Due to China's increased involvement in global trade over the years, COVID-19 will have a larger impact than past outbreaks, decreasing ports' trade volumes.
In a report released by Fitch Ratings Wednesday, analysts say they are not concerned that a rapidly spreading virus will impact ports’ credit ratings, but noted that COVID-19 would have bigger implications than earlier outbreaks, including SARS.
“At this stage, we’re not too concerned,” said Emma Griffith, senior director of global infrastructure and project finance.
“At the same time, we’re still watching and waiting,” Griffith later said. “We do expect this will have a bigger impact than say SARS did.”
COVID-19, an illness caused by a member of the coronavirus family, has spread rapidly globally after originating in Wuhan, China. So far, it has affected thousands of people and caused many factories and ports in China to shutter.
SARS, or severe acute respiratory syndrome, spread rapidly in 2003. It spread globally to affect thousands of people. However, COVID-19 could have a bigger impact on global trade since China has become a bigger player in the world economy since then.
“China is such a bigger player in the global economy now than they were,” Griffith said. “We do think it will have a larger impact than SARS did, but I would be surprised if we had downgrades related to this.”
China’s trade volumes have grown significantly since 2000. If more companies suspend Chinese operations or withdraw from production in China, shipping volume may take longer to recover, Fitch analysts wrote in the report.
The spread of the virus comes as Phase One of the U.S.-China trade deal set to go into effect on Feb. 15. The deal was put in place following a years-long trade war between the two countries.
“We expect that this (COVID-19) will probably dampen the positive effects we might have seen from those tariff rollbacks because the ports or factories are offline for longer,” Griffith said.
Volumes tend to usually decline in February and March during the Chinese New Year celebrations, but Griffith said ports and factories are now closed for longer, impacting trade.
Griffith expects at least a drop in volumes for the first two quarters of this year. Ports such as the Port of Los Angeles and the Port of Long Beach will have the largest exposure to the dip in volumes, Griffith said.
Ports’ saving grace will be port authorities who act as landlords to its terminal operators. Port authorities have up to 30-year agreements with the ports and guarantee a minimum revenue. If volume dips below 70-80%, those landlords will have to pay a minimum to maintain cash flows and protect ports’ credit ratings, Griffith said.
The American Association of Port Authorities informed its members that the U.S. is imposing travel and trade restrictions from high-risk areas and that China has effectively stopped all outbound shipments from Wuhan.
“Heavily reliant on Chinese imports from the affected region, the U.S. is already experiencing a downturn in imports, which might have a larger economic impact, although AAPA isn’t sure of what those impacts are at this time,” wrote Aaron Ellis, AAPA public affairs director in an email.
S&P Global analysts predict a decline in container volume for U.S. ports with exposure to China, though they predict the virus will be contained globally by March.
Imports will be hardest hit by COVID-19, S&P analysts said.
"We consider this latest health emergency an evolving one that we believe is still in its early stages,” S&P analysts wrote. “Therefore, it is difficult to say if it will have a material impact on those U.S. airport and port credits we rate.”
S&P noted that during past outbreaks, it did not take negative ratings actions.
Moody’s Investors Service said the COVID-19 outbreak is a credit negative for Asia-Pacific’s port operators, analysts said in a report released Tuesday.
China represents 50% of trade for ports in Los Angeles and Long Beach, said Moses Kopmar, Moody’s assistant vice president analyst. However, overall credit ratings will not be affected unless the virus is worse than forecasted and impacts global GDP.
"If we believe that the impact will be relatively contained and limited to a quarter or a third of the year in terms of disruption activity, we do not anticipate it having the severity to really move ratings," Kopmar said.
