West Coast port backlogs will take months to unwind

More than 80 ships sitting in the harbor and hundreds of containers stacked in empty parking areas at most of the western ports will take months to sort through now that a deal has been reached between labor and port management after months of negotiations.

The nine-month backlog and intermittent shutdowns have taken a toll on the retail, agriculture and manufacturing sectors who are each pleased to see the 5-year deal reached between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association. The union represents about 20,000 dockworkers at 29 West Coast ports, and the PMA negotiates for the major port employers, including Denmark-based Maersk Line, China-based COSCO and Korean-based Hanjin Shipping.

Port officials recently warned that once a deal was reached it would take to a couple of months to dig out from the backlog. Given the depth of the congestion, they don’t see flow fully normalizing until late summer.

"It's not going to be fast," Jon Slangerup, CEO of the Port of Long Beach, told CNBC television. “We were at full strength on Saturday night, all full strength yesterday, and we're going to stay at it until this backlog is cleared."

Slangerup said that by the next retail cycle which starts in the fall, the flow of product should be normalized.

FREIGHT DEMAND
Trucker demand is expected to surge in the wake of the deal and higher rates are likely, according to Werner Enterprises’ chief operations officer Derek Leathers. He said there will be scrambling by carriers in the next few weeks to get as many trucks as possible to the western port docks. 

“They will load, move out and return for more freight as quickly as they can,” he said during a guest segment on CNBC Fast Money on Monday, (Feb. 23).

Despite the hitches from this sluggish port situation, he expects many retailers who might have diverted business away from West Coast ports to eventually go back given that it’s a 17 day route from Shanghai to the West Coast and it takes 35 days on all-water routes.

Freight demand could help smaller regional trucking operations like Van Buren-based USA Truck, which does not provide trucking services to the West Coast. However, the publicly held company operates a logistics and brokerage division – Strategic Capacity Solutions (SCS) – that USA Truck CEO John Simone has said will benefit when the port issues are resolved. Simone told The City Wire prior to the labor agreement that there would be a “huge” demand for logistics services once port operations are normalized.

SCS generated 29.7% of total revenue – $178.982 million – for the company in 2014, up from 24.6% in 2014. Simone said there is not set timeframe, but his goal for SCS is to deliver about 40% of annual revenue.

BEEF PRICES
One of the more vocal groups about the port congestion was the agriculture industry that relies heavily on exports of fresh items to keep revenues up for U.S. farmers. The 
The American Meat Institute estimates that the port issue cost beef and pork industries $170 million per month in lost export opportunities as produce wilted on the docks and beef stocks stacked up.

Higher valued beef cuts that might normally be shipped to South Korea were ground up and used domestically, which is helping to reduce beef prices, but the price dip is likely temporary and did not benefit the farm industry.

Richard Kinder, a butcher and meat manager at Allen’s Foods in Bella Vista, has spent nearly 40 years in the meat business and grocery business. He said wholesale beef prices have dipped a few penny’s per pound from the West Coast port disruption. Kinder expect ground beef prices to inch back up as U.S. supply comes down and exports pick up.

RETAIL INVENTORY
Retailers were some of the most impacted by the sluggish ports particularly in seasonal items that have a short window of sell opportunities. Many retailers like Wal-Mart ordered deep and early ahead of the holidays stocking more inventory for longer periods of time to ensure they had items throughout the holiday shopping season.

Greg Foran, CEO of Walmart U.S., said Feb. 19 that some routinely imported items are already in short supply and that can be seen by simply walking through larger retailer stores. He said seasonal items like patio furniture and other summer products may have not been received because of the port delays. 

Research group Kurt Salmon estimates that congestion at West Coast ports could cost retailers as much as $7 billion this year. The analysis attributes those costs to a combination of the higher price of carrying goods and missed sales due to below optimal inventory levels.