Fitch: West Coast Labor Seesaw Leaves Reliability Question

NEW YORK--()--After nine months of negotiations, the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) have reached a tentative contract agreement that will allow 29 ports on the U.S. west coast to resume normal operations, according to Fitch Ratings. This follows months of work slowdowns by dockworkers, as well as evening and weekend lockouts by terminal operators, resulting in considerable congestion and delays for shippers utilizing west coast ports for import and export cargo. The agreement must still be approved by ILWU rank and file members, a process which may take several weeks.

Fitch views the resolution and five-year labor agreement as removing a potentially negative development for rated port credits, as recent slowdowns and cargo diversions at many west coast ports have underscored the importance of stable working conditions and dependable scheduling for shippers. In recent months, many shippers have diverted cargo to Canada, Mexico or the East Coast. In recent months, shippers have also added whole vessels coming through the Suez Canal, and have loaded additional containers loaded on existing ships transiting the Panama Canal, in a move to avoid costly delays moving goods through the west coast.

The protracted delays have begun to make their way into the operating results for several west coast ports, many of which rely on the container segment of cargo. The three most dominant ports by volume, the Port of Los Angeles, Port of Long Beach, and Port of Seattle/Tacoma, are reporting measurable year over year drops in total TEU volumes of 29%, 18% and 13% respectively. It is expected to take months for the backlog to be fully cleared and operations to return to normal levels. As a result, and given the duration of the slowdown, Fitch expects to see some negative impact to fiscal 2015 throughput levels even while national GDP is trending positive.

The major west coast ports are amongst the highest rated in the sector (Port of LA 'AA'; Port of Long Beach 'AA'; Port of Seattle 'AA', 'A+', 'A'). 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.

Should the slowdown drive volume decreases at secondary or smaller, niche ports, rating maintenance may be more at risk. However, Fitch notes that smaller secondary ports may also see upsides, as during past slowdowns some shippers who diverted services to such ports to avoid delays affecting larger west coast ports have ultimately stayed on and established regular service with the port.

Longer term, the question becomes one of ports' ability to guarantee reliability to shippers as well as the inherent risk of labor peace when contract renewals are coming due. As many in industry have noted, reliability is the 'currency' of the shipping business. Continued and frequent labor troubles (such as the recent backlogs; slowdowns in LA and Long Beach during clerical worker contract negotiations in 2012; and the 10-day lockout that occurred during the general ILWU contract negotiation in 2002) all serve to devalue this currency, eroding shippers' confidence in port reliability.

With each labor event, some diverted cargo has not returned, and this seems to be the case for some west coast ports coming out of this most recent contract negotiation (the Ports of Portland and Oakland are examples). Discretionary cargo is the most at risk for permanent diversion. Fitch expects cargos destined for and shipped out of local markets to continue to use their local west coast port, as is the case with roughly 50% of cargo in the ports of Los Angeles and Long Beach.

Additional information is available on www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Emma W. Griffith
Director
+1-212-908-9124
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Emma W. Griffith
Director
+1-212-908-9124
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com