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Friday, May 27, 2022

Terminal Consolidation Could Bring Sea Change

The merger of two major shipping lines along with terminals changing hands at L.A.’s ports could be a sign of consolidation that holds the potential to shake up the local supply chain.

Alliances and acquisitions of cargo carriers have already led to the consolidation of port terminals around the world, including at major West Coast ports such as Oakland; Seattle; and Tacoma, Wash. Terminals at the ports of Los Angeles and Long Beach might be next.

“Ocean carriers are all about reducing costs, as they have not been profitable because of an overcapacity problem,” said Michele Grubbs, vice president for Southern California at the Pacific Merchant Shipping Association, which represents shipping lines and container terminal operators at West Coast ports. “Terminal consolidation is on the horizon for the San Pedro (Bay) ports.”

That could mean some of the ports’ 13 container terminals could see their use reduced, while others would take on more cargo, altering port operations but ultimately improving cargo flow and efficiency, some analysts said.

“I won’t be surprised if terminal consolidations did happen at the port, but I’m not worried about loss of revenue with potentially less terminal operators because international trade will continue to grow,” said Port of Long Beach Executive Director Mario Cordero.

He said cargo volume is expected to continue increasing at the twin ports, so the facilities likely wouldn’t lose revenue from leases with terminal operators.

However, the neighboring ports could find themselves in greater competition with each other to attract a shrinking number of shipping companies, Grubbs and others said. Another possibility is a long-discussed merger of the two ports’ operations, which together account for 40 percent of all containerized goods coming into the country, according to officials with other West Coast ports that have already gone through a similar shift.

Representatives at the Port of Los Angeles declined to comment.

Nick Vyas, executive director at the Center for Global Supply Chain Management at USC, said terminal consolidation is a natural step after years of shipping mergers and alliances that were seen as a postrecession remedy to declining revenues. He estimated that consolidations at Los Angeles and Long Beach might occur within the next six months to a year.

“With these deals and acquisitions we will see terminal operators forced to confront the issue of consolidation. This is the driving trend at the moment,” Vyas said. “There are lots of terminals operating under redundant infrastructure and it causes inefficiencies that trickle down to the rest of the port supply chain.”

Mergers, acquisitions

Shipping lines largely operated independently prior to the recent recession, with many running their own terminals. The companies began using ever-larger megaships to move more cargo at once, but the drop-off in global trade that accompanied the recession led to overcapacity on the vessels, driving down shipping prices, particularly during the recession.

Shipping companies responded by forming alliances to share vessel space and costs. The latest iteration has left three global alliances that launched in April responsible for moving 90 percent of the world’s maritime cargo.

Shipping companies and terminal operators have also begun moving beyond simple alliances, acquiring and merging with each other as well.

This month saw one of the Port of L.A.’s largest carriers, Cosco Shipping Holdings Co., agree to purchase Hong Kong-based Orient Overseas Container Line Co. for $6.3 billion. That deal will see Chinese carrier Cosco become the world’s third-largest container liner. Cosco also acquired China Shipping last year.

These companies operate out of different terminals, Cosco and China Shipping at the Port of Los Angeles while Orient Overseas calls the Port of Long Beach’s new $1.5 billion Middle Harbor home. However, Cosco could decide to consolidate operations at a single site after the company finalizes its newest deal.

That would significantly change cargo movement at the ports.

“By 2020, we estimate that these three terminals will account for nearly 30 percent of the capacity of LA/LB,” Neil Davidson, senior analyst at London-based maritime research firm Drewry, said in an email.

More mergers are on the horizon, including that of three Japanese lines planned for 2018. The three operate two terminals in Los Angeles and one in Long Beach.

Local terminals have changed hands as well.

French line CMA CGM, which calls at Long Beach, took over L.A.’s APL terminal through its acquisition of Singapore shipping company Neptune Orient Lines in 2015, recently selling a majority stake to a Swedish investment fund.

Last year’s bankruptcy of Hanjin Shipping Co. resulted in Geneva-based Mediterranean Shipping Co. buying Hanjin’s Long Beach terminal, that port’s largest, early this year.

All of these transactions could auger a sea change at the ports, where 10 terminal operators run 13 terminals that service around a dozen cargo carriers, each often docking several vessels a week.

Changes in the number of shipping companies and terminal lease holders could trickle down through the supply chain and local economy. The L.A. and Long Beach ports together account for 170,000 jobs in Los Angeles County including truckers, longshoremen, freight forwarders, chassis providers, equipment operators, rail workers and employees of both cities’ harbor departments.

“The nature of demand has now changed. … There is pressure on many ports to consolidate terminal capacity,” Drewry analyst Davidson said.

Joining forces

Terminal consolidation can take form and be defined in several ways, he noted.

First, the ports of Los Angeles and Long beach can merge or go the way the Washington state ports of Seattle and Tacoma have, joining cargo operations but maintaining independent business management through the Northwest Seaport Alliance, he said.

The northwest ports are 40 miles apart and competed directly with each other for years, much like the San Pedro Bay ports do now. The Seattle and Tacoma ports started discussing a possible merger in 2014 after realizing they were losing their market share of goods headed to the Midwest to neighboring Canadian ports.

“Shipping alliances and consolidations (are) exactly what prompted us to do this,” said Tara Mattina, communications director at the Northwest Seaport Alliance. “I think there’s pressure throughout the industry to meet economies of scale, and this is what worked for us.”

Second, terminals can be brought under common ownership, and while not physically consolidated, can operate in a more coordinated way, Davidson said.

Third, individual terminals can physically redevelop into one, which he said could be costly. In Oakland, when terminal operator Ports America and Terminal Investment decided to close up shop in April 2016 at its Outer Harbor Terminals, which was responsible for 30 percent of container movement at the port, the obvious answer for management was consolidation.

“We were dealing with excess capacity at our port,” said Mike Zampa, director of communications for the Port of Oakland. “Terminal operators are under pressure in regards to rates they offer, so when Ports America left, we decided to not lease out that particular terminal and instead used the space in a more efficient manner.”

The port did not lose cargo volume or revenue, Zampa said.

“Initially we were worried about operational flow, but the improvement eventually led to cargo moving faster,” he said.

Without similar measures being taken at the ports of Long Beach and Los Angeles to address terminal consolidation, they will find themselves vying with each other for a dwindling number of shipping lines’ business instead of working together, PMSA’s Grubbs said.

USC’s Vyas said that while the consolidation would improve efficiencies, a downside could be its impact on smaller companies as the larger and fewer shipping companies limit their cargo handling to a handful of large contractors.

“Mom-and-pop operations in trucking, freight forwarding and other sectors stand to lose the most from this,” Vyas said. “As we see gigantic volumes run by a few corporations, the smaller companies need to be agile and adaptive if they want to survive.”

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