SAN FRANCISCO — West Coast ports are weathering what may be the toughest storm they’ve ever faced.
After more than two decades of growth in global trade volumes, the big ports that send raw materials to Asia and receive the manufactured goods America receives in return are facing unheard-of declines in business so far this year.
The Port of Los Angeles, the nation’s biggest port by container traffic, saw container traffic fall 17.4% to 1.5 million 20-foot-equivalent container units in the first three months of the year. Long Beach, the second-busiest U.S. port, saw traffic fall by 29.5% to 1.1 million containers. Oakland, the third-busiest West Coast port, saw a decline of 15.7%, while Seattle, the fourth-busiest West Coast port, saw traffic fall 23.6%.
“This is new territory for a lot of ports,” said Baye Larsen, an analyst at Moody’s Investors Service in New York. “In addition to having to manage some decreased cargo, there’s also some concerns about their strategic partners, about the ship lines and the customers that they work with.”
While trade has always been a cyclical business, West Coast ports have benefited over the past 20 years from a massive explosion in global trade, particularly since China’s ascension into the World Trade Organization in 2001.
From 1998 to 2008, the total value of U.S. goods imports and exports more than doubled, reaching $3.4 trillion. Trade volumes more than tripled between 1992 and 2008. But a slowdown in U.S. consumer spending has slammed trade volumes in the first two months of this year, with the value of goods imports and exports tumbling 27% from a year earlier. The WTO forecasts that the volume of global merchandise trade will decline 9% this year.
Port officials are responding by cutting operating budgets, and some, like Los Angeles and Long Beach, are cutting fees in an attempt to improve their competitive positions. So far, Los Angeles and Long Beach, the two giant West Coast ports, have maintained their double-A level credit ratings from all three major rating agencies, buoyed by large cash surpluses built up during years of breakneck growth.
Fitch Ratings earlier this year downgraded the Port of Oakland’s senior consolidated revenue bonds to A-plus with a negative outlook from AA-minus, due to sharp declines in business at both its port and Oakland International Airport. The bonds are rated A1 by Moody’s and A-plus by Standard & Poor’s.
Fitch this week also put about $2 billion of Alameda Corridor Transportation Authority bonds on negative watch. ACTA is a joint-powers agency that runs a 20-mile rail corridor connecting the ports of Los Angeles and Long Beach to the transcontinental rail network.
Its senior-lien revenue bonds — rated A by Fitch — are backed by ACTA’s operating revenues and partially backed by the two big ports, which are obligated to cover shortfalls up to 40% of annual debt service payments. The bonds are rated A3 by Moody’s and A-minus by Standard & Poor’s.
“There is a lot of competition in the sector, so you’re also seeing shifting of cargo between the ports on the West Coast,” said Fitch analyst Jesse Ortega. He said the dominant Southern California ports are facing competition from as far away as Prince Rupert Port in British Columbia.
The biggest competition is for so-called “discretionary” cargo that’s destined for the Midwest, not for the port’s immediate service area.
Maersk Line, the Danish shipping giant, is moving some of its discretionary business from Los Angeles to Seattle in a partnership with France’s CMA-CGM LLC to avoid congestion in Los Angeles.
The ports could also face further competition from East Coast ports after the widening and deepening of the Panama Canal is completed in 2014. The $5.25 billion project is expected to double capacity of the canal and make it easier to take discretionary cargo to Gulf Coast ports.
Despite the signs of stress, the ports themselves say they’re staying on track with big, bond-financed capital investments so that they’ll be positioned to compete for new business when the economy begins to grow again.
In general, U.S. ports are owned by municipal enterprises that build and manage facilities that they lease out to major international shipping companies.
Port of Long Beach spokesman Art Wong said the port cut its 2008-2009 operating budget by a “relatively modest” 10% to 15%, but doesn’t plan to hold off on major expansion plans.
The Long Beach Board of Harbor Commissioners last month approved an environmental impact report for that port’s $750 million Middle Harbor Redevelopment Project. The project aims to redevelop two older port terminals — built three to four decades ago — to accommodate large, modern freighters and to reduce pollution, which has become a major issue at ports across the country.
“We will continue to seek ways to reduce costs and streamline our operations, but this is no time to waiver,” executive director Richard Steinke said in his state of the port speech earlier this year. “We are firmly committed to investing right now in our future.”
The redevelopment would more than double the capacity of the two outdated terminals by consolidating them into a larger facility and filling in 40 acres of harbor. It would reduce pollution by about half by bringing rail tracks right to the water’s edge and providing electricity to ships so that they don’t run their engines while docked.
“Even with today’s slowdown, we foresee a long-term growth in international trade, and many more trade-related jobs in this region,” Steinke said at last month’s board meeting.
That makes sense to Larsen, Moody’s port analyst, despite the current deep economic slowdown.
“We would agree that the long-term expectation is that the global economy will continue to grow, trade will continue to prosper and the current downturn will really be an opportunity, or a challenge, for ports to position themselves competitively for that continued growth going forward,” she said.