European seaport operators face a dual challenge of rising costs and lower revenues following macroeconomic headwinds, which will squeeze their margins in the short and medium term, Fitch Ratings says. We expect profitability to gradually recover, supported by the longer-term economic rebound and steady tariff increases.
The European container throughput index has dropped 15% from its peak in 2Q21, while the global index has stagnated. Slowing economic growth and a decline in goods consumption post-pandemic with consumers reversing to spending on services have affected ports’ performance. This has been exacerbated by slowing trade in Europe due to the Russian invasion of Ukraine. The main European gateway ports, such as Hamburg, Rotterdam and Antwerp-Bruges, recorded a decline of 5%-15% in throughput in 2Q23. Given a bleak demand outlook for Europe, Drewry forecast in 3Q23 that average utilisation of European ports will be just 55% in 2027 (56.3% in 2022).
Port congestion eased considerably in 2022 and early 2023, and we expect this to continue in late 2023, reducing additional storage revenue from which port operators benefited during the pandemic. Operators are likely to lose economies of scale due to lower volumes as utilisation rates will become suboptimal, resulting in reduced earnings per move.
A high proportion of ports’ revenues are based on annual contracts, where prices are agreed in advance. CPI-linked price uplifts therefore take effect with a time lag, compressing operator margins in the short term as high inflation has already increased ports’ costs. Furthermore, we do not expect ports to be able to fully pass on inflation to shipping companies through tariffs in the near term due to a steep decline in freight rates from their pandemic highs seen in 2021. Smaller and secondary ports even need to offer discounts to attract volumes, so their profitability margins will be more affected.
Port operators also face rising labour expenses as the cost of living crisis and nearly full employment have led to demands for higher wages and increased risks of strike actions, potentially extending dwell times and increasing costs per move.
Fitch expects port operators to reduce or postpone uncommitted capex plans due to pressures on profits and cash flows. For instance, we cut DP World’s capex and M&A outflows in our 2023 rating-case projections by 15% from our 2022 rating-case projections, and by 34% for ABP. Existing leverage headroom and the ports’ flexibility to adjust spending when needed are also supportive for our rated portfolio.
We expect a gradual recovery in profitability and cash flows for our EMEA portfolio, driven by the gradual economic rebound, which should support higher shipping volumes and the greater ability of European ports to increase tariffs.
Source: Fitch Ratings