Pacific Coast Container Terminal Competitiveness Study - TP 14837E



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CHAPTER 8 - PRICE COMPETITIVENESS

Our import price comparison is based on the entire route from Shanghai to Toronto or Chicago. The export price comparison is based on prices from container loading facilities to Asia. The container terminal tariffs are an integral part of the overall shipping costs. The total price for other destinations or origins can be calculated by adding on the inland freight from the marine terminal.

Shipping companies usually quote a single inclusive price that may contain four components:  ocean shipping, rail, marine terminal, and off-dock terminal. We have broken down the prices into their separate components in order to discover differences relative to US competitors. The Canadian terminals have published tariffs on the Internet. However, the actual rates are negotiated with shipping companies and are confidential. The US Federal Maritime Commission requires terminals to file rates but these rates are not readily accessible because they are integrated with shipping tariffs.

In this section we discuss prices in US dollars per 40-ft. container because this is the most commonly used pricing unit. Throughout the report we state volumes of shipments in twenty foot equivalent container units (TEUs) because this is the most commonly used volume unit. Rail pricing for crop exports is complex and we provide only a brief overview. We will then provide a summary of the total shipping price.

8.1 - Ocean shipping price

The largest cost component affecting terminal competitiveness is the ocean shipping rate component. The shipping price quoted to customers includes ocean shipping, port and terminal costs and often the rail cost but we have tried to deal with these costs separately. The average ocean shipping rate from Shanghai to Vancouver is about $1,800 per 40-ft. container but this varies with economic conditions, volume of business, route, and back haul opportunities.

Economic conditions have the greatest influence on the ocean shipping price because they affect the capacity utilization of available container ships. The US is experiencing an economic downturn and container traffic overall is down by 1.1 percent in 2007, compared with the same period the previous year as shown in Exhibit 26. Imports are down 0.6 percent with Tacoma experiencing the greatest decline. The continuing decline in the value of the US dollar has contributed to 16 percent growth in containerized exports from the US ports. By comparison Canada is experiencing 8 percent overall container traffic growth, 5 percent in imports and 12 percent in exports. A further slowdown in the US economy may reduce shipping rates but declines may be offset by further depreciation of the dollar.

Exhibit 26 - Change in Container Trade 2007 vs. 20061
  Million TEU 2007 Imports % Exports % Overall %
Los Angeles 8.4 0 12.9 -1.4
Long Beach 7.3 0 22.0 0.3
Seattle 2.0 1.4 14.8 -0.5
Tacoma 1.9 -7.0 21.1 -6.9
Oakland 2.4 -1.1 8.6 0
US Weighted Average - -0.6 16.4 -1.1
Vancouver 2.5 5.3 12.5 8.2

In the past 15 years ocean shipping rates between Asia and North America varied from $1,400 to $2,000 per 40-ft.container (FEU) for imports. The rates for exports have declined from $1,400 to $800 as shown in Exhibit 27.2 Export rates dropped with the increasing excess supply of backhauled empty containers and the increasing volume of container business by the larger forest product, crop, and metal concentrate exporters.

The profit margin for shipping companies varies with economic conditions and ranges from zero to about $800 per FEU. Based on this profit margin range, increased competition has the potential to reduce ocean shipping prices by $200 to $400 per FEU. Large regular shippers such as Walmart and Home Depot receive volume discounts of about $300 per FEU for ship and rail combined.

Exhibit 27 - Ocean Shipping Rates – Asia & N. America $/FEU 1994-2007
Year Asia to NA $/FEU BULK $/FEU NA to Asia $/FEU
1994 1720 792 1260
1995 1800 816 1400
1996 1700 552 1400
1997 1420 530 1320
1998 1450 384 1050
1999 1900 480 850
2000 2000 552 800
2001 1800 600 850
2002 1520 720 750
2003 1700 1270 850
2004 1900 1440 820
2005 1900 1104 800
2006 1850 960 800
2007 1800 1200 800

Ocean Shipping Rates – Asia & N. America $/FEU 1994-2007

The largest ships reduce ocean shipping costs by $180 per 40-ft. container over the smallest ones. Although this 5 percent saving on the overall shipping cost from Shanghai to Toronto may seem small, it is about half the Vancouver port costs. The Fairview terminal is closest to Asia and the average 5,500 TEU capacity Cosco ships combined with rapid unloading is expected to reduce ocean shipping costs to Toronto equivalent to half the terminal costs in Vancouver. However, offsetting this saving are the higher cost for rail transport and interest on debt.

