September 5 , 2009 by Dan McCue

World Trade Magazine

Intermodal Recasts Logistics in the Southeast

A decade after upheaval on the West Coast sent shippers scurrying to the Southeast and the more reliable gateways to the market it represented, competition to be the top supply chain dog in the market continues unabated.

Having now weathered the worst global economic crisis since the Great Depression, ports, logistics providers and economic development officials jockey daily for position, hoping their next move is the one that leads to regional dominance once the recovery gets into full swing.

Increasingly, the competition is becoming a shootout between a handful of ports: Jacksonville, Savannah, Charleston, and Norfolk.

But where the language of the battle once revolved around "container moves" and "gate turns", the focus has now shifted beyond the terminal gates. Today, if you're not talking "intermodal", "distribution centers" and "supply chain efficiencies", you might as well not come out to play.

"Personally, I think the most significant thing we've seen in the Southeast of late is the moves that eastern railroads have made to grow and solidify their intermodal business," said Paul Bingham, managing director of World Trade and Transportation Markets for Global Insight, the world's largest economic forecasting firm.

In doing so, CSX Transportation and Norfolk Southern are following the example of their western counterparts, the BNSF and the Union Pacific railroads. In recent years, both western Class 1 railroads have grown intermodal shipping into a dominant focus of their business.

"Based on what they've seen in the West, CSX and Norfolk Southern see intermodal as an area of future growth and a way of capturing additional revenue," Bingham said.

To date, the most advanced of these efforts is Norfolk Southern's Heartland Corridor linking the Port of Hampton Roads, Virginia to the Ohio River Valley. But, both railroads are seeking to create intermodal hubs anywhere in the Southeast where cargo density and the potential for long hauls warrant the investment.

"What's interesting is that while these efforts divert long hauls off trucks, many trucking firms have shown a willingness to embrace the railroads as partners," Bingham said.

"Why? Because in addition to the environmental and operational benefits we often talk about when it comes to rail, these intermodal and long haul operations also solve a lot of problems for the truckers, namely the difficulty in finding drivers willing to drive these long hauls, but also hours of service requirements and fuel costs," he said.

Advancing long-term plans

But a new day for rail is hardly the only logistics-related story transpiring in the Southeast. Bingham, who has been a member of Global Insight's Trade and Transportation Group since 1999, said, "Big picture, no one has been immune to the economic downturn."

"That's especially true of operating ports, because their revenues are more directly tied to the volume of cargo passing through their terminals. Landlord ports have had a little more insulation from what's transpired over the past several months, because of the brunt of volume decline has fallen not directly on them but on their tenant terminal operators."

But the difference has grown less pronounced as the effects of the crisis and tight credit markets have lingered. Most ports, and along with them, warehouse and distribution center developers, have seen a slowing of the advancement of their longer-term plans.

That said, Bingham believes the major players have "pretty uniformly tried to pay attention to the long view and have plans for potential growth."

However, concerns outside terminal gates are proving to be significant. For example, if the travails at West Coast ports once fired interest in all-water routes to the East Coast, strategic linkages to the Southeast's fastest growing populations centers have been the primary determinate of who's prospered and who hasn't and who is likely to continue to do so in the future.

Initially, the Port of Charleston, South Carolina, the deepwater port that's closer than any other in the Southeast to the open ocean was the biggest beneficiary of the surge in cargo. Today, however, few seem to be looking over their shoulder at what the seaport is doing.

Instead, and for a variety of reasons, most notably serious constraints on its ability to grow, Charleston has been eclipsed by the Port of Savannah, Georgia, which now stands as the nation's third busiest port, after the Port of Los Angeles and Long Beach and the Port of New York and New Jersey.

Just as Charleston's difficulties appear plain on their face, so too do the reasons for Savannah's ascendance: Not only was it blessed with considerable open land near its Garden City Terminal, but also has direct rail connections with Atlanta, the Southeast's most populous city.

The other factor that helped muscle Savannah past others in the Southeast was where its cargo was coming from. According to statistics compiled by the Georgia Ports Authority, roughly 80 percent of its cargo comes from China, the world's fastest growing economy.

