In a brief news article, tucked neatly towards the bottom was one sentence with incredible global implications:

“The big drop in China’s holdings meant that it lost the top spot in terms of foreign ownership of U.S. Treasuries, dropping to second place behind Japan”

Chin ahas long been the largest holder of US Treasuries.  They are (were) our go-to group when we (the US) needed to raise some cash.  If the demand for our Treasuries from China drops off, that could lead to the US paying higher interest rates and a double dip recession for our economy.

It now appears that they are in fact reducing their holdings.  In fact, China has been reducing its exposure to US Treasuries for some time now.  While they are not out in the market selling them (that we know), they are trending towards purchasing shorter  duration notes.  This gives them a quicker “out” when the time comes.

When will that time be?  Well, that’s the $64,000 question.  If they were to dump their holdings onto the market at once, they would devalue the holdings they are trying to sell and do more harm to themselves than they care to.  If they become gradual sellers, they would damage the US economy and potentially we would not be able to buy as many Chinese made goods – again hurting their economy.

What China is doing is making every effort to create a burgeoning middle class that can replace the US as the consumer of their manufactured goods.  With 2 billion people to work with, that shouldn’t take too long to replace the 300 million or so US consumers.  Once that middle class is in place, China has much more freedom in their financial policy because they are not as tied to the US consumer.

This is one that will definitely take some time to play out, but it will play out and it will have dramatic consequences for our economy.

Over the weekend I watched a very interesting Science Channel program on network theory (yes, I know I need to get out more…).  Basically, a group of mathematicians had been able to write a mathematical equation that represents the game Six Degrees of Kevin Bacon.  For those that aren’t familiar with the game, someone proposes an actor or actress and you trace them back to Kevin Bacon by the movies they have appeared in.  The hypothesis is that every actor/actress can be linked back to Kevin in six or fewer movies.  According to the program I watched, the Kevin Bacon game ends up being a very good proxy for other naturally occurring “networks” including the World Wide Web, intra-cellular communications, pandemics, and the US power grid .  Each node within these networks is linked to each other node in a surprisingly few connections.

One trend that emerged out of their research was that in randomly created networks there emerge major “hubs” that shrink the relationships between nodes and enable fewer degrees of separation.  In any given network, you can remove many of the less influential nodes and the network continues to operate well.  If you remove one of the hubs, the network begins to break down.

What I found especially interesting about this is that the hubs occur in multiple, randomly created networks.  It doesn’t matter if the network is microscopic (cellular), operated by viruses (pandemics), or man made (power grid).  The hub and spoke structure ends up being the absolute most efficient way to distribute information.  Now if we jump to the real estate world, will the same hub and spoke structure emerge in supply chain strategies?  Does the world only need a few key, hub warehousing cities and then a vast network of spokes?  What are the qualities that will help a location emerge as a supply chain hub?  Are their locations we consider hubs today that are evolving out of “hub” status?  

And consider the East Coast port situation.  There are a number of ports trying to emerge as the “hub” of the east coast. What are the qualities that will make a Jacksonville emerge over a Charleston?  How vast is the networked web of nodes and how many hubs are needed?

Science, math and nature have told us that hub and spoke is the most efficient way to set up networks.  How effective has the US been at following their lead when we set up our supply chains?  Thoughts?  Anyone care to share a good example of a hub and spoke supply chain that they think works particularly well?

The Panama Canal Authority announced yesterday (LINK) that they intended to keep in place rate hikes which are scheduled to go into effect on May 1, 2009.  They also announced that they were implementing some temporary cost savings measures, effective June 1, 2009, to help shippers during these uncertain times.  The two primary components of their cost savings efforts are the redefinition of ballast for full container vessels transiting the canal and modifications to their reservations program to increase flexibility and reduce fees.  

While helpful, the early indications are that shippers are continuing to pursue other alternatives to both the Panama and Suez canals.  We’ll have to wait and see whether these cost savings offset the higher fees and whether shippers continue to structure routes to avoid any fees at all.

Logistics Management ran an article today entitled, “Ocean cargo/global logistics: U.S. Seaports compete for declining inbound vessel calls“.  The first line of the story reads, 

Shipping analysts are saying that the days of “mega” U.S. seaports may be behind us, as more marginal ocean cargo gateways capture share.

I think that announcing the death of the US “mega” seaport may not only be premature, but dead wrong.  Certainly, there will be changes in the shipping patterns to the US.  We see this every day through service changes, new partnerships and slot sharing agreements.  However, I believe what you are seeing is not a shift away from “mega” ports, but a shift towards new “mega” ports.  

Let’s be clear, the US doesn’t have too many “mega” ports to begin with.  Basically, it’s LA and Long Beach right now.  The trend that Moreland Advisors is seeing, and the trend that our clients our seeing is a shift away from the West Coast ports to East Coast ports.  Some recent analysis indicates that up to 25% of the business that currently calls on the West Coast will transfer to the East Coast in the next 8-10 years.  The enlarged Panama Canal, new Suez services, as well as the improved capacities and intermodal capabilities have helped to drive this paradigm shift.  Also, don’t forget that 75% of the US population lives on the Eastern side of the US.  It’s pretty basic, if you have the option, put the goods as close to the people as possible.

