The countdown for a strike at East Coast and Gulf ports has commenced, resulting in trade diversions.

• The International Longshoremen's Association's six-year contract with the United States Maritime Alliance, which represents port terminal operators and ocean carriers on the East Coast, will expire on September 31.
• The union has set May 17 as the deadline for local contracts to be agreed upon in order to negotiate an overall master contract for the largest union of port workers in North America.
• The ILA has traditionally been less likely to strike than its West Coast counterparts, but logistics managers are increasingly moving freight away from the East Coast due to the Panama Canal drought restrictions and Red Sea diversions.

The possibility of a strike by the International Longshoremen's Association, the largest union of maritime workers in North America, is becoming increasingly concerning for logistics decision-makers and advisors amidst a year marked by numerous trade uncertainties.

The ongoing Red Sea diversions and Panama Canal drought restrictions are causing tension in ocean freight rate negotiations, and the upcoming deadlines for East Coast and Gulf Coast port labor talks are only adding to the stress. In response, shippers are now redirecting cargo containers from the East Coast to the West Coast to avoid any potential service disruptions. This shift in cargo flow is a reversal of what occurred in 2022 and 2023 when East Coast ports experienced significant gains in cargo volume due to both vessel congestion and labor disputes on the West Coast.

This week, U.S. importers are meeting with ocean carriers to kick off their contract negotiations for one-year contracts, which are inked between March and April to secure the 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 on September 31. However, the union has set May 17 as the cutoff date for local contracts to be agreed upon in order to negotiate an overall master contract. Negotiations for the six-year contract began last month.

The ILA, which hasn't gone on strike since 1977, moves all East Coast and Gulf Coast cargo.

The ILWU's contract negotiations on the West Coast resulted in a stall in freight processing due to intentional labor slowdowns and walk-offs. In Canada, a 13-day strike at the ILWU's West Coast ports caused over $12 billion in trade to be stuck at sea, and it took months to clear out the backlog of containers.

The ILA contract offers longshoremen an annual salary range of $150,000-$250,000, taking into account factors such as seniority, skill rate, hazard pay, overtime differential, and tonnage bonus (which can range from $15,000 to $20,000).

The ILA and ILWU have different compensation models for their longshoremen. While ILA workers receive royalties based on tonnage processed, ILWU workers receive additional compensation based on man-hour assessments. This means that ILA workers have an incentive not to have cargo diverted, while ILWU workers do not.

Insiders claim that the ILA is aiming for a larger increase than the 32% secured by the ILWU in its new six-year contract, and is also seeking a substantial bonus package.

The ILA leadership did not specify a definitive salary increase target for the Great Lakes District, which secured a 40% increase in wages and benefits for its new six-year contract in July.

Harold Daggett, the president of ILA International, has stated that he wants a favorable economic agreement for his members, which includes opposing port automation and securing exclusive port contracts for them. In a speech to union members in July 2023, Daggett emphasized the ILA's determination to not be overshadowed by anyone. "It's time for foreign companies like Maersk and MSC to recognize the importance of our services," he said.

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

The ILA is resolving local union disputes before negotiating the master contract to avoid delays in West Coast port negotiations. Tentative local agreements have been reached by the ports of New York/New Jersey and Baltimore, as per the ILA.

"Dave Adam, chairman and CEO of USMX, stated, "We are thrilled that the ILA has resumed negotiations at the local level. As 75% of the contract negotiation workload pertains to the local contract, we eagerly anticipate returning to the table to address Master contract issues.""

A move of cargo back to the West Coast

The ongoing drought, Red Sea diversions, and threat of a strike are causing East Coast trade to flow away from the ports.

Michael Aldwell, executive vice president for , advises clients to have an established method of getting cargo into the U.S. in advance of a labor crisis, as he reports a double-digit shift in cargo moving away from the East Coast.

Due to uncertainties, customers are demanding options, and they need them before it becomes necessary to try and secure capacity. As a result, we are advising our customers to take advantage of the opportunity while there is no congestion or risk. This is already happening, and customers should move their cargo to establish a transload supply chain via the West Coast, which will ultimately travel back by truck and rail to the East Coast and Gulf Coast.

Other logistics companies confirmed the trend.

"According to Paul Brashier, vice president of drayage and intermodal for ITS Logistics, there is a notable shift back to the U.S. West Coast, with 25% of their clients' freight returning to the ports of Los Angeles and Long Beach."

