates LLC (“ L& A LLC”) to undertake the first phase of a
Port and Modal Elasticity Study (“ the Project”). A second phase of this study was
contracted in September, 2004, and a third and final phase was contracted in April, 2005.
Preliminary reports and findings for each phase of the Project were presented to SCAG
and reviewed with critical stakeholders1. Authored by Prof. Robert C. Leachman,
1 A series of working papers were developed in the course of this study. Working Paper # 1 reviews and
documents previous studies analyzing market competitiveness and elasticities of demand for port services,
as well as formulations for infrastructure project funding based on user fees. Working Paper # 2 analyzes
trade flows to and from the West Coast ports and the competitiveness of the SPB Ports versus other West
Coast ports in attracting discretionary traffic. Working Paper # 3 develops a matrix of transportation costs
by mode, port and inland destination region. Working Paper # 4 develops analyses of the inventory costs
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Principal of Leachman and Associates LLC, this document reflects the culmination of
research, findings, and stakeholder feedback for all Project phases and is its Final Report.
L& A LLC engaged three subject matter specialists as subconsultants to aid in research
and to assist in reviewing findings: Theodore Prince, Principal of T. Prince &
Associates LLC, ( analysis of current trade flows and steamship services; steamship, rail
and dray rates; labor and management practices at ports, steamship lines, and third- party
logistics vendors), Thomas Brown, Principal of Strategic Decisions LLC, ( commercial;
labor and management practices at importers, port terminal, rail, dray and intermodal
marketing companies), and George R. Fetty, Principal of George R. Fetty & Associates,
Inc.,( historical background of the Alameda Corridor, literature research and review;
management and labor practices at ports, port terminal, rail and dray companies;
feasibility and structure of container fees). The author also benefited from interviews
with numerous stakeholders, including importers, third- party logistics companies, port
terminal operators, ports, steamship lines, railroads, and dray companies. This input was
invaluable.
While a number of studies have been published concerning maritime trade flows and
competitiveness of the San Pedro Bay Ports, the findings from the consultant’s own
research and market share trend analysis for the SPB Ports were utilized herein.
The competitive position of the San Pedro Bay ports remains quite strong, although
recently it shows slight erosion to other ports. In 2003 the SPB ports handled 60.4% of all
containerized imports ( measured on a TEU basis) from Asia to the United States. SPB
Ports’ share of total inbound containers via West Coast ports ( including Vancouver,
BC), declined from 72.5% in 2001 to 69.7% in 2004. Shares of total inbound containers
grew accordingly at all of the other major West Coast ports ( Vancouver, BC, Seattle-
Tacoma and Oakland), with Vancouver growing the most.
Containerized trade between Asia and the United States may be categorized into all- water
movement to the East and Gulf Coasts via the Panama or Suez Canals and trans- Pacific
movements via West Coast ports. Over the period 2001 – 2003, the all- water share of
imports grew by 2.4 percentage points per year, rising from 18.6% in 2001 to 21.0% in
2002 and to 23.4% in 2003. While total transportation costs for movement to Eastern US
destinations via the all- water channel are much lower than total costs for movement via
West Coast ports, continued growth of all- water trade may be inhibited by several
factors. First, vessel transits through the Panama Canal are nearing capacity, and
bookings on all- water vessel strings via the Panama Canal are increasingly difficult for
importers to secure. Second, transit time and distance to East Coast ports via the Suez
Canal are longer than via the Panama Canal from all Asian points east of India. Third,
experienced by US importers of Asian goods. Working Paper # 5 discusses intangible factors such as
channel capacities and congestion, trends in vessel size, contracts and other forms of inertia, and industry
management and labor practices. Working Paper # 6 discusses the funding potential of container fees.
Working Paper # 7 develops the Elasticity Model and documents the computation of elasticities. Working
Paper # 8 discusses the merits of alternative points for fee application. With the exception of the literature
review, the findings in all of these working papers are incorporated into this Final Report, generally
corresponding to chapters of the report.
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steamship lines are investing in fleets of post- Panamax container ships too large to transit
the existing Panama Canal. As these larger vessels enter service, they displace older ships
able to transit the Canal, but nevertheless the percentage of total vessel capacity able to
transit the Canal is declining. Even if Panama elected to immediately embark on a
program of widening the locks to handle post- Panamax vessels, completion of the project
would require at least a decade, and a referendum necessary to move forward has been
postponed.
Container flows through the SPB Ports also may be categorized as local and
discretionary. “ Local” containerized traffic is that which is ultimately consumed
( imports) or originally produced ( exports) in a geographical area local to the SPB Ports
( Southern California, Southern Nevada, Arizona and New Mexico); “ discretionary”
containerized traffic is that which terminates or originates outside this region. We assume
that local traffic must be proportional to the fraction of total continental U. S. purchasing
power ( personal income per capita times population) that is within the geographical area
local to the SPB Ports. Under this assumption, local traffic accounts for only 23% of SPB
Ports’ total traffic. The other 77% must be discretionary traffic, routed through the SPB
Ports for economic reasons. This in turn breaks down into 37% that is short- run
discretionary ( moving intact in marine containers as inland- point rail intermodal
shipments) and 40% that is long- run discretionary ( shipments trans- loaded into other
vehicles for movement outside the region plus marine containers trucked outside the
region).
To explain and ultimately predict the allocation of containerized imports to ports and
landside modes, one must analyze the economics of both inventory and transportation
from the importers’ points of view. The vast majority of imports from Asia are consumer
goods imported by US retailers or by the vendors of goods marketed by these retailers. It
is thus appropriate to describe inventory and transportation economics for imports in
terms of those faced by a retailer of imported goods.
Importers face two basic types of inventory costs sensitive to the choice of port of entry
and to the choice of landside transportation mode. One is the cost of pipeline inventory
for goods in transit from Asian factories to regional or national distribution centers that
serve the importer’s retail outlets in the United States. This cost is a linear function of the
average transit time of the supply channel, the average declared value of the imports
assigned to that channel, and the quantity routed via that channel. The other is the cost of
safety stocks maintained at destination distribution centers. These stocks are established
as a hedge against uncertainties in transit times and against potential errors in sales
forecasts over the lead time from when the goods were ordered. This cost is a complex
non- linear function of the variability in lead times and transit times of the shipping
channels utilized, the volume assigned to each channel, and the statistical error in sales
forecasts. It also is a function of whether shipments are made directly from Asian origin
to destination distribution center, or whether shipments to multiple destinations are
consolidated from Asian point of origin to a trans- loading warehouse located in the
hinterland of the port of entry, then de- consolidated at that point and re- loaded in
domestic containers or trailers for landside transport to the multiple destinations. Trans-
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loading ( interchangeably described in this report as consolidation- deconsolidation) pools
the variability in forecast errors across the various destination regions and pools the
variability in transit time from the factory in Asia to the port of entry across the
shipments that are consolidated. When many destinations are consolidated, trans- loading
enables a substantial reduction in destination safety stocks. Mathematical formulas to
calculate required destination safety stocks for the cases of direct shipping and trans-loading
were developed and applied in this study. The required safety stocks are sensitive
to the distribution of sales forecast errors. The required safety stocks also are very
sensitive to the mean and standard deviation of transit times. Such parameters were
estimated by the consultant for various ports of entry, destination cities, and alternative
transportation channels.
We found that, for many importers, the cost of their safety stocks is comparable to or
even larger than the cost of their pipeline stocks. Moreover, the total cost of their pipeline
and safety stock inventories is often larger than the total cost of transporting their goods
from Asia to their destination distribution centers.
Both types of inventory costs are linear functions of the value of the goods imported.
Differences between inventory costs for direct- shipping and trans- loading options are
relatively small for importers of low- value goods but relatively large for importers of
high- value goods. For this reason it was important for this study to establish the
distribution of values of goods imported from Asia. Data ( c. 2003) from the World Trade
Atlas ( WTA) was furnished to the consultant by the Port of Long Beach. The WTA
reports the total value declared to US customs for imports from Asia for 99 commodity
types. The Port of Long Beach also furnished the consultant with 2003 PIERS data on
TEU volumes imported from Asia by commodity type. The PIERS data for each of the
commodity types was joined to the WTA data to establish a distribution of imports by
declared value per TEU. This in turn was joined to data from the Pacific Maritime
Association concerning the mix of marine container types ( 20ft, 40ft, 45ft) that are
imported and the consultant’s estimates concerning the mix of standard and hi- cube 40-
foot containers in order to estimate the average declared value per cubic foot for each
commodity type. Grouping commodities by similar declared values, an overall
distribution of import volume vs. declared value was obtained. This distribution is
displayed in Figure S- 1. The blue bars are directly derived from the WTA and PIERS
data; this raw distribution is much lumpier than reality because a single average declared
value has been associated with each commodity type. The red curve represents the
consultant’s smoothing of the data. 2 This distribution suggests a declared value of about
$ 9 per cubic foot to be the most common one, with steadily declining volumes as the
declared value extends up to a maximum of $ 72 per cubic foot.
Inventory and transportation costs for the top 83 importers of containerized Asian goods
were specifically modeled in this study. 3 An average declared value for each of these
2 As may be seen in the figure, the red curve resembles a Poisson statistical distribution.
3 In May, 2005, the Journal of Commerce published a list of the top 100 importers of goods in ocean- borne
containers, derived from PIERS data. 17 of these importers were excluded from this analysis because their
imports predominantly come from origins other than Asia.
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0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
22.00%
0.0 - 4.0
4.0 - 8.0
8.0 - 12.0
12.0 - 16.0
16.0 - 20.0
20.0 - 24.0
24.0 - 28.0
28.0 - 32.0
32.0 - 36.0
36.0 - 40.0
40.0 - 44.0
44.0 - 48.0
48.0 - 52.0
52.0 - 56.0
56.0 - 60.0
60.0 - 64.0
64.0 - 68.0
68.0 - 175.0
Declared value ($ per cubic foot)
% of Total TEUs
Figure S- 1. Distribution of Declared Values for 2003 Asian Imports
Through US West Coast Ports
importers was estimated by the consultant based on the types of commodities imported.
2004 PIERS import volumes reported in the Journal of Commerce for these importers
were scaled by the consultant to more realistic figures for their imports from Asia. 4 The
consultant estimates that these importers accounted for about 32% of total containerized
Asian imports to the US in 2004. To account for the other 68% of imports, 19 categories
of so- called “ proxy miscellaneous” importers were defined at $ 4 increments in declared
value from $ 2 up to $ 70 according to the above distribution of declared values. Inventory
and transportation costs also were analyzed for these proxy miscellaneous importers. To
estimate total nation- wide logistics costs for containerized Asian imports, it was assumed
that every modeled importer ( i. e., the 83 large importers and the 19 proxy miscellaneous
ones) is nation- wide in its distribution of imported goods, with the geographical
distribution of its import volume proportional to the distribution of purchasing power
across the Continental United States.
Alternative transportation channels available to importers include the following:
4 Volume statistics derived from PIERS data are low compared to actual volumes. Actual volumes for some
importers were found to be as much as 33% higher than PIERS- reported volumes.
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- Steamship Line or NVOCC5 provides inland- point intermodal service. Steamship Line
arranges transfer of marine container from vessel to rail and rail line haul movement, all
under one rate. Line/ Carrier or customer may arrange dray from destination rail ramp to
destination distribution center. In this report, we term this the “ Direct Rail” channel.
- Steamship Line or NVOCC provides only transportation to port gate with container
mounted on a chassis. Customer separately arranges for marine container to be
transported from port gate to destination distribution center via long- haul truck or local
dray. In this report, we term these the “ Direct Truck” and “ Direct Local Dray” channels.
