The Port of Seattle’s Century Agenda set a goal of increasing the seaport’s annual container volume to more than 3.5 million TEUs (20-foot equivalent unit) over the next 25 years, compared with just over 2 million TEUs in 2011.
The port commissioners who approved that agenda earlier this month apparently have also concluded that losing a 22-year customer who leases a container terminal generating 20 percent of the port’s container cargo volume is not an ideal way to reach that goal.
And so commissioners have approved a lease extension for Terminal 46 (located on the eastern shore of Elliott Bay, due west of the stadiums) for Total Terminals Inc., whose majority owner is Hanjin Shipping Lines.
The 10-year extension, carrying the lease out to 2025, is loaded with incentives for Total. The base lease rate will drop to a formula that “will keep the port competitive with rates” in the Pacific Northwest. Total also gets to buy five existing cranes at Terminal 46 for $1 each (although a port memorandum says three of the cranes are halfway through their useful life and the other two are at the end and too small for many ships anyway).
The port will also pay Total $4 million to compensate for disruption from nearby highway construction projects, and commits to $20 million or more in capital improvements at Terminal 46.
If that doesn’t sound like an attractive deal, the port concluded that the alternative was even worse. Without modification of the terms, the briefing memo says, Hanjin would likely not have extended the Terminal 46 lease beyond 2015, and would likely have moved to Tacoma – a port Hanjin knows well, since two other shipping lines in the CKYH alliance operate terminals there.
Nor does the port see much hope of leasing Terminal 46 to someone else. “With the global economic downturn, carriers and terminal operators are losing money with their operations and actively seeking to reduce these losses, hence cost is a key driver,” says the memo. “There is overcapacity in both the vessel fleet and in North American terminals that is driving decision making around reducing losses. Container volumes in the Pacific Northwest (PNW) are off their record levels of a few years ago. We do not see carriers and terminal operators making investments and expanding operations in the PNW.”
While the renegotiated lease resolves the potential short-term threat of losing a prime customer, it still leaves longer-term questions over the port’s financial situation and the competitive status of operations like Terminal 46). The financial hit won’t come just from the Hanjin deal; other tenants at the seaport are also likely to want more favorable terms on the leases. Meanwhile, the port and its tenants are still wrestling with how to stay operationally competitive with other ports on the West, Gulf and East coasts that don’t need to deal with hauling containers over traffic-snarled city streets to reach rail connections – a situation the port and Hanjin believe a new arena in the area will make worse, according to the memo (for more on this subject, see “Virgin on Business: Terminal illness,” Seattle Business magazine November 2012).
The port said retention of Total and Hanjin is critical to maintaining Terminal 46 as an active container facility. With the details of the Hanjin lease, commissioners may be in for some interesting deliberations in the coming months over how much staying in place is going to cost them and taxpayers, never mind what the bill for getting some growth will run to.