NACD: Contract dispute disrupts trade

Elaine Burridge

08-May-2015

The nine-month impasse that hit West Coast ports had widespread effects; distributors say preparation and communication are vital tools in coping with the disruption

The recent labor dispute that crippled US West Coast ports will take a long time to fade from people’s memories. The industrial action lasted for nine months from May 2014 to February this year, causing a severe backlog of freight. More than 30 ships were anchored outside the ports of Los Angeles and Long Beach, many others were lined up at the docksides and businesses lost millions of dollars as a result.

 

California Ports dispute stranded holiday-shopping shipments

Copyright: Getty Images

According to an analysis by global consulting firm Kurt Salmon, the shipping delays could cost retailers as much as $3.8bn this year. Indeed, after adding rerouting and carrying costs plus other expenses, total costs could be as much as $7bn this year, it said.

The dispute centered on a new five-year labor contract between the employers who operate the port terminals and shipping lines represented by the Pacific Maritime Association (PMA), and the dockworkers represented by the International Longshore and Warehouse Union (ILWU).

The contract covers nearly 20,000 dockworkers employed at 29 West Coast ports extending from Southern California to Seattle. These ports are said to handle about a quarter of all US international trade, much of it with Asia.

Estimates of the dispute’s impact on the overall US economy range from as much as $2bn per day down to $150m-350m per day. Not surprisingly, ports’ throughput volumes took a big hit. The port of Los Angeles, the largest in the U.S., reported a 22.7% slide in container volumes for January 2015 compared with the same month a year earlier. Imports registered a fall of 28% year on year, with exports 23% lower.

There is no doubt businesses will feel the effect of the dispute for many months yet, with lost demand during the period unlikely to be recovered. Jessica Fegan, director of quality & operations at Connection Chemical of Newtown, Pennsylvania, says margins for chemical distributors have been seriously threatened by the additional cost of diverting product as well as demurrage and increased transportation charges.

As cargo companies are supported by clauses in their contracts, they cannot be held liable for any financial loss. She is expecting a 30% year-on-year rise in rates from shipping companies as they look to recoup some of the additional costs from the dispute.

Distributors such as Brenntag North America diverted some of its cargoes to East Coast ports and Canada. Tom Corcoran, senior vice-president, says the labor standoff added delays of two weeks or more, effectively doubling the average lead time of 10-14 days for product imported from Asia-Pacific to the US West Coast.

TRInternational, a chemical distribution company headquartered in Seattle, had significant volumes of inventory sitting off the coast in late March with dozens of containers affected. The firm’s president and CEO, Anthony Ridnell, says the disruption occurred during a period of fairly severe price declines because of the fall in crude oil costs, which meant product stuck on the water had a lower value than what was paid for it.

The dispute also created port congestion around the globe. Fegan comments: “Chinese ports were congested with product waiting to be exported, but vessels and containers were not returning on schedule.” She says spot rates to the East Coast rose from around $2,500 per container to more than $4,000. Rerouted ports also tried to leverage the increased volume with congestion fees imposed when vessels arrived, but the government stepped in to stop this, she says.

Indeed, the terminals were so congested that they stopped accepting containers, both empty and loaded. Fegan explains that because empty containers were sitting on chassis, there were none available for the offloaded containers that were ready to be picked up.

The chassis problems emerged last year when shipping lines sold assets to leasing companies. This led to shortages and sparked a port congestion problem that got progressively worse just as contract talks between the ILWU and PMA broke down.

As well as being frustrated by the severely delayed transit times, distributors were then faced with the inability to schedule deliveries. Fegan says once a cargo had arrived at the port, it was then impossible to determine an accurate timeframe for delivery. This could be anything from five days, 10 days or more, she says.

In fact, the dispute exacerbated an existing shortage of hazardous material (hazmat) drivers. This sector was already suffering a decline in numbers because of an aging workforce. While controversy raged over the new contract, pick-up times for drivers soared from one hour to seven hours; Fegan says an estimated one-third of the hazmat driver pool quit and took other employment.

The continual unpredictability meant it became even more difficult to meet customers’ expectations and distributors had to increase their working capital and inventory to fulfill demand. Fegan says by managing all logistics internally, using domestic options and increasing inventory in its warehouses country-wide, not only did Connection Chemical manage customer demand, but it was also able to assist several companies which had product dislocated.

Downstream effects
Distributors report too that production at some of their customers was adversely affected. Corcoran says companies in the automotive and durable goods sectors had to curtail output because imported components did not arrive on time.

Reports in February stated Japanese major car manufacturers Honda and Toyota had suffered production interruptions at plants in the US and Canada because of delays in receiving parts shipped from Asia. Others, including Fuji Heavy Industries which makes Subaru cars, were said to have switched to higher-cost air freight to minimize slowdowns in delivery.

“The dispute has been very disruptive to our import business,” says Corcoran, who adds that Brenntag North America will possibly consider reducing its risk in the future by continuing to look at ports in Canada, such as Vancouver and Prince Rupert, as alternatives to the West Coast. However, he notes: “It is hard long-term to compete against Long Beach or Oakland when they are operating efficiently. They have a better cost structure and larger capabilities.”

Although ports on the East Coast do not have the necessary infrastructure to handle large volumes like those on the West Coast, a mix of domestic US ports could be a safeguard if the dispute rears its head again next time the contract is up for renewal.

Although ports are now fully staffed and have returned to full operations, the congestion along the West Coast will take time to clear. How long exactly is anybody’s guess at this stage, but it is likely to be several months before freight traffic returns to a normal pattern.

Ridnell says the key to dealing with an event of this magnitude is to talk and work through it with suppliers and customers and ensure everyone understands the situation. He comments: “Being flexible and having open communication with customers and suppliers is vital. If you do that well, it can actually create opportunities for you.”

Preparation and communication is what isolated Connection Chemical from potential supply chain disturbances, says Fegan. She explains that last spring, the company notified its customers of what it was expecting to happen in quarters three and four and a team worked with them to develop a reliable forecast through early 2015.

For Brenntag North America, Corcoran says its international logistics operations worked very hard to mitigate any impact and reinforced to him the value of having very knowledgeable staff working in both Houston and Beijing, China.

NACD’s vice-president, regulatory affairs, Jennifer Gibson, says the association would like to do everything it can to prevent this happening again in the future. During the disruption, NACD was very active in the coalition led by the National Retail Federation which made numerous contacts with all parties involved to urge a resolution.

Perhaps the only good thing that has resulted from this dispute is it has exposed fundamental flaws in the way the contract is negotiated. Hopefully, these can be resolved before the next contract needs renewing in five years’ time.

Gibson says NACD would certainly look at lobbying on this issue. She says: “We would certainly gauge the views of the membership to see if this is a priority versus other issues. With so many members importing and exporting, I believe it will be of much interest.”

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