Strikes at East Coast, Gulf ports are a big labor risk this year, and trade diversions have already started

The potential for a strike by the largest union of maritime workers in North America, the International Longshoremen’s Association, is beginning to rise on the list of concerns among logistics decision-makers and advisors in a year already fraught with a multitude of trade uncertainties.

Red Sea diversions and Panama Canal drought restrictions are already influencing ocean freight rate negotiations, and the coming deadlines for East Coast and Gulf Coast port labor talks have more shippers on edge. Cargo containers once bound for the East Coast are now beginning to head back to the West Coast to mitigate any service disruptions, a reversal of what occurred in 2022 and 2023, when East Coast ports made major gains in cargo volume due to both the massive vessel congestion and labor strife at ports up and down the West Coast.

U.S. importers are meeting with ocean carriers this week kicking off their contract negotiations. Between March and April, one-year contracts are inked between U.S. importers and ocean carriers to get their best ocean freight rate.

The ILA’s master contract with the United States Maritime Alliance — which represents terminal operators and ocean carriers — is set to expire Sept. 31, but May 17 is the cutoff date set by the union for the local contracts to be agreed to so an overall master contract can then be negotiated. Negotiations for the six-year contract officially began last month.

All East Coast and Gulf Coast cargo is moved by the ILA, which hasn’t gone on strike since 1977, when a work stoppage lasted 44 days.

During the West Coast International Longshore and Warehouse Union (ILWU) contract negotiations between 2022-2023, freight processing was stalled after a series of intentional labor slowdowns and walk-offs. At the ILWU Canadian West Coast Ports, a 13-day strike resulted in over $12 billion in trade stuck at sea and it took months for the back of containers to be cleared out.

The current ILA contract has union members making a range of $20-$37 an hour. Depending on seniority, skill rate, hazard pay, overtime differential, plus tonnage bonus (which can be anywhere between $15,000-$20,000 a year), a longshoreman can make between $150,000-$250,000 annually.

One of the differences between the ILA and their West Coast brethren, the ILWU, is the ILA longshoremen receive royalties based on how much tonnage they process in a year at their port. This compensation model makes it in the best interest of the ILA workers not to have cargo diverted or their bonuses will decrease. On the West Coast, longshoremen accrue additional compensation based on man-hour assessments.

Port insiders believe the ILA is targeting an increase larger than the 32% that was negotiated by the ILWU in its new six-year contract. The ILA is also said to be looking to secure a generous bonus package.

In July, the ILA leadership pointed to the Great Lakes District of the union, which secured a 40% increase in wages and benefits for its new six-year contract. No definitive salary increase target has been made by the ILA.

ILA International president Harold Daggett has said he wants a good economic deal for his members, which includes union opposition to port automation and exclusive port contracts for its members. During a speech before union members in July 2023, Daggett vowed the ILA would not take a back seat to anyone. “It’s time for foreign companies like Maersk and MSC to realize that you need us as much as we need you,” he said.

Daggett’s office told CNBC it had no comment at this time.

To thwart local union disputes, which massively slowed down the West Coast port negotiations and contributed to a 13-month delay, the ILA is tackling the local issues first before the master contract. So far, the ports of New York/New Jersey and Baltimore have reached tentative local agreements, according to the ILA.

“We are very pleased the ILA has returned back to the table for local bargaining,” said Dave Adam, chairman and CEO of USMX. “75% of the contract negotiation workload is the local contract. We look forward to getting back to the table to discuss the Master contract issues.”

A move of cargo back to the West Coast

But East Coast trade is flowing away from the ports in the meantime as a result of ongoing Panama Canal restrictions due to drought, the Red Sea diversions, and the threat of a strike.

Michael Aldwell, executive vice president for Kuehne + Nagel, says it is tracking a double-digit shift in cargo moving away from the East Coast and advising clients to have an established method of getting cargo into the U.S. in advance of a labor crisis.

“As a result of these uncertainties, our customers are telling us they need options, and they need options before it’s a necessity to try and grab capacity,” said Aldwell. “So we’re counseling our customers, take the opportunity while there’s no congestion, while there’s no risk. And it is playing out already. Move some of your cargo so you establish a transload supply chain via the West Coast,” which ultimately travels back by truck and rail to the East Coast and Gulf Coast.

Other logistics companies confirmed the trend.

“We are seeing a significant change back to the U.S. West Coast,” said Paul Brashier, vice president of drayage and intermodal for ITS Logistics. “I would say 25% of our client’s freight is coming back to the ports of Los Angeles and Long Beach.”

The movement of trade away from the East Coast influences the volume of freight moving on the rails, with the extra containers a tailwind for Union Pacific and BNSF, a subsidiary of Berkshire Hathaway, which previously saw a decrease in containers being moved.

Beth Whited, president of Union Pacific, said she thinks that the labor negotiations with the ILA could push freight back to the West Coast, and the Panama Canal could cause some trade to come out of the Gulf and be pushed back to the West Coast.

