Perfect Storm Brewing for West Coast Ports

If you can persevere for three years, the U.S. economy should be making a very nice comeback by 2012.

“Expect low growth until 2012,” said Walter Kemmsies, chief economist with engineering firm Moffatt & Nichol, where he forecasts global trends and trade to help with the California company’s port, maritime and transportation projects. “From 2012 to 2020, we have a pretty good growth forecast.”

Meanwhile, the economy will bumble along. The United States is deep in the throes of a recession, but Kemmsies sees a turnaround in the second half of this year when retailers restock their tight inventories during the third quarter.

His only word of caution is that another mild recession may hit the United States next year as government policy makers try to keep inflation from running rampant. To do that, they will have to keep the country’s gross domestic product (the value of the goods and services a country produces) in check. “This is the single largest threat I see out there,” the economist said, who was speaking in Los Angeles at the ninth annual Trans-Pacific Maritime Conference, held March 2–3 and organized by the Journal of Commerce.

The two-day conference was a look at the shipping industry and all its West Coast ramifications.

At the ports in Los Angeles and Long Beach, Calif., container traffic took a hit last year. The Port of Los Angeles saw a 7 percent dip in container traffic while the Port of Long Beach saw an 11.2 percent decline. Steeper drops have occurred this year. In January, Long Beach’s volume was off 23.4 percent while Los Angeles saw a 10 percent decline in traffic.

Mark Page of Drewry Shipping Consultants said he believes that worldwide container traffic will decline 5 percent to 10 percent this year with a 2.5 percent increase in 2010.

Consequently, trans-Pacific shipping rates were off by 25 percent last year. Those rates are expected to plunge by as much as 20 percent. In 2006, it cost about $2,250 to send a 40-foot container from Hong Kong to Los Angeles. Currently, that is down to $1,150 to $1,200.

“Rates will go down a healthy degree. It’s just a question of how much,” said Ron Widdows, group president and chief executive of the NOL Group, the parent company to container-shipping company APL. “We have seen demand plunge and things take place in a period of time we have never seen before,” he observed. “I can see volume and changes that used to take a long time to occur, and they are now happening by the week.”

Trade flows around the world are expected to be moderate over the next five years.

With rates declining and a glut of container ships sitting idle, Widdows predicted there will be major consolidations or bankruptcies in the shipping industry. “About 1.5 million TEUs (20-foot containers) of new construction in ships is coming into the market that needs a million TEUs to be laid up. Demand is not growing. The ships have no place to go,” he said. “As a consequence, it will put pressure on the entire segment of ship owners and operators and the banks that have financed all these wonderful toys. We are going to see the beginning of bankruptcies and failures. hellip; There will be consolidations that will take place. It is hard to say how much. That will be helpful for the [shipping] industry, but it may not be good for the shippers.”

The shipping executive also cautioned that West Coast ports may lose some of their business to the Panama Canal, where an expansion project is expected to be completed by 2014. That means many shippers may opt to route their containers from Asia through the Panama Canal and on to the East Coast instead of sending their cargo to the West Coast and then loading it onto trucks or trains to reach the East Cost.Volatile oil prices

One of the major unknowns in the world’s economic puzzle is the direction that petroleum prices will take. Oil hit an all-time high last July of $147 a barrel. Prices have skidded ever since, currently trading at about $45 a barrel.

Economist Walter Kemmsies sees oil prices fluctuating between $50 and $80 a barrel over the next 10 years.

But Paul Wihbey, president of GWEST, a Washington, D.C., consulting firm specializing in the geopolitics of strategic resources, sees petroleum prices reaching $150 a barrel by 2012.

Oil has become a highly volatile commodity whose price is governed by speculators and geopolitics, Wihbey said. The Organization of the Petroleum Exporting Countries, or OPEC, has gradually lost its stronghold over oil prices.

“From 1984 until 2001, oil was just under $20 a barrel, laying the groundwork for the great economic expansion. There was a predictability in prices, which helped government and the private sector to make calculations to do projects knowing that the price was stable,” Wihbey said. “But this control mechanism of OPEC has collapsed, and a vacuum has been created. It has allowed other forces to come in and manipulate the price beyond market fundamentals of supply and demand, leading to extraordinary miscalculations by analysts and government officials [on price]. Now we are on the flip side of that phenomenon.”

To show how geopolitics plays a part in oil prices, Wihbey observed that petroleum hit $147 a barrel last July when Israel was threatening to attack Iran’s nuclear sites. Iran is a major oil producer. The United States, through back-door channels, thwarted a threat, Wihbey said, Three days later, oil prices dropped $16 a barrel, and they have been headed south ever since, helped in part by the economy’s decline.

But Wihbey sees a tightening in the world’s oil supplies. “Asia is going to be a significant player in the run-up of prices in the very near future,” he said.

China is probably going to launch a number of infrastructure projects to keep millions of workers, who are seeing their factory jobs disappear, employed. New roads and highways will open up the interior of China, encouraging more factories to move inland to keep their manufacturing costs down.

“The Chinese are buying a large amount of crude oil for storage from Brazil, Venezuela and Russia,” he said. “The upward trend for pricing in the next three years is from the rise of Asia’s middle class and a shift from an exporting economy to a consuming economy.”