From Choked Ports, Pricier Products

Backups at the nation's overburdened shipping centers mean higher costs for all

Dozens of container ships anchored for days outside the ports of Los Angeles, waiting to disgorge tons of toys. Freight trains snarled in Chicago's rail yards, delaying eastbound carloads of clothing. Idling tractor-trailers, stalled for hours outside Newark, N.J., trying to pick up thousands of flat-panel TVs.

These are scenes from last summer's peak shipping season, when America's overtaxed transport hubs choked on an unprecedented influx of imports for the coming Christmas season. Now it looks as if dire congestion is set to become an annual ritual. With maxed-out ports and insufficient road and rail capacity, the U.S. has little hope of opening the choke points in its transport network. Inbound containers this year are predicted to peak sooner, and the total will hit another record, up by 6.7% after surging by 16% in 2004, says Michael G. Fusillo, director of maritime research, at PIERS/Port Import Export Reporting Service. To this unprecedented volume, add high energy costs, and you get rising transport prices, longer shipping times, and fatter inventories. "We're at a turning point," says Robert E. Gallamore, director of Northwestern University's Transportation Center. After falling for the past decade, "logistics prices will rise for a while to come."

One obvious solution is bigger ports. Typically they can grow out, by annexing nearby land, or up, by stacking containers. At most of the nation's largest ports, stacking is already standard, and in many cases, cities have encroached onto once-remote port land -- leaving no room but the ocean to grow into. In effect, that's what happened last August and September in Los Angeles, when an early peak in shipping volumes caught the ports short on labor and caused a miles-long traffic jam at sea. The congestion turned huge freighters into "floating warehouses" for days on end, as David Lim, CEO of Neptune Orient Lines, said at an industry conference back in February.

Secondary ports can offer some relief, but they're not isolated from the traffic-jam problems. To get to the Atlantic Ocean, only smaller cargo ships can fit through the Panama Canal, and this route can add weeks to a journey. What's more, secondary ports tend to lack the high-capacity road and rail links that big transport centers demand.

Wal-Mart, for example, tries to avoid disruptions by shipping to nine major ports. More than half of its so-called direct imports -- rather than goods imported by its vendors -- go to East Coast and Gulf Coast facilities, says Christopher R. Easter, regional manager for direct import logistics at Wal-Mart Stores Inc. Last year, the Bentonville (Ark.) giant directly imported over $9 billion in merchandise from China alone.

As ports approach maximum capacity, costs multiply. Ship operators forced to hold their boats at sea are hitting end customers with surcharges. Ports are imposing new storage fees on containers left on the docks, and trucks are facing penalties for idling. "It means higher costs all around," says Joseph P. Magaddino, a transportation economist at California State University at Long Beach.


The pileup is compounded because trains and trucks can't haul the boxes out fast enough. In the past, ports had enough spare room to unload a whole ship, then dispatch the containers gradually. Today ships carry more than ever -- up to 3,400 tractor-trailers' worth of containers.

Since most containers leave by train, improving rail capacity would help. But that's difficult in the short term. "Railroads grow well if they do it slowly," says Robert Jankowitz, a rail analyst at Moody's Investors Service (MCO ). "They can't handle sharp spikes in demand." Orders for both locomotives and additional cars are backlogged. And adding new track in port areas can take years. A private-public consortium in Los Angeles recently completed an 18-year effort to lower a 20-mile freight line into a trench so it would be uninterrupted by street crossings. The goal is to whisk containers away from the congested port areas to inland yards, where they can be sorted for their onward journeys. The cost: $2.4 billion, or $120 million per mile. Chicago is considering a similar $1.5 billion plan to untangle its freight yards, through which about one-third of the nation's rail freight passes.

Roads are also clogged, so trucks offer little hope for a short-run solution. A bigger problem: The industry has been short of drivers for years and is operating near full capacity. Independent owner-operators have been squeezed out by rising prices for insurance, tolls, and fuel, as well as federal limits on the number of hours they can spend behind the wheel. At bigger operators, turnover rates of 100% per year aren't unusual. To attract more drivers, Schneider National Inc. a $3.2 billion-a-year trucker in Green Bay, Wis., in February boosted drivers' average annual pay by $4,000. The move helped knock turnover down by 15%, and other players are following suit. All the same, truckers still earn less on average in real terms today than they did in the early 1990s. With rising salaries and stubbornly high fuel prices, "the industry is really being burdened with significant inflation," says Christopher B. Lofgren, Schneider's president and CEO.

For shippers, these rising costs are a big reversal. Since 1987 overall transport and warehousing costs have fallen from around 3.2% of gross domestic product to 2.9% in 2003. Thanks to transport deregulation and the push for "just in time" operations, the entire economy got leaner starting in the late 1970s, when trucking deregulation began, says Northwestern's Gallamore. But during the next decade, he predicts, congestion will push costs back up. And even though economists will argue that this is just what the capital-starved transport sector needs, the shippers, retailers, and factories will have to get used to holding a lot more inventory. Just-in-time may become a lost cause.

By Adam Aston in New York, with Michael Arndt in Chicago and Wendy Zellner in Dallas

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