Export freight rates vary by the export destination. A 40-ft. container of lumber costs about $600 going from Vancouver to Shanghai, $900 to Qingdao, and $1,100 to Hong Kong. A 40-ft. container with 26 tonnes of grain going to a Chinese port costs from $800 to $1,200 depending on the size of the shipment and the Chinese port. Containerized and bulk grain export costs in the US are comparable but containerized export quantities are lower in Canada.

In conclusion bulk ocean shipping rates have increased rapidly and ocean shipping rates for export containers are much more competitive. In 2007, containerized exports for the US grew by 16 percent and for Canada by 12 percent. It seems likely that more Canadian exporters and Asian importers will take advantage of the attractive Canada to Asia container shipping prices.

8.2 - Rail freight rates

Rail freight rates affect the competitiveness of container terminals to about the same extent as ocean shipping rates. Import rail rates are relatively straightforward. However, container export freight rates are complex and influenced by government controls on bulk freight rates.

Vanterm and Centerm’s connection to CP gives them the competitive advantage of the shortest import route to Toronto. The Prince Rupert terminal’s connection to CN gives it the advantage of CN’s extensive network south of Chicago and related back-haul opportunities. All terminals on the Pacific Coast are served by two railways except Prince Rupert, Manzanillo and Lazaro Cardenas, Mexico. CP and CN compete for container business in Canada and the Minneapolis and Chicago areas.

BNSF and Union Pacific compete throughout the western US. Rail freight rates are partly based on competition from long haul trucking companies. The rail rate for moving containers of imports from Vancouver to Toronto or from Long Beach to Chicago is similar, about $1,600 per 40-ft. container. Some shipping lines such as ZIM have published eastbound inland tariffs.3

The rail rate for agricultural exports in 20-ft. containers loaded to 24 tonnes is about $1,100/TEU ($46/tonne) from Regina and Saskatoon and $400/TEU ($17/tonne) from Edmonton.4 In Canada, the maximum revenues for the movement of Western Canadian grain by rail in both hopper cars and containers are regulated by the Canada Transportation Act. For the 2006-2007 crop year, CP was allowed $433 million and CN $419 million.5 In the past year CP exceeded the allowance by $4 million and was required to pay this to the Western Grains Research Foundation, Saskatoon, for projects in crop genetic research.

In the US, rail prices are set by the market, although the Surface Transportation Board may intervene if markups are more than double variable costs.6 The published BNSF grain rate from Williston, ND, due south of Regina, to Vancouver, WA, is $3,075 per car or about $34 per tonne. CN can freely set its rates for crops brought from the US Midwest to the new Prince Rupert container terminal. But CN’s revenue from transporting Canadian grain is capped by the Canadian Transportation Agency.

The ports at Tacoma, Long Beach, Los Angeles, and Delta all have government-owned short-line railways that connect to the major railways. In the US these locally owned railways help ensure equitable access to terminals by BNSF and UP. But in Canada container shipments by rail are determined by agreements between CP and CN management. All containers from Centerm and Vanterm are moved by CP. At Deltaport, CN is allocated 7,300 m, CP, 3,650 m, and BNSF zero metres per day.

In the US, the major shipping companies have the option of using either BNSF or Union Pacific. For example, in 2006, a BNSF rate increase from its Tacoma terminal caused Evergreen Shipping to transfer significant volume to its Los Angeles terminal and the Union Pacific railroad. BNSF representatives are interested in providing service to Deltaport to attract new business, reduce unit costs, maintain service during weather-, slide- and derailment-related rail outages, and increase rail capacity in Canada by offloading US bound containers. The 2:1 space allocation at Deltaport may reduce Canadian terminal competitiveness. Increasing the number of railway options has the potential to reduce the total freight cost to Toronto.

