A container ship calls at the Port of Los Angeles, which could see impacts from a slowing China economy

LOS ANGELES — The twin ports of Los Angeles and Long Beach are bracing for potential impacts from a slowing Chinese economy.

Los Angeles' trade with the world fell 7.36% to $190.8 billion in the first six months of 2015 compared to the same period last year, according to an analysis of U.S. Census Bureau data by WorldCity, a media company that focuses on global trade.

During that time frame, Los Angeles' exports decreased 12.7% while imports fell 4.83%, according to the analysis. The Port of Long Beach experienced a 20% decrease to $42.2 billion during the same period, with a 20.1% drop in exports.

As the region's largest trading partner, trade with China represented nearly half of total trade at $73 billion for the first half of this year, according to WorldCity data.

China's yuan devaluation is of concern because the combination of the weakened Chinese currency and the strong dollar mean Chinese consumers will not be able to buy as much, according to Stephen Cheung, president of World Trade Center Los Angeles.

"The strength of the U.S. dollar makes exports more challenging," Cheung said. "If you look at the total trade [with all U.S. trading partners] that number has gone down."

Port of Los Angeles officials attributed July's 16.4% drop in loaded export containers on a year-over-year basis to a strike that ended in February and the strength of the U.S. dollar, rather than China's economic woes.

"China is by far our largest trading partner," said Arley Baker, a port spokesman, "but China's economic circumstances in August would not be reflected in July cargo volumes."

While exports are significant for the region's economy, the Los Angeles port still gets paid if containers return to China empty, because port revenues are by the box, said Michael Kennan, the port's planning and research director.

Though the number of loaded export containers was down in July year-over-year, the amount of empties grew at an almost equivalent 15.4%, Kennan said.

Trade numbers dropped during first half 2015 with all five of the city's top trading partners. China, Japan, South Korea, Taiwan and Vietnam represent 62.4% of the city's world trade, according to WorldCity.

The largest trading partners for the Los Angeles Customs District, comprised of POLA, the Port of Long Beach and Los Angeles International Airport, are mainly Pacific Rim countries, according to the Los Angeles County Economic Development Corporation's 2015-2016 International Trade Outlook for Southern California, released in June.

China was the largest of the region's trading partners last year with two-way trade valued at $176.14 billion or 42% of total Customs District's two-way trade, followed by Japan at $40.4 billion and Korea at $23.8 billion, according to the LAEDC.

China represents 60% of LA's imports, said Seth Lehman, a Fitch Ratings analyst.

"Any changes in China will have a big impact on the volume for both LA and Long Beach ports," Lehman said.

He agreed that the current numbers aren't a reflection of what has been occurring in China. The twin ports began the year in negative territory because of labor unrest, Lehman said.

Congestion from work stoppages in late 2014 and early 2015 resulted in the loss of roughly 30 ship calls - or about 400,000 "twenty-foot equivalent units," Kennan said. TEUs are the way the shipping industry measures container trade.

Volume was down by 10% for a couple of months, but has come back flat, Lehman said.

"We are not expecting to see robust growth out of these two ports this year," he said. "The East Coast ports have been picking up the West Coast ports business."

From a credit standpoint, the ports are protected because more than 60% of their revenue comes from long-term lease agreements with shipping companies, Lehman said.

"The ports have high coverage protection to the debt," Lehman said.

Both ports have AA, AA, Aa2 ratings from Fitch, Standard & Poor's and Moody's Investor's Service, and stable outlooks across the board.

The Los Angeles port had $821.1 million of bond debt, according to its comprehensive annual financial report for the fiscal year ended June 30, 2014.

The Long Beach port had $860 million in outstanding senior lien harbor revenue bonds and an outstanding $325 million Transportation Infrastructure Finance and Innovation Act loan, according to an April Fitch report.

What China imports from Los Angeles has started to shift from recycled paper and waste products to consumer goods, according to the LAEDC report.

Both ports are working on diversifying international trade by increasing trade with other partners, such as Indonesia and the Philippines, Cheung said. The middle class is growing in both countries making U.S. products, which tend to be higher quality, more alluring, he said.

Los Angeles port officials said they have always expected that China's growth would slow down.

"Developing countries experience a lot of economic growth by building roads, bringing in electricity and moving people off farms," Kennan said. "Once the infrastructure is in and the country shifts away from being a developing nation, the economy begins to slow."

Contributing factors in the year-over-year change would be the strength of the U.S. dollar, which typically weakens Los Angeles' export numbers, Baker said. Service shifts from Los Angeles to the Port of Long Beach, which experienced its best July in 104 years with an 18.4% increase, also account for part of the month's decline, Baker said.

Imports at the Long Beach port jumped 16.2% to roughly 345,000 TEUs, while exports increased by 15.9% to roughly 143,000, according to POLB data. While total cargo numbers at Long Beach were up 2.8% for the first seven months of the year, exports were down 10.9%.

At the Los Angeles port, overall volumes for the first seven months of this year are only down 3.5% to 4.6 million TEUs, according to POLA.

The ports of LA and Long Beach, which have $1 billion and $4 billion capital programs underway, respectively, aren't likely to face major impacts from reduced exports unless dramatic reductions occur, said Mike Craft, a managing director at Lumesis, a financial technology company that provides data analysis on the municipal bond market.

"They are very similar credits and conservatively leveraged in structure," Craft said. "Unless there are dramatic reductions, they will be able to weather difficulties."

Lumesis, in its DIVER report Aug. 17, said the twin ports are high quality credits and will be "resilient to potential reductions in volumes whether caused by reduced exports to China or increased competition from East Coast ports."

 

 

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