US Ports’ Revenues Insulated from US-China Tariffs
Increased tariffs on bilateral US-China goods trade may result in decreased traffic at certain US ports, says Fitch Ratings. However, revenues are not likely to be similarly affected in the medium term given the landlord-based operating model at many of the more exposed west coast ports in which contractual minimums provide a floor for revenues should volume declines worsen. Imports, which make up the largest share of volumes at many of the ports with higher exposure to Chinese trade, have thus far been resilient to the imposition of tariffs, though the risks to volumes will rise if trade protectionism is prolonged.
On May 10 the US increased existing tariffs to 25% from 10% on $200 billion of imports from China and additional tariffs on almost all remaining imports are being contemplated. China’s corresponding increase of 20% or 25% on approximately $60 billion of US goods was announced on May 13.
Volume data show some ports are feeling more of an effect than others, particularly when looking at US export volume as measured by loaded outbound 20 foot equivalent units (TEUs). Of the larger west coast, east coast, and Gulf of Mexico ports, there is a levelling off or decline in loaded exports, other than Port of Houston, TX, since tariffs were put in place in January 2018. This trend worsened in second-half 2018 onward as additional tariffs went online in June and September.
The steepest declines occurred at Virginia Port Authority (VPA, commonwealth port fund AA+/Stable), City of Long Beach (Port of Long Beach, senior lien revenue bonds AA/Stable), Port of Oakland (Oakland, senior lien revenue bonds A+/Stable), and in recent months, Los Angeles Harbor Department (Port of LA, revenue bonds AA/Stable) and Port Authority of New York and New Jersey (PANYNJ, revenue bonds AA-/Stable). “Empties” are rising by double digits, partly due to a catch-up effect as shippers reposition containers back to Asia after the tariff-driven rush in fourth-quarter 2018 led to congestion for many west coast ports.
Due to offsetting features unique to each of these credit’s revenue profiles, port volume declines are unlikely to directly translate to revenue reductions or affect ratings. In the cases of both Port of Long Beach and the Port of LA, the ports’ long-term guaranteed contracts with most tenants provide a revenue floor, which helps to insulate port revenue from trade-related volume volatility. In the case of Oakland and PANYNJ, bondholders benefit from diversified revenue pledges from business divisions in addition to port operations, namely airport operations in Oakland, and airport, road, rail, ferry and real estate assets in the case of PANYNJ, serving to mitigate volatility in any one area. VPA’s rating is based on the Commonwealth of Virginia’s legislative appropriations from the general fund if needed and is not reliant on port volumes or revenues.
The US imported $450 billion of goods from China in 2018, the vast majority of which arrive through seaports. In contrast with exports, all Fitch-rated ports continue to see volume increases in loaded imports since tariffs were introduced in January 2018, although with stronger growth for east coast and Gulf ports. As US imports from China tend to be made up of higher value cargos than exports, and comprise roughly 70% of loaded cargo for the Port of LA, Long Beach, and PANYNJ , and 50%-60% for the other ports considered here, the revenue effect of a decline in export cargo will likely be muted. Any long-term imposition of higher tariffs would result in lower US consumer demand, which would reduce US imports and curb trade volumes beyond 2019.
Shifts in production centers may be exacerbated by ongoing trade turmoil with China. This trend, already underway, has the potential to more permanently affect port cargo levels and shipping route decisions. Depending on where goods are produced, all-water routes via the Suez Canal may become comparatively more cost-effective for importing goods to the US compared with traditionally dominant transpacific routes.
Source: Fitch Ratings