The World Picture A View for Sea Trade

The World Picture A View for Sea Trade Presented to: AAPA Marine Terminal Management October 20, 2008 Baltimore, MD Presented by: Scott Sigman Principal, Global Trade & Transportation IHS Global Insight 781-301-9433 scott.sigman@globalinsight.com Copyright 2008 Global Insight, Inc.

Agenda Global issues The world outlook ECONOMY, TRADE National Outlooks ECONOMY RESOURCES & TRADE Implications for sea trade today A system requires capacity throughout The U.S. Presidential Election Conclusions 2

Key Global Issues and Risks: Q&A My work is related to terminals. Why does economics matter to me? Has world growth peaked? Is it hitting bottom? Will high oil prices derail the recovery and trigger higher inflation? Will the dollar continue depreciating? China: Hard or soft landing? How are different markets impacted? What will be the impact of the economy on the U.S. presidential elections and vice-versa? 3

Growth in the volume of world merchandise trade and GDP, 1997-2007 Source: WTO Secretariat 4

World economic growth is past another peak... 5 (Percent change, real GDP) 4 3 2 1 0 The world economy is in recession when real GDP growth is below 2%. 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 5

2-speed Real GDP Growth Gap Narrowing Long-term 8 (Percent change) 7 6 5 4 3 2 1 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Developed (OECD) Countries Emerging Markets 6

World container trade has been growing faster than the world economy, but the double-digit growth era is over 14 12 (Percent change) 2008 2009 GDP 2.9% 2.4% TEUs 6.1% 6.0% 10 8 6 4 2 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 World GDP% TEUs The U.S. slowdown and oil price spike dampens trade in 2009 7

Wide Variations in Regional Economic Growth 10 (Real GDP, percent change) 8 6 4 2 0 NAFTA Western Europe Japan Other Americas Emerging Europe Mideast- N. Africa Sub- Saharan Africa Other Asia- Pacific 2007 2008 2009 2010 8

Long-term world growth is not uniform: Market shifts continue and will affect U.S. trade and transportation (Country GDP Rank in Billions of Real (2007) U.S. Dollars) 2007 2012 2020 2030 U.S. U.S. U.S. U.S. Japan Japan China China Germany Germany Japan Japan China China Germany India U.K. U.K. U.K. Russia France France India U.K. Italy Russia France Germany Spain Italy Russia France Canada Brazil Italy Brazil 2040 U.S. China India Japan Russia Brazil U.K. Germany France Brazil India Brazil Italy Italy 9

Agenda Global issues The world outlook ECONOMY, TRADE National Outlooks ECONOMY RESOURCES & TRADE Implications for sea trade today A system requires capacity throughout The U.S. Presidential Election Conclusions 10

Asia/Pacific Leads in Industrial Production Growth 12 (Percent change) 10 8 6 4 2 0-2 NAFTA Western Europe Japan Other Americas Emerging Europe Mideast- N. Africa Sub- Saharan Africa Other Asia- Pacific 2007 2008 2009 2010 11

China has Changed Market Reform; Bigger; More Open 1980 2002 2007 Real GDP (2002$ billions) 0.169 1.24 3.28 Relative GDP (% of U.S. level) 3% 12% 23.7% Avg Real GDP Growth Previous 10 Yrs 5.3% 9.3% 9.3% Population (millions) 981 1,285 1,321 Nominal Per Capita GDP 171 946 2483 Trade s Share of GDP 15% 55% 66% Current Account Surplus ($ billions) 1 35 371.8 Agriculture s Share in GDP 30% 15% 11.3% Urbanization 20% 32% 44% Source: WTO, CIA Worldfactbook, EDC Canada, Global Insight, 12

China s Merchandise Export Growth Has Slowed 50 (Six-month moving average, percent change a year earlier) 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total Asia Europe U.S. 13

China s Heterogeneous Regions The Margins: 292 million people GDP: US$505 billion (2007 data) The Rust Belt: 109 million people GDP: US$307 billion The Hinterland: 518 million people GDP: US$981 billion The Coast: 405 million people GDP: US$1,803 billion Source: Global Insight China Regional Service 14

China Exports to Americas 15

Europe, Asia Dominate Import Value Growth by Region 9,000 World Trade Value (Real Billions US$) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Asia Europe IndianSubCont LatAmCarib MidEast-Africa NAFTA 1995 2000 2005 2010 2015 16

Asia, Europe Dominate Export Value Growth by Region 10,000 World Trade Value (Billions of Real U.S. Dollars) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Asia Europe LatAmCarib MidEast-Africa NAFTA IndianSubCont 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 17

Ocean Trade Dominates Trade Value Growth 16,000 Trade Value (Billions of Real U.S. Dollars) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Air Ocean Overland - 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 18

Tanker Trade Dominates Trade Tonnage 4,500 Volume of Ocean Trade, (Millions Metric Tonnes) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - Dry Bulk Liquid Bulk General Cargo Container 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 19

