Five-month long labor talks between US West Coast sea terminal operators and shipping lines (PMA) and longshoremen unions (ILWU) reached an impasse last week resulting in a lockout encompassing all 29 US West Coast ports and harbors. At the time of the writing the situation remains unsettled with PMA extending the lockout of (currently on its fourth day) indefinitely.

The situation has thrown the transportation industry and the import/export business from the US East Coast to Asia in disarray and, if protracted, threatens an already frail US economy. The shutdown creates a ripple effect across the US. Truck and rail companies, importers and exporters, manufacturers and retailers, and ultimately the US consumer, all feel the shock of trade disruption, some considerably more than others.

Several economists place the cost to the US economy of the west-coast trade shutdown at 1 billion USD per day. Even though such estimate may be high at the start of the lockout, there is no mistaking the fact that the daily economic cost can quickly escalate as short-term inventories dwindle and shippers, retailers and manufacturers feel the full brunt of supply chain disruptions.

The immediate aftermath: The shipping industry

By the fourth day of the lockout, a significant number of vessels (including 125 containerships) have been tied up at West Coast ports, many moored fully loaded outside the ports. US rail carriers are holding back their trains bound for the West Coast to pick up international cargo for trans-continental destinations, as to avoid possible congestion and intermodal gridlocking in the US West Coast.

Liner companies should follow a similar plan, idling many of their vessels with US West Coast destination, as to avoid significant congestion problems once the situation is resolved. Unfortunately, post-Panamax ships en route cannot be easily diverted. Such large vessels, face limited options of calling in ports with suitable accommodations.

Needless to say that the lockout has created a logistical nightmare for carriers and shippers alike. Valuable cargo is sitting idle at US West Coast and Asian ports. Planning is a risky proposition, considering the uncertainty surrounding the duration of the lockout.

For example, diverting cargo to Canada, Mexico or the US East Coast (via Panama) provides only a partial solution. Such an option could be uneconomical (if the lockout is lifted quickly), impractical (when considering the sheer volume of cargo shipped to the US West Coast ports and the required logistical support infrastructure), or simply in-feasible (unions in such areas may support the ILWU, perhaps delaying diverted cargoes).

Our view on the matter: Liner and Charter markets

Such developments, coming at the tail end of a very bad year for the liner industry, will further compromise liner profitability, primarily for carriers trading in the Pacific.

The economic impact for the carriers could be threefold: a) An immediate logistical expense due to rescheduling, congestion, box repositioning and other related problems, b) An ongoing loss of revenue as vessels remain idle, which can get worse the longer the situation drags on, and c) A potential lingering impact on throughput demand, if the lockout acts as a catalyst to push the US economy back into a recession.

The immediate impact on the charter containership markets is likely to be muted, as liner companies are unlikely to redeliver charter tonnage before the expiration of a contract party agreement. Nevertheless, the longer the situation lasts the lower charter demand will be, as liners will refrain from chartering new vessels. The biggest threat for the charter market lies again with the possibility of the US economy sliding into a recession as a result of the trade disruption.

Likely impact on the US economy

Today, the consensus seems to be that the lockout’s impact on the US economy, although non-trivial, could be limited. We share this view, as we believe that several shippers, manufacturers and retailers have already boosted their inventories in anticipation of labor related trade disruptions. The heightened volumes of US imports during the summer months, despite a sluggish economy, support this theory.

Nevertheless, if the stalemate stretches beyond one week, the economic cost would increase and become a most serious threat to the economy. Regardless, government intervention may be late in coming, considering that the US is in a month preceding elections and the Bush administration would carefully weight potential political gains or losses before taking any decisive action.

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