Over the past six months have you tried to purchase something that was manufactured overseas? If so, whether you have been looking to buy imported flooring and have had to wait or all the local retailers were sold out on that must have Christmas gift that you tried to buy, you have felt the effects of the port congestion that has been ongoing on the West Coast. And this congestion has spread to other US ports as importers and freight companies seek alternatives. Over the past three weeks, this congestion has gotten worse and it will take weeks if not months to get better. On January 28th, there were a total of 28 vessels waiting to be unloaded at West Coast ports (17 for Long Beach/Los Angeles alone). This article will attempt to explain why the West Coast port congestion has happened, how it affects the flooring industry, and what can be expected over the next few months.
Why is there congestion at the West Coast ports?
In the news most recently have been the ongoing negotiations between the Pacific Maritime Authority (PMA) and the International Longshore and Warehouse Union (ILWU). The PMA represents shipping lines and port terminal operators in reaching labor agreements with the ILWU, whose constituents are the dockworkers on the West Coast. The previous contract, reached in 2008 ran through June 30, 2014. Since July 1, 2014, the ILWU has been working without a contract, while both parties have attempted to reach an agreement. At the heart of the many disagreements (other than compensation) is the desire by the ports to increase automation and the fear by the ILWU of different jobs being moved away from the port.
Although there are several more long term causes that have aided in the congestion at the ports, analysts place the blame for congestion in the current dysfunction between the ILWU and PMA. Both sides have noted that productivity has plummeted over the past seven months, but blame each other for causing it. With congestion building since the expiration of the contract, the PMA and terminal operators have alleged that the ILWU has been acting in bad faith, causing work slowdowns, not dispatching the amount of crews that the operators have requested in order to unload and transport containers, and performing needlessly long inspections of chassis (the trailers that containers are loaded on). The ILWU has alleged that the terminals have not requested the crews that they have claimed, that ports are attempting to reduce the work available to dockworkers, and that poor management is the primary reason for slowdowns. News agencies have attempted to uncover which side is telling the truth, but so far there is little clarity on the issue.
Outside of problems between the PMA and ILWU, there are many other causes that have exacerbated the congestion at the port. One of the core problems being addressed is availability of chassis and their maintenance. In the past, shipping lines owned all the chassis used for their containers. However, during the recent recession shipping lines were losing billions of dollars on chassis (in maintenance and insurance costs) that were underutilized due to a reduced amount of import/export traffic in US ports. Consequently, shipping lines chose to liquidate their stock of chassis and then lease them from chassis leasing companies on a per container basis. This afforded shipping lines some much needed liquidity and, in the short term, appeared to have little effect on moving containers to and from US ports. Currently, however, the arrangement has resulted in a lack of the right equipment being at the right place at the right time, as well as inefficiencies for truckers who have to deal with more complex arrangements. For rail containers, the chassis shortage is pronounced due to their use in transporting containers in the port facility to the rail yard.
“Truck drivers are the basic unit of transportation capacity and the glue that holds supply chains together…”
In addition to issues with chassis, a national issue has amplified the problems that are going on at the ports, a shortage of truckers. As one observer notes: “Truck drivers are the basic unit of transportation capacity and the glue that holds supply chains together. No container or straight truck or trailer moves without, at some point, a truck driver.” However, with wage stagnation, high expenses to enter the occupation, and increased regulation presenting a barrier to becoming a truck driver, there is a reported shortage of approximately 30,000 truckers. While not causing port congestion directly, the shortage of truck drivers makes the situation worse as truck drivers are needed to move containers in and out of port facilities.
It would seem that the most obvious cause of congestion is the increased traffic to West Coast ports in 2014. The ports of Los Angeles and Long Beach (the two largest West Coast ports) have reported an increase of 5.99% and 1.3% in container traffic from 2013 to 2014, respectively. However, this increase cannot be noted as the sole factor, as container volumes have only just returned to pre-recession levels of traffic. Another cause noted by analysts is alliances between shipping lines for sharing vessels, which has led to the building of much larger vessels for shipping efficiency. The reason that these larger vessels help cause congestion is because it takes longer to process these vessels at the port, due to containers from different shipping lines being on the same vessel – which slows down the processing of containers.
How does port congestion affect the flooring industry?
The Master’s Craft works closely with our sister companies in importing flooring and exporting lumber, so we have been able to observe several trends over the past seven months. The most apparent effect of port congestion has been the lengthening of lead times on imported flooring. When the ports and ocean freight companies are working smoothly, it can take as little as four weeks for a container to ship across the Pacific, be loaded and unloaded from the rail, and be ready to be delivered to you or your customers. Over the past several months, sometimes this has taken up to 8 weeks (with little to no prior notice of extensive delays). For people working in purchasing and demand planning, a rapid transition from a four to eight week lead time is exceptionally frustrating. And, in some instances, this has resulted in stock outs on some products and endless frustrations for flooring retailers and homeowners. At The Master’s Craft, we continue to work to adapt to the market conditions (and freight delays) to provide our partnered retailers the best possible quality products and service.
Another effect on importers from Port Congestion has been the Port Congestion Surcharge (PCS) that ocean lines have implemented to cover their costs from all the delays. For 20’ and 40’ containers, the PCS is $800 and $1,000 per container, respectively. This amounts to anywhere from $0.03-$0.08 per square foot (depending on the type of product). Consequently, many importers have raised their flooring prices to cover this additional expense. The Master’s Craft is choosing to absorb these costs, as we already set our prices for the next quarter before the PCS was announced and we want to minimize any disruption in pricing or service.
On the export side of the equation, many lumber shipments are delayed in transit to China. Because of the congestion at West Coast ports, rail companies are less inclined to send cargo to be exported West because of delays at the ports. At one point, BNSF imposed an embargo on westbound export cargo because of port congestion. Fortunately, because lumber does not spoil, the only losses that exporters have felt so far are delayed payments on export loads. However, it is conceivable that if the delays are long enough, shipments will have to be reconditioned (either dried or humidified) before a finished product is made, which would lead to delays in production time.
What can be expected over the next several months?
If there is a silver lining to be had in considering the ill effects of West Coast port congestion, it is in its timing. The majority of products that ship through ports on the West Coast come from China. February 19th is the Spring Festival of the Chinese New Year celebration, during which, factories shut down for about two weeks. Following this, it generally takes factories another two to three weeks before they start to export in earnest. So, new shipments to the West Coast from China will not begin to arrive until late March or early April. So, if there is a resolution to the PMA/ILWU negotiations within the next few weeks and cargo resumes a steady flow through West Coast ports, there should be plenty of time to work out the congestion of containers before new shipments from China begin to arrive.
And there is hope for a resolution between the PMA and ILWU. Back in August, there was agreement on healthcare, before things got ugly in November. Following a federal mediator overseeing the negotiations starting in January, progress began to be made. One of the central issues of negotiation that has been resolved is the inspection and maintenance of chassis, which was important to the ILWU because of the jobs that they feared that they would lose to private firms with the chassis no longer being controlled by ocean lines. Wages, pensions, and the length of the new contract are still on the table, but with one major issue down, there is hope for the future.