- Steamship Line or NVOCC provides transportation to warehouse in the hinterland of
the port of entry. Dray from port gate to warehouse may be arranged by Line or by
customer. Customer contracts with a third- party logistics firm ( sometimes a subsidiary of
the Steamship Line or the NVOCC) to provide deconsolidation and trans- loading into
domestic trailers or containers. Customer contracts with an intermodal marketing
company ( IMC) to provide dray from trans- load warehouse to rail ramp in port of entry
hinterland, rail line haul and destination dray. In this report, we term this the “ Trans- load
Rail” channel.
- Same as immediately above as far as the trans- load warehouse. From that point,
customer contracts for movement via long- haul truck or local dray to destination
distribution center. We term these the “ Trans- load Truck” and “ Trans- load Local Dray”
channels.
For the purposes of this study, 21 destination regions were defined encompassing the
Continental United States, and a single destination city was selected within each region.
The destination city so selected was one the consultant believes is representative as a
locus for regional distribution centers operated by large retail importers. Rates charged by
steamship lines, railroads, IMCs, trucking companies and dray companies to these
destinations via ten major North American ports of entry ( Vancouver, BC, Seattle-
Tacoma, Oakland, Los Angeles – Long Beach), Houston, Savannah, Charleston, Norfolk
and New York – New Jersey) were researched by the consultant. Many rates are
confidential and vary by customer or service provider.. In some cases, an average of a
basket of rates was utilized in this study. The data collected for the matrix of 10 ports and
21 destinations by channel was not complete. But enough data was available to infer a
structure to the rates, and missing rates were estimated to fit this structure.
In this report, specific rates are not divulged. Only our estimates of the overall
transportation charges per cubic foot of capacity are reported for the various channel-port-
destination combinations. 6 In general, we find that the total transportation and
handling cost for the Trans- load Rail channels ranges $ 0.02 less - $ 0.05 more per cubic
foot of imports than for the Direct Rail channels from the West Coast ports and $ 0.07 -
$ 0.15 more per cubic foot in lanes from East Coast ports. Trans- loading to truck is $ 0.40
5 Non- vessel- operating common carrier.
6 See Table 18 in Chapter 6.
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- $ 0.60 more per cubic foot than Direct Rail in lanes from West Coast ports and $ 0.05 -
$ 0.15 more per cubic foot in lanes from East Coast ports.
The trade- off of transportation and inventory costs leads to the result that small importers,
importers with few destinations, and importers with low average values of their imports
minimize their total inventory and transportation costs by using direct shipping channels.
Importers that are nation- wide in scope ( i. e., that ship imports to multiple destinations
that may be consolidated as far as the port of entry), have moderate or high average
values for their imports, and have sufficient overall volume minimize their total
transportation and inventory costs by trans- loading their imports in the hinterlands of one
or several ports of entry.
We estimate that the largest of the 83 major importers ( Wal- Mart) imports an average of
580 TEUs per week to each of the 21 destination regions defined in this study; the
smallest ships an average of only 10. The shipping volume for the smallest of the 83
major importers is marginally sufficient for practicing the trans- loading strategy. We
therefore assumed all importers in the proxy miscellaneous categories are too small to
practice trans- loading, i. e, we assumed all proxy miscellaneous importers solely utilize
direct shipping channels.
The transportation cost matrix, the transit time matrix and the formulas computing
pipeline and safety stocks were combined into an overall model termed the Long- Run
Elasticity Model. For each importer and each alternative strategy for the allocation of
imports to ports and channels, this model calculates the total transportation and inventory
costs. For each of the 83 major importers and for each of the 19 proxy miscellaneous
categories, the model was exercised to compute total costs for the following alternative
import strategies:
- Direct shipping of marine containers to destinations using the nearest port and using the
least costly landside mode available. ( This strategy is attractive to importers of low-valued
commodities.)
- Direct shipping of marine containers to destinations using the least costly West Coast
port and landside mode combination available. ( This strategy is attractive to importers of
moderate- and high- valued commodities who are too small or too regional to utilize a
trans- loading strategy.)
- Trans- loading of marine containers into domestic containers in the hinterlands of the
four ports of Seattle- Tacoma, Los Angeles- Long Beach, Savannah and New York- New
Jersey. Destinations are assigned to trans- load centers so as to roughly equalize volumes
at each center. The least costly transportation channels from trans- loading centers to
destinations are selected. ( This strategy is attractive to importers of moderate- valued
commodities who are large and nation- wide in scope.)
- Trans- loading of marine containers into domestic containers in the hinterlands of the
three ports of Seattle- Tacoma, Los Angeles- Long Beach, and Norfolk. Destinations are
14
assigned to trans- load centers so as to roughly equalize volumes at each center. The least
costly transportation channels from trans- loading centers to destinations are selected.
( This strategy also is attractive to importers of moderate- valued commodities who are
large and nation- wide in scope. Compared to the alternative immediately above, it affords
smaller total safety stock but increased transportation costs.)
- Trans- loading of marine containers into domestic containers in the hinterlands of only
one or several West Coast ports ( Seattle- Tacoma, Oakland, LA- Long Beach).
Destinations are assigned to trans- load centers so as to roughly equalize volumes at each
center. The least costly transportation channels from trans- loading centers to destinations
are selected. ( This strategy is attractive to importers of high- valued commodities who are
large and nation- wide in scope.)
Total costs were tallied for each alternative strategy for each importer and the best
strategy was identified. Then total import volumes passing through the SPB Ports were
tallied across importers. This process was repeated assuming the application of a fee on
loaded containers imported through the SPB Ports. This fee was assumed to be borne by
the importer. Fee values in increments of $ 30 from $ 0 to $ 1200 were tested in runs of the
Model. Combining results, an elasticity curve of port demand vs. fee value was
constructed.
The Long- Run Elasticity Model was applied to two scenarios: As- Is and Congestion
Relief. Both scenarios utilize the 2004 Asia – US import volumes, with each scenario
utilizing different assumptions about transit times. Results are summarized as follows.
As- Is Scenario
This scenario includes the consultant’s estimates of current statistics on transit times from
all ports through all channels. A container fee is assumed to be applied on or near the
dock to all loaded containers disembarking at the SPB ports. For a $ 0 fee, the best
distribution strategies as a function of average declared value of imports are summarized
in Table S- 1.
Table S- 1.
Import Strategy as a Function of Declared Value – As- Is Scenario
Importer type Declared Value Least- cost import strategy
Per Cubic Foot
Large importer $ 0 – $ 13 Direct shipping using nearest port
Large importer $ 13 – $ 27 Trans- load at multiple ports
Large importer $ 27 and up Trans- load only at LA- Long Beach
Small importer $ 0 – $ 46 Direct shipping using nearest port
Small importer $ 46 and up Direct shipping using only West
Coast ports
15
The Model output suggests that a large nation- wide importer of furniture or building
materials, such as Home Depot or Lowe’s, should opt for direct shipping of their imports.
It suggests that a large “ big- box” department store importer such as Wal- Mart, K- Mart,
or Target should trans- load imports at multiple ports, while an importer of high- value
electronics such as Sony or Samsung should trans- load all its imports at only one West
Coast port. By and large, these predictions are borne out by actual practice.
As an increasingly larger fee is imposed, the Model predicts that some importers are
induced to change strategy. For example, an importer of high- valued goods currently
trans- loading only in Southern California would be induced to begin trans- loading at
Seattle- Tacoma as well as in Southern California, once the fee is large enough. As the fee
is progressively increased, eventually the importer will be induced to discontinue
importing through the SPB Ports altogether and truck or use rail to supply its Southern
California distribution center from its trans- load warehouse in the hinterland of the
Seattle- Tacoma or Oakland ports. The “ break points” in fee value for each importer, i. e.,
where the importer has the economic incentive to change strategy, are calculated using
the Long- Run Elasticity Model. At these points the importer’s volume through the SPB
Ports is predicted by the Model to be reduced.
Figure S- 2 displays the resulting elasticity curves for the As- Is Scenario. Shown are
curves for total imported containers via the SPB Ports vs. container fee and for total
imported containers via the SPB Ports that are trans- loaded vs. container fee. As may be
seen, imports at SPB Ports are fairly inelastic until fees in the range of $ 180 per FEU7 are
introduced. At that point, total volume has declined about 13% and total trans- load
volume has declined about 8%. Note that trans- loading traffic is much more inelastic to
container fees than is direct shipping. For fees increasing from $ 180, the analysis predicts
steep declines in total container volumes through the SPB Ports. Trans- load volumes hold
up much better until fees above $ 360 are encountered, at which point they too begin steep
declines. At $ 480, the Model predicts that all direct shippers are driven away from the
SPB Ports, only trans- loading importers are left.
As a specific reference point, a recent proposal considered but not adopted by the State of
California Legislature called for a $ 30 per TEU ( i. e., $ 60 per FEU) container fee.
Suppose a fee of this magnitude was assessed before new infrastructure enabling reduced
container transit times was made available, i. e., a fee assessed to accumulate funds for
financing future infrastructure improvements. This study demonstrates the short- run
consequences of such an approach. From Figure S- 2 one can see that the Long- Run
Elasticity Model predicts a 6.3% drop in imports through the SPB Ports and a 5.9% drop
in trans- loaded imports as a result of such a fee, until the time improvements are
completed to SPB Ports’ access infrastructure that would reduce container transit times.
7 Forty- foot equivalent unit.
16
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
0
60
120
180
240
300
360
420
480
540
600
660
720
780
840
900
960
1020
1080
1140
1200
Container Fee ( per FEU)
2004 Annual Volume ( FEUs)
Total Volume
T/ L Volume ( Rail & Truck)
Figure S- 2.
Elasticity of Imports via the San Pedro Bay Ports, As- Is Scenario
Congestion Relief Scenario
A different scenario was tested in which transit time statistics were reduced at only the
SPB Ports. In particular, the mean transit time from port to trans- loading warehouses was
reduced from 3 days to 2 days, and the standard deviation of this transit time was reduced
from 2 to 1.6 days. In addition, the standard deviations of rail transit times for movements
out of the LA Basin were reduced by 0.1 days, with that for rail movement of marine
containers dropping from 3 to 2.9 days and that for rail movement of domestic containers
dropping from 1 to 0.9 days. We term this the “ Congestion Relief” Scenario.
This scenario represents the case where proceeds from the assessment of container fees
are used to retire the bonds on major port access infrastructure improvements, including
dedicated truck lanes from the ports to the warehouse district, and rail main- line and
terminal improvements permitting more reliable service. The modeled reductions in the
mean and standard deviation of port- to- warehouse dray transit times are justified as
follows: At present, dray operations for “ store- door” traffic typically start on the third day
after vessel arrival and complete on the fifth day. ( Drays to rail intermodal ramps are
completed beforehand.) It is assumed that dedicated truck lanes from the port to the
17
warehouse district would be constructed, enabling double- bottom drays ( two containers
per dray). This infrastructure would substantially reduce the duration to complete store-door
deliveries; the consultant estimates the mean would drop by one day and the
standard deviation would drop by 0.4 days. Moreover, a major program of capacity
improvements to main lines in Southern California plus the addition of substantial new
rail terminal capacity should serve to improve the reliability of rail services. The
consultant estimates the reduction in standard deviation of rail transit times from the Los
Angeles Basin to Midwestern and Eastern points afforded by such improvements to be
0.1 days.
The Congestion Relief Scenario significantly changes the economics for importers.
Assuming no container fee, the break points between import strategies are shifted
markedly from the As- Is Scenario. The new break points in value and the corresponding
optimal supply- chain strategy were found to be as summarized in Table S- 2.8
As before, Model calculations were iterated with the addition of a variable container fee
assessed on all containers entering through the ports of Los Angeles and Long Beach.
