Most revenue for U.S. ports yet to feel impact of trade war with China, says Fitch Ratings

A recent report issued by Fitch Ratings indicates that increased tariffs on bilateral U.S.-China goods trade may result in decreased traffic at certain U.S. ports. 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. According to analysts, that’s because 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,” say Fitch analysts. 

Volume data show some ports are feeling more of an effect than others, particularly when looking at U.S. 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.

“Shifts in production centers may be exacerbated by ongoing trade turmoil with China,” says Emma Griffith, Senior Director, Fitch Ratings. “This trend, already underway, has the potential to more permanently affect port cargo levels and shipping route decisions”