CRPY F &) N CANADIAN TRANSPORTATION RESEARCH

.„_ CRPY F &) n CANADIAN TRANSPORTATION RESEARCH LE GROUPE DE REDIERCHES SUR LES TRANSPORTS AU CANADi

21st ANNUAL MEETINL

PROCEEDINGS

VANCOUVER, B.C. MAY 1986

A 609

THE CANADIAN LANDBRIGDE by REJEAN =ETC ST.LAWRENCE DEVEIDPMENT SECRETARIAT.

1.0 Introduction

In recent years, the most significant progress noted in the transportation field, particularly in water transportation, has been the development of containerization. This method took hold gradually In Canada about the middle of the 1960s. It was thought then than 90% of all general cargo shipped could be containerized. Now, twenty Years later, about 70% of general cargo moved by ship is containerized.

Compared with the other sectors of international water-borne trade, the maritime container transport industry accounts for only a small volume of world trade (about 200 million tons out of a total traffic volume of 3 600 million tons)l. Container traffic does of course hold first place in terms of value of goods moved.

. According to Cargo System Research Consultants Ltd., containerized traffic throughout the world grew at an average annual rate of 18i% between 1970 and 1980. As the beginning of the 1980s, the average annual rate of growth was 12i%. Cargo Systems Research Consul- tants Ltd. concludes in its report that the average annual rate of growth up to 1990 will be 5%2. These forecasts are confirmed by the Bremen Institute of Shipping Economics and by the Japanese maritime transport company, Nippon Yusen Koiska (NYK).

In 1970, two regions dominated world container traffic. Western Europe accounted for almost half the traffic and North America for almost a third. Ten years later, their share had fallen to one-third and one-fifth respectively. During this same period, the Far East outstripped the American market while South and Southeast Asia, Africa, the Middle East and South America began to generate not in- considerable volumes of traffic (about 5% each).

The Far East/Europe route is therefore a most thriving one, ranking third in the world, and it is with penetration of this large market in mind that the idea of establishing a Canadian Landbridge service came about.

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2.0 Commerce between Asia and Europe

In 1982, exports from the Far East to Europe totalled more than $37 billion while imports from Europe to Asia amounted to $24.3 billion. The Asia/Europe traffic is concentrated mainly among the EEC countries, Japan, the People's Republic of China, Hong Kong, South Korea, Malaysia and Singapore, with Japan showing a clear predominance in trade at both the import and export levels.

Annual traffic between Asia and Europe is estimated at one million T.E.U., all of which is Timed by water transportation, about 650 000 T.E.U. being shipped fram Asia to Europe and 350 000 fram Europe to Asia 3.

The USSR, meanwhile, operates a landbridge whose traffic has been increasing since 1970 and now totals between 90 000 and 120 000 T.E.U. annually.

The volume of traffic fran Asia to European markets by way of the United States, Mexico and Canada is negligible but could increase in the future.

2.1 Maritime services

To groups of maritime carriers provide services through the Suez Canal: Conference carriers (Far East Freight Conference: FEFC) who hold between 60% and 70% of the market, and carriers who are not members of the Conference and who share the rest of the market.

It is these outsiders who determine the competitiveness of the market and it is they who can cause the Conference to increase its rates. Among the principal outsiders are Evergreen and Yang Ming. These toleratedcutsiders operate at tariffs lower than those of the Conference (5% to 10% lower as agreed by the Conference).

2.2 The Soviet landbridge

The trans-Siberian landbridge (TSR) is a transportation service fram the Far East to Europe by sea (Japan-USSR), then by land route (rail and road) USSR-Europe.

In northern Europe, a feeder service which begins at Leningrad serves the ports of Hamburg, Rotterdam, Tilbury, Antwerp and

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Le Havre. In southern Europe, another feeder service starts from the Russian port of Zhdanov on the Sea of Azov and serves the Medi- terranean countries including those of North Africa.

