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From high in the sky, the building blocks of modern Hawaii resemble colorful children’s toys.
Closer up, those blocks — shipping containers stacked several floors high on docks at the edge of Honolulu — still look like toys, but for giants.
Hawaii is a giant consumer of the goods that arrive inside those large metal containers on mammoth ships from the West Coast.
They are the primary source for our groceries, clothing, equipment and construction materials, as well as many other supplies for our personal and professional lives. Various studies indicate that Hawaii imports more than 80 percent of all goods, about 90 percent of its food, and 95 percent of energy resources. The vast majority comes in on ocean vessels.
There has always been a cost to this reliance on ocean freight, which can be seen as a de facto tax on our inability to sustain ourselves in the islands. And, for generations, it has helped to drive up prices in Hawaii.
The question is how much does shipping increase our cost of living in the islands? The answer, according to experts interviewed by Civil Beat, is less than 7.5 percent — and perhaps far less.
When more than 1.4 million people live on a remote archipelago in the middle of a vast ocean — as many Civil Beat readers have noted in comments on the Living Hawaii series — it isn’t surprising that life is expensive.
Hawaii’s reliance on shipped-in goods is often cited as a major component of the “price of paradise.”
And there is no doubt that for more than 200 years sending goods across the sea on a vessel could be difficult, complicated, dangerous and expensive. But many of the companies that transport such goods today have upgraded their processes and techniques for the 21st century.
Matson Navigation Co. — which controls between 60 percent and 70 percent of Hawaii’s domestic freight market — has invested nearly $1 billion in the last decade to buy four new high-end container ships, additional equipment, fleet enhancements, terminal upgrades and tech improvements, according to a statement by the company.
Modernization has also permitted Matson and its main competitor, Horizon Lines, to offer just-in-time delivery services that allow client-companies to save money on warehousing costs.
Two freight companies were not willing to share information necessary to calculate the precise cost to the state each year. Representatives of Matson and Pasha Hawaii Transport Services declined to do so when asked by Civil Beat.
But the U.S. consumer price index includes a break-out on the price of goods, which are items that are mostly shipped here. The average price of these goods is 7.5 percent higher than the national average.
So the maximum impact of freight costs on inflation is lower than that, explains University of Hawaii economist Lawrence Boyd, who notes that the overall impact must be somewhere between 0 percent and 7 percent.
It is likely substantially below the high part of that range, he says, because the price of goods, like almost everything else, is boosted by two of the major drivers of Hawaii’s high prices — expensive rents and electricity.
Overall prices in the island are about 17 percent higher than the national average, according to the Consumer Price Index. The lion’s share of that increase comes from the high price of usable land and expensive services, which drive up other prices throughout the islands, but other factors include Hawaii’s small total market and a lack of competition in numerous fields.
“That’s not just in shipping, it is in all kinds of things,” said University of Hawaii economist Carl Bonham. “And even when there is competition, it is often not as vigorous.”
Along with water transportation costs, all of these factors increase the cost of goods, although there is no precise calculation of how much.
Jeff Hull, the director of public relations for Matson Navigation, said his company — which services Guam and China, in addition to Hawaii — doesn’t share breakdowns of its revenues in specific markets.
But he estimated that shipping costs add about 5 percent to the final price of goods in the islands.
Land’s impact on costs is at least eight times that of shipping. The biggest drivers of Hawaii’s inflation have little to do with ocean transport.
Paul Brewbaker, a former chief economist for the Bank of Hawaii who is director of TZ Economics, says that 5 percent is far too high now given the ongoing transformation of the industry.
A 2013 Hawaii Department of Business Economic Development and Tourism study calculated the price increase caused by ocean transport from the West Coast for a specific spending model. DBEDT examined how much of a $100 million increase in the retail value of a store would be due to freight costs. The conclusion: 1.75 percent of the price of goods sold at the store would be due to water transportation.
Bonham, the executive director at the University of Hawaii’s Education Research Organization, said it isn’t clear how widely applicable that 1.75 percent estimate is, but he believe the overall cost of shipping is “so much smaller than people think it is.”
All of these estimates, between 1.75 percent and 7.5 percent, pale in comparison to the price of rents and services in Hawaii. The Consumer Price Index pegged that cost at 59 percent more than the national average. That suggests that real estate — which includes residential, commercial and agricultural rents — is the tide that lifts all price boats in Hawaii. Land’s impact on costs is at least eight times that of shipping.