Deltaport and Vanterm operator, Terminal Systems Inc. responds mainly to its customers – the shipping lines – and they in turn respond to their customers, the major importers. Importers generally have a contract that prevents them from using an alternative railway. However, if a shipping line were to ask Terminal Systems to unload its ship to a BNSF train, it would do so if enough of the 11,000 m of sidings allocated to CN and 5,500 m to CP are unoccupied. There was a request from BNSF in December 2005 to bring in a 1,800 m train, but the causeway was full and BNSF was denied access.

CP carries about two thirds of the containers from Vancouver. CP’s freight rates increase by $200 per 40-ft. container per day if shipping companies bring in more containers than their allocation. CP takes an average of four days to remove containers from Centerm and Vanterm one day more than competitive terminals. However, containers can remain at Vanterm for up to 16 days because of the lack of allocations for space on CP cars.

Rail pricing depends on the match between import and export containers and is adjusted to take the overall shipping cost into account. In 2007, the split measured at the marine terminal, was 51 percent inbound, 37 percent outbound and 12 percent empty for Canada, compared with 48 percent inbound, 25 percent outbound, 26 percent empty for the whole Pacific Coast. If ocean bulk rates are higher than ocean container rates the demand for container rail services increases. The rail prices for containers then increase to bring the overall shipping rate to just below the competition. Relatively inexpensive export container rates will increase as more of the containers are filled with exports. Rail prices also increase if the value of the product carried, such as higher quality grains, increases.

In conclusion, container rail rates for imports in Canada are competitive with those in the US. The Canadian system of two railways serving Vancouver is similar to the US system of two railways at each container port. In Canada, however, the container traffic is allocated between the railways. Rail rates for export containers are competitive with bulk shipments.



8.3 - Marine terminal price

California terminals use a revenue neutral demand management pricing system that is more convenient for customers and truckers. In California prices are higher in the day time during the peak demand for service and lower in the afternoon and evening. Based on posted tariffs, in Canada shipping lines or major importers must pay a $190/FEU surcharge for 24-hour service.7  Importers also pay surcharges of $102/FEU for afternoon or $205/FEU for Saturday openings provided they have sufficient containers to move. These surcharges are a disincentive to longer operations and greater efficiencies. California terminals are much busier in the afternoon and evening due to these lower prices.

The actual prices paid by shipping companies for terminal services are less than the posted tariffs. But these actual prices are confidential and subject to negotiation. The actual rates to the New World Alliance members at Centerm are the same for day time or evening operations. The posted tariffs for moving a 40-ft. container through a terminal at the various ports are compared in Exhibit 28. The main components of the price are: wharfage charged by the port, terminal charges, and gate charges. Shipping companies also pay for pilots, tugs, demurrage, customs clearance, a security surcharge, container storage, and cleaning.

The US Federal Maritime Commission granted Pacific coast terminal leaseholders immunity from antitrust regulations and they can coordinate charges, rates, hours of operation, and interchange of intermodal equipment.8  Hours and gate fees are coordinated but terminal prices are integral with shipping prices and are competitively set.

Wharfage, the fee paid to the Port Authority is much higher in Los Angeles and Long Beach, about $260/FEU higher, than in Vancouver or Tacoma. There is a much greater demand in California for returns to the public partly because the terminals were built and financed by the local governments. The wharfage fees charged by the Port of Vancouver and Port of Prince Rupert are the same, $68/FEU for imports and $49/FEU for exports.