In the Far East, feeders ply between Nakhodka/Vostochny, Japan, Korea, Hong Kong, Malaysia, Singapore, Taiwan and the Philippines. The feeder services are operated exclusively by Fesco, Baltic Steam- Ship Co., and Black Sea Steamship Co., except for those between Japan and the USSR which are provided by the Japanese carriers, Y-S Line, K. Line and Jino Lines.

The Russian trains are dispatched to Chop on the Czechoslovakian/ Austrian border en route for southern Europe, and Ungheney on the Hungarian border to serve southeastern Europe.

At present, the Soviet operation holds 10% of the Far East/ Europe market, and the traffic imbalance is between 2 and 3 to 1 for the traffic going West4.

. Russian landbridge traffic is divided up as follows: one-third is destined for northwest Europe and 4% for countries on the Medi- terranean. Just over one-third of the traffic goes to Scandinavia (17./%), Central Europe (10.9%) and the Comecon countries (7.7%). The remaining 301 of the containers go to the Middle East, mostly to Iran.

In short, there are at present two alternatives by mans of which the market between Asia and Europe is served. Let us now consider the potential of a Canadian landbridge and what is needed to make it a reality.

2.3 Canadian landbridge

All the elements needed to create a Canadian landbridge, using the country's rail system to link the Trans-Pacific and Trans- Atlantic maritime services in order to serve the Far East and Euro, Pean markets, are in place. The ports of Vancouver and Montreal (perhaps Halifax and Saint John) could then be the container transit Points for the North American continent.

It should be noted that only a very small volume of traffic from the Far East en route to Europe uses the Canadian landbridge.

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In the early 1980s, before increased rates on the Pacific made costs prohibitive, a substantial traffic volume of 3 600 forty-foot containers of textiles fran South Korea was routed to Europe by the Canadian lanObridge. Now, with the higher rates, fifteen containers per month are shipped by the landbridge which is now used mostly to transport high value products which can support the higher rates in return for faster service than water transportation alone can provide 5.

2.3.1 The port of Montreal

The port of Montreal has six container terminals with a total area of more than 40 hectares. Montreal's ideal geographic location, coupled with an excellent port linked to a first-class intermodal land transportation system, make it a major distribution centre for a numr ber of European shipping lines which serve both the Canadian and American Midwest.

Since the introduction of container traffic at the port of Montreal in 1967, the number of units shipped has been constantly growing and in 1985, with a total of 481 525 T.E.U., Montreal became the third-ranking port on the eastern seaboard of North America, surpassed only by the ports of New York and Baltimore which recorded greater activity in this sector of maritime transport.

The port of Montreal is served by two major transcontinental rail systems: Canadian National and Canadian Pacific.

Numerous maritime container lines put in at Montreal en route to the main European ports. Among the services provided on a more regular basis are the coordinated St.Lawrence services offered by Canada Maritime, and those of Cast North America (1983) Inc. and of Manchester Liners.

It therefore seems that if a Canadian lanlbridge system were to be established, the arrival of additional container traffic would not pose any major technical or infrastructure problems for the port of Montreal.

2.3.2 The port of Vancouver

Vancouver is Canada's front door on to the Pacific, facing as it does the Far East's fast-growing market.

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Vancouver has three container handling terminals covering almost 70 hectares: Vanterm (19.4 hectares), Lynnterm (28 hectares) and Centennial (22.3 hectares). In 1985, Vancouver's container traffic totalled 142 368 T.E.U., a figure which is surpassed in many American ports on the west coast. Unlike Montreal whose container traffic comes in large part fram the U.S. Midwest (40% to 50%) Van- couver has seen its containerized traffic diverted to the U.S. ports of Seattle, Portland and Oakland 6.

. The port of Vancouver is also served by the two transcontinental railway systems (DN and CP) and by the American Burlington Northern Railway.

As with Mbntreal, the arrival in Vancouver of additional container traffic would not pose any technical or infrastructure problems.

Nbreover, the two transcontinental rail companies, CN and CP, have the equipment that would be needed to adequately handle any additional volume of container traffic generated by the landbridge.

Since JUne 1985, the Maersk Line shipping campany has been serving the Far East market and the west coast of Canada fram Van- couver, thereby providing the link needed to develop the Canadian landbridge 7.