The direct and trans- load volumes via LA- Long Beach were then totaled for each fee
value in order to construct curves of volume vs. container fee. Results are plotted in
Figure S- 3. The red curve shows the total inbound container volume through the SPB
Ports vs. fee value; the blue curve shows the trans- loaded inbound container volume vs.
fee value. For ease of reference, the curves for the As- Is Scenario also are plotted, the
yellow curve showing the total inbound container volume and the brown curve showing
the trans- loaded inbound volume.
Table S- 2.
Import Strategy as a Function of Declared Value – Congestion Relief Scenario
Importer type Declared Value Least- cost import strategy
Per Cubic Foot
Large importer $ 0 – $ 13 Direct shipping using nearest port
Large importer $ 13 – $ 17 Trans- load at multiple ports
Large importer $ 17 and up Trans- load only at LA- Long Beach
Small importer $ 0 – $ 46 Direct shipping using nearest port
Small importer $ 46 and up Direct shipping using only West
Coast ports
As may be seen, congestion relief makes the LA – Long Beach ports more attractive to
importers. Even for a fee of $ 150, total SPB Ports inbound volume is higher than for a $ 0
fee in the As- Is Scenario. There is a “ knee” in the total inbound volume curve for the fee
8 While only one of the figures given in Table S- 2 differs from the figures in Table S- 1 ( i. e., $ 27 drops to
$ 17), this change is very significant. As may be seen in Figure S- 1, a considerable portion of Asian imports
falls into the range of $ 17 - $ 27 per cubic foot in declared value. These imports are shifted from being
candidates for trans- loading at multiple ports to candidates for trans- loading only at the SPB Ports.
18
equal to $ 210; at this point, the total volume is only 4.3% below the total volume in the
As- Is Scenario with no fee. At this same point, the trans- load volume is 12.5% above the
trans- load volume in the As- Is Scenario with no fee. The “ knee” in the trans- loaded
volume curve occurs for the fee equal to $ 240; even for a fee as high as $ 240, the trans-loaded
volume is more than 12% greater than the trans- loaded volume in the As- Is
Scenario with no fee.
The economic impact of the Congestion Relief Scenario may be summarized as follows.
The value of the reductions in transit time and transit time variability are more valuable
to large, nationwide importers of moderate- valued and high- valued goods than $ 200 per
FEU, and so total trans- loaded volume at the SPB Ports rises by 12.5%; but importers of
low- valued goods and importers too small or too regional to effectively practice trans-loading
find it more efficient to divert some of their imports to other ports, and so total
import volume through the SPB Ports declines slightly. This structural change in the mix
of traffic at the SPB Ports is significant. Direct shipments generate only dray, truck and
rail employment within the Basin; trans- loaded shipments generate that employment plus
additional dray employment plus deconsolidation center employment plus employment
for value- added activities. Trans- loaded imports provide much more for the local
economy compared to the imports that simply pass through the Region intact.
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
0
60
120
180
240
300
360
420
480
540
600
660
720
780
840
900
960
1020
1080
1140
1200
Container Fee ( per FEU)
2004 Annual Volume ( FEUs)
Total Volume
( Congestion Relief
Scenario)
T/ L Volume
( Congestion Relief
Scenario)
Total Volume ( As- Is
Scenario)
T/ L Volume ( As- Is
Scenario)
Figure S- 3.
Elasticity of Imports at the San Pedro Bay Ports – Congestion Relief Scenario
19
Assuming a 6% growth rate for imports and assuming a 6% interest rate and 30- year life
for tax- exempt bonds financing the congestion relief program, a $ 96 per TEU container
fee ($ 192 per 40- foot container) assessed on all imported container loads at the SPB Ports
would generate sufficient funds for about $ 20 billion in port access infrastructure
improvements. The consultant is advised that dedicated truck lanes between the ports and
the transloading warehouse district would cost about $ 16 billion; and another study
completed by the author estimates main- line rail capacity improvements between Los
Angeles and Barstow/ Indio sufficient to accommodate 2025 traffic levels would cost
about $ 3 billion dollars. 9 This suggests that the Congestion Relief Scenario would be
feasible and successful with a container fee ( per forty- foot equivalent unit, i. e., per FEU)
in the range of $ 190 - $ 200.
Excluded Factors
Certain factors are excluded from the Long- Run Elasticity Model; their qualitative
impacts are summarized as follows.
Some importers utilize port terminals as virtual warehouses ( whereby the importers
deliberately delay picking up goods not yet needed at their distribution centers). Others
maintain warehouses in the hinterland of the port of entry specifically for this purpose.
Economies afforded by these practices are not included in the Model. Qualitatively, these
practices extend the economies of trans- loading as the break- point in the average value of
imported goods for which trans- loading is more efficient than direct shipping is shifted
downwards.
Rail transportation charges input to the Model do not include any surcharges for re-positioning
equipment. What matters most in this regard is the relative cost of rail
shipment of marine containers vs. cost of rail shipment of domestic containers. If these
charges are comparable, the Model’s allocations of imports to channels will remain valid.
But if re- positioning charges per cubic foot for one of these types of equipment became
much larger than for the other, model input parameters would need to be adjusted.
The diversification of port congestion risk is not considered in the model. After the
congestion experienced at the SPB Ports in the 2004 peak shipping season, some
importers have diversified their use of ports as a hedge against potential congestion. This
practice may tend to reduce the SPB Ports volume somewhat below values calculated by
the Model.
Short- Run vs. Long- Run: Proper Interpretation of Model Results
9 Final Report - Inland Empire Main Line Rail Study, prepared for the Southern California Association of
Governments by Leachman & Associates LLC, June 30, 2005.
20
In the short run, there are many factors inhibiting the shifting of imports to other ports or
alternative channels. There are multiple dimensions of capacity constraining the channel
volumes: vessel frequencies and capacities, available transit slots through the Panama
Canal, lift capacities at port and rail terminals, available draymen, available trans- loading
warehouses, and line- haul capacities of rail and truck channels in the various lanes.
Moreover, steamship lines are committed to relatively long- term port contracts whose fee
structures provide the incentive for the lines to tender large volumes and mandate stiff
penalties for premature withdrawal.
The Long- Run Elasticity Model analyzes transportation and handling rates, values of
goods, and transit time statistics faced by importers to determine the least costly
allocation of imports to ports and channels. Transit time statistics are exogenously
supplied to the model and are not updated if the Model shifts substantial traffic volumes
between ports or modes. The Model results should be interpreted as indicating the fee
points at which importers would experience an economic incentive to reduce import
volumes through the SPB Ports.
Given a scenario in which there is economic incentive to shift imports between modes or
between ports, there will be inertia inhibiting such shifts. Major shifts in import traffic
may require considerable time to implement. Thus, in the short run, San Pedro Bay Ports
traffic will be significantly more inelastic than the predictions of the Long- Run Model.
However, given strong economic incentives for importers to shift traffic, one may expect
in the long run that desired terminal and line haul capacities will get built, new port
contracts will be negotiated, vessel strings will be adjusted, new trans- loading
warehouses will be erected, and dray forces will be adjusted.
The Long- Run Elasticity Model is intended to inform the public policy dialogue
concerning potential major investments in access infrastructure for the San Pedro Bay
Ports. Such infrastructure may require up to a decade to build, and financing instruments
may require up to three decades to retire the principal. It seems very unwise to rely solely
on estimations of short- run elasticity to justify such investments. Investment of large
sums of public monies in long- term infrastructure should be confirmed to be sound on the
basis of long- run elasticity calculations.
Container Fee Collection
The consultant believes that it is important that any container- based infrastructure fee be
assessed against all containers entering the San Pedro Bay Ports regardless of landside
mode or destination. The most effective fee collection point is at the dock as an additional
wharfage charge. This approach will ensure that all inbound loaded containers are equally
assessed a fee and that no transportation mode is exempted. In this way, the competitive
place of all transportation providers will remain unaffected by the fee. Moreover, the
revenue collected for a given fee value will be maximized. Attempts to collect fees
further down the supply chain entail all the risks of missed revenue plus the potential to
unintentionally divert shipments from one transportation mode to another.
21
As proposed herein, the container fee is proposed to be assessed only on loaded inbound
containers. Extension of the fee to outbound containers ( loaded and empty) is not
recommended. The problems with assigning fees to boxes other than inbound loads are
twofold. First, for outbound loads, the average value per cubic foot of exports is very
low, e. g., corrugated scrap, scrap metal, grain. Transit time is of little importance;
transportation cost is the paramount consideration. A significant fee assessed on such
exports is likely to cause substantial diversion to other ports of exports originating at
inland points and possibly even curtailment of the exports themselves. Second, for
outbound empties, a significant additional cost borne at the SPB Ports would encourage
the return of containers made empty at inland points to other ports. The resulting
imbalance would entail a hardship on the railroads, requiring them to increase re-positioning
movements of well cars for hauling double stacks. In all likelihood, the
railroads would be impelled to add their own surcharges to the return of containers to
other West Coast ports in an effort to correct this imbalance. Low- value exports via other
West Coast ports might be curtailed.
The soundest approach to the issue of container fee domain is to restrict the imposition of
a fee to imports only. Further, we recommend that per- container charges be used rather
than TEU fees. This approach compensates for the fact that all containers, regardless of
size, consume infrastructure approximately equally.
Conclusions
San Pedro Bay import volume is much more elastic with respect to congestion than with
respect to container fees. Import volume is nevertheless elastic with respect to container
fees.
Without congestion relief, in the long run even a small container fee would drive some
traffic away from the San Pedro Ports. The Long- Run Elasticity Model predicts that a
$ 60 per FEU fee on inbound loaded containers at the SPB Ports would cut both total
import volume and total trans- loaded import volume at the SPB Ports by approximately
6%.
With congestion relief, San Pedro Bay imports are relatively inelastic up to an import fee
value of about $ 200 per FEU. A fee of about $ 190 per FEU that retires the bonds on a
wise and ambitious program of congestion relief seems a safe and effective investment.
Total port volume might decrease marginally, but total trans- loaded volume is predicted
to increase by more than 12%, resulting in an economically more attractive traffic base.
Fee values greater than $ 200 per FEU will have serious negative consequences for the
SPB Ports and the region, even if predicated upon congestion relief.
22
Recommendations
We recommend that ( 1) a complete and comprehensive list of infrastructure projects be
formulated to determine construction cost, ( 2) that the financing cost and term be
calculated for these intended investments, ( 3) should other ( direct) funding be
unavailable, that a container fee exclusively used for retiring the bonds for said
improvements be uniformly imposed on all imported containers, and ( 4) the practical
point of collection is at the dock to be paid by the importer.
We believe that the importer is the appropriate party to pay for several reasons. ( 1) They
are the primary beneficiary of the service. ( 2) The importers are the drivers of the US
economy and are a much more potent political force for obtaining direct funding ( thereby
reducing the amount of the fee required for a given program of infrastructure
improvement or alternatively enabling a greater program of improvement for a given fee
amount) from Congress than either the port or maritime sectors, and ( 3) Market forces
would likely result in differentiated pricing over the different port gateways reflecting a
more realistic view of operating and asset opportunity costs.
Further Study
Asia – U. S. containerized trade is a highly fragmented enterprise. Data collection for this
study was a tremendous challenge. Many important parameters of the analysis had to be
estimated by the consultant based on limited information or based on information of
limited completeness or accuracy ( e. g., PIERS).
The importers themselves are the only ones in possession of accurate values of many of
the key parameters of the analysis: actual total transportation and handling charges, actual
mean and standard deviation of transit times, actual import volumes by destination, actual
declared value of imports, etc. A follow- on effort by the consultant featuring more time
engaging with the importers, gaining insight into their practices and gaining access to
their data, would be extremely fruitful for improving the accuracy of the analysis.