“Right now that is just fractional,” said Whited. “But as the shipping community continues to make decisions about where they want their freight to land for their comfort and certainty of supply, we’ll see how that works out … we’re going to be ready to handle it if that’s what happens.”

Mario Cordero, executive director of the Port of Long Beach, which recently reported its fifth consecutive month of freight volume increase, tells CNBC it is forecasting the annual volume trend to at least match and likely exceed the pre-Covid 2019 number of 6.3 million twenty-foot equivalent (TEU) container units.

“We are forecasting an escalation by the end of the year,” said Cordero. “Just to put it into context, we moved 8.1 million [TEUs] last year. This year we believe we might get up to 8.4 million.”

Preparing for labor strife, but a history of strikes averted

Charles Van der Steene, president of Maersk North America, told CNBC on the sidelines of the recent TPM Conference in California — where shippers and ocean carriers met and discussed their contracts — that all of this is factoring into peak contract negotiation season with customers.

“We see on an ongoing basis the question emerging as to what level should we be ready to potentially make decisions for different inland locations, for different routing of our cargo,” said Van der Steene. “And how do we then prepare for that as part of the contract? So it’s a part of the discussion, but at this stage, it’s again not dissimilar from the same preparations that were had for the negotiations on the West Coast.”

One of the strategies being suggested by logistics experts for their East Coast freight customers is to bring in containers for peak shipping season early, starting in June versus July.

“We’re certainly having a lot of conversations with customers right now to make those decisions early, to, to maybe pull in a little more stock earlier in the summer,” said Tim Robertson, CEO of DHL Global Forwarding Americas. “So you’re not caught up in any potential disruption, and to get access to some of the West Coast routing. These are the discussions that we’re having, right now, and I fully expect you’re going to see many shippers start to move that way, I would say, in the coming months.”

Lars Ostergaard, head of Americas liner operations at Maersk, says it is planning ahead itself and keeping a close eye on the negotiations.

“As of now, we’re advising people to continue using the East Coast, said Ostergaard. “There could be issues when you get beyond October 1, but obviously no one at this point in time knows if that’s the case. So what we are advising our clients to do is to think about potentially, if possible, to pre-move some cargo, particularly because you come into the holiday season at the back of the year, and that it would make sense to think about,” he said. “Are there certain items that are critical for that season that perhaps, if possible, you should actually try and move before the end of September if possible?”

Ostergaard said customers are generally thinking about supply chains in a very different way than they did pre-pandemic, and are concerned about delays.

Mike Hatfield, senior manager of global logistics for Berlin Packing, which imports glass bottles, said the lessons learned during Covid enabled the company to quickly mitigate risk of a strike or slowdown.

“We learned we are not tied down to just going to the West Coast, East Coast, and support volume to other ports in the event the East Coast shuts down,” said Hatfield. “We know we can go back into the West Coast rail product, truck product cross country, so it’s just making sure that we have diversity within our supply chain, within our partners, within our contracts for multiple routings of similar lanes. A little bit of redundancy can go a long way.”

D’Andrae Larry, head of intermodal for Uber Freight, tells CNBC that more customers are coming to him saying they want to plan for the “what if.”

“We’ve learned that optionality is the order of tomorrow,” he said.

Cargo owners at TPM indicated a need for more data and the ability to start plugging that into predictive analytics, according to Chris Rogers, head of supply chain for S&P Global.

“We know what a disrupted system looks like,” said Rogers. “We’ve seen behaviorally what happened during the pandemic and how the ports kind of hit capacity, particularly here on the West Coast. I think one of the other challenges with the labor situation is we’re also running into the elections. And so this whole thing around labor becoming very politicized.”

That’s a global phenomenon, Rogers said. “We are also seeing protests in lots of different countries linked to politics that have an impact on logistics networks. Fingers crossed, cooler minds will prevail and we’ll get a solution well ahead of time. It’s in no one’s interest to disrupt shipping during peak season, but we’ve got a little way to go before we get there,” he added.

So far, labor talks are progressing at the local level, says Daniel Walsh, CEO of TRAC Intermodal, North America’s leading marine chassis pool manager and equipment provider, and the parties are talking.

“I think that if you look at the history, there seems to be a shared understanding that a strike is not really in anyone’s interest, and it’s best to avoid that if possible,” said Walsh. “They’re working pretty, pretty aggressively towards that sort of a conclusion. Hopefully, they can be able to manage it.”

Lars Jensen, CEO of Vespucci Maritime, said he is hopeful that history will repeat itself in this case. ILA negotiations in the past have not led to many major disruptions and he anticipates no major changes to the normal pattern of West Coast trade. “The risk [of a strike] is, of course, always there. But historically there has been more success in those negotiations than what you’ve seen with the ILWU on the West Coast. Peak season might start slightly earlier. Again, people might be concerned about the stability of the supply chains,” he said.