Charleston, meanwhile, has traditionally been a Euro-centric port, with the bulk of cargo coming from mature European and Mediterranean economies that simply aren't growing as quickly.

In an effort to hold onto those gains, the state government established the Georgia Logistics Innovation Center in Savannah to foster logistics innovation not only at the port, but also at Atlanta International Airport, the state's bustling intermodal yards, and all points in between.

"The thing about logistics - not only in Georgia, but throughout the Southeast - is that it is a very fragmented industry," said Page Siplon, the center's executive director. "The challenge in preparing for the economic upturn that's coming is bringing that ecosystem together."

And that means looking for ways to do things better both in and outside the port terminal's gates.

"What that boils down to are both structural and IT improvements, things that Savannah and ports throughout the region have done," Siplon said. "But at the same time, Savannah is the only port in the Southeast that has on-dock service from both CSX and Norfolk Southern, both of whom have intermodal facilities here," he said. "That's one reason why Maersk Shipping Line recently signed a 25-year contract with the port."

Don't count Charleston out

In Charleston, comparisons to Savannah rankle, but are understandably inevitable given that the two ports are less than 105 miles apart.

But that's not to suggest that there isn't a solid business case to be made for Charleston, said James Atkinson, Vice President of the Logistics Practice Group for ProVenture, a company that handles global site selection for logistic firm OHL and other companies, and oversees 30 million square feet of warehouse and distribution space around the world.

Currently, the Port of Charleston has the deepest water in the South Atlantic, with 45 feet of depth at mean low water in the inner harbor and 47 feet of depth in the entrance channel. Along with deep water, Charleston is in the process of boosting its overall container capacity by 50 percent with the development of a new, 280-acre container terminal in North Charleston on the former Charleston Navy Base - the only permitted port facility in progress in the region.

The latest project for the new terminal is a $55 million contract to build a 5,000-foot-long containment wall extending toward the main shipping channel. This area will later be back-filled to create the dock of the terminal. Construction began in July and is expected to take 15 months to complete.

But it's not the operation of the port that experts point to as challenged; it's a simple matter of geography.

"Charleston's problem is that it doesn't have the same available building inventory as some other communities, and its other problem is the proximity of distribution centers caused by land constraints, because the one thing you really want to do is minimize your dray," Atkinson said.

At present, 20 million square feet of distribution space is under development near Charleston, although much of it is a short drive on the local interstate from the port, in Berkeley County, South Carolina.

"That's the challenge, but that's not to single Charleston out - a lot of ports are land constrained," Atkinson said. "If any land could be found for further distribution center development, Charleston would be very attractive."

The other open question surrounding Charleston is rail access to the new terminal. The plan outlined in the Environmental Impact Statement for the project is very much a continuance of practices in place today: utilizing short truck trips between the new terminal and the existing intermodal yards operated by CSX and Norfolk Southern a few miles away.

But private developers, local environmentalists, S.C. Public Railways (a division of the state Commerce Department), and others are pressing for more direct rail links for both CSX and Norfolk Southern. The problem is the alternatives under discussion include rail access out of the north side of the terminal, something prohibited by a Memorandum of Understanding between the S.C. State Ports Authority and the City of North Charleston.

The ports authority has said that by holding to its plan, about 25 percent of containers passing through the new terminal could leave the Charleston peninsula by rail. Advocates for the alternative intermodal say the percentage could be much higher.

But here a comparison with Savannah provides something of a reality check. "For all the virtues of Savannah's on-dock connectivity, about 75 percent of the cargo that passes through the port leaves the Garden City Terminal by truck," Siplon said. "Clearly, rail is both an attribute and an opportunity," he explained. "We know there's still more to do in regard to getting more cargo on rail and more trucks off the road; the problem you run up against is that there aren't a whole lot of Wal-Marts or supermarkets that have their own direct rail connection."

But, in logistics as in life, perception is everything.

