Following macroeconomic headwinds, European seaport operators are facing a combined problem of growing expenses and declining revenues, which will reduce their margins in the short and medium terms, according to Fitch Ratings.
The longer-term economic rebound and sustained tariff rises, which will support the rating agency’s expectation of a gradual recovery of profitability. From its peak in 2Q21, the European container throughput index has decreased by 15%, while the worldwide index has remained unchanged. The performance of ports has been impacted by sluggish economic development, a drop in post-pandemic goods demand, and a shift in consumer expenditure toward services.
The Russian invasion of Ukraine has slowed trade in Europe, which has made the situation worse. This year, throughput at the major European gateway ports fell by 5 to 15%.
Given the dismal demand outlook for Europe, Drewry has predicted that the average port utilisation in Europe will drop from 56.3% in 2022 to just 55% in 2027.
By eliminating additional storage fees from which port operators benefited during the pandemic, port congestion has significantly decreased in 2022 and the first half of 2023, and Fitch anticipates this trend to continue in late 2023.
Reduced volumes would likely cause operators to lose economies of scale as utilisation rates will become less than ideal, resulting in decreased earnings per move, according to a release from Fitch. The sharp decrease in freight rates from their epidemic highs projected in 2021, according to Fitch, makes it unlikely that ports would be able to completely pass on inflation to shipping businesses through tariffs in the near future. Smaller and secondary ports may even need to offer discounts to draw customers, which will have a greater impact on their profitability margins.
The cost of living issue and virtually full employment have led to demands for higher wages and increased risks of strike actions, potentially lengthening stay times and raising prices per move. Port operators are also facing growing labor costs.
Due to pressure on profits and cash flows, Fitch anticipates port operators to scale back or delay uncommitted capital expenditure plans.
