Changes in Global Shipping Influencing Industrial Site Selection

Changes in global shipping strategies are having a profound impact on domestic site selection strategies for industrial companies. Site Selection Group, a leading location advisory, economic incentives and real estate services firm, closely monitors changes to global supply chains so that our clients can employ the most effective location strategies in a changing environment.

U.S. port volume is shifting to the east

Container imports across the country have continued to shift eastward into 2023, even as many supply chain constraints brought on by the COVID-19 pandemic have lessened. Because of this, the ports in the Gulf Coast and Southeast are benefiting from the largest volume increases.

Most would assume capacity shifting east would slow down as congestion brought on by the pandemic at West Coast terminals has declined. However, labor disputes at these ports and the fear of continued delays further harass importers that traditionally routed cargo through the West. Couple this factor with the ongoing risks of inflation and rising interest rates, as well as the ongoing war in Ukraine, and it’s no surprise that container volume continues to experience a significant geographic disruption.

Shippers are making supply chains less China-centric

The industrial sector is not only increasing the rerouting of cargo from the west to the east, but importers are also deploying risk-mitigation strategies on each end of the supply chain. They are doing this by adding additional production capacity in Southeast Asia (outside of China) and India, as well as doubling down on investment in distribution capabilities near growing U.S. ports and in business-friendly states.

Nowhere is the investment in distribution assets more evident than in the Southeastern seaport markets of Savannah, Georgia, and Charleston, South Carolina, which experienced industrial real estate growth rates of 16% and 11% respectively (Supply Chain Dive, May 2023).

Although East Asian shippers can employ the Panama Canal to get to East Coast ports, a Southeastern port executive says, “The dividing line for freight moving trans-Pacific to the West Coast or via (the) Suez Canal to the East Coast is somewhere around Hong Kong.” Thus, as companies continue to diversify supply chains and build resiliency outside of China, the outlook for the Gulf Coast and Southeastern ports continues to look bright.

Investment in port capacity will continue to steer the ships

Not surprisingly, many of the U.S. ports that have benefited from a container volume boom have been steadily investing in upgraded and new infrastructure. Far from a quick fix, adding additional capacity at the terminal takes years of planning, engineering, and design, prior to the first shovel going into the ground.

As an example, SC Ports has invested billions to enhance infrastructure, recently completing two significant projects to ensure its longevity as one of the nation’s leading ports. In 2021, SC Ports opened the first greenfield container terminal in the U.S. in over 10 years, the Hugh K. Leatherman Terminal, which will add 700,000 twenty-foot equivalents (TEUs) of annual capacity once fully operational. Furthermore, the “Charleston Harbor Deepening Project achieved a 52-foot depth in 2022, making Charleston the deepest harbor on the East Coast.” (South Carolina Ports, December 2022).

Gulf Coast ports are investing in infrastructure as well to prepare for increased activity. The Port of Houston is expanding the Houston Ship Channel, otherwise known as “Project 11,” which will deepen and widen the channel along certain segments. Just south of Houston, Port Freeport is, likewise, making investments in shipping channels to accommodate post-Panamax container vessels and post-Panamax tankers. The Port of Mobile is investing over $300 million to achieve a 50-foot draft that would allow for neo-Panamax vessels to call on the terminal (FreightWaves, August 2021). The list of investments goes on and on.

The port labor model is a factor

Often one of the most widely cited and criticized features of Northeastern and West Coast ports is the labor model, in this case what is commonly known as a “Landlord-Tenant” model, or a Landlord Port. This is the most utilized labor model across U.S. ports which relies on peaceful labor relations between the port and the unions, in most cases either the International Longshore and Warehouse Union (ILWU) or the International Longshoremen’s Association (ILA). Conversely, a handful of ports utilize the “Owner-Operator” model, also referred to as Operational Ports. See below a definition of each provided by the Environmental Protection Agency (EPA):

The role of the port authority in operations can vary from port to port; however, ports often fall into one of the following two categories:

• Operational Port: The port authority builds the wharves, owns the cranes and cargo-handling equipment, and hires the labor to move cargo in the sheds and yards. A stevedore, or labor-management company, hires dockworkers to lift cargo between the ship and the dock, where the port’s laborers pick it up and bring it to the storage site.
• Landlord Port: The port authority owns the wharves, which it then rents or leases to a terminal operator (usually a stevedoring company). The operator invests in cargo-handling equipment (forklifts, cranes, etc.), hires dockworkers to operate such lift machinery and negotiates contracts with ocean carriers to handle the unloading and loading of ship cargoes.
  

(Source: Environmental Protection Agency, June 2023)

It is important to note that among the nation’s Top 10 Busiest Container Ports by 2022 TEU volume, the split between operational vs. landlord ports is relatively even. However, it is equally important to realize that much of the cargo that has diverted away from the West Coast (i.e., landlord ports) has found a new home at operational ports along the East Coast.

Site Selection Group can be a resource

Transportation costs account for a sizable portion of a company’s logistics costs, which in turn render it a critical driver of many site selection projects. For projects that are particularly driven by such costs, a location advisory expert such as Site Selection Group can assist companies in evaluating seaport markets and those in favorable proximity to properly test supply chain sensitivities and adequately weight them in the site selection process alongside other factors such as labor availability, operating costs, economic incentives and availability of industrial real estate.