3rd Generation Intermodal

The lack of funding for our nation’s inland navigational arteries is reaching a point of crisis. Much of the nation’s critical inland navigation infrastructure is crumbling, and not much is being done to resolve the funding shortfall needed to upgrade old locks and dams.   

It seems that things have never looked this good for the intermodal industry, specifically the railroads and some of the truckload carriers.  The tepid economic recovery has been everything but that for them. They’ve taken the recovery by the horns, while pushing it from the rear. 

The industry has benefited from a double-punch of growing volumes and rate hikes.  Norfolk Southern, Union Pacific, and CSX reported record years, thanks in significant part to their intermodal businesses. Norfolk Southern reported its fifth consecutive quarter of intermodal revenue growth. Even the trucking industry is benefiting, with JB Hunt and Schneider reporting big wins in this area.

However, the spike in demand and rates are shading the true story.  What’s behind the recovery are structural changes in mode choices that have slowly manifest over the past half decade, specifically with the gradual increase in fuel prices.  The conversion of truck to intermodal is a very real phenomenon, stemming from factors far beyond national policy motivations.  Modal shift is here to stay, as long as fuel prices continue to grow.  Getting a truck tuned-up and keeping its tires properly inflated is certainly not going to slow the trend, at least not until the Middle Eastern Spring finds it’s Summer.

Another key shift is the trend toward near-sourcing from suppliers in closer proximity to achieve leaner and tighter supply chains. “Kansas City Southern (KCS) is benefiting from a near-sourcing trend,” reports David Jacoby, President of Boston Strategies International Inc, referring loosely to an upswing in near-sourcing from Mexico in-lieu of China. This trend has also benefited the long haul-truckers like Schneider, setting up specific intermodal business units to tackle this area. 

Intermodal is also showing strength in the short-haul business, an area long deemed unprofitable. Some of the major truckload carriers have partnered with the railroads to serve specific lanes in regions like the Midwest, California, and Florida.  “Short-haul intermodal gives the truckers added capacity along key lanes, allowing them to reallocate precious resources and offer their customers a cheaper alternative where cost is more important than speed,” says Ken Asztalos with RNO. In essence, across certain lanes, the truckers let the railroads do the hauling, allowing them to pay more attention to customers’ needs.

The question is, will the intermodal genie rub-off on the barge industry. I’m leaving that question to Virginia.  

I’m a proud, expectant first time father who, among other things, is anticipating the challenge of responding to her growing inquisitive mind. She has a name, but for this post let’s call her Virginia, for the state we recently moved to, and as a nod to Santa. Not knowing what a transportation consultant really does, she’ll probably have the idea that her daddy is responsible for all of Transportation.

“So, Daddy” she’ll ask at some point, “why don’t you put containers on barges?”  She’d remind me of all the times I told her that barges can move so much, for so little, and without using much oxygen.  “You said it would reduce traffic, and make our roads much safer. Why are you such a moron?”

Well, Virginia, you see… 

“But, but, you told me more and more things move in containers. Even things you used to think couldn’t, are, more and more. Like corn, and beans, and steel, and stuff.”  She’d remind me that just the other day, Mr. LaGrange at the Port of New Orleans said container traffic jumped 31% in 2010, which he partly attributes to “steel products and grain, now moving in containers.”

And I would bite my tongue, knowing that in 2004, grain in containers brought sexy back.  Since then, containerized grain exports doubled year over year, jumping to 363,000 TEUs by 2008, declining a bit the past two recessionary years.  In fact, about 5% of US grain exports to Asia are shipped in containers, 9% of soybean exports.  I’d hate to also tell her that all of these grain containers are carried to the sea by truck and rail before being loaded onto ships.  Very close to none of it by barge.  I’d be afraid she’d call me a moron, again. In her mind, if over 60% of all grain moves by barge, why is it that when we put it in containers, only a fraction moves on barge. 

