Metals & Manufacturing Outlook Newsletter

Presented by All Metals & Forge Group, the MetalsWatch! newsletter was first published in print in 1988 for All Metals & Forge Group. Its primary focus was to be informative to the metalworking industries in the United States. Its original circulation was 2500 organizations. Today, Metals & Manufacturing Outlook™ (formerly MetalsWatch!) has a global circulation of 85,000 companies from a very diverse group of industries, including Aerospace, Defense, Oil, Chemical, Automotive, Medical, Electronics, Heavy Industry, Shipbuilding, amongst many others. Feel free to read the most current issue below, or Click here to view the back issues in our Library at the bottom of the page. To Subscribe to Metals & Manufacturing Outlook™ and receive future issues, please enter your e-mail address and click on Subscribe.


West Coast Port Slowdown Update

West Coast Ports Create Damaging Economic Tsunami

by Tim Grady, Host, Manufacturing Talk Radio

For those industries and companies that either import or export raw materials, parts, subassemblies or finished goods, the West Coast port situation is creating an economic tsunami that could flood their income statements with red ink. On Tuesday, January 6, 2015, the ILWU agreed with the PMA that the negotiations between the parties required a federal mediator to work on resolving the outstanding issues. All of the following information is a review of how the port situation got to where it is today.

The International Longshoremen and Warehouse Union (ILWU) contract with the Pacific Maritime Association (PMA) 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 exports, and retail imports may have to be dumped at fire sales after Christmas when imports finally reach store shelves. 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 are already in the works.

In 2002, the contract between the ILWU and the PMA 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 for 10 days. After then-President George W. Bush invoked the Taft-Hartley Act forcing the ILWU back to work, a new agreement was reached in December 2002.

port-1

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, winter storms prevented rail lines from shifting 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 three 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.

port-2

In March, the PMA and the ILWU began negotiations ahead of the current 6-year agreement expiring on July 1, 2014. Some progress was 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, 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, and the chassis maintenance and repair issue that accounts for hundreds of ILWU jobs at West Coast ports. Until this year, shipping lines owned the chassis and, as PMA members, had ILWU workers performing maintenance and repair of those chassis. However, in 2014, the shipping lines sold the chassis to equipment leasing companies who are not PMA members and have no need to use ILWU mechanics that must be paid $100,000 a year or more, depending on seniority.

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.

Source: Pacific Maritime Association

Source: Pacific Maritime Association

On July 1, 2014, when the current contract expired, the parties were still far apart on the major issues. With no new contract in place, both sides continued to negotiate, and work continued at the port, but not at a rate that would 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 had several 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. And the move by shipping companies to sell of chassis to non-union leasing companies added another sticky wicket to the negotiations. The two sides are not finding middle ground.

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

Screen Shot 2015-01-06 at 9.22.28 PM

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 slowed container offload and onload to 1/3 of average levels, from 35 containers per hour to around 11, and began dispatching unskilled crane operators at a rate of 35 per day instead of the usual 110 per day. Trucks and rail lines were not provided with a reliable pick up schedule, so many chassis’ and rail cars left the ports 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 rotted 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 ‘fire 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 was 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 will source 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, non-union chassis 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 its own books with state debt now approaching $1 trillion dollars.

Respectfully,
Tim Grady
Host – Manufacturing Talk Radio

Archive Back Issues

2014

Jan 2014
Feb. / March 2014
April /May 2014

2012

May 2012
June 2012
August 2012
Sept 4, 2012
Sept 24, 2012

2011

Jan 2011
March 2011
April 2011

 

2010

Feb 2010
April 2010
July 2010
Sept 2010
Nove 2010

2009

Feb 2009
April 2009
June 2009
August 2009
Oct 2009
Dec 2009

2008

Feb 2008
April 2008
June 2008
August 2008
Oct 2008
Dec 2008

2007

Feb 2007
April 2007
June 2007
August 2007
Oct 2007
Dec 2007

2006

Jan 2006
March 2006
May 2006
July 2006
Sept 2006
Dec 2006

2005

March 2005
May 2005
July 2005
Sept 2005
Nov 2005

2004

Feb 2004
April 2004
June 2004

2003

Feb 2003
April 2003
June 2003
Aug 2003
Oct 2003
Dec 2003

2002

June 2002
Aug 2002
Oct 2002
Dec 2002

2001

Jan 2001
March 2001

2000

Jan-Feb
March-April
Sept 2000

1999

June-July
Aug-Sept
Nov-Dec

1998

Feb 1998
June 1998
Sept 1998
Dec 1998

1997

Feb 1997
April-May
Sept 1997

1996

Jan-Feb
April-May
July-Aug
Dec 1996

1995

Jan 1995
June 1995
Oct-Nov

1994

Dec 1994