Episode 48: West Coast Port “Quake” Sets Off Economic Tsunami

December 23rd at 1PM EST – The ILWU contract expired on July 1, 2014, and once again the West Coast port container offloads and onloads have been crippled during contentious union negotiations in the face of near-record imports and exports during the accelerating economic recovery. Hundreds of millions of dollars in losses have already occurred in agricultural exports, retail imports that will have to be dumped at fire sales after Christmas, manufacturing productivity losses from just-in-time raw material delays, and future losses from overseas buyers who will source products elsewhere in 2015 and beyond. Listen to our December 23rd show LIVE at 1PM EST as we talk about this prickly situation.

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West Coast Port Slowdown Update:

West Coast Ports Create Damaging Economic Tsunami

The International Longshoremen and Warehouse Union (ILWU) contract expired on July 1, 2014, and once again the West Coast port container offloads and onloads have been crippled during contentious union negotiations in the face of near-record imports and exports during the accelerating economic recovery.  Hundreds of millions of dollars of losses have already occurred in agricultural export losses, retail imports that will have to be dumped at fire sales after Christmas, manufacturing productivity losses from just-in-time raw material delays, possible employee layoffs at American manufacturers, and future export losses from overseas buyers who will source products elsewhere in 2015 and beyond.

In 2002, the contract between the ILWU and the PMA (Pacific Maritime Association) expired on July 1.  Negotiations on a new contract were contentious and the ILWU used a work slowdown during the fall months to force their demands on the PMA.  In response, the PMA declared that the work slowdown was illegal and locked out ILWU workers in November, shutting down the ports.   After then-President George W. Bush invoked the Taft-Hartley Act forcing the ILWU back to work, a new agreement was reached in December.

West Coast Port before the slowdown
West Coast Port before the slowdown
Current West Coast Port
Current West Coast Port
West Coast port slowdown
West Coast port slowdown

In 2008, the new six-year agreement was reached in August, just 10 weeks after the previous contract ended without much incident when the economy was in the dumps.  However, 2014 looks like 2002 all over again, and possibly worse.  Here is the development of the current port situation affecting all ports on the West Coast with a ripple effect now impacting all ports in the U.S. as well as some in Mexico and Canada.

In February, spring storms prevented rail lines from moving cars into the right positions to move containers from West Coast ports to Midwest, South and East importers after being stuck in snow and ice for almost two weeks.  This created a problem that would worsen later in the year with the ILWU port slowdown when rail stopped scheduling cars into the ports because the ILWU could not guarantee the railcars would even be loaded.

In March, the PMA and the ILWU began negotiations ahead of the current 6-year agreement expiring on July 1, 2014.  Some progress is made, but a new agreement was not reached by July 1, 2014.  There were several major issues, including the $150 million Obamacare Cadillac Plan penalty on the health care plan provided to the ILWU, and the ILWU demand for more Class A workers, which are life-time, full-time jobs at a time when the PMA wants to advance its M&M (Modernization and Mechanization) at the port that could reduce ILWU jobs.

In May, the largest volume for any May compared to any prior year, volume swamped the ports as the larger volume container ships arrived at ports that have insufficient on-port storage for containers, both loaded and empty. A back-up of containers being offloaded began to occur at West Coast posts.  Anticipating that the situation could get worse, retailers with large distribution center operations (DC’s) began looking at strategic locations East of the Mississippi River in the right-to-work States where union issues have been less nettlesome, tax policy is attractive for relocating businesses, and ports unload 44 containers per hour, as opposed to 35 per hour at West Coast ports under current work rules, expecting that the port negotiations would not conclude before the current contract expired. By December, retailers shifting some orders to eastern or gulf ports begins to cause a backup of containers at all U.S. ports.

On July 1, 2014, the current contract expired with the parties still far apart on the major issues.  With no new contract in place, both sides continue to negotiate, and work continues at the port, but not at a rate that will overcome rising volumes, much less the coming peak volume period in August-October as retail goods arrive for the holidays.

Through August and September, the PMA and ILWU still have two major outstanding issues.  The cost of the health plan under Obamacare would be approximately $80,000 per worker.  The plan that the ILWU had in the old contract is now classified as a ‘Cadillac Plan’ under Obamacare and is penalized under the ACA at upwards of $150 million. The union members, who mostly voted for Obama, don’t want to pay the $150 million penalty, have their previous health plan carved back or gutted, or contribute anything towards health care costs since they paid no premiums under the previous contract. The PMA’s 72-member companies do not want to take on the upward burden of health care costs plus the Cadillac plan penalty.  The PMA M&M effort also is seen as conflicting with the ILWU desire for more Class A jobs at the port.  The two sides are not finding middle ground.

In October, it appears to the PMA that the ILWU is staging a work slowdown similar to their slowdown in 2002, as the ILWU workers ‘work safely’ and unload fewer containers per day than on an average day just as the peak import/export season is underway.  A federal mediator is observing the negotiations, but little progress is made.  Containers are now backing up at the port, both loaded and empty, making it difficult to move containers and to coordinate who can pick up containers, as loaded ones are stacked high and wide.  Containers are backing up at all West Coast ports from San Diego to Seattle.