If I tried to explain that we are still working on the container-on-barge concept, she’d say “but I thought you first learned how to put containers on ships.  Then you put them on trucks.  And then on rail cars.  Why can’t you learn to put them on barges?  Why, Daddy?”

And I would probably have to nod and say she’s right, knowing there are answers, but none would pass infant logic. It wouldn’t be enough for her to accept that barges are already a vital part of the economy, keeping US exports competitive, and imports cheap too. She probably would expect more, even though she won’t learn about the changing economy, and the need to adapt to supply chain trends until she gets her MBA, at UVA.

I wouldn’t be able explain why, for whatever reason, no one has managed to build a large container port near the mouth of the Mississippi River, for example, so that lots of containers can move through a single point, creating densities, economies of scale, efficiencies, etc.  River transportation thrives on densities. Again, the MBA at UVA.   

She probably wouldn’t understand why those Europeans have been able to develop a burgeoning container-on-barge sector on their rivers, handling as much containers as any of the large container ports on the US east coast.  She’d want to know why the US river system moves more tonnage, and a greater share of its economy than the European counterpart, yet can’t compete with containers. “Why, Daddy?”

She wouldn’t begin to understand why we try to put containers on barges that do a really good job moving mountains of bulk things.  She’d ask “Why? The trucking companies don’t haul containers in their dry vans.  The railroads don’t stuff containers into their box cars.  Why do you continue to put containers on bulk barges?” 

Yes, Virginia, there is a Santa.

The Port of Charleston has always shown great promise as a leader in the container trade. In earlier decades, it was ranked as the second largest container port on the east coast, behind New York. But over the past decade, Savannah and Norfolk outgrew it, thanks to their success at positioning for warehousing and distribution business, and investing heavily in intermodal connections to mid-country markets.  

In fact, I can recall from my years as a junior market researcher at the SC Department of Commerce (early 1990’s), getting local and state industrial recruiters to bite on a warehouse/distribution prospect was practically impossible. 

However, all indications are that Charleston and the State of South Carolina are starting to look beyond the Port’s edge of being deepest in the southeast. The Port of Charleston is planning to invest in intermodal rail and are starting are luring warehouse/distribution customers.  

The results are positive so far.  

1. Charleston’s Container Volumes Jump

The Port of Charleston handled nearly 17 percent more containers in 2010 than the previous year. 

Charleston’s container volume in December was up 9.7 percent from the same month in 2009, the 12th consecutive month of year-over-year growth for the South Carolina State Ports Authority.

 “While we have tempered expectations on near-term volume growth, South Carolina’s ports are positioned to continue the upward trend in 2011,” said Jim Newsome, president and chief executive officer of the port authority. 

via americanshipper.com

2. The State of South Carolina Unveils an Intermodal Rescue Plan

A picture is worth a thousand words.  

This video, embedded from CSX’s You Tube site, explains how intermodal works, and provides a good illustration of the US-Pacific all-water trade lane through the Panama canal (see frame 0:55), as well as how the reverse intermodal landbridge factors in (see frame 1:33).  

Once the Panama Canal is widened, larger ships will be able pass through it.  Larger ships are more economical and will allow ocean carriers to improve the pricing of their Asia-to-US East Coast all-water services (through the Panama Canal) versus stopping at a West Coast port.  

While it’s unlikely to result in a wholesale shift of US-Pacific trades to the East Coast, it will result a measurable level of diversion. Enough to have an impact on East and Gulf Coast ports, and the demand for intermodal services to mid-country markets. 

This is the underlying premise for arguing the need for investing in a 3rd generation of intermodal systems - specifically short- and medium-haul intermodal rail and intermodal barge. This is especially pertinent given that East Coast ports are historically truck oriented, due to the “truck-suited” proximity of their mid-country markets. The diversion of container traffic from West Coast to East Coast ports, regardless of the extent, will reduce national intermodal mode-share, unless strategic intermodal investments are made along the Gulf and East Coasts.     

