A More Competitive World Pacific Northwest Freight Movement Opportunities and Risks 2013 Annual Convention Portland, Oregon October 3, 2013 Tom McCollough, Vice President Moffatt & Nichol 1
Major trends 1. The global economy depends primarily on the US 2. The US economic outlook depends on exports 3. US exports can grow IF infrastructure investment begins now 2
2012: The US steps up (and continues to do so in 2013) Europe s recession pulled China and Latin America down. The US became the recession-buster. Japan s contribution reflects a rebound from the effects of the 2011 earthquake and tsunami. The US (excluding Japan s contribution) singlehandedly continues to support global economic growth. Contributions to the Change In Global Real GDP Growth in 2012 0.20% 0.15% Pulling global growth up 0.10% 0.05% 0.00% -0.05% -0.10% -0.15% United States China Japan India Germany Russia Brazil United Kingdom France Italy Mexico Korea Spain Canada Indonesia ROW -0.20% -0.25% Pulling global growth down -0.30% United States China Japan India Germany Russia Brazil United Kingdom France Italy Mexico Korea Spain Canada Indonesia ROW 3
Unsustainable trade deficit Excluding the oil trade deficit, the Goods deficit is 2x the Services surplus. This contributed to the decline in the value of the dollar last decade and the US economic crisis. The US is importdependent and needs to increase exports to correct the economic threat the trade deficit imposes or US Trade Balance Components: 1992-2012 $20 Billions $0 -$20 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 32% of the trade deficit is due to oil 4 -$40 -$60 -$80 Goods Balance Services Balance Oil Balance Foreign Investment in the US Industry Share Manufacturing 34% Other industries 21% Finance (except depository institutions) and insurance 14% Wholesale trade 11% Depository institutions (banking) 7% Information 5% Professional, scientific, and technical services 4% Retail trade 2% Real estate and rental and leasing 2% 100%
Longest post-recession recovery period since 1950 Employment recoveries have been lengthening as capital and foreign labor (offshoring) reduce manufacturing employment. US workers need opportunities in export-oriented industries. 160 140 120 100 80 60 US Non-farm Payrolls 1970 2015 And Recovery Periods 18 Mos 15 Mos 10 Mos 26 Mos 30 Mos 78 Mos Jul 2014? 46 Mos Question: Will the recovery be complete before the next recession begins? 40 20 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Recession Employment (millions) Trend Forecast 5
Unprecedented Greying Tsunami The US, as well as other major developed economies, has an increasing share of its population entering retirement. This impacts labor markets and future public sector spending. People Turning 65 and Their Share of US Population: 1900-2050 25% Last Boomers Turn 65 (2026) 2,000 1,800 20% 1,600 1,400 Share 15% 10% First Boomers Turn 65 (2011) 1,200 1,000 800 600 Thousands of People 5% 400 200 0% 0 1900 1907 1914 1921 1928 1935 1942 1949 1956 1963 1970 1977 1984 1991 1998 2005 2012 2019 2026 2033 2040 2047 65 and Over Share of Population (left) Increase in Over 65 Population (right) 6
US and developed economy labor costs are not competitive It is unlikely that labor-intensive manufactured goods will be produced in the US. Note: be careful with country wage comparisons when large countries are involved as wages vary greatly across large areas. $55,000 $50,000 Manufacturing Wage Comparisons in US$ in 2008 and 2012E 44% of World Population 9% of World Population $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 7
China has changed its economic objectives China is investing in more capital per worker to boost productivity. Higher productivity means higher wages to increase consumer spending. More consumer spending reduces dependency on exports. 60% China s Investment Spending Share of GDP 50% 40% 30% 20% 10% 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Investment IMF Investment MN 8
China wants to depend less on developed economies Mexico and India have lower raw material costs and cheaper labor. Mexico has lower transportation costs to/from the US. China s most recent 5-Year Plan focuses on increasing domestic consumption to reduce dependency on exports, it may not care about losing share of US imports. Indexed Value of US Imports From China, India and Mexico Imports Indexed to 100 in December 2008 250 200 150 100 50 0 Mexico has long been the US largest trading partner India s share is increasing at China s expense Neither of these trends support PNW port volume growth 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 China India Mexico 9
Emerging markets are the growth opportunity for developed economies Growing emerging market middle class consumers want the same things that their developed economy counterparts buy. Real GDP Growth: 1980-2018E 14% GDP Based on Purchasing Power Parity 2012 Rank 1982 1992 2002 2012 1 US US US US 2 Japan Japan China China 3 Germany Germany Japan India 4 France China Germany Japan 5 Italy Russia India Germany 6 UK France France Russia 7 Brazil Italy UK Brazil 8 Mexico UK Italy UK 9 India India Brazil France 10 China Brazil Russia Italy 11 Spain Mexico Mexico Mexico 12 Canada Spain Spain Korea 13 Australia Canada Canada Canada 14 Netherlands Korea Korea Spain 15 Saudi Arabia Indonesia Australia Indonesia 12% 10% 8% 6% 4% 2% 0% -2% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018-4% -6% World Advanced economies Developing Asia Source: IMF