While the Long- Run Elasticity Model is suitable for informing public policy, a Short- Run
Model also is of considerable interest. The impact of changing congestion levels in
alternative channels and at alternative ports is exogenous to the Model at present, but it
could become part of the model’s calculations through the incorporation of formulas
developed from queuing theory. The economic impact of contracts between steamship
lines and ports also could be incorporated. Time and budget limitations prevented the
consultant from developing a Short- Run Model, but it could be done in a follow- on
effort.
Finally, the Elasticity Model at present is quite labor- intensive. About a man- day is
required per scenario to execute and record Model calculations. The consultant could
make this much more automated and much less time- consuming in a follow- on effort.
23
2. CONTAINER FEES AND OTHER FUNDING SOURCES
Having reviewed a number of data bases, we found no relevant, published economic
research in the area of elasticity of demand for port services. The Transportation
Research Board, the Foundation for Intermodal Research and Education and the other
resources we investigated were unable to identify any work on the topic. Evidently, prior
to this study, elasticity of port trade volumes was an unpublished topic. However, there
are a number of studies extant concerning the SPB Ports’ market competitiveness and the
intermodal market share of SPB Ports’ container traffic. Eight of these studies were
reviewed by the consultant. 10 Chapter 3 provides the consultant’s own assessment of the
competitive position of the SPB Ports.
The Alameda Corridor is the most prominent example of port access infrastructure
employing user fees as a funding source. We therefore explain in detail the user fee
structure of the Alameda Corridor. Other instances of user fees for port access are
described. However, as noted in the trade press, 11 there is now considerable discussion in
the U. S. government of ideas and preliminary proposals for financing intermodal
infrastructure improvements. Alternative funding concepts for such improvements now
under active discussion by Federal policymakers are reviewed in the next section of this
chapter.
Alameda Corridor Fees
The Alameda Corridor Operating Agreement identifies two types of fees paid by the
railroads for haulage of port related containers or use of the Corridor ( for non- port related
cargo). These are termed “ User Fees” and “ Container Charges”.
“ User Fees” are triggered whenever a container is loaded/ unloaded and transported by
rail to/ from a port facility or – uses the Alameda Corridor. Therefore, if a container is
loaded at a port facility and is transported over a rail line other than the Alameda Corridor
the railroad must pay a fee. Conversely, if the container is loaded at a non- port facility,
but is transported over the Alameda Corridor, the railroad must pay a fee.
“ Container Charges” are applied to all loaded water- borne containers transported by rail
to/ from a rail ramp in a 10 county Southern California Region, provided the container
passes through the San Pedro Bay Ports, but is neither loaded at a port facility nor
transported over the Corridor. The counties are San Luis Obispo, Santa Barbara,
Ventura, Kern, Los Angeles, Orange, Riverside, San Bernardino, Imperial and San Diego
10 See Port and Modal Elasticity Study, Working Paper # 1: Previous Studies on Market Competitiveness,
Elasticity of Demand, and User Fee Funding of Infrastructure Improvements, prepared for the Southern
California Association of Governments by Leachman & Associates LLC, June, 2003.
11 See, for example, Intermodal Bottleneck Ahead, Bill Mongelluzo, Journal of Commerce, March 31- April
6, 2003, p. 22- 24.
24
County. This provision was placed in the Alameda Corridor Operating Agreement to
discourage draying around the Corridor to avoid the “ User Fee”. Note that “ Container
Charges” are applicable to loads only.
When negotiated, the fee was pegged at $ 15 per loaded TEU ( 20 foot equivalent unit),
and $ 4 per empty TEU. Non water- borne containers transported over the Corridor are
also charged a $ 4 “ User Fee”. A small percentage of the Intermodal Container Transfer
Facility ( ICTF) traffic is non water- borne. The agreement contains a fee escalation
clause indexed to the CPI. The escalator is adjusted in January of each year ( following
the Corridor’s opening), and is no less than 1 ½ % or more than 3% in any year. There is
no downward adjustment for a deflationary environment. The TEU charge was adjusted
for the first time in January of 2003 – the full 3%. Thus, the TEU charge per loaded
container during 2003 was $ 15.45 and an empty TEU was charged $ 4.12.
When negotiated, carload traffic transported over the Corridor was assessed a “ User Fee”
of $ 8 per load, - $ 8.24 per carload during 2003 because of the January 2003 adjustment.
There is no charge for the transport of empty cars. There are exceptions to the general
rule. Two of Union Pacific’s carload trains are exempted from paying “ User Fees”. That
is because the trains were included in the EIR document, and the ports wanted the trains
operated over the Corridor. Neither train hauls port traffic, and Union Pacific agreed to
place the trains on the Corridor provided no fee was assessed. Union Pacific had
alternative lines over which to operate the trains. Thus, the exception.
The “ User Fees” and “ Container Charges” will be used to pay off approximately $ 1.6
billion of debt incurred in construction of the Corridor. The fees run for 35 years or until
the debt is retired, whichever comes first. The two San Pedro Bay Ports guarantee up to
40% of the debt service. In the early years of operation, the ports will be required to
contribute money for debt service. However, when railroad fees produce a stream of
revenue greater than what is needed to service the debt, the ports will be paid back with
accumulated interest.
In addition to fees as noted above, the railroads pay for the Corridor’s operation,
including Maintenance of Way and Dispatching expense. This expense averages another
$ 1.50 per container.
During 2003, about 35% to 37% of the containers passing through the San Pedro Bay
Ports were assessed a fee and were hauled by rail to/ from the region. The railroads haul
an additional number of containers on which no fee is assessed ( see discussion of
“ Container Charges” above). It’s estimated that this amounts to an additional 4% of the
San Pedro Bay Ports aggregate TEUs.
A study conducted immediately prior to the Alameda Corridor bond offering estimated
that the railroad market share would be close to 50% of the total number of TEUs passing
through the ports. 12 While perhaps accurate at the time, the percentage in recent years
12 San Pedro Bay Ports Long- Term Cargo Forecast - Final Report, Mercer Management Consulting, Inc.
and Standard & Poor’s DRI, October, 1998.
25
has dropped because of increased transloading, warehousing and distribution of trade
with Pacific Rim countries. We are aware of no studies to support the notion that the
Alameda Corridor Fees are accelerating this change in goods distribution. Studying this
issue is difficult. Tracking container movements is challenging, but once the cargo has
left the water- borne container, it is almost impossible to track cargo movement using
current data collection resources.
Other Instances of User Fees
A few other instances of container user fees used to finance access infrastructure have
come to light. Prior to the Alameda Corridor, the construction of the Intermodal
Container Transfer Facility ( ICTF) serving the SPB Ports was financed in part by a $ 30
gate charge collected by a joint powers authority for the purpose. Currently, the Port
Authority of New York and New Jersey ( PANYNJ) is charging a " cost recovery fee" to
the users of Millennium Rail ( an on- dock rail facility). The railroads collect the fee and
pass it directly to the port authority. The Port of Tacoma charges the railroads a $ 20 per
container fee for containers moving to and from port intermodal facilities. While the fee
primarily defrays operational costs ( e. g., rail switching of well cars at the terminals), part
of its proceeds ostensibly could be used for infrastructure expansion.
Financing Transportation Infrastructure for Port Access
In the years since the initial efforts to develop and fund the Alameda Corridor, a great
deal of work has been done to make Federal, State and local policy makers more aware of
the importance of freight transportation to national transport policy. The recognition and
identification of “ intermodal connectors” ( which the Alameda Corridor would now be
identified as) in TEA- 21 and, the proposal that there be set- asides for such intermodal
connector improvements in the next iteration of this legislation (“ SAFETEA”), represent
important steps along this path. Recognition of the often poor condition or inadequate
capacity of these connectors has led to an active public dialogue concerning how this
issue can most effectively be addressed. At the same time, though, we are still in the
“ early days” of developing a coherent national transportation policy for freight and in
securing adequate funding for the intermodal connector projects that must be undertaken.
In this context, the Alameda Corridor project is considered by policy makers and
transport industry figures a pioneering and successful example of how Federal, State and
private interests can come together to execute transportation projects which generate
large- scale public benefits by leveraging and supplementing privately owned
infrastructure with public investment. What SCAG was prescient enough to see in 1983
as a critical regional concern is now recognized as a national one.
Furthermore, with the USDOT’s projection that demand for freight transportation will
double by 2020 there is wide spread recognition that existing public and private
transportation capacity, even augmented by the currently anticipated levels of
transportation infrastructure funding, cannot meet this demand.
26
Accordingly, there are a variety of approaches to funding freight transportation projects
under active discussion. What is most interesting about the variety of these approaches is
that few, if any, focus on infrastructure charges on particular modes as a source of
funding. Rather, the assumption that drives these approaches is that funding must come
from more general revenue sources. We found no examples of U. S. freight projects under
active discussion that proposed financing based on an infrastructure charging scheme.
We provide a brief review of the relevant financing concepts below.
1. Transportation Infrastructure Bank: Modeled on Freddie Mac or
Fannie Mae, this approach would create a national bank that would
stimulate low- interest, federally guaranteed loans for freight infrastructure
projects.
2. Issue Federal Bonds – a variety of approaches have been discussed, two
of which are:
a. Federal Transportation Bonds (“ T- Bonds”): Tax- exempt Bonds,
underwritten by the U. S. Treasury, would be sold to private
investors, with the funds used to finance transportation
infrastructure projects. Funds generated could be distributed as
grants, loans, or credit enhancements.
b. Tax Credit Bonds: Tax credit bonds are proposed as a means of
supplementing gas tax revenue in the Highway Transportation
Fund and are also anticipated as a means of financing freight
connector projects.
3. Create a Transportation Finance Corporation (“ TFC”): The American
Association of State Highway and Transportation Officials’ (“ ASHTO”)
solution to solving the infrastructure funding issues across all modes. The
TFC would be a cooperative private- government organization that would
issue tax- credit bonds ( see above) and create a capital- revolving fund to
pay for intermodal projects. They propose to issue $ 60 billion in bonds
between 2004 and 2009 to support a $ 5 billion capital revolving fund.
4. Increased Priority and Expand Eligibility for Intermodal Projects at
the Reauthorization of TEA- 21: The administration bill (“ SAFETEA”)
has taken steps down this path with a 2% set- aside for intermodal
connector projects.
5. Combine and Market Existing Programs: The U. S. Chamber of
Commerce recently identified this as a possible approach: “ Components of
the program could include: Qualified intermodal investment tax credits,
Industrial revenue bonds directed at freight capacity building; Urban
Development Action Grants for freight faculties, ( and) A waiver of certain
property taxes on freight facilities. 13”
13 “ Trade and Transportation,” National Foundation of the U. S. Chamber of Commerce, March, 2003, p.
40.
27
The conceptual approach and funding for the CREATE ( Chicago Regional
Environmental and Transportation Efficiency) project in Chicago are considered by many
in both the private and public sectors as a model for future freight infrastructure projects.
Commercial interests, as well as local, state, and federal officials, have come to
agreement on implementing and funding a $ 1.5 billion rail improvement project for the
region; approximately $ 900 million of which is slated to come from Federal sources,
$ 212 million from the six railroads involved and the remainder from state and local
sources. From a rail industry perspective this is considered a model for public- private
partnerships wherein the railroads contribute equivalent to the benefits they derive and
the public sector contributes relative to the public benefits generated. Of particular
interest is the fact that no infrastructure surcharging is proposed; rather this effort seeks to
be identified as a “ project of National Significance” and to derive the bulk of its public
funding from federal sources. Significant support has been demonstrated across the
transportation industry ( it benefits both passenger and freight) and across the Chicago-region
and national political spectrum for CREATE. Some Federal funds were committed
in the most recent highway bill but the extent of future federal and state funding remains
to be seen.
3. MARITIME TRADE FLOWS
This chapter reviews containerized Asia – U. S. trade flows and trade flows to and from
the West Coast ports, analyzing the competitive position of the San Pedro Bay Ports.