Exhibit 28 - Terminal Services Tariffs $/FEU October 20079
  ITS, K-Line,
Pier,
G&J,
L Beach
Evergreen,
Tacoma
TSI,
Deltaport,
Vanterm
DP World,
Centerm
Maher,
Elizabeth NJ
Ships loaded to/from rail 220 234 304 307 317
Ships loaded to/from truck 200 210 272 267 317
Load empty containers     226 222 317
Yard rehandling   54 50 54  
Truck gate weekdays 80 56 58 57  
Truck gate afternoon   - 102 57  
Truck gate night & Sat   - 205 -  
Rail gate 30 81 90 97  
Premium rail service   - 190 100  
Wharfage import 327 83 68 68 68
Wharfage export 238 83 49 49 49
Container storage $/d 87 17 200 50  
Missed appointment   -   50  
Labour cost weekdays $/h   79 65 65 65
Premium for afternoon $/h   25 13 13 13
Free days In 4 5 1 0  
Free days Out 6 10 3.5 0  
First 5 days In 44 0 200 25  
First 5 days Out 28 0 0 50  
Beyond 5 days In 87 17 200 25  
Beyond 5 days Out 58 0 200 50  
Total imports 577 398 462 472 385
Total exports 518 373 379 373 366

In Vancouver, Seattle and Tacoma, the posted price of marine terminal services is similar. The terminal prices at Deltaport and Vanterm is $462/FEU for regular import service and $379 for exports. The rate shown for Prince Rupert is based on Maher’s published tariff for Elizabeth, NJ, since the actual tariff for Prince Rupert is not yet available. The public tariffs include labour, the terminal lease, insurance, capital recovery, interest, property tax, income tax, and intermodal yard costs. About half of the terminal price is for labour. Prices are for eight-hour shift packages taking into account the number of import and export lifts per hour. Since ship unloading and load is intermittent, crews of longshore workers are called as required. Typically a 22 person crew may be needed to achieve unloading rates of 25 containers per hour. The crew includes crane operators, supervisors, drivers, clerks, equipment operators, lashers, and helpers and costs about $3,000 per hour.

The posted tariffs in Vancouver and Delta appear higher than the in-house terminal costs for shipping companies with berths in Tacoma: K-Line, Evergreen, Yang Ming, Hyundai, and Maersk, Similarly most of the California terminals are integrated with shipping companies and terminal prices would not include a return to third party equity investors or interest paid to the debt holders for the recent leveraged acquisitions.

Deltaport, Centerm and Vanterm have a competitive advantage over Seattle and Tacoma because their labour contracts provide for continuous operation, including truck service during lunch, break times, and shift changes. The current collective agreement with the International Longshore Workers Union for Vancouver Port Authority terminals expires on March 31, 2010. Dispatch issues for the Vancouver branch of the union remain to be negotiated. Management seeks to reduce the variability of the work force dispatched by the union. The longshore contract in Los Angeles and Long Beach expires July 1, 2008.



8.4 - Surface terminal price

The prices of container unloading and filling services are very closely related to marine terminal competitiveness because they contribute about a quarter of the price of shipping export containers. In Canada, more exports are moved in bulk to the Vancouver area where they are transloaded into containers and then trucked to the port. These extra steps add to the price of exports and need to be considered in evaluating the price competitiveness of Canada’s marine terminals. New and expanded inland container terminals in Prince George, Edmonton, and Saskatoon are important to Canada’s overall container transportation competitiveness. These inland terminals reduce costs by loading the products into containers close to the source and avoiding the extra handling and trucking costs in Vancouver.

Estimated prices for unloading and loading international shipping containers for several terminals visited are summarized in Exhibit 29. Transferring imported goods into domestic shipping containers costs from $190 for a simple transfer to $500 depending on whether goods are only transferred into larger domestic containers to reduce freight costs or if sorting, labeling and other services are provided. Transferring box cars of pulp, paper and panelboard into international shipping containers costs about $250 per container.

Exhibit 29 Off-Dock Terminal Prices September 200710
Service Unit $
Transload Imports Transfer consumer goods 40-ft. into 53-ft. domestic container $/FEU 190
Transload and sort goods for 53-ft. domestic container $/FEU 250
Transload exports Transload lumber from trucks to 40-ft. container $/FEU 200
Transload pulp or panelboard $/FEU 250
Transload lentils 24 tonnes $/TEU 350
Transload peas 27 tonnes $/TEU 425
Trucking Truck from Surrey to Deltaport $/FEU 250

We did not attempt to compare trucking rates per tonne per kilometre charged by truckers in Vancouver with those in the US because the Vancouver rates are set by agreement between trucking companies and the Canadian Autoworkers’ Union for trips between the main transload and warehouses locations. Federal regulations require independent owner operators to be paid rates at least as high as the union rates. This results in a higher overall trucker income in Canada than in the US. However, the system of multiple forest product and crop bulk to container transload stations used in Vancouver is quite different from Los Angeles and Long Beach where such costs are avoided. The US system of loading containers close to the source is more efficient.

