Ports face structurally slower growth; protectionism a downside risk


Traffic growth in the ports sector is likely to remain well below historical levels for the foreseeable future, due to fundamental structural changes in the industry and global trade. A move towards protectionism would represent a significant additional risk, with the potential to reverse sector growth.

Global port traffic growth has slowed in recent years due to a mix of factors. The majority are structural in nature, including the growth of China’s internal market and shifting global supply chains. A maturing container shipping industry in the developed world, which has already reaped the benefit of shifting bulk goods into containers, is another key driver.

Together, we expect these factors to result in sector growth that is much closer to global GDP growth, compared to the two decades before the financial crisis, when the growth rate in container throughput was a multiple of GDP. In this lower- growth environment, over capacity will probably linger for longer, resulting in increased competition and price and revenue erosion. Vessel sizes have increased and major ports have increased their capacity in response. Smaller ports that are not equipped to handle the biggest ships may therefore suffer price wars if volumes shrink.

The shift from bulk transport to containers has been a major force in the growth of port traffic as lower end-to-end transport costs allowed firms to more easily benefit from cost differentials in the location of production.

This has contributed to the globalisation of production, where production of a given good that was originally concentrated in one site now involves components being manufactured in different places and shipped to a final assembly point. This is demonstrated by the fact that the total quantity by weight of transported goods has grown slowly or been stable in most OECD countries, while the distance travelled by the goods has increased hugely.

We believe this shift towards containers is now maturing in developed markets as there are few goods left that can be containerised. Containers are being used to transport cargoes previously shipped in bulk or on pallets and even liquids or commodities such as cement and coal. Containerisation still has the potential to drive growth in developing markets such as India and parts of Africa, as infrastructure investment increases to ensure containers can be shipped on by road or rail.

Supply chains shifting

Developments in emerging markets will also throttle back growth in the ports sector. The expansion of internal markets, particularly in China, may mean production is less oriented towards exports. The convergence of labour costs may also reduce the trend for production to relocate to emerging markets.

Data shows that supply chains are shifting, with an increasing proportion of emerging market exports being shipped to other emerging markets. This creates challenges for port operators, but also new investment opportunities.

Competition is more intensive in ports than in other areas of infrastructure, particularly for containers because they are standardised and can easily be transported to their final destination from any port. History shows competition becomes fiercer when markets shrink. A long-term lower-growth environment therefore increases the potential for periods of intense competition.

Ports’ operating performance is sensitive to operational efficiency and the ability to on-and off-load cargo. Major ports offer the most reliable processes and facilities to accommodate large vessels, often with the fastest turnaround times. They are better positioned to weather downturns, while small and mid-sized ports face greater risks from a race to the bottom in prices.

Accelerating consolidation in the container shipping sector could further erode the pricing power of smaller ports, as bigger shipping operators have more power in negotiating prices.

Shipping companies’ efforts to achieve economies of scale are leading to route rationalisation that can leave out smaller ports and to fleets comprising ever-larger vessels that are physically limited to ports with the facilities to handle their size.

Protectionism risk

A recent increase in protectionist and anti-globalisation rhetoric, particularly in the US, represents a growing risk for the ports sector. While this has not yet translated into higher tariffs or non-tariff barriers, and our base case is that disputes will be resolved within the existing World Trade Organization framework, our analysis suggests broader protectionist measures would have a significant impact on world growth. We examined a hypothetical shock scenario in which the US imposed a 35% tariff on imports from Mexico, China, South Korea and Taiwan (prompting similar retaliatory tariffs on imports from the US) and deported one million migrants, leading to declining business and household confidence in all major economies. Our global macroeconomic simulations show that the US and the countries targeted by tariffs would see the largest loss of GDP, but global repercussions would be significant, including through disruption to multinational supply chains. In this scenario, US and eurozone GDP would be 2.1pp and 0.8pp below our baseline in 2019 respectively, while China’s GDP would be 2.8pp below our baseline.

Historical case studies show the significant damage protectionist measures can have on trade. The 1930 Tariff Act in the US helped prolong the Great Depression by sparking retaliation by other nations and driving real exports down 46% between 1929 and 1932. Imports and exports started to grow after the signing of the Reciprocal Trade Agreements Act in 1934, but it still took until 1940-1941 to recover to pre-depression levels.

If restrictions that significantly hinder global trade are introduced we may revise the sector outlook for EMEA ports to negative. The ratings Outlook is already Negative due to asset-specific issues for many ports in our EMEA ratings portfolio. Our outlook for US ports is stable and our downside scenarios do not point to a negative revision in 2017, but significant changes to trade deals are an event risk that is not reflected in these scenarios.

The UK’s exit from the EU could also have a negative impact for trade, and therefore the ports sector, particularly in a scenario of a "hard" Brexit with no trade agreement and the imposition of WTO tariffs. We see UK container import volumes declining modestly post-Brexit, regardless of whether the UK retains single market access, negotiates a trade deal with the US or falls back on WTO rules. But exports would be hardest hit in a WTO scenario.

Fitch Ratings

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