Terminal facilities and capacities at the West Coast ports are documented, as are current
vessel service levels. Overall waterborne container traffic is classified into portions for
which port routings can be considered to be discretionary in the short run, discretionary
in the long run, and local.
Comparison of West Coast Port Facilities
Container ships operated by transpacific steamship lines predominantly make regularly
scheduled calls at the following ten ports on the West Coast of North America, listed
north to south: Vancouver, British Columbia; Seattle, Washington; Tacoma, Washington;
Portland, Oregon; San Francisco, California; Oakland, California; Los Angeles,
California; Long Beach, California; Ensenada, Mexico; Lazaro Cardenas, Mexico; and
Manzanillo, Mexico. Our intent in this section is to gain a general idea of the relative
capacity and relative level of service at the SPB Ports versus the other West Coast ports.
Container Handling Facilities at West Coast Ports
Table 1 compares the facilities for handling container ships at West Coast ports, as of
2003. Container throughput comparisons are complex because of varying water depths
and berth lengths ( more depth and length allow larger vessel sizes) and variations in
dockside cranes ( greater size, speed and number per berth may enable quicker vessel
28
turnaround and higher berth utilization). Considering all of these factors, we estimate that
the San Pedro Bay Ports possess at least one third and perhaps as much as one half of the
existing West Coast container handling capacity.
Table 1.
Container Handling Facilities at West Coast Ports
Port
Container
Ship Berths
Berth
Water Depth
Container
Cranes
Long Beach 16 9@ 50ft, 2@ 48ft, 5@ 42ft 42
Los Angeles 32 10@ 53ft, 22@ 45ft 63
Sub- total,
SPB ports 48 105
San Francisco 4 40ft 7
Oakland 23 5@ 50ft, 18@ 42ft 34
Portland 3 40ft 7
Tacoma 7 4@ 50ft, 3@ 48ft 18
Seattle 12 9@ 50ft, 1@ 45ft, 2@ 40ft 20
Vancouver, BC 7 5@ 50ft, 2@ 40ft 13
Manzanillo,
Mexico 2 46ft 4
Ensenada,
Mexico 1 36ft 2
Sub- total, non-
SPB ports 59 105
Source: Port web sites
Rail Intermodal Facilities
Rail intermodal terminal capacities for handling double stack trains serving West Coast
ports were developed and compared. Table 2 provides an approximate comparison of
intermodal handling capacities at the various West Coast ports, as of June, 2003. There
are a number of independent variables to be taken into account in this regard ( e. g., train
lengths vary from terminal to terminal, as do operating hours and container lifting rates
on and off double- stack well cars). While some ports report on- dock intermodal facility
sizes in terms of numbers of car spots, others report the maximum numbers of trains that
can be simultaneously on- spot for loading or unloading. We assumed 25 cars per train for
terminals reporting the number of car spots, then rounded off the resulting number of
trains. For off- dock terminals, we apportioned capacity based on the current mix of
domestic and international traffic handled through the terminal. We estimate that the San
Pedro Bay ports possess close to half of the overall West Coast intermodal terminal
capacity, as well as close to half of the on- dock or near- dock intermodal capacity.
Transpacific Container Vessel Service
29
Steamship line service was researched to develop a summary of the distribution of port
calls by commercial Asia - North America container vessel strings. A comparison based
on services in effect as of May 1, 2003 is provided in Table 3.
Table 2.
Rail Intermodal Facilities at West Coast Ports
Port Max Number of Stack Max Number of Total
Trains On Spot Stack Trains On Spot
at On- Dock or at
Near- Dock Terminals Off- Dock Terminals
Long Beach 9 See Los Angeles
Los Angeles 9 8
Subtotal, SPB Ports 18 8 26
San Francisco 1 See Oakland
Oakland 4 1
Portland 2 0
Tacoma 5 See Seattle
Seattle 4 4
Vancouver, BC 4 3
Subtotal, non- SPB Ports 20 8 27
Sources: POLB/ POLA Transportation Study ( June, 2001), Port web sites.
Note: Trains “ on spot” refer to those actively loading or unloading. For terminals handling both
domestic and international traffic, total capacity has been apportioned based on current domestic
and international volumes. Only capacity allocated to international traffic is shown. Train lengths
range between 20 and 28 five- well cars. Capacity for car storage not considered.
The table shows the number of vessel strings coming from Asia that make their first
North American stop at each port ( or port region), the number making their last stop at
each port, and the total number of strings serving each port. There are typically 70 vessel
strings operated per week between Asia and North America; of those, 4- 5 strings per
week utilize the Suez Canal route, whereas the rest cross the Pacific. About 21% of the
vessel strings make their first U. S. port call on the East Coast, about 18% of the strings
call only on the East Coast, 75% of the strings call only on the West Coast, and the other
7% ( 5 strings) serve both coasts. Most vessel strings serve multiple ports; thus the figures
given for the various ports do not add to the total number of strings.
Perhaps the most important statistic derived from this table is that over half ( 52%) of the
Asia- North America vessel strings make their first North American port call at the SPB
Ports. In contrast, less than 15% of the vessel strings make their last North
American port call at the SPB Ports. Instead, nearly 62% of all strings make the last
North American port call at either Oakland or the Pacific Northwest ports. These figures
30
demonstrate the steamship lines’ preference for operating strings that first off- load U. S.
imports at the SPB Ports, load up with exports and westbound empties at the SPB Ports,
and then top off with more exports and empties at subsequent stops at Oakland and/ or the
Pacific Northwest ports. Considering all stops, more than 63% of the Asia- U. S. vessel
strings serve the SPB Ports.
Table 3.
2003 Weekly Container Vessel Strings, Asia – North America
Port( s) No. of Strings w/
First Stop = Port( s)
No. of Strings w/
Last Stop = Port( s)
Total Strings
Serving Port( s)
East Coast USA
via Panama Canal
10 9 14
East Coast USA
via Suez Canal
4.5 4.5 4.5
Subtotal,
East Coast USA
14.5 13.5 18.5
Long Beach 15.5 3.5 16.5
Los Angeles 21 6.5 27.5
Subtotal,
San Pedro Bay
36.5 10 44
Oakland/ S. F. 2 23 30.5
Portland 0.5 2 3.5
Tacoma 5 2 8
Seattle 4 8 14
Vancouver, B. C. 6 8 19
Subtotal, PNW 15.5 20 24.5
Manzanillo 1 2 4
Ensenada 0 0 1
Subtotal, Mexico 1 2 4
Total 69.5 69.5 69.5
Sources: Steamship line web sites, ComPair, Pacific Shipper, interviews with steamship line and interviews
with ports staff.
Notes: Fractional totals result from inclusion of vessel strings not operated every week. These totals reflect
vessel schedules in effect as of May 1, 2003. During peak season ( roughly July through October), the
number of vessel strings serving the West Coast increases by 3%- 7%. Offsetting this increase, some vessel
strings serving both West and East Coasts curtail some or all of their West Coast stops during peak season.
31
San Pedro Bay Ports’ Traffic Shares
We begin our analysis of traffic shares by comparing the SPB Ports to the other major
West Coast ports for containerized trade. Considering the port capacity and vessel service
statistics developed above, one might expect the SPB Ports to handle 50%- 60% of the
West Coast container traffic. The traffic volumes reviewed below confirm this.
Shares of West Coast Container Traffic
Table 4 displays twenty- foot equivalent unit ( TEU) volumes and percentage shares of
total container traffic at West Coast ports over the last eleven years. Both loaded and
empty container movements – inbound and outbound, both foreign and domestic – at all
major West Coast ports are included. Figure 1 depicts the trends in shares of West Coast
containerized traffic, comparing the San Pedro Bay ( SPB) Ports to the San Francisco Bay
( SFB) Ports, to U. S. Pacific Northwest ( PNW) Ports ( including Portland, Tacoma and
Seattle) and to the Ports in the vicinity of Vancouver, BC.
Container movements through the West Coast ports grew at a compound annual growth
rate of 6.2% between 1994 and 2002, reaching almost 17 million TEUs in 2002.
Container volumes handled through the SPB Ports grew even faster. During the period
1994- 2001, the SPB Ports steadily increased their share of West Coast container volumes,
rising from about 51% to more than 62%. However, from 2001 to 2004, the SPB ports’
share of total TEUs handled has been flat.
Over the period 1994- 2002, the traffic shares of the other U. S. West Coast ports
consistently declined. SFB Ports dropped from 16% to 10%, and that of the PNW ports
dropped from 28% to 19%. Exhibiting an opposite trend, the traffic share of the Port of
Vancouver, BC rose from less than 5% to almost 9%, reaching 9.45% in 2004. As with
the SPB Ports, the trends in traffic shares over the period 2002- 2004 of all other West
Coast port regions are flat.
Within San Pedro Bay, Los Angeles overtook Long Beach in 2000, and in 2004 the ratio
of LA: LB total container traffic stood at approximately 56: 44.
If we examine inbound loaded containers only, a somewhat different picture emerges.
Table 5 displays West Coast port shares of inbound loaded containers, 2001 – 2004, and
Figure 2 graphs these trends. First note that the SPB Ports’ share of inbound containers is
higher than their share of outbound containers ( both loaded and empty). However, as may
be seen, the SPB Ports’ share of imports has dropped about 1.8 points since 2001, with
Vancouver picking up 1.2 points and the US PNW ports picking up 0.6 points. To more
fully comprehend this aspect of the trade flows, it is useful to examine the mix of
inbound and outbound containers at the several ports. Figures 3 – 6 display the mix of
inbound load, outbound loads and outbound loads at the San Pedro Bay Ports, at
Oakland, at the US PNW Ports, and at Vancouver, BC.
32
Table 4. West Coast Port Volumes, 1994 – 2004
( Total TEUs, loaded and empty, inbound and outbound)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
LONG BEACH 2,573,827 2,843,612 3,067,335 3,504,599 4,097,689 4,408,480 4,600,787 4,462,959 4,526,365 4,658,124 5,779,852
LOS
ANGELES 2,518,618 2,555,206 2,682,803 2,959,715 3,378,217 3,828,851 4,879,429 5,183,520 6,105,863 7,178,940 7,321,440
OAKLAND 1,491,002 1,549,886 1,498,202 1,531,187 1,575,406 1,663,756 1,776,922 1,643,585 1,707,827 1,923,104 2,043,122
SAN
FRANCISCO 66,486 29,919 5,553 15,973 18,297 39,547 50,147 34,952 25,957 20,633 32,045
PORTLAND 317,961 329,747 302,171 294,930 259,308 293,262 290,943 278,491 255,745 339,571 274,609
SEATTLE 1,414,950 1,479,076 1,473,561 1,475,813 1,543,726 1,490,048 1,488,267 1,315,109 1,438,872 1,486,465 1,775,858
TACOMA 1,027,928 1,092,087 1,073,471 1,158,685 1,156,495 1,271,011 1,376,377 1,320,273 1,470,834 1,738,068 1,797,560
VANCOUVER 493,843 495,463 616,692 724,154 840,098 1,102,092 1,230,020 1,197,142 1,558,786 1,799,881 1,985,042
TOTAL 9,904,615 10,374,996 10,719,788 11,665,056 12,869,236 14,097,047 15,692,892 15,436,031 17,090,249 19,144,786 21,009,528
LONG BEACH 25.99% 27.41% 28.61% 30.04% 31.84% 31.27% 29.32% 29.01% 26.49% 24.33% 27.51%
LOS
ANGELES 25.43% 24.63% 25.03% 25.37% 26.25% 27.16% 31.09% 33.69% 35.73% 37.50% 34.85%
OAKLAND 15.05% 14.94% 13.98% 13.13% 12.24% 11.80% 11.32% 10.68% 9.99% 10.05% 9.72%
SAN
FRANCISCO 0.67% 0.29% 0.05% 0.14% 0.14% 0.28% 0.32% 0.23% 0.15% 0.11% 0.15%
PORTLAND 3.21% 3.18% 2.82% 2.53% 2.01% 2.08% 1.85% 1.81% 1.50% 1.77% 1.31%
SEATTLE 14.29% 14.26% 13.75% 12.65% 12.00% 10.57% 9.48% 8.55% 8.42% 7.76% 8.45%
TACOMA 10.38% 10.53% 10.01% 9.93% 8.99% 9.02% 8.77% 8.58% 8.61% 9.08% 8.56%
VANCOUVER 4.99% 4.78% 5.75% 6.21% 6.53% 7.82% 7.84% 7.45% 9.12% 9.40% 9.45%
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Source: Port web sites. Vancouver volume includes Fraser Surrey Docks, Deltaport, Vanterm and Centerm.
