10% of freight cargo shipped to East Coast will ‘remain there permanently’: Analyst

Jason Seidl, Cowen Managing Director for Industrials, examines the state of the supply chain as cargo continues to be lost or locked in ports, how West Coast ports are positioned, and the outlook on impacts from railway workers' strike against freight operators.

Video Transcript

SEANA SMITH: Uncertainty at West Coast ports could lead to roughly 10% of freight shifting from West Coast to the East Coast ports. That's according to a new note out by Cowen. Jason Seidl, one of the authors behind that note, joins us now.

Jason, it's great to see you. So you think some of that business is not going to return to the West Coast ports. Why?

JASON SEIDL: Yeah, well, we did a proprietary survey of shippers and basically just asked them what their plans were. And what we found out is about 10% of that freight that has shifted over to the East Coast is going to remain there permanently. And we think going forward, that as supply chains shift even further, you can have more movement away from the West Coast ports because of a variety of different factors, including country of origin changing, as well as some regulations in California that just make it a little more onerous on shippers to do business there.

SEANA SMITH: Jason, we had the Port of LA director, Gene Soroka. He joined us in studio last month. He was talking about winning back some of the business that he lost.

I want to play a quick clip of what he had to say and then get your reaction. GENE SEROKA: We will not strike. We will not lock out our workers.

Have confidence that these gateways will still work, and they are. Productivity has never been higher. So we're out knocking on doors, beating on the drum, making sure that folks know we've got a short amount of time left before the all-important retail holiday season.

We've got to get the goods to market. LA is open for business. SEANA SMITH: What do you think of that message?

And I guess, what does LA Port need to do in order to regain some of that? Story continues JASON SEIDL: Well, Gene's a good buddy of mine.

I've had him on many, many calls. And they're doing all they can on the West Coast ports. And he's right.

Right now, they are open for business. If you look at the delays out on the West Coast ports, they're almost nonexistent right now. But part and parcel, that's because some of the stuff went out east, and you're seeing some congestion at ports like Savannah right now, which is a little bit overloaded at the moment.

But also, there's been a shift where shippers this year pulled forward some of that freight. So that typical peak season freight that you normally see around this time, just not happening for a lot of people. RACHELLE AKUFFO: So, then, what are the implications in terms of the industry model now that we've had this shift, and people are like, look, I've gotten used to this shift to the East Coast and sort of balancing that with West Coast as well.

JASON SEIDL: Yeah, so when you look at supply chain issues, people don't take them like a light switch, on and off, right? So when they make that move, and they say, hey, listen, we're going to move freight to the East Coast, and it's not just a reaction or anything due to some blockade or anything like that, then a lot of that tends to be sticky type of business. We think over time that you're going to see a natural shift.

And another place you look with the near-shore effect that we see out there is Mexico. You could see a lot of supply chains move down south and have that come up through some of the Mexican interchanges, particularly on the rail side. KCS is being bought by Canadian Pacific.

We're looking for approval in the first quarter of the year. And that could create a whole new contiguous rail service from the southern tip of Mexico up through the US and transcontinental across Canada, first time we've ever had it. SEANA SMITH: Jason, how much of this also has to do with the contract negotiations, where they stand, and the fact that they are still stalled-- we don't have an agreement?

JASON SEIDL: Yeah, part of it absolutely has. But I think a large part of it was that this is not the first time we've had issues with the West Coast ports. For some shippers, this is the second, third, or even fourth time that they had had some problems.

Then you look at some of the card regulations out there or the AB5 rules, which is going to impact a lot of the port trucking. And it's just getting harder and harder to do business out on the West Coast. And that's why I think you're going to see some of those shifts remain permanent.

And it could be a benefit to some stocks out there. You look at the East Coast railroads out there, both Norfolk Southern and CSX, if they could pick up some freight and win it from some of the Western railroads. RACHELLE AKUFFO: And Jason, I want to ask you the domino effect because there's also a looming rail strike in the midst.

And the Service and Transportation Board has called the Union Pacific management, including the CEO, for some hearings that are scheduled for December 13 and 14. The proposed strike date, though, December 9. So it might be a little bit too late.

Are you expecting any sort of spillover when it comes to how that affects the flow from ports? JASON SEIDL: Well, we've already seen some shifts, but let's get one thing clear. The STB doesn't really have anything to do with a potential strike.

Right now, that's-- this is sort of strike fears 2.0. If you go back, we were worried about a strike before they came to a tentative agreement. Now the rank and file has been asked to ratify that.

Some unions have not done so. We're looking at the earliest possible date to see a rail strike, is about the 5th of December right now. Maybe the latest we could see it is about the 8th.

But if you look at what was offered, it was largely what the presidential emergency board had recommended, plus a little extra, if you will, out there. And it's going to-- this contract, if ultimately ratified, will be the largest in rail labor history. But in terms of what shippers are doing right now, our contacts are telling us that some freight is moving from the rails to the highway, just in advance of this, not wanting to be around and have any freight in the system.

And then I think one thing to keep an eye on is look at your hazardous materials on the railroads. If the railroads start embargoing that-- and I think that you might see that soon, maybe post the Thanksgiving Day holiday-- you'll know that they're gearing up for a potential strike. RACHELLE AKUFFO: Certainly lots to keep an eye on.

And thank you there for throwing those dates out for us.

Jason Seidl there, thank you for joining us this afternoon.

And have a great Thanksgiving.