2019 AAPA. Planning for Shifting Trade Tampa, FL. Joshua Hurwitz. January 30, 2019

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1 2019 AAPA Planning for Shifting Trade Tampa, FL January 30, 2019 Joshua Hurwitz

2 Commercial & Technical Advisory Services Who we serve Commercial Advisory Services Port Engineering / Design / Operations Commentary and presentation materials are based on the personal views of the speaker and may not coincide with opinions held by or its employees 2

3 Agenda 1. You don't know where you're going until you know where you've been 2. We don t know what will happen in the future, but we know what may happen and therefore can plan for it 3. Ports are, and should be, champions of infrastructure development 4. Conclusion 3

4 You don t know where you re going until you know where you ve been

5 Three broad themes discussed at the 2008 AAPA Shifting Trade Lanes conference in Tampa, FL 1. The weakening economic outlook 60/40 chance of recession Potential shock housing/sub-prime credit markets 2. The expected future opening of the Panama Canal Favoring all-water route to US East Coast via Panama Canal Increase in Caribbean transshipment 3. Capacity limits in Los Angeles & Long Beach lead to new gateways for U.S. cargo, especially in Mexico Punta Colonet Intermodal route from Lazaro Cardenas to U.S. 5

6 How well did our predictions pan out? GREAT FINANCIAL CRISIS (GFC) PANAMA CANAL EXPANDS U.S. EAST COAST GAINS SHARE 60% 50% 40% 30% 20% 10% 0% West Coast East Coast Gulf Coast 6

7 US container trade growth continues to outpace overall economic growth at roughly 1.8X GDP U.S. CONTAINER TRADE GROWTH & GDP YOY% Growth 20% 10% 0% -10% -20% Source: AAPA; MN 3.0X Avg Multiplier 1.8X Avg Multiplier Multiplier (RHS) GDP Growth TEU Growth Multiplier U.S. TOTAL CONTAINER TRADE ( ) TEU (Millions) Source: AAPA; MN 4.2% CAGR 7

8 Alliances dominate the Transpacific trade lane, less so on Transatlantic SHARE OF ALLIANCE SERVICES FROM DEPLOYED CAPACITY Vast majority of Trans-Pac capacity is in alliance services 100% 75% 50% 25% 0% Global - TEU Trans Pacific - TEU Global - TEU Trans Pacific - TEU Trans Atlantic - TEU Early YTD (July) Source: Bluewater No Alliance 2M Alliance THE Alliance OCEAN Alliance CKYH Alliance G6 Alliance Grand Alliance New World Alliance 8

9 Average vessel sizes have increased on the order of % over the past decade AVERAGE VESSEL SIZE (TEU) AT SELECT U.S. CONTAINER PORTS, ,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 *Mobile *Tampa 2012-expected average following COSCO service deployment MAXIMUM VESSEL SIZE DEPLOYMENT BY PORT Vessel Capacity (TEU) 25,000 20,000 15,000 10,000 5,000 0 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 Feb-18 LA/LB Max NY/NJ Max Global Max Source: COMPAIR 9

10 Liner Consolidation and Alliances COSCO acquires OOCL 10

11 Consolidation trickling down to terminals and port authorities 11

12 Strong container growth at many North American ports 2018 TEU volume (in millions) and year-on-year growth rate for selected ports 14% 12% 10% 8% New Orleans, 0.6M Prince Rupert, 1.0M Norfolk, 2.8M NYNJ, 7.1M Oakland, 2.5M 2018 estimated US port growth: 5.1% 6% Houston, 2.7M 4% Savannah, 4.3M Charleston, 2.3M 2% 0% LALB, 17.5M NWSA, 3.8M Source: MN estimates, port authority websites 12

13 We don t know what will happen in the future, but we know what may happen and therefore can plan for it

14 In the U.S., economic fundamentals look ok for now, but headwinds exist and policy uncertainty looms over the near term Employment Payrolls (Millions) % Fed Funds Rate Effective Fed Funds Rate 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% NonFarm Payrolls YOY% 0.0% % 4% 2% 0% -2% -4% Retail Sales Retail Sales ($Billions) $250 $200 $150 $100 $50 $- -12% New Home Sales New Sales (Thousands) Retail Sales YOY%!! % 9% 6% 3% 0% -3% -6% -9% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Effective Fed Funds Rate New Home Sales YOY% 14