3.0 Muffle System and Transit Time

Tariffs for container transportation change constantly (see Table 1 for comparative rates for 1985).

3.1 Tariff system for maritime services

The Far East Freight Conference tariff system is based on a number of CBR (Ccmodity Box Rate) groups. It should be noted that products fram Europe to the Far East are grouped into fifteen categories while those shipped in the opposite direction are grouped into eighteen categories. Mbreover, the tariff system used is flexible and so costs can be changed depending on the main destination of the container flows.

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3.2 TSR tariff system

First, it should be pointed out that the Trans-Siberian landbridge MO operates under the umbrella of SOYUZ TRANSIT which is owned by the Soviet government. Forwarders pay for the movarent of containers inside Japan and for the loading of containers onto vessels in Japanese ports. The Russians use a port-to-port tariff system (from a Japanese port to a European port).

Non-vessel operating common carriers Wars1 must pay for the unloading of vessels in Europe. NVOCCs provide through bills of la- ding from the port of departure in Japan to the destination in Europe.

Soyusuneshtrans, the Soviet company which handles transportation to other countries, awards licences to forwarders in Europe and the Far East (atio number about 15), and it is they who use the Soviet landbridge. TSR rates are set at annual meetings held with each individual forwarder. The system is for the most part coordinated by 17 NVOCCs in Europe and by members of their Trans-Siberian Intermodal Operation Association of Japan. They have a very simple tariff structure. There are seven Commodity Box Rate (CBR) groups.

But now, the TSR must compete in terms of rates. Its low rates vary from one commodity to another as to those of the FEPC mothers. As a rule, TSR rates are 10% to 20%, and in some cases 30% to 40%, lower than the Conference rates. To combat this, the members of the Conference grant reductions of between 10% and 30% to shippers of certain commodities who guarantee than a regular volume of traffic.

A comparison of the maritime services tariff system with that of the TSR reveals that when goods are destined for a European port, the maritime tariff system seems to be more advantageous. If, on the other hand, the goods are headed for an inland destination on the continent, the TSR rates are the least costly.

3.3 Canadian tariff system

The tariff system in effect for container transportation in Canada is based on FAK (Fadght:All Kinds) which means that it is a unitary system. If a landbridge is established, the tariff system will have to take into account the fact that, as indicated earlier,

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there is an imbalance in Asia/Europe traffic which stands at between 2 and 3 to 1 in favour of traffic to Europe. The tariff variance, Which at present is between $100 and $200 for the transport of one container in either direction, seems too narrow. It is clear to us that this tariff structure is too narrow. It is clear to us that this tariff structure is too rigid for the operation of a competitive Canadian landbridge.

. One striking fact with regard to the tariff system is the rigi- dity of the rates charged for goods shipped by the Canadian landbridge. The other two competitors (the FEFC and the TSR) have very flexible rates based on the goods shipped and on the direction of the traffic.

3.4 Transit time

The Canadian landbridge system could stand up well to competition from the point of view of transit times (Table 1).

At present, the Soviet landbridge cannot compete with the other systems when it comes to transit time and reliability of service. Maritime services make the Far East/Europe crossing in 33 days can- pared with the more than 40-day journey by the Russian landbridge. It is this aspect of the Canadian landbridge which could prove attractive since it offers the shortest transit time, i.e. 32 days 7.

By crossing the Pacific direct to Vancouver, the transit time could be reduced by three days and this would certainly influence the rivalry in rate setting.

As far back as a century ago, a cargo of tea leaving Yokohama, Japan, crossed the ocean direct to Vancouver and from there was ?lipped by the Canadian railway system, reaching London 29 days after its departure from the Far East 8, a journey four days shorter than the transit time offered by today's maritime services. Postal service along this same route took only 26 days 9.

With railway tunnels rebuilt 10 to accommodate double-stack trains, the advantages of the Canadian landbridge could be enhanced in terms of time-saving and lower transportation costs 11 in order to make the systen more attractive.