Most significantly, rents and services, which are the biggest drivers of Hawaii’s high costs, have little to do with ocean transport.
None of this means lower shipping costs wouldn’t help Hawaii’s struggling middle class, or that locals wouldn’t applaud meaningful price decreases. And it is hard to assess how much substantially cheaper freight rates might otherwise benefit consumers and workers in the islands by stimulating new economic activity.
Freight prices change frequently and for many reasons.
At the start of 2015, Matson boosted its standard westbound container rate by $225 each, just as it did the previous three years, for a total increase of $1,000 on those routes since the start of 2012. The company’s eastbound container prices have jumped by $110 annually over the same period of time.
Statements by the company indicate that this was to offset operating costs and pay for the upgrades. The company estimates this year’s increase will boost shipping rates for customers by 5.4 percent.
Consolidation within the industry could also affect rates. The second largest ocean cargo carrier in the islands, Horizon Lines, is in the process of selling its Hawaii operations — which includes four ships and a terminal at Honolulu Harbor — to the Pasha Group for $141.5 million.
If the deal is granted regulatory approval, it will mean that Pasha’s core roll-on, roll-off cargo service for vehicles and machinery will be complemented by Horizon’s containerized cargo assets in Hawaii, which have connections at three West Coast ports.
A statement from Pasha asserts that the transaction will be good for customers, but some economists and regulators question deals that reduce already limited competition over concerns that it will ultimately result in higher prices.
Beyond such issues the ocean freight industry could be vulnerable to price increases triggered by an array of factors, including a natural disaster, an act of war, rising fuel costs, a labor dispute like the one that disrupted West Coast ports in recent months, or even a simple but sudden surge in shipping demand.
The addition or subtraction of regulation could also have a big impact on freight costs in the islands. This is a key component in debates over whether Hawaii should seek an exemption from the 95-year-old Jones Act, which requires that vessels traveling between American ports be U.S. built, crewed and flagged.
In practical terms, freight prices also vary depending on things like the size of the shipping container, the type of items shipped and the direction that goods move in. In March, Matson’s rate for shipping the contents of a two- or three-bedroom home in a 20-by-8-by-8-foot storage metal box from southern California to Honolulu was $3,003.
Sending that same container of household goods back to Long Beach was much cheaper, at $1,874.
The bill for a similarly sized container that holds fresh fruit and vegetables, which requires on-vessel refrigeration, was $6,800 when it travels to Honolulu. Delivering an identical shipment back to California was $3,700.
Prices are much lower for goods going to California because most containers leave Hawaii empty. Less demand usually translates into lower prices.
Keeping items cool on interisland vessels also increases costs, although not nearly as much since the shorter trip requires less energy. Young Brothers, which dominates the interisland trade, will send a 20-foot container of dry goods from Honolulu to Hilo for $713.49, while refrigeration raises the price to $847.26.
Freight costs, of course, don’t have a uniform affect on products, but they do have a particularly notable effect on certain groceries.
Lynette Larson, the general manager of Kokua Market on South King Street in Honolulu, said dry goods — such as grains, cereals and other fairly durable foods that are easy to ship — usually see a minimum transportation-related markup of 4 percent in their sales price. Refrigerated items — like milk, eggs and frozen goods — spur an average price hike of about 18 percent, she said.
Civil Beat priced out a basket of products at several Oahu supermarkets and found that they were, on average, about 35 percent higher than the mainland average.
All such price differences are embedded in the Consumer Price Index numbers, notes Bonham at UHERO. “We can gather data in all different kinds of ways to compare costs, but we’re not going to be able to do as good of a job as they have done,” he said. “It shouldn’t be surprising that in a snapshot in one point in time we don’t come up with the same numbers.”
But, given Larson’s estimates on the impact of transportation costs, it’s clear that something else is making groceries at markets in the islands so much more expensive than on the mainland. Those other factors include the cost of fuel and electricity in the islands, especially when items require refrigeration in transit and at the store.
And business owners also need to pay for their buildings and facilities, which is ultimately linked to the islands’ high real estate prices.
Larson sees transportation costs as an incentive for her market to source items locally as much as possible.
Doing so at a reasonable price can be challenging, especially since the tools and technology used for farming in the islands tends to arrive in the same building blocks that dot Honolulu Harbor.
• Civil Beat intern Marina Riker contributed to this report.
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