Seattle Port White Paper

Gnostam LLC February 15th, 2012 Newsletter
PO Box 960
Inverness, CA 94937

Improving Economic Performance through Research

SEATTLE’s PORT:
WHITE PAPER ON HOW TO INCREASE THE ECONOMIC TRACTION THE PORT
HAS ON THE LOCAL ECONOMY.

EXECUTIVE SUMMARY:
Given the strategic importance of the Port of
The conclusion from the study of the existing Seattle to the Pacific Northwest’s economic
literature is that the Port of Seattle is not sustainability as a viable manufacturing and
taking advantage of the very large economic trade hub for Northeast Asia, it is somewhat
opportunity as an alternative West Coast shocking that while billions have been
port to Los Angeles, Long Beach, which is earmarked for the redevelopment of the
operating almost at capacity. The growth in Seattle Waterfront, no investment has been
the global trade between Northeast Asia and earmarked for the extension of the rail spur
the Northwest Coast of the United States is to allow direct dock loading from Terminal
likely to be the single largest trade route in 18. Rather these containers are shipped by
the world by value. Seattle lies most private contractors on very rudimentary,
strategically on the Great Circle route to inefficient and polluting trucks to the rail head
Northeast Asia, the fastest growing one mile away. Notwithstanding the
economic region in the world. There are recommendations in the Governor’s
competitors to Seattle in the Pacific Container Port Initiatives Work Group
Northwest, namely Prince Rupert and recommendations of January 2009, we still
Vancouver, BC as well as Los Angeles Long have no strategic plan for the port expansion,
Beach. nor has there been substantive progress with

Tons Miles shipped by
Marine Transport:
Source UNCTAD. Share
of Container has gone
from 18.8% in 1970 to
31.7% in 2008

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the Washington State Office of Financial “Great Circle” route from Northeast Asia to
Management [OFM] objective of enhancing the US West Coast and onto the big
the amount of freight cargo moving in and population markets of the US East Coast.
out of the State of Washington while Shippers have a choice. They can transship
respecting requirements for clean air and on the West Coast, [with the ports of choice
energy efficiency. By the admission of the being Los Angeles and Long Beach, [LA/LB]:
OFM, air water and rail traffic decreased by Seattle is a distant third choice on the West
0.9% from 2007 to 2008 while highway Coast]; or ship through the Panama Canal.
freight traffic increased by 6.7% from 2002- The Canal route takes a lot longer, [7-10
2007. Rail cost per ton mile is 0.025¢, while days] but requires less handling and is more
trucks are 10 times less efficient and far reliable in terms of certainty of delivery date.
more polluting. Marine is most efficient at The alternative is to transship and move
0.007¢. containers in particular onto the US freight rail
system. While the Asian Trade is expected to
The Pacific Northwest -- a Global Traffic continue to expand, the infrastructure of the
Hub: LA/LB Port is almost at capacity [operating at
88% capacity]. Seattle and Tacoma both
Seattle has a premier location in terms of its operate well below 55% capacity. In view of
global geographic position. The greatest capturing the opportunity for more container
global logistics corridor in the world is the and bulk commodities traffic, Prince Rupert in

Source: Transport Canada
Pacific Coast Container
Terminal Competitiveness
Study 2011

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Notwithstanding the huge increase in port traffic and capacity from China, Seattle has shrunk
on West Coast, a testament to a strategic misunderstanding of the N E Asian- East Cost US trade.

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Inverness, CA 94937
British Columbia has invested in a state of a mximum capacity of 4,500 TEU to the
the art Container Port that adds to the bulk “Post Panamax” giants that will not be able
commodity capabilities of Prince Rupert, and to transit through the Panama Canal until
has a fully integrated modal transport 2014. Even then, ships with greater length
system with Canadian Railroads as a long than 366 meters, 49 breadth and 15 meters
distance rail carrier of containers to Chicago. depth will not be able to transit the Canal.
This new entry into the “Container Trade” by Because the economies of scale in shipping
Prince Rupert is a very serious threat to the on a 20,000 TEU ship are so great, this
viability of Seattle as an alternative to LA/LB, makes the North American land-bridge
especially because the rail land route to competitive again, something not lost on the
Chicago from Prince Rupert has far less government of British Columbia, [BC],
elevation gain than the route to Chicago which has invested over 750 million to
from Seattle. extend the Fairview terminal wharf by 800
meters maintaining a 17 metre minimum
Drivers of Trade and Containerization water depth, increasing the dock area to
The main driver to the huge Container ports 165 acres. This should enable Prince
that have sprung up in China and Asia has Rupert to double the number of super post-
been the economies of scale of going from Panamax cranes and supposedly create an
the Current “Panamax” container ships with additional 725 person years of employment.