Our contention is not that the “mega” port is dying, but that it is moving.  We expect to see 1, maybe 2, East Coast hubs emerge from the fray.  Economically, it just makes sense to use bigger ships and call on fewer ports.  Why pay multiple port and harbor pilot fees, and incur the additional time delays, if you don’t have to?  This becomes especially critical when you consider that many of the US ports are tidally constrained and shippers are facing the prospect of steaming to a new port only to have to wait until high tide to unload (or low tide to get under bridges).  We are in an era where efficiencies and cost cutting is critical and we believe that benefits the new hub, or “mega” ports, not the smaller niche ports.

For those that don’t think that sailboat racing qualifies as an “extreme” sport, check out the boys of the Volvo Ocean Race rounding Cape Horn in the link below.

http://www.volvooceanrace.tv/page/NewsDetail/0,,12573~1591823,00.html

Good stuff.

Earlier this week, the Port of Savannah took delivery of 4 new, super post-Panamax cranes.  These container cranes are some of the largest in the world and can handle ships that carry up to 22 rows of containers on their decks.  In addition to being huge, the cranes are environmentally friendly.  To begin with, they are electric not diesel.  In addition, they generate a significant portion of their electrical requirements internally, utilizing the pull of gravity to spin up generators.  Overall, this is another good move by Savannah to prepare themselves to accommodate the future big ships and an important step to protect the environment.  

The Jacksonville Business Journal reported yesterday that Mitsui estimates the final bill for the necessary channel dredging at JaxPort could reach $1 billion.  Dennis Kelly, general manager at the Mitsui Jacksonville terminal, said the St. Johns River dredging is necessary to accommodate the newer, larger container ships.  This need becomes even more critical in 2014 when the newly widened Panama Canal opens, allowing those larger ships to transit.  Although Jacksonville will compete with Savannah for the dredging funds, the new nuclear aircraft carrier base at Mayport will strengthen its argument.  

In an economy where we hear on a daily basis about hundreds of billions, or even trillion’s, of dollars being handed out by the government, it is easy to be lulled into thinking that a $1 billion dredging project is small.  This is still a huge undertaking for the Corps of Engineers and these funds won’t come without a significant struggle.  However, a 50′ channel depth seems to be the magic number and if you have it you have a significant competitive advantage.  When the big ships come there will only be a few mega-ports on the east coast that these ships will call on.  Jacksonville’s ability to obtain these funds will go a long way in helping to determine whether it can become one of these “winners”.

Today, February 18, 2009, is the day when the Ports of LA and Long Beach will begin collecting the Clean Truck Fee (CTF).  This fee, amounting to $35 per 20ft container or $70 per 40ft container, is to be paid by the cargo owner (as named on the bill of lading).  No cargo will be allowed in or out of the port unless this fee has been paid, no exceptions.  

I can appreciate the POLA/POLB position and their desire to clean up the environment.  However, I continue to question whether an additional fee is the wisest move in this economic environment.  I wouldn’t want to give a current customer any reason to take their business somewhere else.

For more information on the project, please see the Portcheck.org website.

How can this:

affect this:

Well it can in more ways than you’d think.  The animal pictured above is the Right Whale.  The Right Whale is a species of baleen whales growing up to 18m long and weighing upwards of 100 tons.  The beleaguered creature earned it’s name because whalers thought it was the “right” one to hunt due in large part to the fact that they float when they are killed.  These creatures live in three distinct areas of the world, one of which is the Western North Atlantic ocean, near the East Coast of the US.  In the spring and summer they live up around New York, and in the summer they head to Georgia and Florida – much like many snowbirds.

This annual migration puts them directly in the path of some of the busiest shipping lanes the US has to offer.  In fact, the leading cause of death for a Right Whale is a ship strike.  As you can imagine, hitting a 100 ton animal doesn’t leave the ship feeling too great either.  However, ships can be repaired, whales can’t.  In 2006, several conservation groups sued the NOAA and prompted them in 2008 to impose a cap on ship speeds when they are 23 miles (20nm) from a major US east coast port.  During the whale season (varies by port), the ship captains must maintain a vessel speed less than 10 knots when they are within this 23 mile radius.  January 2009 was the first time when an area was affected by the new regulations.

A typical ship speed for a container vessel would be closer to 25-26 knots.  This reduction in speed means it takes longer to reach our east coast ports.  In the shipping business, time is money and efficiency is everything.  Several of the east coast ports are “river ports” where ships must steam upriver once they reach the coast.  Those steaming speeds are typically closer to 6 knots.  As shipping lines evaluate where to bring their ships, the amount of time it takes to reach each port will certainly be a consideration.  It’s too early to tell, but you would think that the east coast ports, and the river ports specifically, may find themselves at somewhat of a disadvantage.

The Link: LINK

The Story:  According to the Kansas City Business Journal, BNSF Railway is slowing its efforts to build its intermodal freight hub in Gardner.  This freight hub is to be the centerpiece for the Kansas City Logistics Park – a 1,000 acre, $735 million industrial park.  Without the intermodal hub, the industrial park project is effectively dead in the water.  The projects developer, The Allen Group, had apparently been notified by BNSF at the same time as the city, county and Corps of Engineers.  BNSF maintains that progress has not stopped and they are still pursuing Corps approval for some wetlands issues.  However, the company is letting the economy dictate when the major construction will begin and end.