15 Fewer levers left to manage the next recession; global growth slowing THE US BUDGET DEFICIT IS INCREASING OECD: GLOBAL GDP GROWTH IS LOSING MOMENTUM OECD Economic Outlook, 21 November 2018

16 2019 AAPA Annual Conference There is a lot of near-term uncertainty, but infrastructure is long-term GLOBAL ECONOMIC POLICY UNCERTAINTY, JANUARY 1997 TO DECEMBER 2018 U.S. Elections & Politics in Brazil, China, France, South Korea and the UK Shifting global economy, Brexit, US government shutdown, tariff policy Asian & Russian Financial Crises 9/11 Invasion of Iraq Global Financial Crisis Eurozone Crisis, U.S. Fiscal Battles, China Leadership Transition Brexit Referendum Immigration Crisis, China Economy Fears Source: PolicyUncertainty.com; Baker, Bloom and Davis Global EPU Index 16

17 US Containerized Volume Growth Projections US CONTAINER GROWTH PROJECTIONS MARKET SHARE PROJECTIONS BY COAST TEU (million) CAGR: 2.7% 2040 CAGR: 2.9% CAGR 1.9% CAGR 3.0% CAGR Share of US 60% 50% 40% 30% 20% 10% % Import Export Empty West East Gulf 17

18 Several factors have the potential to alter our planning for trade lane growth 18

19 China s effort to reduce waste imports is shifting US waste paper export trading partners EXPORTS OF US WASTE PAPER (6-MONTH MOVING AVERAGE) 140, , ,000 TEU 80,000 60,000 40,000 20,000 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 China India Korea, South Indonesia Vietnam Taiwan Thailand Other NonContainerized Equivalent Source: US Trade Online 19

20 IMO 2020 could (temporarily?) shift up to 1.2 million TEU of discretionary cargo to the West Coast LALB NORTH ASIAN IMPORTS BASE CASE LALB NORTH ASIAN IMPORTS LOW SULFUR HFO LALB's Cost Advantage More than $200 $151 to $200 $101 to 150 $51 to 100 $1 to $50 $0 or less Source: MN 12 % Base Case 18% Low Sulfur HFO LALB's Cost Advantage More than $200 $151 to $200 $101 to 150 $51 to 100 $1 to $50 $0 or less Cost Advantage of LALB over NYNJ for North Asian Import destined for Chicago 20

21 US China tariff hikes would slow GDP growth IMPACT ON GDP AND TRADE BY 2021, PERCENT DIFFERENCE FROM BASELINE % Total tariffs plus higher uncertainty -0.8 Tariffs on rest of US-China trade in Current tariffs rise to 25% (The Jan increase postponed 90 days) -2.0 USA GDP China GDP World GDP World Trade Trade excl. USA & China Current US-China tariffs Source: OECD

22 Conflicting trends and a diversity of business strategies for serving inland markets HIGHLY CONGESTED HIGHWAYS, 2045 PRECISION RAILROADING Source: USDOT, Bureau of Transportation Statistics,

23 Ports are, and should be, champions of infrastructure development

24 Smart infrastructure investment precedes, follows and facilitates trade growth SAVANNAH, GA: MASON MEGA RAIL 2020 Source: GPA / Stephen A. Morton 24

25 Smart infrastructure investment precedes, follows and facilitates trade growth TAMPA, FL: MASTER PLAN: VISION 2030 Source: Port Tampa Bay 25

26 Conclusion

27 Major Themes 1. US economy strong but showing signs of weakness; Global growth slowing 2. Near-term uncertainty over major economic policies, including trade policy 3. IMO 2020 has potential to cause short-term congestion challenges in West Coast 4. Longer-term macro fundamentals favor continuation of slow shift to East and Gulf Coasts, provided proper planning 5. Landside connectivity is an evolving challenge 6. Efficient freight networks require multiple entities working together 7. Infrastructure needs a champion: port authorities are that champion 27

28 Joshua Hurwitz THANK YOU