The GDP rollercoaster screams on

In a presentation, and in the sector report Port and Port Infrastructure Ratings Move With The Economic Tide, S&P stresses that “a prolonged weak economy poses the greatest risk to much of the US port sector by depressing cargo tonnage or cruise passenger levels”.

In the report, S&P reveals a forecast of 1.8% for growth in the US Gross Domestic Product (GDP) in 2013, followed by a pickup to 2.8%, in 2014.

However, S&P does caution that “our expectation for the chances of another US recession is about 25%. If the US were to enter into recession and port volumes declined, that could pressure some ports’ financial metrics and potentially lead to downgrades.”

Ratings analysts look closely at the numbers, but are also looking at the bigger economic and strategic picture of highly capital-intensive ports business. The RatingsDirect report alludes to some of the challenges faced by the analyst team. Because of the capital intensity, and the long-term nature of supply chains, trade flows are ‘sticky’.

S&P describes the dynamic as follows: “Most US port operators do not face new competition due to tremendous capital investment and transportation infrastructure requirements, as well as environmental and regulatory restrictions.” However, the analysts did caution that increasing environmental and sustainability issues will require ports to wrestle with the impacts of green initiatives against those of economic development and financial results.

In explaining a port’s competitive dynamic, the analyst notes that: “Instead, a port’s competitive risk is the loss of cargo or incremental growth to other markets.” From a ratings perspective, diversification of commodities and tenant base, as well as the port’s place within the bigger trade network, are of vital importance.