Sustainable exports are those where the US has a comparative advantage 1. Require low interest rates so that capital investment is cheap enough to reduce labor usage 2. Technology supports higher quality and/or lower costs 3. Cheap raw materials 4. Supportive regulatory framework focused on quality control Primary Petrochemical Production: technological advances can be exploited across the economy 11
US can grow export of industrial goods Capital for labor substitution and shifts towards higher-end capital (industrial) goods such as jetliners underlie growing manufacturing output. US can grow these exports. 800 Manufacturing Production and Employment Indexes (1950 = 100) 700 600 500 400 300 200 100 0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Industrial Production Manufacturing Employment 12
Commodity demand is growing faster than supply Emerging Market consumption demand will be met. Commodity production is capital-intensive which means Commodities are good candidates for US exports (if we can get them to market). 700 Major Commodity Price Indexes (2000 = 100) 600 500 400 300 200 100 Steel scrap Copper Soybean Oil Crude Oil Meat Natural Gas 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 13
Energy sector has to accommodate emerging market demand Since 1972 growth in oil consumption has come from Developing Economies. Since 2008 Emerging Markets consume more oil than Developed Economies. Rising oil prices reflect increasing production costs and lack of substitutes for oil until recently. Crude Oil Consumption and Annual Average West Texas Intermediate Benchmark Price 100 90 $120 80 $100 Millions of Barrels Per Year 70 60 50 40 30 $80 $60 $40 Price per Barrel 20 $20 10 - $0 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Developed Emerging World WTI (right) 14
US can export its low cost natural gas Mexico also has natural gas, but without exploration investment reform, domestic production will remain more expensive than imports from the US. Europe and Asia would like to tap into US production for fuel and manufacturing feedstock (plastics). US Natural Gas Prices and Trade With Mexico Natural Gas Price (black) has decreased over time, and supply side suggests this will remain the case for some time. Natural Gas Exports to Mexico (blue) tend to exceed Imports (red), making it a favorable component to our trade balance equation. There is further room for that contribution to the balance of trade. US$ Millions 300 250 200 150 100 50 0 1997 1997 1998 1999 2000 2000 2001 2002 2003 2003 2004 2005 2006 2006 2007 2008 2009 2009 2010 2011 2012 2012 US Exports US Imports Natural Gas Price (right) 12 10 8 6 4 2 0 US$ Per Million BTU 15
Water is becoming increasingly scarce Potable water and arable land scarcity is a growing concern in Asia and the Middle East. The UN FAO estimates that Asia and the Middle East are seriously stressed. Stressed Critical Source: UN Food and Agricultural Organization 16
China s response to water scarcity is worrisome The Tibetan plateau is the world s largest freshwater repository and the source of Asia s greatest rivers, including those that are the lifeblood of mainland China, South Asia and Southeast Asia. New dam projects announced recently by China s State Council are concentrated in the Tibetan plateau, which could spark political tensions. More food security for Asia might ease the pressure. 17
The Americas are a proven source of agricultural supply to Asia Agricultural productivity is rising in the Americas while weakening in Asia. The US can benefit from this (if we can get products to market), but our competitors are gaining. 35,000 Soy Yields (Hectogram Per Hectare) 30,000 25,000 20,000 15,000 10,000 USA Brazil Argentina Canada World China Indonesia India 5,000 Source: ASCE Failure to Invest 0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 18
Weak bridges raise the cost of heavy US exports like agricultural goods The price tag to repair and modernize the nation's 600,000 bridges is $140 billion, according to a report by the American Association of State Highway & Transportation Officials (AASHTO) in July, 2008. Highway Bridges Not In A State of Good Repair 19
Containerization of freight is increasing Bulk exports are increasingly containerized as prices (values) rise and rates (costs) decline. Ports need to be capable of supporting containerized and bulk agricultural exports. Percentage of Non-fuel Containerized Marine Freight 60% 50% Imports 40% 30% Exports 20% 10% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20
