with Walter Kemmsies
Last month this column focused on the impact of rising interest rates on freight movement. The focus this month is on how rising interest rates will shape freight
movement infrastructure investment.
Employment, which is an objective of the Federal Reserve’s interest rate policy, has been recovering and in March was only 0.01 percent below the level it was when the recession began at the end of 2007. During the nearly five-year long recovery, railroads and ocean carriers, as well as some sea, air and inland ports/logistics centers, continued to invest in capacity and service quality. Railroads around the world have also invested in network capacity and safety, and ocean carriers have been ordering and taking delivery of larger vessels.
The Panama Canal expansion to accommodate larger vessels has progressed and is currently slated for completion in 2016.
Seaports have been either actively planning or engaged in deepening their channels and berths, and in some cases preparing to raise bridges to remove air draft constraints for ships, as well as improving operations via automation. New rail ramps and logistics centers, such as inland ports, have been built while existing ones have been upgraded.
Since throughput capacity for freight movement nodes is constrained by the size of their real estate footprints, the ability to densify storage (such as stacking containers) and reduce the dwell time of cargo in the storage areas, it is worth considering the impact of rising interest rates on these three freight movement investment drivers:
Ports and other transportation nodes will generally need to expand the area in which they operate by acquiring through purchase or lease new land, or by developing some of the unused land they own. The time to increase the operating footprint is now while interest rates are still low.
The urgency for ports to make decisions on land acquisition also comes from growing demand for urban distribution centers as the population continues to migrate to more urban locations. Demand for urban distribution centers is also accelerated from the retail sector’s shift to omni-channel distribution strategies which require e-commerce sales to be delivered the same day.
When horizontal expansion through increased real estate footprints is not possible, vertical expansion options, such as stacking containers, can be pursued. Railroads have been increasing air draft in their networks so they can double-stack containers and ocean carriers have ordered ships that are wider but also have deeper water and higher air drafts to increase their capacity. Ports and inland facilities are likely to continue to follow this trend. That requires investment in handling equipment that has a higher and, in some cases, wider reach, as well as automation. The Middle Harbor terminal and Gerald Desmond Bridge, both in Long Beach, Calif., are excellent examples of this.
Longer dwell times reduce the throughput capacity of ports and other transportation nodes, just like dawdlers reduce the number of diners that a restaurant can serve during the lunch rush hour. Efforts to reduce dwell time in recent years were not very strenuous, since the cost of holding inventory was low due to low interest rates and excess capacity in various locations. Higher interest rates increase the cost of holding inventory, which means shippers will want to speed their cargo movement. It is likely that free storage time will be reduced and demurrage charges will increase, particularly in ports where volume growth is strong.
Larger ships and trains also need to be turned quickly, since these assets lose money when they are sitting still. This adds further impetus to expediting cargo handling, and hence the continued interest in automation or other operational techniques that move cargo out of the main terminal areas quicker.
In addition to focusing on investment to handle specific cargo types more efficiently and reliably, due to shifting patterns of international trade a greater emphasis is being placed on multi-purpose facility planning. It makes sense for freight movement nodes to be prepared to handle containers, dry bulk and, if possible, liquid bulk. The export and energy sectors are strong candidates to lead economic growth during this business cycle.
With all of the economic and industry pressures these days, it is not surprising that experienced port and railyard planners, as well as terminal technology and supply chain analysts, are in high demand. The time to get access to these professionals is now, particularly before engaging in large program management contracts. Leaders in the freight movement industry have already taken the right steps and the ability to compete in the future can be compromised by poor planning.
Kemmsies is chief economist at Moffatt & Nichol, an infrastructure engineering firm. He can be reached at (212) 768-7454 or by email.
This article was published in the May 2014 issue of American Shipper.