The Administration’s Marine Highways Program is a very positive step in the right direction toward developing large scale containerized marine highway corridors serving mid-country markets. What it needs next is a boost in the form of a specific mission.  A goal, so to speak.  Like landing a man on the moon.

The skeptics abound.  The notion of a containerized marine highway corridor in the range of 1-2 million containers a year, offering tangible critical mass, is laughable to many. But the Europeans have beaten us to it already. The River Rhine in Europe carries on the order of 2 million twenty-feet equivalent units (TEUs) annually.  

The historic Apollo Space Program was key to America winning the epic space war. The third in a succession of spaceflight programs, it was revolutionary in terms of its technological advancements still evident today in areas of our lives beyond space travel and aviation. It focused NASA’s resources on overcoming specific obstacles experienced to that point from previous spaceflight programs. And, it landed a man on the moon.  The Apollo spacecraft and Saturn launch vehicles used for the lunar landing graduated to subsequent programs, and set the stage for getting NASA’s program where it is today.

The Marine Highways Program needs a similar focus.  In comparative terms, man has orbited the earth, but not quite landed. Containers on barge services (including containers on chassis loaded on barge) are nothing new to the USA. There are a handful of operations along the East, Gulf and West coasts. The question is, what can we can we learn from them, in the way of “Lunar modules and Saturn launch vehicles”, to apply to the mission of landing a corridor with at least 1 million annual TEUs.   

The Marine Highways Program is making great progress, adopting a business-case focus. The last round of TIGER grants included a healthy crop of marine highways projects and initiatives. With these grants, the Program has signaled a focus on incubating and growing a set of business-feasible services.

These services provide a good start, but it’s time to ratchet-up the program a notch or two.  Build on the business focus with an additional systemic and operational focus. The next mission should be on building critical mass and speed. The intermodal container trade hinges its success on densities. Leading maritime carriers favor routes serving load centers with sufficient densities to keep their vessels loaded, and which optimize turn times. The same can be said for intermodal rail carriers, investing in fewer corridors and servicing the largest and most efficient load centers, and running faster, scheduled services.

The Marine Highways need a similar focus on critical mass and speed. The business success of the TIGER-funded services will depend on the size of the load centers they serve, and the speed and reliability of their scheduled services.  Neither of these factors are in existence today. There is no single major container load center at the mouth of a major waterway serving the America’s mid-country heartland markets.  And the prevailing vessel technology is too slow to meet rapid delivery requirements to reach these distant markets. 

How do We Land a Man on the Moon?

A mission critical program to boost the Marine Highways Program might look something like this:

Objective – A corridor with an annual container density of 1 million TEUs.

Tactical Approach -  Phase the existing set of Marine Highways Corridors, by identifying and prioritizing a system of corridors with the greatest potential from a national standpoint, i.e. provide access to the largest markets offering the greatest scalability. 

Actions -  1) Develop 3-4 million TEUs of container handling capacity at and around the mouth of the river system. 2) Develop a vessel/s which can sustain operational speeds of around 12-15 knots, with a payload of between 100-300 containers.    

Naturally, there is more to it than these few core aspects. But like the Apollo program, the single mission of landing a man on the moon by the of that decade, provided enough focus for everything else to fall into place. 

Similar reports:

Aside from the fact that traffic through the Panama Canal is likely to increase significantly, the amount of container handling and “transloading” activities at ports around the Panama Canal will increase.  The widening of the Panama Canal is expected to double the amount of container traffic handled by the Panama Canal’s port on either side of the isthmus. 

Panama Canal’s port system moved approximately 4.4 million TEUs per year on average and is expected to handle eight million containers annually by the year 2015.  via portworld.com

One implication is a “spreading” of container densities along the western North and Central American coastline. It’s natural for ancillary supply chain activities to flourish at the confluence of major landbridges. The San Pedro Bay and Inland Empire regions in Southern California are major warehouse and distribution centers, in large part as a consequence of the great North American intermodal rail landbridge which terminates at the Ports of Los and Angeles and Long Beach. In the Northwest, the Ports of Seattle, Tacoma and Vancouver play a similar, but smaller role as intermodal landbridge gateways. And now with the Panama Canal widening, west coast container load center densities will continue to decentralize away from Southern California.  