The price for shipping peas and wheat in 20-ft. containers is about $28 per tonne, compared with $45 per tonne for moving it in hopper cars. Twenty-foot containers are preferred for grains, peas and lentils because ocean shipping rates are lower than for 40-ft. containers. About 24 tonnes of lentils or barley and 27 tonnes of peas or wheat fit into a 20-ft. container. Barley from hopper cars can be stored in silos or be transferred directly to containers. Even though container shipping prices are lower there are price penalties if source loaded containers require added terminal storage costs. Hopper cars are government owned and there is a two day allowance for transferring them into a storage elevator.

Return shipping prices are relatively low and 80 percent of shipping line revenue is earned on imports. Therefore, shipping lines return containers to Asia as quickly as possible. The average cycle time for import containers is about 52 days from origin to destination and return. If a container is repositioned to the Prairies for loading grain the cycle time increases by about 14 days. If the shipping line has limited containers the longer cycle time would reduce revenues. However, the major shipping companies have an ample supply of containers. It costs about $100 to clean and inspect a container. As previously described, Canada Customs import duty and regulations constrain the free flow of containers from international shipping lines. US importers and exporters have more container movement flexibility and lower costs.

Our conclusion is that the Canadian system of transloading most export containers near the port adds to the price of exports. BC forest products can be brought by truck to Vancouver for transloading relatively efficiently. But crop export competitiveness could be improved by source loading.

8.5 - Overall price

The shipping prices for Canada’s four Pacific Coast terminals and the fastest growing US competitors are compared in Exhibit 30. The price for imports is comparable for all ports. Los Angeles and Long Beach are farther from Asia but the volume discounts offered to the larger US importers offset Canada’s distance advantage. Deltaport is the lowest price option for bringing imports to Toronto and is also very competitive for imports to Chicago.

However, export container shipping costs in Canada are higher overall than through the US mainly because less of Canada’s exports are loaded at the source. The price of additional handling adds about $600/TEU or about 20 percent to export shipping costs compared with a source loaded container at Tacoma.

The price of shipping wheat in bulk is $68/t for storage and ground transportation11 plus $40/t for bulk ocean freight equivalent to a total of $2,800/TEU about the same as the price of container shipping. Recently bulk ocean shipping prices have increased, potentially giving containers a 20 percent price advantage. However, most shipping lines add a $1,200 per container repositioning charge for stopping the container in Saskatchewan, which makes containers uneconomical for most grain.

Exhibit 30 - Competitiveness of Shipping Prices September 2007

USD per 40-ft. container (excludes storage & trucking)
Export rate based on peas, lentils and barley12
  Pier G&J
L Beach
Evergreen
Tacoma
Deltaport
Delta
Centerm
Vancouver
Fairview
P Rupert
IMPORT to Chicago  Chicago Toronto Toronto Toronto
Ocean Freight 1,875 1,797 1,775 1,740 1,628
Rail 1,580 1,607 1,430 1,595 1,841
Terminal 577 398 462 472 385
Total 4,032 3,802 3,667 3,807 3,854
Difference 365 135 0 140 187
EXPORT to Shanghai Shanghai Shanghai Shanghai Shanghai
Ocean Freight 900 827 900 900 850
Rail 800 600 500 700 600
Truck to transload 200 250 300 300 400
Handle empty cont 200 200 205 280 200
Transload 0 0 250 250 0
Truck to terminal 0 0 250 120 0
Terminal 518 373 379 373 366
Total 2,618 2,250 2,784 2,923 2,416
Difference 368 0 534 673 166



An illustrative example of the total price of shipping agricultural crops in bulk or by container is provided in Exhibit 31. This subject is complex, and more accurate data on prices and container repositioning charges would be useful. At present most crops are moved in bulk to Vancouver or Prince Rupert. If shipments are containerized, most of the container filling is done in Vancouver.