U.S. Containerized Maritime Trade 160 140 Imports Exports 120 Million Metric Tons 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 20

U.S. Maritime Trade Narrowing Gap between Imports & Exports 1200 1000 Imports Exports Million Metric Tons 800 600 400 200 0 2003 2004 2005 2006 2007 2008 21

Agenda Global issues The world outlook ECONOMY, TRADE Nations & Regions ECONOMY RESOURCES & TRADE OUTLOOK More Implications for Sea Trade A system requires capacity throughout The U.S. Presidential Election Conclusions 22

World Real Oil Prices Will Decline Key Drivers Speculators pushed up the dollar oil price. Global demand growth outstripped supply. Short run additions to supply disappoint. Periodic supply disruptions contribute to price volatility Geopolitical events. Speculation / Market events. Abundant energy resources Concentrated in higher-risk locales. Conservation and additional production progress. Risks: Lower prices in the near-term, Forecast lower prices in the medium-term (WTI falling to average $90-101/bbl in 09-10- 11) 23

Real Crude Oil Prices Will Come Down (U.S. refiners acquisition price of imports, $/barrel) 160 140 120 100 80 60 40 20 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Nominal Real (2007 dollars) 24

The Petroleum Resource Base Is Not a Constraint: Projected Supplies and Development Costs Dollars per Barrel Billions of Barrels Sources: IEA, EIA, Company Websites, O&G Journal, World Oil, Rand Corporation, ECG 25

Oil Prices Will Return to Elevated Levels $140 (West Texas Intermediate price, dollars per barrel) $120 $100 $80 $60 $40 $20 $0 1998 2000 2002 2004 2006 2008 2010 2012 26

Industrial Materials Prices Retreat from Peaks 5 (Global Insight Indexes, 2002:1=1.0) 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 In U.S. Dollars In GDP-Weighted Currency Basket 27

Household Energy Spending Takes a Larger Share of Disposable Income 10 (Percent of disposable income) 8 6 4 2 0 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Gasoline Consumption All Energy Consumption 28

U.S. Foreign Trade Outlook Reflects the Impacts of Exchange Rates, Business & Consumer Spending 20 (Percent change from a year earlier, volumes) 15 10 5 0-5 -10-15 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Real U.S. Exports Real U.S. Imports Source: Global Insight U.S. Macroeconomic Forecasting Service 29

TR "...the man who really counts in the world is the doer, not the mere critic, the man who actually does the work, even if roughly and imperfectly, not the man who only talks or writes about how it ought to be done." (1891) 30

U.S. Long-Term Globalization Trends Are Not Reversed by the Current Oil Price Spike U.S. Imports and Exports as Percent of Gross Domestic Product Source: Global Insight U.S. Macroeconomic Forecasting Service 31

The Story on Reverse Globalization High transportation costs Origin to Destination Can somewhat be offset Trade-offs in service quality Direct trade sourcing diversion pressures can be reduced 32

Outlook for U.S. Transportation from Trade Long-term, trade volume growth eventually adds new traffic through smaller port gateways and on secondary traffic lanes. Trade growth increases average total length-ofhaul, but inland U.S. transport rail & truck mode portions of these shipments are under pressures from energy, environmental and labor dimensions to be rationalized. The cost pressures work to the advantage of rail versus truck. 33

The U.S. dollar depreciation steady decline from 2002, due to current account deficits. 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Major Trading Partners Other Important Trading Partners 34

U.S. Dollar Exchange Rates Depreciation Against Japanese Yen (Yen per U.S. dollar, quarterly averages) 150 130 110 90 70 50 1996 1998 2000 2002 2004 2006 2008 2010 2012 Spring 2009 Trough Against the Euro 1.2 (Euro per U.S. dollar, quarterly averages) 1.1 1.0 0.9 0.8 0.7 0.6 0.5 1998 2000 2002 2004 2006 2008 2010 2012 1.8 Near Parity with the Canadian Dollar (Canadian dollars per U.S. dollar, quarterly averages) 9 Falling Against China s Renminbi (Yuan per U.S. dollar, quarterly averages) 1.6 8 1.4 1.2 1.0 7 6 0.8 5 0.6 1996 1998 2000 2002 2004 2006 2008 2010 2012 4 1996 1998 2000 2002 2004 2006 2008 2010 2012 35

The U.S. Economy in Recession The financial crisis will deepen and prolong the recession that began in late 2007 Consumers, businesses, and state & local governments face tighter credit conditions and will spend cautiously The global economy is dragged down too, undermining the U.S. export boom Inflation is yesterday s problem; more interest rate cuts are expected No sustained upturn until mid-2009 at earliest 36

As U.S. Economic Growth Falls Below Potential, the Unemployment Rate Rises 8 (Annual percent change, 2000 dollars) (Percent) 8 6 7 4 6 2 5 0 4-2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 3 Real GDP Growth Unemployment Rate 37