33
Figure 1. Container Traffic Shares
at West Coast Ports
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
% of Total West Coast TEUs
SP Bay Ports
SF Bay Ports
PORT/ SEA/ TAC
Vancouver
34
Table 5. Inbound Loaded Containers, West Coast Ports, 2001 – 2004
( Total inbound loaded TEUs)
1999 2000 2001 2002 2003 2004
LONG BEACH 2,317,050 2,456,188 2,420,687 2,452,490 2,409,557 2,987,980
LOS ANGELES 1,965,853 2,492,546 2,683,657 3,232,411 3,814,473 3,940,420
OAKLAND 469,226 503,858 486,389 547,230 599,408 690,480
PORTLAND 86,900 69,462 63,748 55,447 73,185 71,224
SEATTLE 337,667 416,917 368,069 453,534 555,455 596,582
TACOMA 583,822 594,991 497,068 537,504 542,863 704,664
VANCOUVER 402,791 494,876 520,118 737,324 846,056 947,169
TOTAL 6,163,309 7,028,838 7,039,736 8,015,940 8,840,997 9,938,519
SAN PEDRO BAY 69.49% 70.41% 72.51% 70.92% 70.40% 69.71%
OAKLAND 7.61% 7.17% 6.91% 6.83% 6.78% 6.95%
PNW 16.36% 15.38% 13.19% 13.06% 13.25% 13.81%
VANCOUVER 6.54% 7.04% 7.39% 9.20% 9.57% 9.53%
Source: Port web sites. Vancouver volume includes Fraser Surrey Docks, Deltaport,
Vanterm and Centerm.
Figure 2. Shares of Inbound Loaded Containers at
West Coast Ports
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
55.00%
60.00%
65.00%
70.00%
75.00%
2001 2002 2003 2004
San Pedro Bay
Oakland
PNW
Vancouver, BC
35
Figure 3. 2004 Distribution of Containers
Handled at the San Pedro Bay Ports
53.14%
16.40%
30.46%
IB Loads
OB Loads
Empties
Figure 4. 2004 Distribution of Containers Handled
at Oakland
IB Loads,
33.80%
OB Loads,
39.81%
Empties,
26.39%
IB Loads
OB Loads
Empties
36
Figure 5. 2004 Distribution of Containers Handled
at Seattle- Tacoma
IB Loads,
47.22%
OB Loads,
26.59%
Empties,
26.19%
IB Loads
OB Loads
Empties
Figure 6. 2004 Distribution of Containers
Handled at Vancouver
IB Loads,
47.01%
OB Loads,
41.73%
Empties,
11.26%
IB Loads
OB Loads
Empties
37
Inbound empty container volumes are negligible at all ports. As may be seen in the
figures, San Pedro Bay is primarily an import port, with about 3.2 inbound containers for
every outbound loaded container. Considering both loads and empties, more than 53% of
the containers handled are inbound. In contrast, outbound containers outnumber inbound
containers at the other West Coast ports. At Oakland, less than 34% of the containers
handled are inbound. At the US PNW ports and Vancouver, about 47% of the containers
handled are inbound. Thus a significant fraction of the containers that enter North
America via San Pedro Bay return to Asia via the other West Coast ports.
Another significant trend concerns the mix of outbound containers. This is documented in
Table 6. As may be seen, the fraction of the boxes that are loaded is declining as imports
continue to grow. Over the period 2001 – 2004, the total containers handled by the SPB
Ports grew by 38%, the inbound loads grew by 41%, and the outbound empties grew by
55%.
Intermodal Share of Imports
The Pacific Maritime Association publishes inbound and outbound container statistics
for US West Coast ports. The Intermodal Association of North America ( IANA) collects
statistics concerning eastbound rail movement of marine containers from US West Coast
ports, aggregated into the groups PNW ( Washington and Oregon) and PSW ( California).
By comparing these data, the consultant was able to track trends in the rail share of the
movement of inbound marine containers. Statistics on 20- foot, 40- foot and 45- foot
containers were aggregated assuming the mix 12.37% 20- foot, 80.28% 40- foot, and
7.35% 45- foot containers and converted into statistics on a TEU basis. 14 Results are
depicted in Figure 7.
The fraction of containers moving inland by rail from US West Coast ports is declining.
During the period 2000 – 2004, the rail fraction from PNW ports declined from about 82
percent to about 70 percent, and the rail fraction from California ports declined from
about 45% to about 40%. Although no IANA numbers are available that are specific to
Southern California, one can estimate the fraction of inbound boxes that leave the Los
Angeles Basin via rail if it is assumed that the fraction at Oakland is the same as at the
PNW ports ( 70%). For that assumption, the resulting fraction applying to the SPB Ports is
37 percent. As discussed in the previous chapter, the analysis supporting the bonds for the
Alameda Corridor indicated the historical percentage at the SPB Ports up until the mid-
1990s was 45- 50%.
The declines in these percentages do not reflect a decline in the competitiveness of rail
vs. truck. Instead, they reflect other factors. One factor is the increase in Asian imports
handled “ all- water” through East Coast ports ( discussed below). The consultant believes
the most important factor explaining this decline is the increasing practice on the part of
14 The assumed mix reflects the statistical average for year 2004 for US West Coast ports, derived from
Pacific Maritime Association data.
38
Table 6.
Mix of Loaded and Empty Containers at the San Pedro Bay Ports, 2001 – 2004
( TEUs)
Year IB Loads OB Loads Empties Total
2001 4,908,749 1,990,639 2,551,496 9,450,884
2002 5,684,901 1,949,709 2,867,360 10,501,970
2003 6,224,030 2,067,884 3,469,279 11,761,193
2004 6,928,400 2,137,793 3,971,698 13,037,891
2001 51.94% 21.06% 27.00% 100.00%
2002 54.13% 18.57% 27.30% 100.00%
2003 52.92% 17.58% 29.50% 100.00%
2004 53.14% 16.40% 30.46% 100.00%
Growth,
2001- 2004 41.14% 7.39% 55.66% 37.95%
Figure 7. Percent Intermodal Movement of
Inbound Containers
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
2000 2001 2002 2003 2004
PNW
PSW
Total
importers to trans- load their Asian imports into domestic containers and trailers at
warehouses located in the hinterlands of the ports of entry. The imports are then re-shipped
from these warehouses by rail or truck as “ domestic” freight. As will be
discussed in Chapter 5, there are substantial savings in inventories afforded to large
nationwide retailers from this practice. Moreover, the additional transportation and
39
handling expenses of the extra stop to sort and re- ship the imports are moderated by the
much larger cubic capacity of the domestic vehicles compared to marine containers. This
will be discussed in Chapter 6.
Shares of Asia – U. S. Containerized Trade
The U. S. Maritime Administration ( MARAD) provided the consultant with 2003 PIERS
data concerning total imports from Asia and exports to Asia by U. S. port. These data are
summarized in Table 7. As may be seen, the SPB Ports garnered approximately 60% of
total containerized Asian imports via US ports in 2003. The West Coast ports’ share was
76.6%; all- water service from Asia to Gulf or Atlantic Coasts captured 23.4%.
Turning to exports, the SPB Ports handled approximately 39.7%. The West Coast ports’
share was 70.5%; all- water service to Asia from Gulf or Atlantic Coasts captured 29.5%.
West Coast vs. East Coast Shares of U. S. – Asia Containerized Trade
Published data concerning shares of U. S.- Asia containerized trade routed through West
Coast ports vs. East Coast ports is scarce. Statistics presented at the March, 2003 Trans-
Pacific Maritime Conference indicate that the all- water share of containerized Asian
imports was 21 percent in 2002 vs. only 18.6 percent in 2001.15 ( We remark that this 21%
figure precisely matches the percentage of Asia – U. S. vessel strings making their first
North American port call at an East Coast port.) Further statistics cited at the Conference
reveal that Asian cargo moving through East Coast ports increased 37 percent from 2001
to 2002, compared with 17 percent through the West Coast. As noted above, the all- water
share of U. S. – Asia trade rose to 23.4% in 2003, sustaining the growth rate of 2.4
percentage points over another year.
The primary reason cited for this surge in East Coast share of Asia – U. S. trade is the
development of high- capacity distribution centers in proximity to East Coast ports by
large retailers such as Wal- Mart, Kmart, Best Buy, Home Depot, etc. It was reported that
Wal- Mart used West Coast ports for only 43 percent of its Asian traffic in 2001,
compared with 74% in 1994.
These centers encouraged the steamship lines to set up additional vessel strings operating
through the Panama Canal. ( A weekly all- water service to the East Coast requires 8 or 9
vessels, compared with 5 for a transpacific service to the West Coast.) It was reported at
the Conference that all- water service from Asia to the East Coast grew at the CAGR of
about 9% 1993- 1999, about 15% 1999- 2001, and about 37% in 2002.
15 See “ East vs. West,” Journal of Commerce, March 17- 23, 2003. The article cites the presentation given
by Michael Petracek of Booz Allen Hamilton.
40
Table 7
2003 Containerized U. S. - Asian Trade by U. S. Port
Port Imports ( TEUs) Percent Exports ( TEUs) Percent
Seattle 474,129 5.0 306,123 7.6
Tacoma 587,804 6.2 323,001 8.1
Portland 49,387 0.5 138,565 3.5
Oakland 416,053 4.4 461,412 11.5
Los Angeles 3,489,663 37.1 930,995 23.2
Long Beach 2,199,235 23.4 660,186 16.5
Other West Coast 252 0.0 4,106 0.1
Total West Coast 7,216,592 76.6 2,824,387 70.5
Houston 45,517 0.5 43,363 1.1
New Orleans 5,724 0.1 8,821 0.2
Port Everglades 19,516 0.2 7,380 0.2
Other Gulf Coast 207 0.0 16,011 0.4
Miami 109,039 1.2 22,011 0.5
Jacksonville 5,004 0.1 1,439 0.0
Savannah 491,258 5.2 332,959 8.3
Charleston 247,215 2.6 133,543 3.3
Wilmington 43,270 0.5 25,967 0.6
Norfolk 288,408 3.1 183,088 4.6
Baltimore 49,225 0.5 38,442 1.0
Philadelphia 48,435 0.5 4,628 0.1
NY – NJ 826,926 8.8 347,474 8.7
Boston 19,142 0.2 17,472 0.4
Other East Coast 233 0.0 964 0.0
Total GC+ EC 2,199,371 23.4 1,183,562 29.5
Grand Total 9,415,643 100.0 4,007,950 100.0
Source: PIERS, courtesy of MARAD.
Note: Totals exclude Hawaii, Alaska, Puerto Rico and Asia – U. S. trade handled via Canadian or Mexican
ports. Norfolk figures include Newport News. Philadephia figures include Chester, PA.
