LOS ANGELES — Ports on the West Coast are recovering from the cargo backup that developed during a recent labor dispute and are turning their attention to long-term strategic threats from ports in other regions.
The tentative labor agreement was reached Feb. 21 between the Pacific Maritime Association, which represents management, and the 20,000-member International Longshore and Warehouse Union on a five-year contract. The agreement still must be approved by ILWU members, a process anticipated to take until mid-April, according to Phillip Sanfield, a Port of Los Angeles spokesman.
The ILWU represents workers at 29 ports, including some of the nation’s busiest container ports in Los Angeles, Long Beach, Calif., Oakland, Calif., Tacoma, Wash. and Seattle.
The agreement came after several months of work slowdowns by dockworkers, and weekend lockouts by the terminal operators, creating large backlogs of cargo and ships.
The long-term economic impact of the protracted labor dispute remains to be seen given the risk that temporary measures to divert cargo to ports in Canada, Mexico and the East Coast could become permanent, said Jock O’Connell, international trade advisor for Beacon Economics.
“What shippers are likely to do in the short run is redirect to ports on the Eastern seaboard and to the Gulf Coast,” O’Connell said. “Whether they want to diversify into the Gulf and East Coast ports in the long term will depend on fundamental factors.”
Ongoing work to widen the Panama Canal is expected to entice shippers to use larger vessels to move containers through the canal to the East Coast as an alternative to offloading the ships on the West Coast and moving the cargo overland.
For now, labor peace means the ports’ capital and borrowing plans remain on track.
“The labor battle accelerated a slide in market share for the ports of Los Angeles and Long Beach, and was endangering their plans to issue bonds to finance $5 billion in improvements,” Miller Tabak Asset Management, LLC wrote in a March 3 report that cites PMA data.
“The two largest U.S. ports by container volume, with $2.1 billion in bonds, planned to issue a combined $315 million this year. If labor slowdowns and bottlenecks continued to send cargo elsewhere, they would have had to scale back their capital projects and with that, their borrowing,” the report said.
The Port of Long Beach and the Port of Seattle both have plans to issue bonds. Fresh off a September issuance, the Port of Los Angeles tentatively has a refunding planned, but the decision isn’t impacted by the protracted labor negotiations, according to Marla Bleavins, the port’s chief financial officer.
The Port of Long Beach is seeking approval on March 23 from its board to issue $230 million in revenue bonds. Of that, $150 million would be new money and up to $80 million would refund 2005 bonds, according to Betsy Christie, the port’s finance director.
The proceeds would be used to fund the port’s Middle Harbor terminal development project and several rail projects.
While the January and February cargo numbers were low, Christie said, they are expecting a rebound in March and April.
The Port of Los Angeles only tentatively plans to refund bonds this year, but that is because it priced $337 million on Sept. 3 and 4 and doesn’t need to price a new money issuance this year, Bleavins said.
The September sale comprised $45 million of new money and the remainder was a refunding. The projects are typically funded by lease revenues. The port tends to issue commercial paper and then uses long-term debt to take that out, Bleavins said.
One of the refundings completed in September involved taking out $220 million in commercial paper, so Bleavins said that, even though it was classified as a refunding, it was more like new money.
The port could push this year’s refunding out to next year, but that is because some of the bonds it intends to refund are not callable until 2016, Bleavins said. It might result in lower issuance costs to head to market once to refund bonds callable this year and next year, she said.
For January and February, twenty-foot equivalent units are down 20% on a year-over-year basis, Bleavins said. Revenues are up slightly, less than 1% for the same period, but down 4% based on what had been budgeted, she said.
The Los Angeles port doesn’t anticipate needing to issue new money long-term debt for the next few years, even though its capital projects budget for fiscal 2015 is $280 million, Bleavins said.
“Our strategy is to use cash, revenue and commercial paper and then take out short-term debt with long-term financing,” she said.
The West Coast’s third largest port heads to market on March 24; The Port of Seattle plans to price $155.1 million of limited tax general obligation and refunding bonds in a competitive sale.
The new Port of Seattle bonds will be backed by property taxes, as opposed to port revenues; they received ratings of Aa1, AAA, and AAA from Moody’s Investors Service, Fitch and Standard and Poor’s, respectively.
Even before the protracted labor negotiations caused problems, the West Coast ports were losing market share, according to the MTAM report.
The facilities handled 43.5% of U.S. imports in 2013, down from 48.6% five years earlier, according to PMA data cited in the report.
Miller Tabak said the firm is “monitoring the long-term situation with the planned expansion of the Panama Canal and the potential for East Coast ports to be more viable as a result.”
MTAM said it “views the resolution and five-year labor agreement as removing a potentially negative development for port credits, as recent slowdowns and cargo diversions at many west coast ports have underscored the importance of stable working conditions and a dependable schedule for shippers.”
With the expectation that it will take months to clear the backlog and for operations to return to normal levels, Fitch Ratings “expects to see some negative impact to fiscal 2015 throughput levels even while national GDP is trending positive.”
The double-A rated ports are among the highest rated by Fitch in the sector, analysts wrote.
“In Fitch’s view, the leading west coast ports are collectively critical to maritime trade and their strong market position protects them sufficiently to be relatively resilient to the interruptions from a financial/credit perspective in the near to medium term,” Emma Griffith and Seth Lehman wrote in the Feb. 24 report.
In a recent report, UCLA Anderson Forecast Economist Jerry Nickelsburg wrote that the short term impact of the port’s labor issues is assumed to be relatively small.
He wrote that shippers, manufacturers and retailers will consider the costs and risks of moving supply chains away from the West Coast ports after 2016 when the widened Panama Canal is open, but that it is not clear that they will.
“The Panama Canal is congested at present and increased shipments through the canal to East and Gulf Coast ports will add considerable time to the journey,” Nickelsburg wrote. “Similarly, diversion through the Suez Canal is more costly in transit time. The non-U.S. West Coast ports are small and congested and while they can take some additional cargo from U.S. West Coast ports, their capacity is limited.”
From the shippers’ point of view, Nickelsburg writes, these additional costs have to be balanced against the risk of future port labor unrest.
It has always been more cost-effective to bring products through the West Coast ports and transport them east by rail or truck to the Midwest, O’Connell said.
The fact that the Long Beach and Los Angeles ports have handled 40% of all inbound containerized traffic to the U.S. doesn’t suggest an easy fix, he said. Moving that traffic would just ship congestion elsewhere, O’Connell said, noting that East Coast ports to which shippers recently diverted also experienced congestion.
“They do face competition, and it’s not just Panama,” O’Connell said. “They also face intense competition from Canadians, who have done a lot of work developing their ports.”
What California has is the lack of inclement weather. Blizzards have resulted in East Coast port closures while hurricanes have impacted Gulf of Mexico ports.
Nevertheless, Philip Sanfield, a Los Angeles port spokesman, said there is always concern that shippers using east coast ports will not come back.
“That is why Gene [Seroka, the port’s CEO], is in Washington D.C., and why he has been in Europe,” Sanfield said. “The industry has never been more competitive than it is today.”
When there are opportunities for other ports to take advantage of “what we believe is a temporary situation, there is concern.”
What tempers concerns of Canadian competition and that East Coast ports are widening their terminals in anticipation of Panama opening is the fact that the deep water twin ports of Southern California can service ships large enough to haul 13,000 containers.
“We intend to work with the stakeholders,” Sanfield said. “We are addressing the concerns day-by-day and month-by-month.”