The shift in trade from the East Coast affects the amount of freight transported on railways, benefiting Union Pacific and BNSF, a Berkshire Hathaway subsidiary, as they experience an increase in container shipments.

Beth Whited, president of , believes that the labor negotiations with the ILA may result in freight being pushed back to the West Coast, and the Panama Canal could cause some trade to be redirected from the Gulf to the West Coast.

""As the shipping community decides where they want their freight to land for their comfort and certainty of supply, we'll see how that works out. We're ready to handle it if that's what happens," said Whited."

The Port of Long Beach's executive director, Mario Cordero, predicts that the annual freight volume trend will likely surpass the 6.3 million TEU container units recorded in 2019, despite the port experiencing five consecutive months of increases.

"Cordero stated that we anticipate an increase by the end of the year. To provide context, we moved 8.1 million TEUs last year, and we expect to achieve up to 8.4 million this year."

Preparing for labor strife, but a history of strikes averted

At the TPM Conference in California, Charles Van der Steene, president of Maersk North America, stated that the ongoing trade tensions and economic uncertainty are influencing the upcoming contract negotiation season with customers.

"Van der Steene stated that the question of how to make decisions for different inland locations and routing of cargo is a recurring issue. He added that this topic is part of the ongoing discussion, but at this stage, it is similar to the preparations made for negotiations on the West Coast."

Logistics experts recommend bringing in containers for East Coast freight customers early for peak shipping season, starting in June instead of July.

"Tim Robertson, CEO of DHL Global Forwarding Americas, stated that they are currently having numerous conversations with customers to make early decisions, possibly bringing in more stock earlier in the summer, to avoid any potential disruptions and gain access to West Coast routing. He expects many shippers to follow this approach in the coming months."

Maersk's head of Americas liner operations, Lars Ostergaard, is keeping a close eye on negotiations and planning ahead.

"Ostergaard advised people to pre-move some cargo before the end of September, as there could be issues beyond October 1st. He suggested considering critical items for the holiday season that should be moved before the end of September if possible."

Customers are now thinking about supply chains differently than before the pandemic, with a focus on avoiding delays.

Berlin Packing's senior manager of global logistics, Mike Hatfield, stated that the company was able to promptly reduce the risk of a strike or slowdown due to the lessons learned during the Covid pandemic.

"We discovered that we are not limited to only going to the West Coast, East Coast, and supporting other ports in case the East Coast shuts down," said Hatfield. "We understand that we can revert to the West Coast rail and truck products for cross-country transportation. Therefore, we need to ensure diversity in our supply chain, partners, and contracts for multiple routings of similar lanes. Having a little bit of redundancy can make a big difference."

Freight's head of intermodal, D'Andrae Larry, reveals to CNBC that an increasing number of customers are expressing a desire to prepare for potential uncertainties.

He stated that tomorrow's order is optionality.

According to Chris Rogers, head of supply chain for S&P Global, cargo owners at TPM expressed a requirement for more data and the capability to integrate it into predictive analytics.

"According to Rogers, we are aware of the appearance of a disrupted system due to our observation of behavioral changes during the pandemic, particularly in the ports on the West Coast, which reached capacity. Additionally, the labor situation is facing challenges due to the upcoming elections, which have politicized labor issues."

According to Rogers, the global phenomenon of protests affecting logistics networks is also happening in many countries. He hopes that cooler minds will prevail and a solution will be found before the peak season. However, he acknowledges that it may take some time to achieve this.

Daniel Walsh, CEO of Intermodal, reports that labor talks are progressing at the local level and the parties are engaged in discussions.

"Walsh stated that based on history, it appears that everyone agrees that a strike is not beneficial and should be avoided if possible. He added that the group is working hard to reach this conclusion and hopes they can succeed."

Lars Jensen, CEO of Vespucci Maritime, expressed optimism that history would repeat itself in the current situation. He noted that past ILA negotiations had not resulted in significant disruptions and anticipated no major changes to the typical pattern of West Coast trade. Although there is always a risk of a strike, Jensen pointed out that historically, negotiations with the ILWU on the West Coast have been more successful than what has been seen with the union. As a result, peak season might start slightly earlier, and people may be concerned about the stability of supply chains.