Major Issues and Trends Facing the Port and Marine Transportation Industry

Major Issues and Trends Facing the Port and Marine Transportation Industry Presented to: AAPA Marine Terminal Management Training Program April 24, 2006 Charleston Riverview Hotel Charleston, SC - USA Presented by: Robert West Managing Director, Global Trade & Transportation Global Insight 781-301-9078 robert.west@globalinsight.com Copyright 2004 Global Insight, Inc.

Agenda Global issues and trends affecting the world and U.S. economic outlooks What about China? Implications for sea trade in the U.S. Conclusions 2

Key Global Issues and Trends Will higher oil prices derail the recovery? Will the dollar crash? China: Hard or soft landing? New and important players? NO - Not at $70-75 NO, but... SOFT YES, A FEW... 3

Has world economic growth peaked? ---yes, but The world economy is in recession when real GDP growth is below 2%. 5 (Percent change, real GDP) 4 3 2 1 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 4

Container trade normally grows faster than the world economy. This year should be very healthy. 14 12 10 2006 GDP 3.4% TEUs 8.2% 8 6 4 2 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 World TEUs 5

Asia is 2/3 of global container trade. TRANS-ATLANTIC ATLANTIC 5.4 million TEU 5.7% Growth ASIA-EUROPE 12.1 million TEU 12.2% Growth TRANS-PACIFIC 19.3 million TEU 10.8 % Growth INTRA-ASIA ASIA 26.2 million TEU (including Australia, Indian Subcontinent and Middle East) 10.0% Growth World Container Trade Flow 2005 E-W = 43% Intra Asia = 31% 6

Real GDP Growth Is Uneven Across the World and emerging markets grow fastest. 8 6 4 2 0 NAFTA Other Americas Western Europe Emerging Europe Japan Other Asia Mideast & Africa 2004 2005 2006 2007 7

The U.S. expansion is entering a new phase. The U.S. economy has strong momentum entering 2006. 4.8% in the first quarter Business investment is now leading the expansion, supported by record profits and global market growth. Further dollar depreciation is expected, boosting exports. Home sales and construction will decline as affordability deteriorates; hurricane rebuilding will cushion the fall. Consumer spending growth will slow in response to higher interest rates and a cooling housing market. A Fast Start and A Slow Finish in 2006 8

The U.S. Economic Expansion Will Slow. 8 (Annual percent change, 2000 dollars) (Unemployment rate - %) 7 6 4 2 0 6 5 4 3-2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2 Real GDP Growth Unemployment Rate 9

A Record U.S. Current Account Deficit over $800 billion as far as the eye can see. 200 0-200 -400-600 -800-1,000 (Billions of dollars) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2 0-2 -3-5 -6-8 Current Account Deficit Deficit as % of GDP 10

U.S. Imports are fueling the huge current account deficit. (Billions of dollars) 400 200 0-200 -400-600 -800-1,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 United States Western Europe Japan Asia exc. Japan 11

The U.S. dollar will depreciate further steady declines through 2008, due to huge current account deficits. 1.3 (2000=1.00) 1.2 1.1 1.0 0.9 0.8 0.7 12 1978 1979 1980 1981 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 Industrial Countries Developing Countries

Real U.S. exports and imports reflect the business cycle and exchange rates. (Year-over-year percent change) 16 12 8 4 0-4 -8-12 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Real Exports Real Imports 13

Asia is supporting world growth. Inflation remains under 4% in most Asian economies exceptions include Indonesia, India, and the Philippines. High saving rates mean these economies will continue to be capital exporters - investors in ports and transportation infrastructure. China will have a soft landing. Exchange rates across Asia will rise as part of a global trade adjustment. India is positioning for an economic take off. 14

India could align with China and create a powerhouse from toys to high tech. India and China Real GDP Growth Rates 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 India Real GDP China Real GDP $1.3 trillion GDP 8%/year total TEU growth to 2010 6.8% GDP growth this year (2006) 1.1 billion population is growing 1.5% annually 15

China s momentum is hard to slow down, but the government is trying - - - soft landing most likely. 1980 2004 Real Per Capita GDP (2004$) $171 $964 Real GDP as $ of US Level, 2004$ 3% 14% Real GDP growth in previous 20 years 5.3% 8.6% Population (millions) 981 1,300 Trade's share of GDP 15% 85% Number of Supermarkets 0 70,000 Current Account Surplus ($ billions) 1 266 Agriculture's share of GDP 30% 15% Urbanization 20% 33% 16