Savannah has been perhaps the most successful East Coast port in competition for Asian
business. Savannah’s containerized shipments from Asia jumped 41 percent in 2002 to
666,000 TEUs. Charleston, Norfolk and New York- New Jersey also saw steep increases.
Looking to the future, continued growth of all- water trade may be retarded or inhibited
by several factors. First, vessel transits through the Panama Canal are nearing capacity,
and bookings on all- water vessel strings via the Panama Canal are increasingly difficult
for importers to secure. Second, transit time and distance to East Coast ports via the Suez
Canal are longer than via the Panama Canal from all Asian points east of India. Third,
steamship lines are investing in fleets of post- Panamax container ships too large to transit
the existing Panama Canal. As these large vessels enter service, they displace older ones
41
able to transit the Canal, but nevertheless the percentage of total vessel capacity able to
transit the Canal is declining. Even if Panama elected to immediately embark on a
program of widening the locks to handle post- Panamax vessels, completion of the project
would require at least a decade, and a referendum necessary to move forward has been
postponed.
Traffic Shares by Inland Region
The Journal of Commerce PIERS database is a summarization of US customs data
concerning containerized imports. Tabulations are available by port, commodity code,
shipper, destination and quantity of containerized imports. Unfortunately, many types of
aggregate statistics derived from PIERS are unreliable. MARAD advised the consultant
that only about 20% of the import records have correctly filled out destination records,
and it cautioned against using the PIERS data as a base for analyzing the geographical
distribution of imports.
The Port of Long Beach supplied the consultant with PIERS data for the West Coast
ports for the years 2001- 2003. These data frustrated any determination of the
geographical distribution of destinations. 16
The statistics cited in Table 8 below concerning inland shares of West Coast container
traffic date from 1996.17 These data also were developed from the PIERS database,
considering only loaded containers routed through the major U. S. West Coast ports.
North American destinations were grouped into ten regions defined as follows:
CA/ NV PNW: WA, OR, ID, MT
AZ/ NM Mid Rockies: UT/ WY/ CO
South: TX, OK, AR, LA, AL, TN, MS, Neutral East: NE, KS, IA, MO, IL, WI, IN,
GA, FL, SC, NC MI, OH, KY, WV, VA, PA, MD, DE, NJ,
Upper Midwest: ND, SD, MN NY, CT, MA, VT, NH, ME, DC
Canada AK/ HI
Mexico
The rationale for grouping the states this way was as follows. Compared to other West
Coast ports, the PNW ports offer landside cost and transit time advantages for serving the
PNW and Upper MW regions. The CA/ NV region is best served by either the SPB Ports
or the SFB Ports. The Mid Rockies region is also competitively served by the SFB and
SPB Ports, but there is more potential for traffic to be routed through the PNW ports than
in the case of the CA/ NV region. Assuming stack trains are routed through Memphis or
New Orleans gateways, the SPB Ports can offer landside cost and transit time advantages
for serving the South. None of the West Coast ports would seem to offer a substantial
16 For example, the most common destination shown for imports through the Port of Los Angeles was
“ Unknown”. Next was California, and third most common was “ Puerto Rico”(!).
17 The data in Table 8 is adapted from San Pedro Bay Ports Long- Term Cargo Forecast – Final Report,
Mercer Management Consulting, Inc. and Standard & Poor’s DRI, October, 1998.
42
advantage serving the states in the Neutral East region, as distances and rail rates from all
West Coast ports are comparable. ( We shall take up the economics of the alternative
West Coast ports in subsequent chapters of the report.) Generally speaking, rail
intermodal haulage accounts for the lion’s share of traffic to/ from the Upper MW,
Neutral East and South regions, while truck haulage dominates the CA/ NV, AZ/ NM,
PNW and Mid Rockies regions.
Table 8 displays total 1996 TEU volumes and shares by region for the U. S. West Coast
ports, grouped as SPB Ports ( Long Beach and Los Angeles), SFB Ports ( Oakland and San
Francisco) and PNW Ports ( Seattle and Tacoma). The SPB Ports dominated traffic
to/ from the CA/ NV, AZ/ NM, South and Mexico regions, as might be expected
considering their cost and time advantages. But they also pulled in 63% of the Neutral
East traffic, 47% of the Upper MW traffic, 48% of the Mid Rockies traffic, even 21% of
the Canada traffic. The substantial shares of these latter regions are not explained by
landside cost or time advantages; instead they must be the result of the preference of
steamship carriers to call at the SPB ports first and off- load discretionary containers at the
first port of call.
Table 8
1996 Total Containerized Cargo Shares - U. S. West Coast Ports
Via SPB Via SFB Via PNW Total
TEUs Percent TEUs Percent TEUs Percent TEUs
CA/ NV 1,524,528 69% 453,615 21% 230,470 10% 2,208,613
PNW 73,620 13% 32,334 6% 470,843 82% 576,797
AZ/ NM 21,070 84% 3,135 12% 903 4% 25,108
Mid
Rockies 20,042 48% 15,512 37% 5,931 14% 41,485
Upper MW 21,442 47% 3,126 7% 21,492 47% 46,060
Neutral
East 900,012 63% 118,817 8% 413,883 29% 1,432,712
South 532,273 79% 49,302 7% 88,724 13% 670,299
AK/ HI 36 2% 26 2% 1,643 96% 1,705
US Total 3,093,023 62% 675,867 14% 1,233,889 25% 5,002,779
Canada 34,995 21% 7,160 4% 121,437 74% 163,592
Mexico 33,469 99% 181 1% 33 0% 33,683
Unknown 376,943 71% 38,776 7% 112,094 21% 527,813
Total 3,538,430 62% 721,984 13% 1,467,453 26% 5,727,867
Source: San Pedro Bay Long- Term Cargo Forecast, Mercer Management, Inc. and Standard
and Poor's DRI, October, 1998. Based on PIERS data.
Discretionary Traffic
43
Previous consulting studies for the SPB Ports identify the container traffic to/ from the
predominantly intermodal- served regions Upper MW, Neutral East and South as the
“ discretionary” traffic passing through West Coast ports. Containers to/ from the PNW,
CA/ NV, AZ/ NM and Mid Rockies regions are termed “ local” traffic. 18
Steamship lines sell transportation from Asia to inland U. S. points such as Chicago under
a single rate regardless of which port the container is routed through. While the shipper
typically chooses the vessel string, the choice of port at which to off- load the cargo
belongs to the steamship line, so the port routing seems mostly discretionary in that case.
However, as will be discussed below, steamship lines enter into long- term lease contracts
with ports that feature incentive pricing based on volume. Thus even if a steamship line
finds an inland economic incentive to shift traffic from one port to another, the terms of
the port lease contract may render it economically unattractive for it to do so, at least
until the contract expires or is renegotiated.
Moreover, there are cases in which the routing of imports is restricted to a specific port
by the shipper. Thus intermodal traffic is not entirely discretionary. At the same time,
some truck- hauled traffic might be discretionary between two port regions, if cost and
service to alternative ports are comparable. As noted above, this is the case for large
regions of the U. S.
As a rough approximation, identifying the intermodal portion of port traffic as that
portion of the total traffic that has a discretionary port routing is plausible, in the short
run.
In the longer run, if the economics of alternative ports are significantly changed because
of major changes in port charges, user access fees or inland transportation costs, traffic
conventionally viewed as “ local” or “ not discretionary” may be induced to shift port
routings. This leads to the notion of traffic that is discretionary in the long run.
With the notable exception of auto parts, the consultant believes the vast majority of
containerized imports from Asia to the United States are retail goods. It is reasonable to
expect that the geographical distribution of destinations for retail imports should be the
same as the geographical distribution of retail sales. Furthermore, it is reasonable to
expect that retail sales may be indexed to purchasing power in each region, i. e., average
income times population in each region.
The consultant obtained population and personal income data by state from U. S. Dept. of
Commerce web sites. This information, summarized by destination region, is displayed in
Table 9. Figures in the table express the product of population and personal income per
capita.
Table 10 compares total purchasing power shares of the ten destination regions with 1996
shares of total containerized cargo to and from Asia. We have assumed that the split of
18 This is the case for the following studies: San Pedro Bay Ports Long- Term Cargo Forecast – Final
Report, and Ports of Los Angeles/ Long Beach Transportation Study ( June, 2001).
44
traffic routed via East Coast and West Coast ports at that time was 18: 82 in order to
derive expected shares by region of total Asian containerized trade routed through West
Coast ports. We have further assumed that all of the traffic routed via East Coast ports
originated or terminated in the South and Neutral East regions. The 76.07% West Coast
Table 9
Relative Purchasing Power by Region
Region Total Purchasing Power States in Region
Percentage of all
50 states
Percentage of
Continental 48 states
CA/ NV 13.57 13.66 CA, NV
PNW 3.74 3.76 ID, OR, WA
AZ/ NM 2.17 2.18 AZ, NM
Mid Rockies 2.81 2.82 UT, WY, MT, CO
Upper MW 2.32 2.34 ND, SD, MN
South 26.09 26.26
TX, OK, AR, TN, LA,
MS, AL, GA, FL, SC,
NC
Neutral East 48.65 48.97
NE, KS, IA, MO, IL,
WI, MI, IN, OH, KY,
PA, WV, VA, DC, MD,
DE, NJ, NY, CT, RI,
MA, VT, NH, ME
HI & AK 0.66 HI, AK
Source: U. S. Dept. of Commerce web sites.
Table 10
Comparison of Actual and Expected Regional Shares
of U. S. – Asia Containerized Trade
Region
Proportion of
Continental
U. S. Personal
Income
Estimated
West Coast
Share of Asia
Trade ( 1996)
Expected
Proportion of
West Coast
Total Loaded
TEUs ( 1996)
Actual
Proportion of
West Coast
Total Loaded
TEUs ( 1996)
CA/ NV 13.66% 100.00% 16.67% 44.16%
PNW 3.76% 100.00% 4.59% 11.53%
AZ/ NM 2.18% 100.00% 2.66% 0.50%
Mid
Rockies 2.82% 100.00% 3.44% 0.83%
Upper
MW 2.34% 100.00% 2.86% 0.92%
South 26.26% 76.07% 24.37% 13.40%
Neutral
East 48.97% 76.07% 45.43% 28.65%
45
share for the South and Neutral East regions is chosen so that the share of total U. S. –
Asia containerized trade that passes through East Coast ports totals to 18%.
Note that there were many more containers terminating on the West Coast than could be
explained by purchasing power in the West Coast regions, and many less in all other
regions. In particular, about 44% of the total 1996 Asia – U. S. container cargo routed
through West Coast ports terminated in California or Nevada, yet only about 17% was
expected to do so based on these states’ share of total continental U. S. personal income
( and based on the assumed East Coast share of Asian trade). That is, traffic to/ from
CA/ NV was two and one half times the amount expected based on purchasing power. ( A
smaller value assumed for the East Coast ports’ share in 1996 would drive the value of
this multiplier even higher.) It is simply not plausible that all of this cargo was consumed
or produced in these two states.
We believe the explanation for this seeming anomaly is that much of the import traffic
“ terminating” in California actually were cargoes that were trans- loaded into trucks or
domestic containers for re- shipment to other regions after re- mixing in a distribution
center. Such re- shipments would be considered as “ domestic” freight and excluded from
the international traffic statistics. Also contributing to this traffic shift was traffic that
underwent “ value- added” transformation – ranging from insertion of hangers in garments
up to use as a component of assembly of a larger manufactured good – and subsequently
was shipped elsewhere in the U. S. as “ domestic” freight.
A similar but smaller- scale statistical phenomenon is evident in the Pacific Northwest,
where a 4.6% share was expected but the actual share was 11.5%. Note that all other
regions have deficits of actual vs. expected shares, suggesting where the value- added
transformations and trans- loads were shipped. There also may be some transloading of
exports contributing to these numbers.