Souce Drewry Shipping Consultants. Maritime shipping is sensitive to fuel costs as they represent between 45
and 50% of operating costs with limited opportunities to mitigate outside slow steaming. Maritime shipping with
less fuel price sensitivity than trucking and rail, implies that higher energy prices are likely more to trigger the
consideration of routing options that have a port call the closest possible to the destination of the shipments.
The other variable for very large ships is the sophistication of the receiving port infrastructure, turnaround
speed and intermodal integration. Port of Seattle lags other major West Coast ports in this respect.

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Inverness, CA 94937

Port Expansion Model’s

Bird (1963) developed a theoretical model of port infrastructures evolution. Based on his
research into the evolution of British ports, Bird’s five stage model demonstrates how facilities in
a typical port develop over several decades and even centuries. The stages are:

▪ Setting. Until the industrial revolution, ports remained rather rudimentary in terms of their
terminal facilities. Port-related activities were mainly focused on warehousing and
wholesaling, located on sites directly adjacent to the port (1).
▪ Expansion. The industrial revolution triggered changes that impacted on port activities. (2). As
the size of ships expanded, shipbuilding became an activity that required the construction
of docks (3). The integration of rail lines with port terminals enabled access to vast
hinterlands with a proportional growth in maritime traffic. Port-related activities also
expanded to include industrial activities which occurred downstream.
▪ Specialization. Construction of specialized piers to handle increased freight volumes such as
containers, ores, grain, petroleum and coal (4), expanded warehousing needs
significantly. Larger high-capacity ships often required dredging or the construction of long
jetties granting access to greater depths. This evolution required several ports to increase
capacity, migrating activities away from their original setting. Reconversion opportunities
of port facilities to other uses (waterfront parks, housing and commercial developments)
were created (5).

Local conditions do produce differences in detail. There are sufficient similarities to make the
Anyport concept a useful conceptual tool. One of the features that Anyport brings out is the
changing relation between ports and their host cities. Instead of only stressing the port
infrastructure development, this emphasizes the changing linkages between the port and the city.
One of these urban linkages is the redevelopment of old port sites for other urban uses, such as
Docklands in London and Harborfront in Baltimore. Expansion is possible in Seattle as operating
conditions allow the existing sites to be extended or modified, with Consolidation of several
existing berths to provide new expanded facilities; and the potential establishment of a super
terminal.
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Inverness, CA 94937

Maritime Transportation Rates for a 40 ft Container, between selected ports 2010
Source Drewry Shipping

Main Container Ports in North and South America with volume
of TEU traffic per major maritime hub.

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Inverness, CA 94937
This under estimates the real impact on one half to $1,449. This is illustrated in the
employment, as the port is a huge diagram below which shows the impact of
productivity gain for the West Coast of increasing the size of vessels on the
Canada in its attempt to capture and attract operating costs. The figures are from Drewry
more trade to BC. Prince Rupert is 4,642 nm Shipping Consultants Ltd., for 2008 and
from East Asian ports [South Korea], while show that the total annual operating costs
Seattle is 5,101 nm, only 10% further. But per TEU for a 4000 TEU vessel are
what Prince Rupert has is the intermodal rail approximately US $ 2,314/TEU, while for a
infrastructure with Canadian National that 10,000 TEU the annual operating costs fall
allows for highly competitive trans shipment by more than ½ to US $ 1,413 per TEU.
to the US hinterland in Chicago that Given this industry is very price sensitive,
Container Ship operators need in order to the pressure is on for operators to build ever
justify the capital investment necessary for bigger ships that will reach 20,000 TEU. It is
the Post-Panamax ships. The order of likely that the annual operating costs per
magnitude of the cost savings that derive these ships will be in the region of US $ 800
from the increase in size from 4,500 TEU, per TEU.
[current Panama Canal container ships] to
12,000 TEU is illustrated as follows. This will bring more pressure on Port
infrastructure. The growth of the massive
The incentive to use larger of 10,000 TEU Super Ports like Shanghai, Hong Kong, and
containerships that were introduced in 2007, Busan will mean that these ports, if they are
was that fuel and port charges account built on the West Coast of the United States,
respectively for 50% and 21% of annual will have to be capable of handling
operating costs, while manning costs transshipments in a timely and cost effective
remains constant. However, annual manner.
operating costs per TEU drop by more than

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The rise of the Mega Port handling > 5 million TEU’s. 10 ports in Pacific Asia handled
more that 10 m TEU’s per annum. Shanghai, Hong Kong and Busan handled > 12 m TEU.