Thomas Scorsune, senior vice president for supply chain and logistics, with Jones Lang LaSalle Americas, Inc., said he views Savannah as a strategic port of entry precisely because of its on-dock intermodal capabilities and the shortline service it allows the port to provide Atlanta.

"A similar case can be made for Jacksonville, which doesn't have on-dock rail, but does have near-dock intermodal service," he said. "It all comes down to a matter of costs, and even with near-dock rail, you can save as much as $200 per container in drayage costs, not to mention avoiding fuel surcharges," Scorsune said. "As a result, locations with intermodal connections are where the economic development will be."

Atkinson agreed. "It really is a home run when you can make connections via rail. It's one of the things that OHL really liked about the Virginia Inland Port (VIP), which is 230 miles inland from the state's maritime ports, but receives daily services from a dedicated Norfolk Southern train." Furthermore, "Because of that connectivity, they were able to develop VIP right along Interstate 81 in Virginia, which affords its tenants really good connectivity to markets in the Northeast and mid-Atlantic," he said.

Atkinson said that while the head-to-head competition between the four primary port communities in the Southeast is compelling, the two ports that he's found "really surprising" are Jacksonville and Norfolk/Hampton Roads, Virginia.

"At a time when Savannah has empty 400,000 and 500,000 square-foot buildings available for potential tenants, Jacksonville, which doesn't have a large building inventory, has landed five to eight deals with good sized manufacturers and retailers seeking 400,000 and 600,000 square-foot buildings," he said.

What gave Jacksonville the edge? Atkinson said that while it was impossible for him to be 100 percent certain, he believes it has mainly been a matter of Jacksonville being better situated in terms of its location to global shipping lanes.

"The other thing Jacksonville has in its favor is that it has good connectivity to the Atlanta market through CSX railroad and it also provides entrance into Florida, which is kind of a unique market given the way the state is shaped."

Florida is indeed unique, said Martha Harbin, executive director, of the Florida Maritime Leadership Coalition.

With an economy that's historically been driven by tourism and real estate sales, the state's 14 deep water seaports - including 11 active cargo ports - are often overlooked even by the state government. By way of example, Harbin pointed out that in submitting their stimulus funding requests to the federal government, lawmakers in Tallahassee, the state capital, didn't include a single port project on their lists.

"That underscores the need for there to be a better recognition in the state capital of a role our seaports play in the state economy," Harbin said. "And that's particularly true in light of the opportunities manifest in the opening of a widened Panama Canal, and the massive port-related expenditures that have been made in Savannah, the Carolinas and Virginia."

She remarks, "We've kind of been the state's red-headed stepchild."

But that's not to suggest Florida's ports missed the stimulus boat completely. Many applied for funding on their own, most notably Jacksonville, which is using federal stimulus money to dredge its navigation canal down to 50 feet.

At the same time, the Port of Miami is using a combination of federal and private sector money to build a tunnel under the City of Miami to facilitate the movement of cargo from the port to Interstate 95.

While all hasn't been to the good for Jacksonville - one example being CSX's decision to delay construction of an on-dock intermodal terminal because of the global decline in cargo volumes - Jacksonville officials have signed a 30-year lease with Hanjin Shipping Company of Seoul, Korea calling for the construction of a $300 million, 90-acre container facility at its Dames Point terminal facility. The Hanjin project is expected to open in 2013.

Mexico's influence on future development

If the four ports and their respective communities will indeed be the Southeast's battlegrounds for logistics supremacy, Atkinson said of all things an emerging port in Mexico, specifically the Port of Lazaro Cardenas, might ultimately stymie the growth of all of them, if only by degree.

"It's the primary port serving Mexico City, and also serves the automotive and other sectors with dedicated nonstop rail service on the Kansas City Southern Line that extends directly into the central United States," he said.

"Obviously, I don't think Lazaro Cardenas is going to take the place of any of the ports along the Southeast coast, but with manufacturing drifting from Southeast Asia back toward continental North America and with its potential to offer lower door-to-door container costs to Houston, Memphis, Kansas City, and Atlanta, it will be interesting to see if it becomes a viable alternative to the ports we've been discussing."