Wall Street doesn’t expect a port strike at the East and Gulf Coasts to be long-lasting if it were to happen.
However, it’s the aftermath that could take weeks to clear up, as well as result in billions in losses.
Jaret Seilberg, a managing director at TD Cowen Washington Research Group, said a work stoppage could last anywhere from “24 hours to two weeks,” according to his contacts in the transportation sector. He said one industry contact’s clients has shifted from diverting “10 percent to 15 percent of their business to the West Coast to now moving 20 percent to 30 percent.” However, Seilberg said a smaller importer is sticking with the East Coast routes because it was “having trouble finding capacity to switch to the West Coast now.”
“If you asked us a few months ago, we would have said the probability of a strike by the International Longshoreman’s Association (ILA) ahead of a presidential election was slim,” Seilberg said. “However, as each day passes, the gaps between the two sides appears to have grown.”
The ILA represents 85,000 workers across 36 ports on the Eastern seaboard and gulf coast. Those ports include 10 of country’s busiest ports. And while President Joe Biden has said he won’t intervene between the two sides, Seilberg said that could be negotiating ploy to get the two sides to the bargaining table before the Oct. 1 strike date. The existing collective bargaining agreement expires on Sept. 30.
The 1947 federal Taft-Hartley Act allows the president to request a court order for an 80-day cooling-off period, essentially pausing a strike and moving the parties back to the negotiating table.
“If there is a strike, it is hard to fathom it will last long given the potential macro impacts,” Seilberg said. He added that a strike would be “massively disruptive to the U.S. supply chain.” While intermodal activity at the West Coast has increased, moving a container through the supply chain is also about to become more expensive. Seilberg said that shipping giants CMA CGM and Hapag-Lloyd are implementing East Coast surcharges that will kick in during the first half of October, with the former tacking on $1,500 per container to ship to a U.S. East Coast and Gulf Port from all origins. And while Hapag-Lloyd is adding $1,000 per TEU (twenty-foot equivalent unit, a measurement for a ship’s capacity) for all imports, Seilberg said storage rates—currently $50 to $100 per day—will likely go up for boxes as well.
“Supply chain disruption could deprive shippers of much-needed ocean rate relief as surcharges partly undo the precipitous drop in spot rates that we have seen over the past few months,” Seilberg said.
He said that while the apparel sector could be the most vulnerable due to seasonality, most likely already have inventories on hand for the fall and winter seasons. And while the “sales to inventory spread remains healthy across retail with sales growth outpacing inventory growth,” Seilberg said this could reverse “depending on the timing of inventory receipts as companies try to get shipments earlier to mitigate the impact.”
Telsey Advisory Group’s chief investment officer Dana Telsey said that when the ILA went on strike in 1977 for seven weeks, that results in $4 billion worth of cargo delays and costing the economy hundreds of millions of dollars, or the equivalent of $20 billion and $1 billion to $4 billion today, respectively.
She said that a one-day strike could take five days to clear the back up, while a one-week strike could cause slowdowns into mid-November 2024 “on an estimated $3.7 billion per day in cargo for October 2024,” citing to data from Sea-Intelligence. In contrast, the eight-day lockout at the ports of Los Angeles and Long Beach in 2012 cost an estimated $1 billion per day in losses. Telsey also noted that in 2002, when then U.S. President George W. Bush invoked the Taft-Hartley Act to end the 11-day lockout by the ILWU longshoremen at the West Coast ports, that had cost the economy an estimate $1 billion per day.
For now, shippers responded by shipping earlier and shifting to the West Coast and Canadian ports, with July 2024 the busiest as imports rose 13 percent year-over-year for back-to school goods and holiday merchandise. But Telsey also said that while the Canadian ports of Halifax and Montreal have proximity to rail carriers, there could be backlogs as they “pass through the Midwest, specifically in Chicago, Ill., and Port Huron, Mich., due to congestion from the limited supply of rail and truck trailer carriers. Moreover, she also raised the possibility that there could be a work slowdown by the ILWU dock workers on the West Coast, in sympathy with their ILA counterparts. That’s primarily because the longshoremen on both coasts are opposed to automation.
