Key Takeaways
- Port congestion in Asia underscores the robust demand for container shipping. Key drivers are supply-chain disruption caused by the Red Sea conflict and restocking from the U.S. and Europe.
- We expect the profitability of the China port operators we rate to benefit from the robust demand, potential port tariff hikes, higher dividends from shipping investment, and higher income from port storage.
- Our rated peers have ample financial headroom to cope with potential trade tensions and the associated downside scenario of falling throughput.
Chart 1
Bottlenecks associated with the Red Sea conflict are among key factors that could boost profitability of rated China's port operators. Strong transshipment demand in Southeast Asian ports is spilling over to China's ports, including Hong Kong and Shanghai. Robust throughput growth favors operators with diverse assets such as China Merchants Port Holdings Co. Ltd.
We expect global container trade growth in 2024 to surpass forecasts. This is because U.S. and European retailers are replenishing their stock and procuring goods ahead of time to ensure supply in case of disruptions. This could lead to higher shipping rates, improved handling efficiency, and hence a potential tariff hike for port operators next year. Higher shipping dividends and storage income will also boost port operators' earnings.
S&P Global Ratings believes the rated issuers have ample financial buffer against trade tensions and their potential to weigh on throughput. Our sensitivity tests show metrics would not breach downgrade triggers even if throughput declined by up to 30%.
Conflict Causing Rerouting And Delays
To avoid the Red Sea, shipping companies are changing their usual path from Asia to Europe. Instead of going through the Suez Canal, they are taking a longer route around the Cape of Good Hope. About 22% of global container trade transits through the Suez Canal. As a result, ports along the Cape of Good Hope have seen a jump in throughput growth in 2024.
This rerouting can cause delays of up to two weeks. To catch up, shipping lines are skipping some small ports in Asia and dumping more containers at large transshipment hubs such as Singapore and Port Klang in Malaysia. Congestion at Singapore ports has surged, with delays of up to a week in late May. Consequently, liners have started to avoid Singapore. The congestion has spread to other large ports in Southeast Asia and even to some of China's largest ports, such as Ningbo, Shanghai, and Qingdao.
Chart 2
This congestion presents a potential boost in storage income for port operators. In the previous bout of congestion in 2021 and 2022, the unit revenue of Hutchison Port Holdings Trust (HPHT; A-/Stable/--) was 15%-20% higher than in 2020, largely due to a spike in storage income. We anticipate the port of Singapore and the port of Klang will post the biggest increase in storage income. The spillover may also moderately boost storage income of China's ports.
Adding to the congestion is strong demand. Stronger-than-expected container volume for Europe and the U.S. is underpinning robust throughput performance. This stems from resilient retail consumption in major economies, notably the U.S. where GDP grew 1.4% in the first quarter, and 2.8% in the second.
Chart 3
We expect trade demand will moderate later in 2024. Chinese container port operators should still benefit. Given the state of the supply chain, cargo owners may opt to preplace orders, similar to what happened during the previous round of port congestion caused by the pandemic. U.S. retailers, after a few quarters of destocking, are now restocking. The U.S. National Retail Federation forecasts stronger growth in container imports than in 2023. A perceived threat of trade restrictions may force cargo owners to frontload.
Chart 4
Tariff Hikes: Rising Tide For All Boats
Increased handling efficiency and higher profits for shipping companies could lead to tariff hikes for port operators next year. The surge in shipping rates echoes the previous super-cycle from the second half of 2020 to the end of 2021. The Shanghai Containerized Freight Index reached a new 18-month high, rising to 3,700 points by the end of June 2024, from about 1,000 points in December 2023.
Port congestion has been a windfall for shipping companies and has given port operators more power to negotiate. Port fees have mostly stayed the same for the past decade. However, in 2022, port operators in China increased their fees by 5% to 10%, taking advantage of the success of shipping companies. Even during the shipping downcycle in 2023, when the shipping rate was below 1,000 points, the port tariff did not decrease (see "China Container Ports Can Chug Through The Doldrums," published on RatingsDirect, April 13, 2023).