In November, to increase pressure on the PMA-member companies to agree to take on the financial pain of the new contract health care costs and provide more Class A union positions, the unions slow container offload and onload to 1/3 of average levels, from 35 containers per hour to around 11. Trucks and rail lines are not provided with a reliable pick up schedule, so many chassis’ and rail cars leave the port for loads elsewhere, resulting in container storage areas at the port reaching capacity.  The ports have no off-site empty container storage areas, and the ones identified as possibilities cannot be opened and staffed because no contract is in place to create ILWU work rules at those locations.  New offloads cannot occur unless container storage at the port is brought down to accommodate the new containers coming off ships.  Ships cannot be loaded with containers that should have been on the water in October for U.S. exports, including agricultural products that are now rotting in containers languishing at the ports or at staging warehouses. And, ships needed overseas for loading of exports there are stuck here waiting to be offloaded.  Retailers began moving high-margin goods by air freight for the holiday season.  Imported retail goods in containers stuck at the ports will probably become ‘sale goods’ in January, and retailers will likely blame decreased earnings on the port situation, should that fiscal outcome materialize, which is likely.

By December, it’s too late for agricultural exports still at the port to fulfill overseas contracts, and many are either dried out (Christmas trees) or rotted (apples, potatoes, other agricultural perishables) in containers or warehouses, costing the agricultural industry over a $100 million dollars in immediate losses from canceled contracts, as well as future losses because overseas customers have sourced goods elsewhere and are less likely to buy goods from the U.S. that must go through the West Coast ports in the future.  Shipping lines apply and then waive demurrage charges of several thousand dollars per container for the second time, putting pressure on customers that will absorb the costs but be unable to pass them on to their customers.  It is unclear when the current situation will be resolved, but it is clear that President Obama is unlikely to even become involved, much less invoke the Taft-Hartley Act unless there is a complete breakdown in talks, or one side takes an action that shuts down the 29 West Coast ports.  However, it is unlikely that either side will cause a shutdown, having learned that lesson in 2002, since that only forces the government to invoke the Taft-Hartley Act to the benefit of neither party.

Although the Cadillac Plan penalty issue has been resolved by the PMA/ILWU by deciding to consider a new contract for three years or less and address the $150 million issue in 2018 when the penalty would be invoked, no contract has been signed.  However, this creates the specter of the port problems recurring all over again in three years or less, making the West Coast ports appear as no longer reliable for future import and export supply chain management.  Major U.S. companies are shifting from studying to planning for DCs in East or Gulf Coast states, with the added advantage that some corridors in the East support heavy haul trucks, or those with a gross vehicle weight up to 96,000 pounds, as opposed to the gross vehicle weight limitations in the West Coast States of 80,000 pounds.  The East Coast ports are also dredging their access waterways to accommodate the new, larger container ships, an advantage the West Coast ports naturally had with their deep water ports.

The West Coast deep water port advantage will melt away as eastern ports complete their dredging projects in the next year or two, and the large DCs are relocated east of the Mississippi River; albeit, at great expense.  These companies will then shift imports and exports through their eastern locations and reduce or stop importing or exporting through West Coast ports, and are unlikely to abandon their multi-million dollar investment in new DCs simply because the West Coast ports had a shipping time advantage from Asia of about 10 days which has been flipped to a disadvantage by recurring labor strife, with many imports and exports now 3-6 weeks late.  In 2015 and beyond, retailers will place their overseas orders two weeks earlier and bring goods into East Coast ports that are seen as more reliable supply chain channels, and agriculture will devise ways to protect exported perishable goods to overseas buyers through different packaging techniques to maintain freshness. 

It appears that union job position demands and Obamacare costs are making the port negotiations unhealthy, and regardless of the outcome, someone may have to foot the bill for higher labor costs and the ILWU’s Cadillac health care plan and the $150 million penalty, unless it is revoked by the government.  This cost will be on top of the $80,000 per worker in health care costs under the old contract, on top of the six-figure ILWU salaries, plus the $82,000 pension liability per retired worker per year, plus the 401K employer contribution costs, plus prescription coverage expenses.  These escalating costs, and increasing container volumes from the larger ships coming online, are the driving factors for PMA-members to push for modernization and mechanization at the ports that the union sees as conflicting with increasing member roles.

In addition, there is evident risk that fewer goods will be moving through West Coast ports. This was highlighted in a May 2014 Journal of Commerce survey, where two-thirds of the respondents answered that they would be shipping goods into alternate ports.  More than 70% planned to begin shipping to Gulf and East Coast ports, 25% through Canada and 2% through Mexico. That would mean less revenue for the PMA-member companies, forcing them to raise prices and making import and export costs less attractive via West Coast Ports, if the members can offset the staggering ILWU cost increases and still balance their books.  It is likely that some companies will go bankrupt and consolidation will occur within the industry at West Coast ports.

Who are the winners in this?  Canada, Mexico, Gulf Coast and East Coast ports, the Suez Canal and the Panama Canal, when the Panama Canal begins allowing the larger container ships through in 2016, as supply chain managers shift imports and exports to ports that are more reliable than West Coast ports where a new union contract could expire in one to three years, causing disruption all over again. The other winners are airlines handling air freight who may recapture some of the 15 million tons lost to container ships as ocean freight became more efficient and less expensive over the last decade.
Who are the big losers? The PMA member companies, the ILWU members and California, Oregon and Washington, as unions push wage and benefit expenses beyond where PMA-member companies can recover them in price increases or cost cutting measures, especially as East Coast ports complete their port dredging and retailers relocate their DCs and adjust their ordering schedule, and as exporters change how they get their goods around the world.  Seattle and Tacoma ports are already reporting loses in annual container volume as imports and exports shift to Vancouver, B.C.  But the biggest loser will likely be California, which will suffer because it is already seeing businesses leave the State in droves, along with taxpaying employees who are following employers or jobs to Texas, the Carolinas, and other states, at a time when California cannot balance it own books with state debt now approaching $1 trillion dollars.

by Tim Grady, Host, Manufacturing Talk Radio