The pandemic led to a huge boost in international freight as global economies stopped and started. Producers and shippers rushed to fill U.S. consumer demand. Overall, container traffic at U.S. ports is a good measure of potential pallet demand. The bad news is that the ten largest U.S. ports reported a 28.0% volume drop in February. This is a record monthly decline and comes after a 17.3% decline in January (See Graphic 1). According to the McCown Report, the February figures are the fifth straight month of double-digit percentage declines. West Coast ports were even weaker with a decline of 37.1%.
John McCown, the editor of the McCown Report, sat down with Pallet Enterprise to discuss trends and changes taking place in the sea container market. For more information on the McCown Report, visit https://conta.cc/41mBk8C to access the report for free, or e-mail john.d.mccown@gmail.com.
Graphic 1.
Pallet Enterprise: How did the McCown Report start?
John McCown: I started my report back about five years ago. It began as a research project for a private equity firm. I accumulated a lot of data and started sharing it with friends in the logistics industry. I believe that sea container traffic is a good macro indicator of global economic trends. The report grew by word of mouth. The pandemic helped fuel interest in my work. One port CEO recently told me that when my monthly report comes out, it dominates the focus of their staff meeting.
Pallet Enterprise: Did you at one point work for a port or container company or in logistics?
John McCown: I’ve spent my career broadly in transport. Earlier in life, I received an MBA at Harvard, and then I went to work for McLean Industries. Malcolm McLean was the inventor of container shipping, and he became my mentor. Eventually, Malcolm and I started a smaller container shipping company, and I led it as CEO for 15 years. Through my career, I have held a number of other positions in the container shipping sector.
Pallet Enterprise: The most recent copy of your report talked about how there have been some significant declines over the last year, and even the last month or two have been even more severe. What are some of the drivers behind those trends? How does recent performance compare to some historical numbers?
John McCown: The focus needs to be on a year-over-year comparison. The numbers have been quite ugly in terms of the year-over-year decline. It’s not really a story of a shrinking economy as much as the industry returning to normal patterns after sort of a ‘sugar rush’ of inbound freight during the pandemic. January marks the seventh straight month with double-digit declines. Port activity has reduced to reflect more normal traffic patterns. This will continue, and the industry will grow at more normal rates because outsourcing will continue.
I think that container shipping is one industry, over time, that can be guaranteed to grow as much as Gross Domestic Product, maybe even more. A major driver is population as well as the growth of additional types of cargo making their way to ocean freight. Container ships are so big that they have their own scale of economies equal to the largest ships in other sectors. This economic reality puts them in a position to take some market share. For example, one of the biggest U.S. exports from a value standpoint is agricultural products. Generally, you think of agricultural products as moving in bulk carriers. But now, something like 5% of America’s agricultural exports are moving in sea containers. A reason for this change is extraordinary cost efficiency of container shipping. It’s easier to process if the agriculture product has to go some distance inland, and producers just put the bulk product in a container from the beginning.
Pallet Enterprise: What are some of the major trends right now in terms of ports and sea container traffic? How might those trends impact palletization and unitization?
John McCown: The biggest trend that has been going on for a while and I think it will continue is the eastward shift. Volume is moving away from West Coast ports to Gulf Coast and East Coast ports. This reflects long-standing trends connected to port upgrade activity and the growth of distribution centers in those areas. Going back 30 years, about two-thirds or more of the container traffic to the United States came through West Coast ports. But those numbers have come down significantly. Now, the ratios are more like 50/50. The simple math is that water miles on any size vessel are significantly cheaper than land miles, whether it’s double-stacked rail or single rail.
Container activity shifting eastward moves products closer to the largest population centers in the country. While California certainly has a large population, the biggest concentration of people is in the East. When the Panama Canal was expanded, that increased the size of ships that could go through to the East Coast. Ships that are about four times bigger can now go through the canal.
More recently, there’s been an even bigger swing because of the congestion mess last year at the West Coast ports. The freight that has shifted because of the congestion may bound back for a little while, but in the end, a lot of that activity will move to the East.
Pallet Enterprise: When you talked about port activity and you expect growth to restart, when exactly are you anticipating this growth to occur?
John McCown: I think you are going to see some small growth sometime this year. Nothing like what happened over the last two years, but the trend will turn from downward activity to a nominal increase.
Pallet Enterprise: Is part of this shift from the West Coast to eastern ports a result of better or improved infrastructure in the East?
John McCown: Well, that’s certainly part of it. Of the top ten ports, they are split about 50/50. There are another 20 ports that are small to medium sized, and those are predominantly in the Gulf Coast and the East Coast. Most of the ports in the West are landlocked with limited ability to grow. Many of the ports in the East are surrounded by open land or property that can be utilized for port expansion.
The big driver is the growth of distribution centers near the East Coast ports. These facilities will serve as magnets for container activity. Another benefit for eastern ports is that they are just closer to the population centers where most of the cargo is going to end up anyway.
Also, there is a fundamental difference in the operating structure of ports. The classic model is called landlord ports, where the port had the land and leased it to a carrier or terminal operator to manage. Most of the ports on the East Coast, except for New York, and almost all in the Gulf are operating ports. In these facilities, the port authority provides the labor and management. These ports consistently perform better than landlord ports.
Operating ports usually have more experienced management teams; many of the key employees come from the container sector with years of experience. Better, more qualified management leads to better results.
One of the things that operating ports are better at is dredging and expanding the port to accommodate larger vessels. For example, the Port of Charleston is the first port in decades to build an actual new terminal. The area around the port was dredged, and now it is the deepest port on the East Coast. The operating ports have also focused their marketing on the shippers, such as Walmart, The Home Depot and Amazon, instead of the ocean carriers. They realized that if the distribution centers are located near certain ports, the ocean traffic will gravitate to those areas.
Pallet Enterprise: Is there anything else that would be informative or helpful for people in the pallet and container sectors to know about transitions, trends, or things going on in port and sea container activity?
John McCown: One area where container shipping is leading the way is moving toward decarbonization. A big part of the focus is emissions. Both shippers and carriers are setting corporate goals to mitigate environmental impact. While there is still a lot of work to do, the container industry has embraced this environmental messaging, and that is a fairly new development.