PO Box 960
Inverness, CA 94937
One of the major implications of the growth in the USA, [LA/LB] has done to connect its
of super-ports and of containerization is that port to the hinterland we see that 68% of the
they create the need for large scale trans- traffic is bound to long distance inland
shipments. Seattle is clearly affected by this locations. Local congestion and constraints
shift to mass containerization economics, as in infrastructure expansion invitemitigation
the infrastructure necessary to compete strategies, such as consideration of where
effectively is completely different to that in the cargo is bound to, but also its logistics.
place at the moment. Perhaps this can be For LA/LB, there are two main options for
illustrated by the following. The composition inland flows:
of the container growth reveals a growing
share of the function of transshipment and ▪ Rail option. Containers are directly
an enduring share of the movement of loaded on an intermodal yard and
empty containers in the range of 20% of all placed on a train, via an on dock rail
containers handled. While the transshipment yard. Alternatively, maritime
incidence was around 17% in 1990, it containers can be drayed to a near
climbed to more than 28% in 2008. This dock or an off-dock rail yard. The
reflects the growing complexity of the containers thus enter the local road
maritime network and the trade interactions system with the ensuing congestion
it supports. and pollutant emissions (noise,
particulates). LA/LB Port has
The challenges for a Port the size of Seattle mitigated the rail access issue, by the
is particularly acute as it needs to invest Alamada 20 miles rail corridor linking
heavily in an intermodal yard, especially for the port cluster to the major rail yards
the Terminal 18 “inside” Container terminal. of BNSF and UP near downtown in
2002.
If we examine what the most successful port

Port TEU movements 1985-2008: Source
Drewry Shipping. In 13 years the growth
has been 122% compound annually. This
has been 10 x the growth of Chinese GDP
in the ßsame period.

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Inverness, CA 94937
Transloading option. Mainly because of Goldman Sachs owned company that will
container leasing agreements and a larger spend $27 million on buying the new Post
inland transportation load unit in North America Panamax cranes necessary to unload the
(the 53 foot domestic container) a significant bigger ships. In return for making this
amount of transloading activity takes place in investment, SSA will no longer pay the
the vicinity of the port cluster. Maritime port an $11.60/container fee, and will be
containers are brought to a distribution center able to charge its own fees to unload
(transload center) where typically the contents larger ships, and more containers.
of three maritime containers are transloaded Essentially SSA is betting that it will be
into two domestic containers. Themaritime able to recover its costs and make
containers are then brought back to the port serious profits if it is able to unload >
terminals. The domestic containers can either 500,000 containers in 5 years. In my
be trucked to their final destination or brought estimation SSA will easily achieve this
to a rail terminal to be loaded for an inland breakeven in less than 18 months.
bound train (e.g. Kansas City or Chicago). It Clearly this is a deal done in desperation
was estimated that in 2009 45% of the by the Port of Seattle’s director of seaport
containers imported through Los Angeles / leasing and asset management, Michael
Long Beach were transloaded into domestic Burke.
containers.
Taxpayers in the State of Washington
Specific Seattle Port Problems: support the Port of Seattle. The loss of
the Port’s revenue source is a serious
The port is suffering financially as a result of matter, as reducing funding flexibility will
the severe downturn in trade following the impact the Puget Sound taxpayers. The
global financial crisis of 2008. In early 2012 business model should allow for the Port
several new cranes will be delivered to to capture revenues in more ways than
Terminal 18 and Terminal 5, care of SSA, a one, especially as the container business

Container Maritime Freight Rates from 1993 to
2009, US $/TEU: Source UNCTAD

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Inverness, CA 94937
is highly cyclical – tied to world trade flows. Asia and North South trade has
increased;
Impact of Global Economics on Seattle’s 2. The rise of the West Coast of Canada
business opportunities. as a hub for container bulk commodity
exports to North Asia does pose a
There appears to be a business case for threat to Seattle as a viable hub,
investment in upgrading the Port of Seattle especially as the infrastructure [rail
infrastructure to a world class level. Seattle and crane] in Prince Rupert is superior
is blessed with a great location in the to that of Seattle;
Northern hemisphere, at the cross roads of 3. Seattle is a transport hub for the
the heaviest container trade in the world. Of coastal trade to Alaska, but this has
the 432 m TEU global trade, 56 million was been a declining industry;
intra-Asia, 21 million transpacific. This is 4. North of Seattle there is substantial
expected to more than double if we have an opportunity to integrate liquified
economic recovery in 2015. The economics natural gas and pipeline complex that
of post Panamax container ships mean that could be the source of export to Asia.
there will be a drive to push the size of
container ships to 20,000 TEU’s which In closing there is a substantial economic
would be bigger than the maximum 12,000 case to be made for the avoidance of
TEU that the 2014 new Panama Canal locks managing the Port of Seattle into negligent
can handle. Seattle can be integrated by rail decline. There are positives that can and
into the US Northeast. should be leveraged to spur growth for this
The main investment concerns of this region.
otherwise very strong business case are:

1. The unbalanced nature of the East
West trade that has been evidenced
by the global financial crisis. There
has been a significant slump in the
West to East trade, with an increase
of “empties” as demand from Asia
has waned post 2008, even as intra
Bibliography:

Credits: Jean-Paul Rodrigue et al The Geography of Transport Systems, Hofstra University,
Department of Global Studies & Geography. Professor Rodrigue is the source for the excellent
graphs for this paper, as is credited for these. The conclusions and any errors are mine alone.
Governor’s Container Ports Initiative: Recommendations of the Container Ports and Land Use Work
Group, Washington State 2009;
Transport Canada: Pacific Coast Container Terminal Competitiveness Study 2011
Office of Financial Management, State of Washington , Land use around the Port of Seattle, 2009;
State of Washington Office of Financial Management. Land Use and local finance 2005.
EC (2005), ExternE: Externalities of Energy - Methodology 2005 Update, Directorate-General
forResearch Sustainable Energy Systems, European Commission (www.externe.info).
EDRG (2007), Monetary Valuation of Hard-to-Quantify Transportation Impacts: Valuing
Environmental, Health/Safety & Economic Development Impacts, NCHRP 8-36-61, National
Cooperative Highway Research Program (www.trb.org/nchrp); at
www.statewideplanning.org/_resources/63_NCHRP8-36-61.pdf.

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Changes in
value or
world
Merchandise
1950-2009

Private Sector Investment in Port Terminals

Four major port holdings have substantial global assets of about 45 dedicated port terminals each; Jointly,
they controlled through various equity stakes 177 dedicated maritime container terminals in 2010.
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Inverness, CA 94937

Explosion of Container Trade. Is this sustainable? Global Container Throughput 1970=100

Source: Population and GDP from World Bank, World Development Indicators. Exports from World Trade Organization.
Container port throughput compiled from ContainerizationInternational

Singapore Rotterdam $ Cost per TEU, “experience curve”. 2008 Source
Germanischer Lloyd. Singapore and Rotterdam are among the largest
container ports in the world. We clearly see the effect of economies of scale
where the Port terminal has made the investments for 18,000 TEU ships.

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Monthly value of Exports from Selected Traders 2006-2010;
Source: WTO

The rail route from Seattle to Chicago is most efficient of through the North, CN 13
owned infrastructure. This is a serious constraint for Seattle.

PO Box 960
Inverness, CA 94937

Disclaimer:

The information and any statistical data contained herein have been obtained from sources which we
believe to be reliable, but we do not represent that they are accurate or complete, and they should not
be relied upon as such. All opinions expressed and data provided herein are subject to change
without notice. Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have
long or short positions or deal as principal in the securities discussed herein, related securities or in
options, futures or other derivative instruments based thereon. The securities mentioned in this report
may not be suitable for all types of investors. ALL investments involve different degrees of risk. You
should be aware of your risk tolerance level and financial situations at all times. Furthermore, you
should read all transaction confirmations, monthly, and year-end statements. Read any and all
prospectuses carefully before making any investment decisions. You are free at all times to accept or
reject all investment recommendations made by the Gnostam LLC. As you know, a
recommendation, which you are free to accept or reject, is not a guarantee for the successful
performance of an investment and we are expressly prohibited from guaranteeing accounts against
losses arising from market conditions.

Past performance is no guarantee of future results, and current performance may be lower or higher
than the performance data quoted.

Investment Disclaimer  All investments involve different degrees of risk. You should be aware of
your risk tolerance level and financial situations at all times. Furthermore, you should read all
transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully
before making any investment decisions. You are free at all times to accept or reject all investment
recommendations made. All products sold are subject to market risk and may result in the entire loss
to the client's investment. (For example: excessive withdrawals may result in the depletion of your
account). Please understand that any losses are attributed to market forces beyond the control or
prediction of Gnostam LLC. As you know, a recommendation, which you are free to accept or reject,
is not a guarantee for the successful performance of an investment and we are expressly prohibited
from guaranteeing accounts against losses arising from market conditions.
Gnostam LLC Gnostam LLC
PO Box 960 5731 Kirkwood Place N
Inverness, CA 94937 USA Seattle, WA 98103 USA
Tel: 206 384 0069
E-mail: pcorsano@gnostam.com
E-mail: pcorsano@me.com

www.gnostam.com
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