Ports on Edge Amid Talk of Trade War with China

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PHOENIX - A trade war or trade slowdown with China could impact some credits, with West Coast container ports particularly vulnerable.

The idea that the U.S. could be headed for an economic showdown with China, its largest source of imports, stems from tough talk President Trump dished out on the campaign trail.

Trump said China takes advantage of the U.S., labeling the world's most populous country "the single greatest currency manipulator that's ever been on this planet." He has yet to follow through on a promise to impose a massive tariff on Chinese goods, but market participants take seriously the negative effects such a situation could cause.

Particularly affected would be ports on the West Coast that do a massive amount of their import trade from Asia, and specifically China.

Joseph Krist, a longtime analyst and partner at Court Street Research Group in New York, said that he views a potential trade war with China as more of an economic event than a credit event, but acknowledged that the impact on West Coast ports could be notable.

"Obviously they have grown and benefited from trade with China as you go up and down the West Coast," Krist said of the ports. "There would be kind of the obvious ramifications for those ports, in terms of lower volumes and lower revenues."

East Asian trade accounts for more than 90% of the shipments through the Port of Long Beach, according to the California port, with China being the port's top trading partner.

The port handles more than 6.8 million 20-foot-equivalent container units (TEUs) annually, with cargo valued at $180 billion.

The neighboring Port of Los Angeles reported handling 8.8 million TEUs in 2016.

The Long Beach port's most recent comprehensive annual financial report listed 2015 operating revenue at $355.4 million, with revenue related to container shipping accounting for some $270 million. The port issues bonds backed by those revenues, and had $641.4 million outstanding as of the end of 2015.

They carry AA ratings from both Fitch Ratings and S&P Global Ratings.

Noel Hacegaba, managing director of commercial operations at the Port of Long Beach, said that the port's lease agreements with the companies operating the marine terminals include guaranteed annual minimums that the port must receive from their operations.

While that does serve as a safety net, the port's revenues are still ultimately tied to cargo volume moving in and out. Hacegaba said that the port is watching the trade policy situation closely.

"We are closely monitoring developments in trade policies, and we are staying closely engaged," he said. "Historically we've been very active as a port authority engaging and educating legislators at all levels."

Court Street Research's Krist also mentioned the Alameda Corridor Transportation Authority, which operates a bond-financed rail line from the ports of Long Beach and Los Angeles 20 miles north to downtown Los Angeles, carrying containers from dockside to the yards of the freight railroads that send them onwards.

Its revenues are volume-dependent, Krist said, as are some small tax-allocated land deals for warehouse facilities that could be vulnerable to an extended trade slowdown.

Eleven hundred miles to the north in Washington, the ports of Seattle and Tacoma also take seriously the prospect of a slowdown in trade with China.

More than half of the container cargo shipped through the two ports is with China alone, said Port of Seattle spokesman Peter McGraw.

"Four in ten jobs here in Washington are tied to trade, making us one of the most trade-dependent states in the union," said McGraw. "Our port commissioners have been on record saying that a tariff on goods from China would be disastrous to not only Washington State's economy, but the nation as a whole."

Tara Mattina, a representative of the Northwest Seaport Alliance, a joint venture of the Seattle and Tacoma ports, said that those ports have some revenue stability due to their business model.

"I won't speculate on what might happen under a new administration," Mattina said. "What I can tell you is that more than 70% of our revenue is fixed, from long-term leases with marine terminal operators. They contract with the shipping lines."

The Port of Oakland, Calif.'s cargo volume makes it the fifth busiest container port in the United States, and China is its top trade partner too.

Seattle and Oakland both benefit from the mitigating factor that their enterprises also include major airports that account for major chunks of their revenue. This somewhat insulates them from the risks associated with a decline in container volume, Krist said.

East Coast ports are less likely to be affected by a slowdown in Chinese trade because they tend to do a smaller percentage of their business with Asia.

The Port Authority of New York/New Jersey, which also includes airports, declined to comment on the possibility of a trade war with China. But 2015 trading data published by the authority showed that China, while being the port's largest trading partner, accounted for less than 30% of total volume that year.

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