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July 21, 2014

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LONG BEACH TO SPEND $579 MILLION ON INFRASTRUCTURE THE PORT OF Long Beach is proceeding with $579 million in capital improvements, including the replacement of the Gerald Desmond Bridge and redevelopment of the Middle Harbor. In approving the fiscal 2014-15 budget that funds the projects, the Long Beach Board of Har- bor Commissioners on July 15 said the port's heavy expenditures on marine terminal and infrastructure projects are necessary in today's highly competitive port environment. Doubling the capacity of the Middle Harbor and replac- ing the bridge with a structure that will allow the industry's largest container ships to pass underneath are two examples of how ocean car- riers are driving ports to compete for business in an era of big ships. Some Long Beach termi- nals already handle vessels capable of carrying 14,000 20-foot container units, but the Gerald Desmond Bridge doesn't offer enough clearance to permit the mega-ships to pass underneath to access another area of the port. Middle Harbor will have annual capacity of 3 million TEUs, and will be one of the most automated container ter- minals in North America. CONGRESS PREPARES A PATCH FOR TRANSPORTATION FUNDING THE U.S. CONGRESS is winding up to punt on the challenge of finding a long-term solution to fund the highways, bridges and roads that shippers and carriers depend on to deliver goods and materi- als. There is little doubt Congress will replenish the Highway Trust Fund by July 31, ensuring states don't see their federal construction dollars reduced by 28 percent on average, starting Aug. 1. Through a combination of "pay-fors," or budget- ary gimmicks, Congress is expected to keep the trust fund solvent through next May. The House on July 16 passed an extension bill to replenish the trust fund with $10.9 billion, giving it a 10-month lease on life. The federal government spends about $50 billion annually on road and transit work. Senate Finance Committee Chairman Ron Wyden, D-Ore., is pushing similar legislation that is expected to hit the upper chamber's floor by the end of the month. Congress's inability to find a sustainable way to fund surface transpor- tation construction has a real-world impact for the freight industry. With little certainty from Washington D.C., cities and states are putting larger projects on hold, meaning the potholes will keep getting filled but larger projects, such as an interchange needed to handle increased truck traffic around a distribution center, won't proceed. "It's the difference in playing defense instead of offense," said Joshua Schank, president and CEO of the Eno Center for Transportation, a nonprofit think tank. There is no guarantee Congress will pass a long-term bill after the extension expires. MEGA-SHIP EFFICIENCIES COME WITH A CATCH THE UNIT COST advantage container carriers are gaining by operating mega-ships is dragging down freight rates at a time when all but the top lines are struggling to remain profitable. Martin Dixon, director and head of research products at research and consulting firm Drewry, said freight rate development is being driven by changes in slot cost, and as those costs fall, so do freight rates. "The big carriers have realized that they can still remain profitable despite low freight rates due to their unit cost advantage. For carriers, this means that future profitability, and for some, survival, will depend on cost leadership," Dixon told Tan Hua Joo, an executive consultant with research firm Alphaliner, said significant cost differentials have emerged, and some carriers are profitable at current levels with no urgency on their part to raise rates. Vessel overcapacity persists, he said, and canceling sailings or idling vessels are not sustainable capacity- management tools. "Demand and supply are still the main determinants of freight rates, and nothing has fundamentally changed," he said. HSBC illustrated the cost advantage of operating larger vessels in a report that found every container on a ship of under 10,000 TEUs operating in the Asia-Europe trade would be carried at a loss. Spotlight 6 THE JOURNAL OF COMMERCE JULY 21.2014 6 THE JOURNAL OF COMMERCE

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