Canada s Economy Faces Headwinds After soaring 60% from late 2002 to late 2007, the Canadian dollar has retreated 15% Growth stalled in the first half of 2008 as a weak U.S. economy dragged down exports No pick-up is expected before the summer of 2009 Consumer and government spending are driving the economy Western provinces will lead Canada s growth; Ontario and Quebec will lag 38

Canada s Economic Growth Depends on the U.S. 6 (Real GDP, percent change) 4 2 0-2 -4 1988 1991 1994 1997 2000 2003 2006 2009 2012 Canada United States 39

Western Provinces Lead Canada s Growth not updated for national forecast (Percent change, real GDP) Canada British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick Nova Scotia PEI 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2007 2008 40

Mexico s Economy Chilled by U.S. Recession Manufacturing and remittances are adversely affected by the U.S. recession Monetary policy was tightened to restrain inflation Fiscal stimulus support growth But declining oil production is a major problem Currency adjustments have improved competitiveness More structural reforms are needed 41

Mexico s Economy on a Moderate Growth Path 8 (Percent change, real GDP) 6 4 2 0-2 -4-6 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Mexico United States 42

Mexico s Economy Chilled by U.S. Recession Manufacturing and remittances are adversely affected by the U.S. recession Monetary policy is tightening to restrain inflation High oil prices and fiscal stimulus support growth Declining oil production is a major problem Currency adjustments improved competitiveness, helping auto industry More structural reforms are needed Education Infrastructure FDI / Productivity Competitiveness 43

Asia Helping More than Hurting World Growth China, particularly Domestic demand growth strong as mini growth locomotive. Boost to commodity exporters worldwide. India, particularly Early signs of economic take off Reform process continues. Inflation has been rising Fear of overheating, so far premature High savings rates as capital exporters Investors in ports and transportation infrastructure. China is expected to continue growth with a soft landing. 44

Regional Select GDP 8.00% 7.00% 2007-2008-2009-2010 GDP (% Change Y-Y) Percentage Change 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Countries Canada Caribbean Colombia Costa Rica Ecuador Mexico Trinidad and Tobago United States 45

Trade Prompts Interdependence 40 (Percent of world GDP in US$) 35 30 25 20 1995 2000 2005 2010 2015 2020 2025 North America Western Europe Asia/Pacific 46

Agenda Global issues The world outlook ECONOMY, TRADE Nations & Regions ECONOMY & TRADE OUTLOOK RESOURCES & PRICES OUTLOOK More Implications for Sea Trade A system requires capacity throughout The U.S. Presidential Election Conclusions 47

China Exports to the World - Growth 48

US Primary Coastal Ranges Source: Historical data from selected national and international data sources. All forecasts provided by Global Insight. 49

North American Opportunity Compete for imports from the Far East USWC port and rail congestion will likely persist. Container volumes will continue to grow. All-water service cost may go up. 50

Agenda Global issues The world outlook ECONOMY, TRADE Nations & Regions ECONOMY & TRADE OUTLOOK RESOURCES & PRICES OUTLOOK More Implications for Sea Trade A system requires capacity throughout The U.S. Presidential Election Conclusions 51

Global Insight Election Model Points to the Democrats 65 (Percentage of 2-party presidential vote for incumbent party) 60 55 50 45 40 48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 Actual Predicted 52

Bottom Line Impact to Trade Patterns Supply Chain Flows Driven by Economics Relative Prices and Total Delivered Cost. Impact from Near-sourcing Transport cost increases Trade with Near-Neighbors and Domestic Sources. Impact on Trade in the Americas Exports have been up Soften due to global slowdown. Energy Price Spike (July) Has Limited Impact. Infrastructure capacity: Trade diversion risks considered. Current flow adjustment is no excuse for delay improving facilities. 53

Bottom Line Global recovery will happen, but uneven. Inflation and interest rates are set to fall then rise. A soft landing is the most likely scenario for China. $100 oil and $4 diesel ranges are challenging What direction foresee opportunities Global Insight: $90-$95? Others: $147? 175? $200? The dollar will appreciate somewhat, but stabilize. 54

Bottom Line A global recession in 2009 is increasingly likely After surging in 2008, global inflation will retreat in 2009 The U.S., Japan, and several European countries (U.K., Italy, Spain, Ireland) will experience recessions Growth in emerging markets will slow; there is no decoupling from the downturn in advanced countries The global financial crisis poses downside risks 55

Did we answer the questions? Growth in all major regions will slow in 2009 Inflation depressurized as commodity prices retreat The U.S. recession will extend into 2009 Headwinds from currencies, tightening credit, and price corrections Emerging markets increasingly drive global growth A worsening financial crisis is the major risk I work on the terminal. Why does economics matter to me? 56

Thank You! QUESTIONS? Discussion?! Visit Us on the Web: www.globalinsight.com Thank you! AAPA Marine Terminal Management October 20, 2008 Baltimore, MD Presented by: Scott Sigman Principal, Global Trade & Transportation IHS Global Insight 781-301-9433 scott.sigman@globalinsight.com 57