China s container exports continue to grow at double-digit rates NAFTA s share has hit 45%. 40,000,000 35,000,000 TEU exports climb by 14.3% in 2006. 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NAFTA World Total 17

Mexico joins China s million-teu club China/HK - Largest Export Markets 2010 2006-10 United States 12,084,640 9.8% Japan 3,778,186 9.1% Mexico 2,798,144 15.5% South Korea 1,862,507 11.4% Germany 1,554,331 10.1% United Kingdom 1,447,126 11.2% Mexico already imports 1.5 million full TEUs from China (2006). Mexico is the fastest-growing large market for China/HK. 18

71% of North America s TEU imports from the Far East come from China, but only 36% of the value. 80% 70% North American Imports 60% 10.8 Million TEUs 50% 40% 30% 20% $213 Billion 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 China Share of Total Far East TEUs China Share of Total Far East $$ 19

Market penetration in some sectors is reaching saturation 100% 90% 80% 70% Footwear Electrical Appliances 60% 50% Textiles 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Footware Electrical Appliances and Houseware Textiles 20

But look at China s penetration of new market segments. 80% 70% 60% Office and Computing Equipment 50% 40% 30% 20% Semi-conductors, Electronic parts, etc. 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Semi-conductors, Electronic Tubes,etc Office and Computing Machinery 21

China Economic Summary There appears to be little risk at the macroeconomic level. Even with a soft landing we will see growth in excess of 8% GDP through 2010. The exchange rate will revalue smoothly. The financial markets, although not exactly stable, are also not seriously in danger of toppling. So long as Foreign Direct Investment continues, we will see the continuation of an export driven economy. 22

Agenda Global issues and trends affecting the world and U.S. economic outlooks What about China? Implications for sea trade in the U.S. Conclusions 23

As China expands its markets, the US becomes less important. US Share of China's Container Exports 40,000,000 40.0% 35,000,000 35.0% 30,000,000 30.0% TEUs 25,000,000 20,000,000 15,000,000 25.0% 20.0% 15.0% US Share of China's Exports 10,000,000 10.0% 5,000,000 5.0% 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 World Total United States US Share of China Exports 0.0% 24

The USEC gained share of imports from the Far East in 2002, but the USWC has resumed it increase in share. US Coastal Shares of TEU Imports from the Far East 54.0% 52.0% 50.0% 48.0% 46.0% 44.0% 42.0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 USEC Share USWC Share 25

The USWC will hold on to its 53% share of imported Chinese containers shipped to the U.S. Unless - - - China & Hong Kong Containers to the USWC 14,000,000 12,000,000 10,000,000 Full TEUs 8,000,000 6,000,000 4,000,000 2,000,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US West Coast United States 26

... Mexico can implement this idea, to compete for US imports from the Far East. Container volumes will continue to grow. USWC port and rail congestion could return. All-water service cost may go up. There are wrinkles to iron out. 3.0 more days at sea (at 18 knots) 27

US container imports from Latin America will rise to equal imports from Europe. 18,000,000 16,000,000 14,000,000 12,000,000 TEUs 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Latin Amer (Not Mexico) Far East European Union 28

US imports from Latin America will top 2.5 million this year (full TEUs). US TEUs Imported from Latin America - 2006 8% 4% 4% 4% 2% 1% Brazil 29% 8% Caribb Basin 15% 25% Brazil and Caribbean containers come through the USEC. Brazil Caribbean Basin Central America Chile Venezuela Argentina Peru Colombia Other West Coast of South America Other East Coast of South America 29

US container exports are dominated by the Far East and are about equal to Europe and Latin America. 3,500,000 The US exports only 1 container for every 5 imported from the Far East. 3,000,000 2,500,000 Full TEUs 2,000,000 1,500,000 1,000,000 500,000 Import/Export Ratio Far East 5 Latin America 2 Europe 2 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Latin America no Mex Far East 2 European Union 30

Agenda Global issues and trends affecting the world and U.S. economic outlooks What about China? Implications for sea trade in the U.S. Conclusions 31

Bottom Line World economic growth will remain robust in 2006, but will slow by year end. Enjoy it now. Emerging markets of Asia and Europe will experience the strongest growth; the Eurozone and Japan will lag behind. A growing trade deficit will further weaken the dollar, by 10-30% through 2010. China s currency adjustment will be gradual. The U.S. and Far East (China) will expand their imbalanced trade, with imports swamping exports. While transpacific container trade continues to climb, north-south trade will grow in importance. No recession is likely in 2006 or 2007 32