Mexican ports could take traffic from L.A.

Mexico has been expanding its port operations at such a rapid pace that it could be siphoning away a significant amount of business from the ports of Los Angeles and Long Beach within several years, according to a confidential study just compiled by the L.A. port.

The Port of Lazaro Cardenas, on the Pacific coast in southern Mexico, is the most immediate threat. It has beefed up capacity and recently completed test runs from Asian importers as an alternative route to the Midwest and the East Coast.

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Volume at Lazaro Cardenas is expected to increase to 280,000 20-foot equivalent units this year, from a mere 2,670 TEUs in 2003, according to the report. The port already has the capability to send containers stacked double by rail to Mexico City and rail line connections to the U.S. Last year, the Port of Los Angeles handled 7.2 million TEUs.

Meanwhile, Mexican officials are eyeing Punta Colonet, about 80 miles south of Ensenada, as a major container port. While the plan would take years to fully develop, requiring significant public and private investment, its construction would have serious implications on the Port of L.A., according to the report.

The sprawling Baja California beach has the potential to become a major player in maritime trade, with 3,000 acres of backland off the beach and another 8,000 acres on an adjacent mesa, plus the all-important deep waters able to handle next-generation vessels.

West Coast ports historically have looked at Mexican ports with a collective yawn due to their small size and lack of infrastructure needed to accept and move cargo into the United States.

But U.S. importers--hit with labor unrest, terminal and freeway congestion, and higher fees--are instructing steamship lines to look for alternative routes to transport cargo from Asia.

A unit of Hong Kong-based Hutchison Whampoa Ltd., a global leader in terminal operation, is already handling container traffic at Lazaro Cardenas. Hutchison also plans to develop the Punta Colonet site, although it is not clear whether a formal agreement has been struck with the Mexican government, according to a source with the L.A. port.

"All the big boys have put it out to the global market that they want the carriers to look at options other than L.A. and Long Beach," said the L.A. port official. "That's what's really pushing this Mexico thing."

Mexico's plans

The report, completed late last month, was compiled largely with information from the Mexican government's maritime business plan.

While it would be challenging to develop a cargo system that could viably compete with the U.S.--the Mexican topography, for instance, resembles an alligator's back in many places--there are reasons to take the threat seriously.

Punta Colonet, for example, has the support of local authorities, state authorities in Baja California Norte and federal authorities, according to the report. Environmental issues, it said, "seem to be under control," and the project is in harmony with plans to transform the Port of Ensenada into a center for cruise tourism and yachting only.

Much of the container traffic the feeder port now moves would be handled by Punta Colonet.

At stake is more than $200 billion in container cargo that moves through L.A. and Long Beach annually. With traffic counts estimated to double in the next decade, neither port has a strategy to protect market share, the port source said.

At Lazaro Cardenas, where Hutchison already has one terminal and options to build two more, APL Ltd., A.P. Moller-Maersk A/S and CP Ships Ltd. are offering weekly services, the study said. (Maersk Sealand ships were scheduled to add three additional weekly hauls this month.)

Several major importers, including WalMart Stores Inc., have run test shipments or are planning to do so. Some are also planning to build warehouse and distribution centers around both ports, the report states.

Constructing a terminal using less-expensive Mexican labor would take only about a year, as opposed to the usual 18 months for West Coast operations. Also, fuel costs are lower.

"We're always mindful of where we can save time and money," said James Sinegal, president and chief executive of Costco Wholesale Corp., which has rerouted cargo through Ensenada during West Coast labor disputes. "Getting in and out of San Pedro is not always the simplest way."

What's more, Chicago and Kansas City are only 200 miles further from Lazaro Cardenas than they are from the L.A.-Long Beach facilities, while Houston is 600 miles closer.

Looming threat

At Punta Colonet, Union Pacific Corp. is considering a joint venture with Hutchison to lay down tracks to Yuma, Ariz., where cargo could be hauled to the Inland Empire without ever passing through the L.A. or Long Beach ports.

(Union Pacific and Burlington Northern Santa Fe Corp. operate Southern California rail lines to the Mexican border where they pick up U.S. bound cargo.)

That would make between 45 percent and 50 percent of the imports that currently move through L.A. or Long Beach en route to Southern California destinations vulnerable to competition from Mexico.

The U.S.-bound cargo that Lazaro Cardenas handles goes straight to the Midwest and East Coast through Texas.

A developed Punta Colonet would also take over container operations from the Port of Ensenada.

Although Ensenada has the closest port to a U.S. border, its small size and lack of adequate rail connections into the United States make it obsolete as Mexico seeks to become a big player in the expanding global market. It currently moves only 103,000 TEUs with a capacity for 150,000 TEUs.

Lazaro Cardenas and Punta Colonet could each be move 6 million TEUs annually within five years if developers and the Mexican government maintain their current pace, the port source said, citing the fact that the 6,000-acre Lazaro Cardenas has a capacity to handle 25 million TEUs annually.

"(The new port) is to attract all the overflow that is being projected for the San Pedro Bay," said Juan Carlos Ochoa Morales, marketing manager for the Port of Ensenada. "There's going to be a lack of space in the San Pedro area."

Hutchison's plans for Punta Colonet are being kept secret--so much so that the site is referred to by the code name "Tomas"--after a nearby winery, the L.A. port source said.

"With the Port of Los Angeles being the largest container port in the country, obviously it behooves us to keep tabs on the competitive landscape and that would include Mexico," said Arley Baker, chief spokesman for the L.A. port.

Don Snyder, the Long Beach port's marketing manager, said there have been rumblings about Hutchison's plans to develop a port south of Ensenada, but he was unaware of details.

Hutchison Whampoa is one of Hong Kong's oldest trading companies, with $13.5 billion in revenues in 2003. Its terminal operation, Hutchison Port Holdings, is a major maritime trade player in Hong Kong, Panama and in other major port facilities worldwide. However, it has been trying without success to crack the U.S. market.

The L.A. port has repeatedly turned Hutchison away because the port prefers to sign contracts with steamship lines rather than terminal operators. Hutchison does not have a joint venture with a steamship line.

Those long-term contracts will protect L.A. and Long Beach for the time being because they contain so-called minimum annual guarantees, which mean tenants must pay a certain amount of money to the port regardless of the amount of cargo they move.

It would not be economically feasible for the carriers to reroute so much cargo that the minimum is not met.