The Canadian rail work stoppage is now behind us after a shutdown that lasted just 17 hours before the government stepped in. Leading up to this disruption, some ocean liners began rerouting their ships to the U.S. West Coast, which resulted in a boost in imports at those ports.
While this shift aided in a particularly strong July (and likely August), an interesting trend has been developing over the past year. The U.S. West Coast has been gaining share from the U.S. East and Gulf Coasts, partially reversing the longer-term trend. Due to the significant impact that container imports have on land-based transportation, it’s important to ask: Will this West Coast reversion continue?
Before trying to understand if this reversal toward the West Coast will last, let’s recount the shift that has been occurring over the past decade whereby the U.S. East and Gulf Coast ports have been gaining market share at the expense of the U.S. West Coast.
The chart below shows the extent of this shift between 2013 and 2023. From 2013 to 2018, West Coast ports lost 4% of their U.S. market share to either East of Gulf Coast ports. A shift of another 6% of market share occurred from 2018 to 2023. This trend is even more prominent when looking specifically at imports from Asia.
There isn’t a singular reason for this long-term shift but rather several different changes in the shipping landscape that have generally worked to the East’s/ Gulf’s advantage and the West’s disadvantage. One of these changes is the expansion of the Panama Canal that opened in 2016, allowing for more and bigger ships to make passage.
This tailwind for the East Coast and Gulf Coast ports was compounded by significant investment in port capacity, including an expanded geographic footprint of the ports, the types of equipment used, and dredging of harbors in order to accommodate larger ships. These incremental changes allowed ocean carriers to more easily and cheaply transport their goods to the East Coast where the majority of U.S. metropolitan areas are located and, thus, the final destination for many goods.
Another contributing factor was the U.S.-China trade war, which spurred ocean imports from other countries in South and Southeast Asia.
Finally, labor stability in the east also has contributed to the shift. East Coast ports have a better track record than the West Coast ports in reaching labor agreements ahead of time. West Coast ports have had more disruptions or threats of disruptions, most recently when the port workers’ contract lapsed at the ports of LA and Long Beach for more than a year and wasn’t resolved until June 2023. This particular event is apropos to the current environment and helps explain the recent reversal of the long-term shift in coastal share.
Over the past year, the West Coast has made an apparent comeback, partially reclaiming share that has been lost in recent years. The chart on the following page shows the shift in coastal share for the past three years with the past year showing the reversal of the long-term trend.
The most top-of-mind circumstance regarding U.S. container shipping is the potential strike on the U.S. East and Gulf Coasts, which has tarnished the East/ Gulf Coast reputation for having high quality and reliable levels of service. The current situation is that the master contract between the ILA labor union and USMX, the alliance representing the East and Gulf Coast trade partners, is set to expire at the end of this month. Therefore, a labor strike could begin as early as October 1.
A potential strike has undoubtably instilled a feeling of unease in the industry, especially as the negotiations don’t appear to have made any headway in recent months. USMX released a statement in mid-August stating, “USMX has been unable to secure a meeting with the ILA to resume negotiations on a new Master Contract.” As a result, shippers likely will respond to uncertainty by either pulling forward inventory sooner than they otherwise would or rerouting their vessels to other container ports, such as those on the West Coast.
While this uncertainty can help explain the recent shift back to the West Coast, like the long-term shift to the East, it’s not a single cause but rather multiple compounding circumstances that have aided in the recent trend.
Both the potential ILA worker strike and the now passed Canadian rail lockout have boosted or will boost U.S. West Coast container activity. In addition to these, two exogenous events have forced shippers to reconsider their choice of port.
One issue is the dry Panama Canal, which constricted the number and size of vessels that (Continued from page 10) could pass through. This constraint was brought on by the El Nino weather pattern, but conditions seem to be returning to normal after nearly the lowest water levels since at least 1965.
The other major factor has been the violent attacks by the Houthi rebels in the Red Sea, a variable that, unlike the Panama Canal, still presents a significant threat. These attacks strongly incentivize ocean carriers to reroute their ships away from the Suez Canal. However, rounding the Cape of Good Hope would often add several thousands miles to a trip, so the situation incentivizes vessels bound for the U.S. East Coast to instead make port on the West Coast.
The trillion dollar question now is whether the reversion will last. There are several different factors to consider when addressing this question. Significant variance, whether up or down, in any of these factors could completely alter the landscape. With this in mind, it’s important to understand what can and cannot be measured and forecast.
Examining first what’s top of mind: The potential ILA strike. The growing uncertainty surrounding the situation has already scuffed with the ports’ reputations for labor stability. However, even if a strike were to occur, it’s unlikely that this development alone would cause significant long-term shifts away from the East and Gulf Coasts. The market fundamentals behind shippers using East/ Gulf ports are simply too strong. Increased port capacity, the broadening reach of South and Southeast Asian producers, and the geographical locations of U.S. population centers all incentivize further use of these ports.
Working against the idea that shippers will continue to move away from the West Coast would be any type of exogenous event that inhibits shippers’ abilities to utilize these ports, such as shifts in weather patterns or global conflicts. However, beyond these exogenous risks, there are other, more business-centric, changes that could help reverse this trend. Those changes could include development and investment in West Coast capabilities or situations further down the supply chain, such as investments in logistics parks, cross docking facilities, or inland ports, where a shipper’s experience could improve significantly.
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