Sunny Skies Ahead?

The Port of Mobile has entered an era of growth ahead of the uncertain U.S. trade tariffs.

by David McGrath

The Port of Mobile should be considered one of the crown jewels of the local economy, along with Airbus and Austal. The port, which has been one of the fastest-growing ports in the country over the past 10 years, is on the cusp of seeing benefits from several projects to improve both capacity and efficiency.

To begin with, the Port of Mobile has important logistical advantages. It benefits from access to five Class 1 railroads, which few other ports in the country can claim. This extensive rail network facilitates efficient inland transportation, connecting the port to major markets across the U.S. It also sits on major north/south and east/west interstates, and just 5 miles from Brookley Field.

The new improvements include the dredging of the Mobile Ship Channel to a depth of 50 ft to allow larger vessels carrying more significant cargo volumes. The dredging project is expected to be completed this summer. The size of the port has expanded from 132 acres up to 166 acres and increased the number of cranes from four to six to accommodate the expected increased volume.

To further bolster its logistics capabilities, two new inland container transfer facilities (ICFTs) have been developed in Montgomery and Decatur. This should increase the efficiency of removing containers from the Port of Mobile by rail and the amount of valuable space next to the docks, allowing for more ships to be unloaded. For example, a container destined for the Hyundai plant in Montgomery can now be loaded on a railcar the same day it arrives by ship and moved to the inland port in Montgomery. From there, it is now a much shorter drive by truck to its end destination. That’s a much-improved situation for both Hyundai and the Port of Mobile.

The Tariff Hurricane

Just as we are about to see a much larger cargo volume hitting the Port of Mobile, the entire global supply chain has been thrown into chaos with an ever-changing U.S. tariff policy. The Trump administration is attempting to bring some manufacturing jobs back to the U.S. and to shrink the trade deficit with some of our largest trading Partners.

There are significant short-term questions about how these rapid changes in trade policy will affect business at the port. As I write this at the end of May, it is impossible to predict where the exact U.S. tariff policy will land in respect to China, the European Union and other major trading partners. In the short run, every major port in the country will have to deal with uncertainty as we work through what the “new normal” global trade will look like.

As you get past the short-term view, the intermediate and long-term view is a bit clearer. The U.S. simply does not have the need, or the capacity, to bring all manufacturing on shore. We would like to see computer chips, pharmaceuticals and other complicated products made here. Also, consumer spending is very consistent, and changes in tariff policy should not have a long-term dramatic impact on spending.

With a current unemployment rate of 4.2%, we do not have the workforce to produce everything we consume. Parents will continue to buy back-to-school clothes in August, no matter what the tariff rates are, and those shoes and uniforms will mostly be manufactured overseas. It is hard to envision all of our T-shirts and sneakers ever being made in the U.S.

Yet, we could see more Honda, Volkswagen and Hyundai vehicles being assembled locally. One clear target of the Trump administration with the changing tariff policies is to have more cars assembled in the U.S. This could be a long-term benefit for the port. We do not have many finished vehicles come through our local port, but we do see a significant volume of component parts getting shipped to various auto assembly plants across the Southeast. In the past few months, almost every major car manufacturer have either committed to, or are in talks to, increase production in current assembly plants or build a new plant.

With lower labor costs, a favorable regulatory environment and local tax benefits, the Southeast has been the favored location for new auto assembly plants since the early 1990s. The increased volume in existing plants for Hyundai, Mercedes, Kia, Honda and Nissan should provide a benefit to the port. If the new tariff policy makes it financially beneficial for cars to be assembled in the U.S. with a lower tariff rate of the component parts than the tariff on a finished car, you may well see new assembly plant start to show up in the South. The lead time on a new auto assembly plant is three to four years, so that potential benefit is still some time away.

Another potential benefit to the port could come from retailers carrying lower levels of inventory and needing to use more efficient shipping methods to get products into consumers’ hands. The bottlenecks that hamper the largest ports in the country should make the Port of Mobile an even more attractive option. The ability to get containers off the ship and on a train or truck quickly will be a competitive advantage for the port.

The short-term uncertainty will fade, and the structural advantages that the port has, with the additional capacity and efficiency benefits from recent projects, should only add to the growth that the port has experienced in recent years.

David McGrath, CFA®, brings 29 years of experience in asset management to his role at Oakworth Capital Bank, where he develops and manages wealth relationships across South Alabama. As Chief Equity Strategist and a member of the Investment Strategy Committee, McGrath helps shape Oakworth’s investment approach and equity outlook.