. It should never be forgotten that transit time is the key factor In the landbridge system. In fact, "at 18 percent simple interest,

7 LECLERC. COMPARATIVE TABLE OF LANDBRIEGES VS ALL WATER SYSTEMS 1985. EUROPE / FAR EAST / EUROPE.

OPTIONS ALL WATER TRANS SIBERIAN CANADIAN LANEBRIDGE Traffic/Year (T.E.U.) Average 1 000 000 100 000 1 000 Tariff Range/T.E.U. $1 250 - $3 400 US $1 250 - $3 000 US $2 500 US1 Tariff Range/F.E.U. $2 600 - $7 000 US $2 600 - $6 000 US $4 100 US1

LOADING/ DtEPSEA ROUTES MILEAGE TRANSIT TIME TOTALTPAIT OPTIONS DISCHARGE

ALL IViTER Japan (MX:0 - Rotterdam 11 121 29 days 4 days 33 days2

CANADIAN LANDBRIDGE Japan (KoIxt) - Vancouver 4 541 11.8 4 15.8 Mbntreal - Rotterdam 3 343 8.0 4 12.0 Rail - Landbridge Vancouver Montreal 4.4 4.4 Japan (Kobe) - Rotterdam (Via CLB) 32.2 3

TRANS SIBERIAN Nakhodka - Western Europe - 40-50 - 40-50 LANDBRIDGE Kobe - Nakhodka & Vbstochny 805 2.0 4 6.0 Japan (Kobe) - Rotterdam (Via SIB) 45-55

1) With sizeable container volume on a regular basis, more competitive rates would be possible. 2) With an average of 36 days. 3) With possibility of a 3-day reduction if there is a direct Far/Fact/Vancouver service. 617

a container with $150 000 worth of merchandise costs $74 (sic) a day in inventory carrying costs" 12.

One thing is certain: there is no lack of competition in international maritime trade.

3.5 competition

The winds of deregulation now sweeping across the United States (U.S. Staggers Act 1980, U.S. Shipping Act 1984, U.S. Motor Carrier Act 1980) will result in the rationalization of transportation systems. Canada will be indirectly affected by the liberalizing of transport regulations. Already, we are seeing a concentration and consolidation of transportation companies which enables same of than to provide services without hindrance over wide areas of the United States and even across the entire country. The coming of minibridge and microbridge services between the west coast of the U.S. and the Gulf of Mexico are striking examples of this 13, not to mention the introduction a few years ago of rail services for double-stack trains which enable containers to cross the country rapidly at very competitive costs 11.

The advent of round-the-world services, particularly those offered by U.S. Lines Inc., and by Evergreen, whose vessels have a capacity of 4 218 T.E.U. and 2 728 T.E.U. respectively, will maxi- mize economies of scale and rationalize port operations by reducing unit costs (creation of load centres).

It should be noted that the TSB:creates problems for FEFC members since it concentrates its efforts on the Japan/Europe routes where its share of the market increased fram 7% in 1970 to 19% in 1977 14. In fact, of the 100 000 T.E.U. which move along the Trans-Siberian, more than three-quarters is exclusively between Japan and Europe 15.

The laying of a double track along the Trans-Siberian rail system is under way. Mien the 3 146 km B.A.M. (Baikal, Amour, Magistrale) is completed, the Trans-Siberian landbridge will have a greater transportation capacity (250 000 T.E.U. per year) for Far East/Europe traffic, and it will be able to improve its transit times since the average speed of the trains will rise from 45 km per hour to 60 km per hour.

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On the other hand, the maritime services developed at a rela- tively low cost will provide an alternative to the costlier but faster landbridge intermodal services.

4.0 Conclusion

But, in the final analysis, it is on grounds of economic feasi- bility that the battle for the Far East/Europe market should be waged so that Canada can obtain a greater share of this market Which could amount to some 100 000 T.E.U. per year) for its two rail systems via the ports of Vancouver and Montreal. This additional traffic would almost double the number of T.E.U. shipped to Vancouver (142 368 in 1985) and increase T.E.U. container traffic to the port of Montreal by one-quarter (481 525 in 1985).

