Chennai, 27 July 2022:
Labor issues at cargo ports could prolong shipping bottlenecks and temporarily reduce volumes, Fitch Ratings says.
Global ports are sensitive to labor-related disruptions as they are still clearing residual pandemic-related backlogs with shippers entering their peak season. However, stable, contractually guaranteed revenues and robust liquidity will limit the effects on port credit profiles.
In the US, the International Longshore and Warehouse Union (ILWU) and Pacific Maritime Association (PMA) continue to negotiate a new contract following the expiration of their prior contract on July 1.
Both parties announced that operations will continue, despite the failure to agree to a contract extension, but the risk of disruptions remains as long as an agreement has not been reached.
Negotiations affect 29 West Coast ports, the largest of which are Port of Los Angeles (POLA) and Port of Long Beach (POLB), which together handle roughly 30% of US container volume.
Major points of negotiation are salary increases and cargo handling automation. No end date for negotiations is set but market reports indicate a new contract may be in place by August or September.
Twenty-foot equivalent units (TEUs) at US ports remain elevated this year compared with 2019 and early 2020, and US port import volumes are expected to tick up as retailers stock up for back-to-school and holiday season sales.
Stronger volume growth for East Coast ports beginning in 3Q21 was the result of shippers rerouting some cargo from the West Coast ports to avoid congestion and adjusting ahead of contract negotiations. East Coast and West Coast port TEUs were up 9.9% and 0.4%, respectively, this year through May 2022 versus the same period in 2021.
Organized labor actions during previous ILWU contract negotiations caused delays in processing cargo and resulted in fluctuations in port volumes. A breakdown in negotiations between the ILWU and PMA in 2002 resulted in a 29-port West Coast lockout that ended after 10 days when President Bush stepped in with an injunction.
Similarly, in 2015 PMA ports were congested for nearly four months due to the renegotiation impasse, requiring intervention by the Obama administration.
Despite short-term volume fluctuations following these past disruptions, US port credit ratings generally are unaffected due to the insulating nature of the port’s long-term contracts with terminal operators, coupled with sizable liquidity reserves. POLA and POLB both benefit from more than 1,200 days cash on hand and minimum annual guarantees accounting for 70% and 85% of operating revenues in FY 2021, respectively.
The larger, longer-term risk to credit is the potential for shippers to shift operations away from West Coast gateways to alternate ports to avoid both real and perceived dangers of future operational disruptions from labor unrest.
However, US West Coast ports are not the only ones facing labor challenges. Port of Montreal saw sizable labor disruptions in 2021, due to longshoreman strikes, and Charleston on the US East Coast is facing below-capacity operations due to a dispute with the International Longshoremen’s Association regarding carrier relocations.
Labor actions in Europe are exacerbating congestion problems at ports in the UK, Netherlands, Germany, and Belgium.
In Germany, recent port strikes slowed down trade in exports, with unions seeking yearly automatic inflation adjustment in the renewed contracts. Similarly, in Belgium, nationwide strikes in May and June slowed operations at already congested terminals in Antwerp, exacerbating existing bottlenecks.
Global port congestion and high shipping rates are expected to persist into 2023 with continued uncertainty in the supply chain. These dynamics give labor more leverage in negotiations, and higher wages as part of new contracts could increase shipping costs and shift competitive dynamics over time.