Deteriorating inland waterway infrastructure 54% of the Inland Marine Transportation System s (IMTS) structures are more than 50 years old and 36% are more than 70 years old. This has impacted where grain is produced and exported. Hours of Lock Outages by Year and by Type of Outage Grain and Oilseed Production in 1997 Grain and Oilseed Production in 2007 Share of US Grain Exports 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E Gain Columbia-Snake 14% 17% 16% 14% 16% 18% 15% 17% 18% 20% 24% 10% Los Angeles, CA 1% 1% 2% 2% 4% 4% 3% 3% 4% 4% 5% 3% Minneapolis, MN 0% 0% 1% 1% 2% 1% 1% 2% 1% 1% 0% 0% New Orleans, LA 60% 55% 51% 54% 49% 46% 51% 49% 47% 51% 46% -14% Norfolk, VA 1% 0% 1% 2% 2% 2% 2% 2% 2% 2% 2% 2% San Francisco, CA 1% 1% 1% 1% 1% 1% 2% 1% 2% 2% 2% 1% Seattle, WA 8% 11% 13% 12% 11% 13% 12% 11% 12% 11% 10% 2% Total US 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 21
US must repair and build infrastructure The aggregate loss of GDP from the U.S. economy is expected to be $3.1 trillion cumulatively over the years 2012-2020, and an additional $18 trillion from 2021 through 2040. By 2020, the economy is expected to lose almost 3.5 million jobs, and mounting impacts from underinvestment in infrastructure will result in nearly 7 million jobs lost by 2040. Source: ASCE Failure to Invest 22
Larger vessels are gaining share of the global fleet Rising fuel costs are offset by economies of scale achieved by deploying vessels that require 50 feet of water, longer berths and gantry cranes with a greater outreach. Widening the Panama Canal incentivizes deployment of larger vessels but a third set of locks is needed. This will help US exports from East Coast and Gulf Ports to Asia. Many US ports are preparing for the larger ships (significant infrastructure investment). Global Fleet Composition by Capacity Global Order Book Largest Vessel >20K TEUs Source: Alphaliner Source: Alphaliner 23
Public sector finances are strained Government Debt-to-GDP ratio is at its highest level since World War 2. Demographic trends indicate it will be difficult to reduce the $16 trillion debt to a desirable level (below 60%) for a long time. $18 US Government Debt and Debt-to-GDP Ratio: 1976-2013 120% $16 $14 100% $12 80% Trillions $10 $8 60% $6 40% $4 $2 20% 24 $0 1976 1977 1979 1981 1982 1984 1986 1987 1989 1991 1992 1994 1996 1997 1999 2001 2002 2004 2006 2007 2009 2011 2012 Govt Debt Govt Debt to GDP 0%
US has sufficient financial resources for infrastructure investment needs US wealth exceeds the amount needed to return all US infrastructure to a state of good repair (about $4 trillion) to improve export competitiveness. 70 US Total Household Net Wealth 60 US$ Trillions 50 40 30 The $4 trillion needed represents approximately 6.7% of 2012 Household Net 20 10 25 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
The public sector needs to uncork the bottleneck Given the state of government finances, demographic trends, the magnitude of US Household Wealth and the substantial infrastructure investment bill, the importance of Public-Private-Partnerships is increasing. But the public sector finds it challenging to be a good partner. Risk-Responsibility Allocation Matrix Type of Risk Planning & Geological & Construction Force Responsibility Permitting Development Environmental & Completion Operational Financial Majeure Government XXX XXX XX XX General Contractor XXX XXX XXX XXX Operator X X XXX Investors XX XX XX XX XXX XXX Lenders X X X XXX Insurers X X X X XX 26
Brazil Is making a major infrastructure development policy change Brazil s exports have underperformed, but a major infrastructure development policy is being rolled out. Panama Canal expansion could be a game changer for soy exports. China has been investing in Argentina. Canada has invested in productivity to offset appreciation of its currency. It is not clear how long the US can retain its pole position. 40% Latin America Goods Exports As A % Of GDP Brazilian Soy Production and Exports 35% 30% 25% 20% 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Goods Exports as a % of GDP Ecuador Chile Uruguay Mexico Venezuela Peru Argentina Colombia Brazil 27
Increasingly urbanized, increasingly congested Drivers are farm mechanization, automation, increasing service employment opportunities and aging populations. Port cities will find it increasingly difficult to expand their footprint. Percentage of urban population and urban agglomerations 1980 Fewer people live on the farms. More people are living in urban coastal areas. Most major ports are in or near an urban center. 2011 Urban congestion has adverse impact on delivering products to the port. 28
The Internet is changing consumer and seller behaviors Same day delivery is necessary for e-commerce to close the brick & mortar gap. Social media allows selling before products hit the shelves. Good luck to the freight movement industry as it tries to find sufficient space for warehouses. 60 Sales At General Merchandise and Electronic/Catalogue Stores 50 40 30 Good luck to the freight movement industry as it tries to find sufficient warehouse space 20 10 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Ecommerce and Catalogue Bricks and Mortar 29
Summary 1. The global economy depends primarily on the US 2. The US economic outlook depends on exports 3. US exports can grow IF infrastructure investment begins now 30 Additional Information: Tom McCollough tmccollough@moffattnichol.com (206)622-0222 Walter Kemmsies wkemmsies@moffattnichol.com (212) 768-7454