One way of competing on the Asia/Europe market would be:

a) to reduce the rates for internal rail shipments;

b) to promote diversion of export traffic shipped from eastern Canada to the Far East via Vancouver;

c) to establish a tariff system by group of CBR goods (Commodity Box Rate) and create four or five product groups so as to keep up with competitors using this system.

One way of competing effectively with the Siberian lanahridge would be to use the NVOCC concept 16. Of course, it would then be necessary to use the services of maritime transport companies which operate on both the Pacific and Atlantic oceans but which are not involved in Asia/Europe maritime services.

The door-to-door tariff concept used by NVOCC would perhaps be an efficient way of solving the problem of rates that future users of the Canadian lanabridge will have to pay. This umbrella could cover rail tariffs (should a Canadian landbridge be established) and the rates charged by maritime transport companies which work the Atlantic and Pacific oceans and which complete the servicing of the European and Far East markets. This would allow for greater operating flexibility.

There is no question here of applying an "on-the-spot" tariff system but rather of introducing a well-planned system whose scope

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must be envisaged in the long term. The introduction of an efficient and competitive landbridge service could initially serve trade between the Far East and Europe. At the same time, it could place Canadian and even American products (with the possible advent of free trade) on the doorstep of the major markets of the other two components of Triad power 17.

Thus Canada, by its special goegraphic position coupled with its Port and rail intermodal system, could, in serving as a link between the continents, play its most important role ever.

BIBLIOGRAPHY

1. PEARSON, Roy and John FOSSEY, "World Deep Sea Container Shipping", The University of Liverppol, Marine Transport Center, 1983, p. 10 and Containerization International Yearbook 1984.

2. Cargo Systems Research Consultants Ltd., "Container Port/Terminal Facilitates & Trade Growth", Cargo Systems, Worcester Park, 1982.

3. Cammodities originating in the Far East are in 60% of cases shipped by 40-foot containers while those travelling in the opposite direction are shipped in 20-foot containers.

4. Containters shipped along the Soviet landbridge are rented while those shipped by sea alone belong to the maritime - transport campanies.

5. WILSON, Mark, "Landbridge to depend on tolls". The Province, Vancouver, Wednesday Aug. 8, 1984, p. 19.

6. ARCHAMBAMT, Michel, "North American Trade Diversion: A New Perspective", Canadian Transportation Research Forum, 20th annual meeting. Proceedings, ronto 1985, pp. 836-858.

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7. The Maersk Line service takes 12 days between TOkyo and Vancouver, passing by Tacoma/Seattle. If the vessels could stop first at Vancouver, transit time could be reduced by three days.

8. JOHNSCN, Ron, "Les ports du Canada: Vancouver la porte du Pacifique", Commerce Canada, April 1985, p. 27.

9. KACKING, Norman R., "History of the Port of Vancouver", Documentation from Port of Vancouver 1985, p. 7.

10. "'lbw up north of the border": Canada's railways are experi- menting with double-stack technology". Cargo Systems, January 1986, pp. 16-19.

11. KNEE, Richard, "Burgeoning Double-Stacks", American Shipper, August 1985, pp. 6-9 and HARDW1CKE, Robert, "Double-Stack Savings May Eaual 20-25%", American Shipper, August 1985, pp. 10-16.

12. "Pail Intermodallse, Container News, February 1982, p. 24. At 12% interest, the daily inventory carrying cost is $50, which could affect the competitiveness of the other options.

13. No INTYRE, Geoffrey R., "Minibridge Traffic: impact port development", Wbrld Wide Shipping, July/August 1984, pp. 17 and 19.

14. PEARSON, Roy "Containerline Performance and Service Quality" University of Liverpool, Marine Transport Center, Liverpool, 1978, p. 114.

15. Ibid., p. 17.

16. "NV0002's Brokers, Forwarders: integral part of shipping", Container News, November 1983, pp. 12-13.

17. KENECHI CHMAE, and McKinsey and Company Inc., "Triad power: The coming shape of global camnetition", The Free Press, 1985.

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