Earnings Boost From Stakes In Shipping Companies
This year, the earnings of our rated issuers will be boosted by their stake in shipping companies. For example, Shanghai International Port (Group) Co. Ltd. (SIPG; A+/Stable/--) has a 9% ownership in Orient Overseas (International) Limited (OOIL; unrated), a container shipping company listed in Hong Kong. Additionally, China Merchants Port Holdings Co. Ltd. (CMPort; BBB+/Stable/--) has a 28% ownership in SIPG. As a result, these rated issuers will post an increase in profit from their minority shareholding investment.
In the case of SIPG, it received Chinese renminbi (RMB) 2.2 billion-RMB3.7 billion in dividends each year from OOIL in 2021-2023, which accounted for 13%-22% of SIPG's EBITDA. This is a big jump from the RMB100 million-RMB400 million received in other years. CMPort also received record high dividends from SIPG in 2022-2023, amounting to RMB1 billion-RMB1.3 billion. This accounted for 12%-14% of CMPort's EBITDA.
Chart 5
Trade Tensions Heighten Downside Risk
Trade tensions remain a key downside risk for throughput growth for China port operators over the next three years. This may accelerate the relocation of supply chains to alternatives to China, such as Southeast Asia countries, or via reshoring and near-shoring.
The issuers we rate have ample financial against volume risks. Our sensitivity tests show they can handle a decrease in throughput of 24%-31% in 2025 without their financial metrics reaching the triggers for a downgrade of their stand-alone credit profile.
Our base case does not incorporate any tariff hike assumptions for 2025. In the past ten years, there has been no year-on-year annual throughput drop, thanks to China's increasing market share in global trade. However, we note that during the onset of the trade war between the U.S. and China in 2018, China's coastal throughput growth slowed. It fell to about 5% in 2018 and 2019, compared with the 8% growth in 2017.
China's capital expenditure for water infrastructure has grown about 20% year-on-year each year between 2022 and 2023. We believe the capital spending by port operators will continue to focus on automation, digitalization, better capacity to serve larger vessels, and lower carbon emissions in port construction.
Already at full capacity, leading ports in China, such as port of Shanghai and port of Ningbo Zhoushan, are planning for capacity construction. SIPG has announced its Xiaoyangshan North terminal construction plan. HPHT is seeking to improve Shenzhen Yantian's handling capacity through the construction of Yantian East Port. And CMPort is also looking for acquisition opportunities overseas.
The measured pace at which they're spending, and their favorable financing costs suggest the issuers we rate will have sufficient headroom for such capex plans.
Chart 6
A More Vulnerable Supply Chain
The recurrence of port congestion after the pandemic era underlines the vulnerability of the supply chain. The supply chain has become more linear, and vessels have grown in size. This has made it more susceptible to disruption, leading to increased instances of port congestion.
Managing these obstacles and capitalizing on growth opportunities will require investment in the streamlining of cargo flow. Collaboration between port operators and shipping companies will be key.
Writer: Lex Hall.
Digital Designer: Tim Hellyer
Related Research
- Full analysis: China Merchants Port Holdings Co. Ltd., July 29, 2024
- Industry Credit Outlook Update Asia-Pacific: Transportation Infrastructure, July 18, 2024
- Full analysis: Hutchison Port Holdings Trust, June 11, 2024
- Full analysis: Shanghai International Port (Group) Co. Ltd., June 8, 2024
- Asia-Pacific Transport Infrastructure 2024 Outlook: Capex Is Becoming A Credit Driver, Nov. 28, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Shanshan Yang, Hong Kong +852 25333596; shanshan.yang@spglobal.com |
| Secondary Contacts: | Laura C Li, CFA, Hong Kong + 852 2533 3583; laura.li@spglobal.com |
| Christopher Yip, Hong Kong + 852 2533 3593; christopher.yip@spglobal.com | |
| Yuehao Wu, CFA, Singapore + 65 6239 6373; yuehao.wu@spglobal.com | |
| Kendrew Fung, Hong Kong + 852 2533 3540; kendrew.fung@spglobal.com | |
| Research Assistant: | Shuyang Liu, HANGZHOU |
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