In addition to the ILA’s demands for a 77 percent pay raise over a six-year contract term, the union is also against any move to automate certain job functions at the ports.
From a credit analyst’s point of view, the impact for fashion and retail firms from an ILA strike is expected to be higher freight costs, which can impact margins.
“The retail and apparel sector, heavily reliant on sourcing from Asia, primarily uses West Coast ports for importing goods. Thus, disruptions at East or Gulf Coast ports may not directly impact it significantly,” Moody’s Ratings vice president of corporate finance Mickey Chadha said. “However, the sector is vulnerable to interruptions during the peak fall and holiday shipping seasons. With potential diversions to the West Coast due to work stoppages, there could be a temporary surge in freight costs, potentially eroding profit margins.”
He added that companies, especially large retailers with considerable leverage over vendors, often plan well in advance for the holiday season, usually by moving up deliveries to mitigate disruption risks.
According to S&P Global Supply Chain Commentary, imports to the East and Gulf Coasts in August rose 2.5 percent year-over-year, with the shift mostly due to the risk of the port strike and the “increased used of de minimis shipping strategies by mainland Chinese exporters.” The S&P report also noted that the East Coast leads in imports of machinery at 57 percent and vehicle imports at 59.4 percent.
A report from Jefferies Equity Research found that neither shippers nor retailers appear to be scrambling to make adjustments, such as re-routing. In fact, with shipments pulled in earlier ahead of peak holiday shipping season, the note concluded that there could be “breathing room” as a work stoppage could come “just as the post-peak-season lull takes effect.”
Jefferies consumer lifestyle and growth analyst Randal Konik said that a strike at the ILA ports would not have a material impact on the majority of apparel and footwear firms. Many can elect to use air or land shipping over ocean freight, and companies in the sector have included more flexible supply chains in recent years.
Konik did note that those firms with exposure to commodities such as nylon or other polyamides and polyesters, could garner some investor focus. These companies would include athletic apparel brand Lululemon, and the golf sector’s Topgolf Callaway Brands Corp. and Acushnet Holdings Corp.
Jefferies discount retailer analyst Corey Tarlowe said Walmart should be well-positioned, noting that the mass discounter was able to mitigate transit and port delays when there were port closures in 2022, such as by adding extra lead times and rerouting deliveries. The analyst also noted that two-thirds of what Walmart “sells is made, manufactured, or assembled in the U.S.”
In contrast, Tarlowe expressed concern about Dollar Tree, which imports 41 to 43 percent of its merchandise for the Dollar Tree banner, and 15 percent and 17 percent for its Family Dollar nameplate. Noting that Dollar Tree highlighted the import of 90,000 40-foot containers in Fiscal 2021, and that it experienced significant freight costs that year, Tarlowe said a port strike could have the dollar store “experience more substantial increased costs.”
For the distressed home sector, hardlines retail analyst Jonathan Matuszewski said Tractor Supply Co., Home Depot and Lowe’s are most insulated because of their reliance on the domestic supply chains. But categories such as flooring, bedding, and furniture would likely be the most affected industries. Recent home retailer bankruptcies have cited high shipping costs for furniture—due to size and weight—as a contributing problem. The analyst said that those who have been actively diversifying their global supply chains could be less impacted, while others facing persistently elevated shipping rates would probably raise prices charged to consumers, which in turn could drive deferrals in purchasing behavior or trade-down mindset.
On Monday, the American Apparel & Footwear Association (AAFA) called on the Biden administration to intervene to avoid a strike. AAFA president and CEO Steve Lamar said in a letter that the East and Gulf Coast ports accounted for 53 percent of all U.S. apparel, footwear, and accessories imports in 2023, or over $92 billion in value. If AAFA members can get their products to market during the critical holiday season, it will be through “massive delays and at exorbitant cost,” Lamar wrote.
And on Tuesday, the Retail Industry Leaders Association (RILA) also sought intervention from the Biden administration. “The ripple effects of a strike—port congestion, vessel delays and missed shipments, increased shipping costs, inventory challenges, and more—all amount to yet another round of supply chain disruption and uncertainty,” RILA said in a statement. It noted that while retailers have already activated contingency plans to help mitigate its effects, “the longer a work stoppage goes on, the harder it will be to do so.”
