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October 28 2019

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October 28 2019 | The Journal of Commerce 27 www.joc.com Commentary Lars Jensen IN A WORLD where so-called connec- tivity is increasingly understood in the context of computer networks and the flow of information, it is easy to lose track of the fundamen- tal physical tenets of connectivity. Yet this is exactly where part of the competition for future supply chains is already beginning to play out. Connectivity to regular shipping services is key to the competitive- ness of a container port. Measuring such connectivity can be done in many ways, and, realistically, each port will have a slightly different position in the market, so a one-size- fits-all comparison across all ports is not meaningful. However, the more a group of ports is competing for the same cargo and customers, the more likely it is that a common measure provides a meaningful comparison. According to the United Nations Conference on Trade and Develop- ment's (UNCTAD's) liner shipping connectivity index, ports on the East Coast of North America have increased their connectivity 28 percent since the widening of the Panama Canal, compared with an 8 percent improvement on the West Coast. The index takes into account the number of scheduled services to a port, vessel capacity on those strings, the number of other ports with direct connections to the port, and the number of liner carriers calling the port. Losing edge The first and most obvious question is whether we have seen any ports lose the competitive battle in terms of providing connectivity across the ocean. In this case, Port- land, Oregon, emerges as the only top-30 port that has, in essence, been removed from the competitive landscape. This culminated in 2016 when now-defunct Hanjin Shipping initially pulled out, followed shortly thereafter by Hapag-Lloyd and then Westwood Shipping Lines. This is a good example of the self-reinforcing mechanism at play in relation to connectivity in ports. If connectivity to a port is reduced, cargo owners see their supply chain options being reduced as well, so they're likely to shift part of their volume elsewhere. That reduction in volume prompts the shipping lines to reduce their service, further reducing connectivity, and result- ing in a classic negative feedback loop. Portland's UNCTAD connec- tivity index reading began declining in 2006, dropped sharply in 2015, then collapsed in 2016. None of the other top 30 North American ports is showing a similar decline in connectivity to that in Portland. However, most ports con- tinuously increase connectivity; the few ports that don't do so fall behind. Among the top 30 ports, the laggards are Dutch Harbor, Alaska; Camden, New Jersey; Portsmouth, New Hampshire; Port Everglades, Florida; and Wilmington, Delaware. These are the ports where long-term concern should be raised. Panama Canal impact The main ports on the West, East, and Gulf coasts have all seen connectivity increase over the past decade, but in quite different ways, especially considering the impact of the opening of the new set of locks in the Panama Canal in 2016. Looking at the average connec- tivity in the three years prior to 2016 versus the three years after, the West Coast ports have increased their connectivity by 8 percent on average. During the same period, the East Coast ports have increased their connectivity by 28 percent, with substantial connectivity improve- ments in Charleston, Halifax, Phil- adelphia, and Boston. Connectivity to the Gulf Coast has, on average, improved 10 percent, with Mobile, Alabama, and New Orleans, Louisi- ana, being the key drivers. As East Coast ports are improv- ing their competitive positioning against both the Gulf and West Coast ports, cargo owners have more choices for shipments destined for the US interior, which could lead to more East Coast routings. More volume would bring in more services and larger vessels, in turn improving connectivity. As opposed to what happened in Portland, this sequence creates a positive feedback loop, gen- erating additional East Coast volume growth at the expense of the West and Gulf Coast ports. This also heats up the compe- tition among the East Coast ports themselves. Falling behind on con- nectivity for import/export cargo could trigger a negative feedback loop, eventually leading to elimina- tion of regular liner services. Based on the pre- and post-Panama Canal expansion data, the East Coast ports most at risk in this scenario are Port Everglades, Baltimore, and Montreal. Connectivity is a complex concept, but the UNCTAD measure's 50,000-foot overview clearly identi- fies the East Coast ports as boosting their competitiveness versus the West Coast, with some ports facing a genuine risk of losing all liner coverage in the long run. JOC email: lars.jensen@seaintelligence- consulting.com Connectivity breakdown Loss of liner connectivity can trigger a negative feedback loop that leads to the elimination of regular container services.

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