Another implication is the impact on container volumes in the Gulf Coast region. Increased transloading or “transhipment” activities at and around the Panama Canal will increase the level of container traffic “fed” to and from container ports along the Gulf Coast.  The Ports of Houston, New Orleans, Gulfport, Mobile and Tampa will need more container handling capacity in response to the Panama Canal’s widening, as well as in response to the spin-off transload activities at and around the Canal.

Owning and managing chassis pools is becoming less enticing to ocean carriers, partly due to increased regulatory requirements and operational factors which favor the trucking operators. The most recent carrier to do so is GAL which recently announced that it will drop its chassis pool service on January 1, 2011.  In June, the ACL dropped its chassis fleet, as reported by the Journal of Commerce.    

With the prospect of Brazil, Russia, India and China (BRIC) leading global economic growth over the coming decade, many are concerned about what that means for America.  Will America fade away into economic obscurity?  Or, will this translate to an era of export driven growth. 

“The last decade saw the BRICs make their mark on the global economic landscape. Over the past 10 years they have contributed over a third of world GDP growth and grown from one-sixth of the world economy to almost a quarter (in PPP terms). Looking forward to the coming decade, we expect this trend to continue and become even more pronounced.” via www2.goldmansachs.com

Continued growth of the BRIC economies will likely lead to higher demand for US exports.  The latest port trade statistics posted by the Journal of Commerce provide some evidence of this trend.  

“November container volume at the ports of Los Angeles and Long Beach indicate exports are building strongly while imports, though down compared to recent months, are still running at double-digits ahead of last year. November was the peak month of the year in Los Angeles for exports. Exports were 14.2 percent higher than in November of 2009. Exports in Long Beach were up 24.8 percent from the same month last year. November was the second busiest month of 2010 after October.” via joc.com

In addition to increased demand, America’s exports are likely to ride a cost advantage for some time, for at least two reasons. The first is a sustained weaker dollar, thanks to the Federal Reserve’s two rounds of quantitative easing (aka QE1 & QE2) monetary policy actions.  The second is based on evidence of continued lower shipping costs for American exports.  

“China’s ravenous appetite for iron ore and coal – the two main commodities shipped in the dry bulk market by volume – has transformed the maritime industry, with mining and shipping firms building bigger and bigger vessels to meet its demand. Vale, the world’s biggest iron ore producer, is scheduled to take delivery of the first of more than 30 400,000-tonne iron ore carriers in the first half of 2011. The ships, to be delivered through 2013, will surpass the largest bulk carrier now in operation, the 365,000-tonne MS Berge Stahl. The arrival of these so-called Chinamax carriers will not only cut costs for Vale but will also lower freight rates for the entire industry, as the new vessels swell an already oversupplied market. ‘This will be the biggest factor affecting the market for at least a couple of years, with the big increase in supplies driving down the market,’ said Rahul Sharan, senior analyst at Drewry Shipping Consultants.” via hellenicshippingnews.com

The question remains whether America will be prepared for a growth in exports. It is critical that we continue investing in our transportation infrastructure to support exports, and our economy in general. One potential obstacle is the navigable health of the national waterway system, least of all the Mississippi River.

The Wall Street Journal reports that the U.S. Army Corps of Engineers “said it is likely to run short of funds as early as next spring to fully dredge one of the nation’s busiest waterways, potentially slowing the movement of key imports and exports and raising shipping costs. ‘The way to go about doubling exports is not by closing down your major customs district,’ said Gary LaGrange, CEO of the Port of New Orleans.” via online.wsj.com  

The irony is that the Corps’ budgetary pains to maintain America’s export oriented waterways comes at a time when the Corps also needs more money to deepen Atlantic coast harbors by 2015, when the Panama Canal widening is completed.