Exhibit 31 - Comparison of Shipping Prices for Agricultural Crops $/tonne 200713
  Bulk Container loaded
in BC
Container loaded
in Saskatchewan
Farm Costs Truck to rail 10 10 15
Marketing 20 20 20
Subtotal 30 30 35
Processing company Country elevator 15 15 0
Removal of dockage 5 5 5
Storage at rail head 2 2 1
Cleaning 10 10 10
Drying 15 15 15
Fill container 0 0 10
Subtotal 47 47 41
Shipping Company Hopper car cost 1 1 0
Container cost 0 3 5
Rail transport14 40 40 50
Transload terminal 0 15 0
Truck to marine terminal 0 10 0
Bulk terminal elevator 15 0 0
Cleaning 5 0 0
Marine container terminal 4 12 12
Ocean freight 40 20 20
Marine terminal in China 10 6 6
Rail in China 10 0 0
Inland terminal in China 2 0 0
Subtotal 127 107 93
Customer costs Truck in Asia 2 10 10
Storage in Asia 10 2 2
Quality penalty 20 10 0
Subtotal 32 22 12
Total 236 201 181

It is unclear how the saving would be split by buyers, container shipping companies, railroads, Viterra, Richardson, Cargill, the Canadian Wheat Board, and farmers. It is likely that savings from containerization would primarily benefit the Asian container shipping companies and crop purchasers. On the other hand if farmers and their representatives became more active in marketing specialized higher quality products they may be able to realize higher prices and profits.

Competition between the shipping companies will affect the proportion of crops that are loaded into containers at the source and the proportion that are transloaded in Vancouver. Although Cosco and Hanjin bring container ships to Prince Rupert, they plan to backhaul crops mainly from the US. Companies such as Evergreen, Hyundai and APL do not call at Prince Rupert and may continue to prefer to use Westnav’s transloading system in Vancouver. The Japanese lines NYK and K-Line use Coastal Container and Columbia Container respectively in Vancouver and are less likely to change to source loading or the Prince Rupert marine terminal. As some lines such as Cosco reduce their proportion of empty containers going back to Asia their ocean rates may increase.

We conclude that the overall shipping prices for Canada’s containerized imports are competitive with those in the US but prices for exports seem to be higher especially for agricultural crops. Further data gathering and field trips to existing loading sites are required to accurately describe containerized export marketing and compile shipping price breakdowns.



1 Source: Port statistical reports

2 K-Line Financial Reports, 2006. http://www.kline.com/KAMCorpInfo/news2006/060803-fh2006_1con_e.pdf

3 Canadian Freight Conference, Oakville, ON Canadian Inland Tariff (Eastbound) – Tariff No. 4, September 1, 2007. http://www.canconf.com/

4 Quorum Corporation, Edmonton, Container Measures Study for Transport Canada, June 2006, p.25. http://www.quorumcorp.net/

5 Canadian Transportation Agency, Gatineau, QC, News Release, December 28, 2007. http://www.cta-otc.gc.ca/media/communique/2007/071228_e.html

6 National Corn Growers Association, Washington, DC, October 31, 2006. http://www.ncga.com/transportation/pdfs/102006CommentsSurface
TransportationBoard_RailTransportationGrain.pdf

7 Shipping Federation of Canada, Montreal.

8 Teamsters Port Industry Update, December 2005. http://www.teamster.org/divisions/Port/newsletter/PortIndustryUpdateV1_No1.pdf

9 Source: Compiled by Hanam from Published tariffs and interviews with terminal representatives

10 Source: Compiled by Hanam Canada

11 Canadian Grain Commission, Canadian Grain Exports Crop year 2005-2006. http://www.grainscanada.gc.ca/

12 Source: Compiled by Hanam Canada

13 Source: Hanam Canada and Quorum Corp., Edmonton

14 Excludes container repositioning cost of $50/t

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