Transloading and value- added transformations of Asian imports are concentrated in
Southern California for economic reasons, considering inventory economics,
transportation economics and handling economics. Were these economics to change
significantly, firms would experience an incentive to shift their transloading and value-added
operations elsewhere. In that sense, their traffic is not really “ local” traffic; instead,
we term this traffic discretionary in the long run.
As a rough yardstick for quantifying discretionary traffic, we shall follow previous
consulting studies and identify traffic moving intact in marine containers as inland- point
rail intermodal traffic as the short- run discretionary traffic. But our long- run discretionary
traffic includes this amount plus traffic to/ from the West Coast regions that is in excess of
that expected based on regional purchasing power. All purchasing- power- based traffic
to/ from the Mid Rockies region also is viewed as discretionary in the long run. ( The
rationale for this is that Mid Rockies is competitively served by the three port regions.
While 16- 18% portions of the PNW and AZ/ NM regions were served by ports more
distant than the nearest ones in the 1996 PIERS data, for simplicity we shall assume that
46
traffic to/ from these regions is local to the Seattle- Tacoma ports and to the Los Angeles-
Long Beach ports, respectively.)
Expressed as a percentage of total Asia - West Coast containerized trade, the total short-run
discretionary traffic handled through the West Coast ports is as follows ( see Figure
7):
West Coast short- run discretionary traffic = 45%
Per the discussion concerning Figure 7, the short- run discretionary traffic at the San
Pedro Bay Ports is a smaller percentage:
SPB short- run discretionary traffic = 37%
Total long- run discretionary traffic handled through the West Coast is computed as
follows. First, we compute traffic to/ from the West Coast regions expected on the basis of
regional purchasing power:
West Coast local traffic = [( 0.1667) + ( 0.0459) + ( 0.0266)] = 0.2392: 24%
Long- run discretionary traffic is then computed as the complement:
West Coast long- run discretionary traffic = 1.00- 0.2392 = 0.7608: 76%
Assuming 69% of CA/ NV and 100% of the AZ/ NM purchasing- power- based traffic is
assigned to the SPB Ports as “ local” traffic, the resulting percentages of total SPB Ports’
containerized cargoes that are discretionary are estimated as follows ( all figures
expressed as percentages of total SPB Ports’ containerized cargoes):
SPB local traffic = 69% of CA/ NV purchasing- power- based traffic plus 100% of the
AZ/ NM purchasing- power- based traffic =
[( 0.69)( 0.1667) + ( 0.0266)]( 5,002,779)/ 3,093,023 = 0.2291: 23%
SPB long- run discretionary traffic = ( 100% - Local traffic) = 0.7709: 77%
Including trans- loaded and value- added freight to/ from other regions, we believe the total
amount of discretionary traffic at the SPB Ports is a much larger figure than suggested by
previous studies.
In addition to impacts on regional shares, transloading and value- added transformations
have a profound impact on the modal share to and from the SPB Ports. We therefore
analyze the economics of transloading in a subsequent section of this report. As will be
discussed, these economics have changed significantly in recent years, with consequent
significant shifts in modal shares.
47
Alternative West Coast Ports
Previous studies have examined differences in total steamship line costs and transit times
to move loaded containers from Asian origins to US inland points via the various West
Coast ports. The overall differences are relatively modest and they do not explain the
ports’ market shares. 19 The principal factors explaining the dominant share of the SPB
Ports seem to be ( 1) large customers of the steamship lines have concentrated trans-loading
activity in the hinterland of the SPB Ports, thereby adding a very large demand to
the already- large Southern California demand, and ( 2) the lines choose to operate most
vessel strings so as to carry a mix of all West Coast and inland destinations ( as opposed
to, say, operating separate “ intermodal” vessels exclusively loaded with inland point
intermodal cargoes). For such vessel strings it is most efficient to direct them to the
largest market first ( the SPB Ports) and off- load most or all inland cargoes there.
As will be discussed in Chapter 6, rail rates and transit times to most eastern points tend
to be lowest from Southern California, next lowest from Seattle- Tacoma, next lowest
from Oakland, next lowest from Vancouver, BC. But the differences across the West
Coast ports are not large, all are competitive to most eastern points. Differences in the
levels of capacity and congestion among the alternative West Coast ports are more
important factors influencing market shares than the modest price and cost differences.
East Coast vs. West Coast Ports
The basic cost trade- off for routing Asian imports via East Coast ports vs. via West Coast
ports is one of lower transportation costs via East Coast ports ( because water- borne
transport is much cheaper than rail or truck transport) vs. lower inventory costs via West
Coast ports ( because the mean transit time, and possibly the standard deviation of transit
time, is lower using land transportation from West Coast ports than if using the all- water
channel). Generally speaking, low- value goods destined to eastern markets are most
efficiently handled using all- water supply channels via East Coast ports, while high- value
goods are most efficiently handled via West Coast ports.
To quantitatively assess the trade- offs of routing via alternative ports and supply
channels, analytical models of inventory costs ( as a function of the mean and standard
deviation of transit times) are developed in Chapter 5, and a tabulation of transportation
charges for alternative ports of entry and supply channels is developed in Chapter 6.
4. STAKEHOLDER INTERVIEWS
The consultant endeavored to interview as many stakeholders as time and budget
permitted. These interviews took place over the period December, 2004 – June, 2005.
19 See, for example, San Pedro Bay Ports Long- Term Cargo Forecast, Mercer Management Consulting,
Inc. and Standard & Poor's DRI, 1998.
48
Stakeholders interviewed included ports, marine terminal and rail terminal operators,
dray and trucking companies, third- party logistics and trans- loading service providers,
intermodal marketing companies, railroads, steamship lines, and importers. By request of
some of these parties, the specific companies interviewed are not identified in this report.
In addition, comment on study plans and findings to date were solicited from participants
in SCAG- organized Stakeholder Forums on 02/ 07/ 05 and 05/ 10/ 05. Comment on study
plans and findings to date also were solicited from the SCAG Goods Movement Task
Force on 01/ 19/ 05 and 03/ 16/ 05.
The stakeholders interviewed for this study provided valuable insights concerning current
industry supply- chain practices and traffic volumes, components of transit time and
transit time variability, components of transportation and handling expense, and
components of inventory expense. However, it is to be emphasized that the modeling of
transportation and inventory costs reported in Chapters 5 and 6 and the elasticity
calculations reported in Chapter 8 are the original and independent work of the author.
Stakeholders did not participate in the development of the Elasticity Model nor did they
have any opportunity during the study to review or comment on analyses of container
fees made using the model. The conclusions expressed in this report are solely those of
the consultant and do not convey the views of any stakeholder.
5. INVENTORY COSTS
The choice of transportation mode and route by importers of Asian goods depends on a
number of factors. Clearly, transportation charges for the alternative modes and routes are
important. But other factors play an important role as well. Differences in transit time, in
required inventory levels, and in labor required for labeling, repackaging, and other
handling may result in substantial differences in inventory costs, handling costs and
sometimes even significant differences in sales revenues. The economics of these factors
therefore must be jointly analyzed with transportation costs.
In this chapter, economic models are developed to analyze inventory and distribution
costs arising from these factors. Analytical methodology and supporting data are
developed to compute the value to shippers of transit time, inventory and logistics factors
as a function of commodity values.
Also discussed in this chapter are other factors that influence logistics decision- making,
including re- packaging and labeling services by trans- loaders, the supply of 53- foot
containers at various ports, the desire on the part of importers to diversify risks of delays
from congestion arising in specific shipping channels or at specific ports.
Types of Inventory
Alternative strategies for goods imported from Asian vendors to U. S. demand points
typically feature differences in the mean and standard deviation of transit time, as well as
49
differences in the opportunity for consolidation and de- consolidation of shipments
serving multiple demand points. These differences impact the inventory costs of the
importer.
The vast majority of imports from Asia are retail goods. The origins for imports are
typically factories in China and elsewhere in Asia, and the destinations are regional
distribution centers ( RDCs) that supply the importer’s retail outlets or retail customers
within the region. Differences in inventory costs resulting from use of alternative supply
channels typically extend only as far as the RDC, not to the store or customer level.
There are two types of inventory costs influenced by the choice of supply channel. One is
the working capital required to finance goods in transit ( so- called “ pipeline stock”). The
other is working capital required to finance stocks of goods at destination RDCs. The
overall stocks of goods at destination RDCs may be subdivided into what is called “ cycle
stock” and what is called “ safety stock.”
Average pipeline stock is simply the product of the average transit time and the average
shipment size. Larger pipeline stocks result from using supply channels with longer
transit times
At any given time, cycle stock at a shipment destination is the unused portion of the stock
that arrived in the previous replenishment. This stock level equals the amount of the
shipment just after a shipment arrives, then steadily drops to zero just before the next
shipment arrives. Its average value is therefore equal to one half of the average shipment
quantity.
Safety stock is required by retailers who strive to have stock on hand to service customer
demands without delay. This stock level is maintained as a hedge against potential delays
to shipments and potential errors in sales forecasts upon which the shipment quantities
were based. That is, if customer demands are to be met without backorder, safety stocks
are necessary to buffer against unpredictable surges in demand while replenishment
orders are in transit and against unpredictable extensions in transit times for
replenishments. Use of supply channels that entail a longer transit time and/ or a more
unreliable transit time result in the need for larger safety stocks at destinations.
As noted above, the vast majority of imports from Asia are retail goods. It is therefore
important to understand the impact of the choice of supply channel on safety stock. Let us
first consider the simplest case of a single destination for imported goods. Suppose the
frequency of shipments from Asia is once every R time periods. Suppose the lead time
between ordering goods from Asia and receipt at destination has mean value L and
standard deviation σL. Further, suppose the mean absolute percentage error in sales
forecasts made one period ahead is MAPE. The mean absolute deviation in forecast errors
is defined as MAD = MAPE * D where D is the expected ( forecasted) demand per period.
It is well- known that the standard deviation is related to the mean absolute deviation by
50
σ = ( 1.25)( MAD) = ( 1.25)( MAPE)( D) . 20
Considering the replenishment lead time and the frequency of replenishments, sales must
be forecasted over an interval of length ( L+ R) in order to determine the proper quantity to
be ordered from the Asian supplier. To analyze the impact of differences in lead time, the
growth of forecast errors as a function of lead time must be characterized.
Mathematically, the standard deviation of forecast errors grows with lead time according
to the general model
σR+ L = ( L+ R) c σD
where c is a constant that depends on the correlation of week- to- week sales ( i. e., does
higher- than- expected sales last week imply higher- than- expected sales this week) and σD
is the standard deviation of errors in one- period- ahead forecasts. Perfectly correlated
sales would imply c= 1. We shall assume in this analysis that c= 0.5, which has been found
to be accurate for household consumer products. 21 That is, to good approximation,
forecast error grows as the square root of the time interval over which sales are
forecasted. Hence the standard deviation of forecast errors over ( L+ R) is
( L + R) σ D .
As a function of the standard deviations of the transit time and the sales forecasting
errors, the required level of safety stock ss may be expressed as
( ) 2 2 2 D L ss = k L + R σ + D σ
where R denotes the time between replenishments, L denotes the average transit time, σL
denotes the standard deviation of transit time, D denotes the average shipment quantity
per replenishment, σD denotes the standard deviation of forecast errors and k is a safety
factor corresponding to the desired probability of no stockout.
To illustrate, suppose k = 2; this value corresponds to a 98% probability of no stockout, a
typical value chosen for the safety factor. Suppose σL = 2.5 days, D = 1000 cases per day,
σD = 200 cases, R = 3 days and L = 7 days. Then the required safety stock is
ss = 2 ( 10)( 40,000) + ( 1,000,000)( 6.25) = 5,158 .
The aver