At The Fork In The Road Outlook for 2012 and Beyond AAPA Port Finance Seminar April 18, 2012
ENR Top 100 company, founded in 1945 in Long Beach, California Offices: US, Guam, Canada, Europe, Middle East, Latin America and the Pacific Rim 500+ Employees Practices: Goods Movement, Energy, Ports, Coastal, Urban Waterfronts & Marinas, Inspection & Rehabilitation M&N combines the expertise of technical and commercial specialists gained over 65 years of planning and engineering experience on over 6,000 projects: Economic analyses of investment/privatization Strategic development plans Independent Market Consultant Coastal engineering Port and waterside construction (marinas) Terminal design for all types of freight and passenger movement Surface transportation connectivity Railroads and capacity expansion Environmental issues/emission modeling Moffatt & Nichol Background American Society of Civil Engineers John G. Moffatt Frank E. Nichol Harbor and Coastal Engineering Award
All clear: optimism is justified but not bullishness At The Fork In The Road Scorecard indicates all clear for the US but not high growth Asia will revive as the US recovers from its credit supply shock Europe is in a harmless recession and will neither help nor hinder There is still time to change the road we re on Retiring boomers present unique challenges Twin deficits: US needs to live within its means Emerging markets need to become less export dependent Resource constraints need to be dealt with The new operating environment is still emerging Shorter supply chains Exports Near-sourcing
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Traumatic Supply Side Recession 10% US Real GDP Growth 8% 6% 4% Forecast 2% 0% -2% -4% -6% Recession RGDP %YOY Financial sector took out the housing and energy markets before collapsing Federal Reserve realized its Lehman error too late
1999 2001 2003 2005 2007 2009 2011 2013 1999 2001 2003 2005 2007 2009 2011 2013 Emerging Markets Have Driven The Global Recovery Developed Economies Are Struggling Emerging Markets Are Leading 16% 12% 8% 4% 0% Annual Real GDP Growth 16% 12% 8% 4% 0% -4% -8% -4% -8% World US Japan Euro area World China India Brazil Emerging markets have helped but do not lead the global economic recovery China and India are unlikely to sustain their support since 30% to 50% of their GDP is investment spending, global average is 20% China s growth is still largely dependent on exports Developed economies need to take the lead
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 World Economy StrainsTo Recover Without The US US Consumer Spending and Global Real GDP Growth 6% 5% 4% 3% 2% 1% World US Consumer 0% -1% -2% The US accounts for 20% of World GDP US consumers account for 70% of US GDP, or 14% of World GDP
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Accumulated Payrolls (in thousands) Private Sector Has Led Employment Recovery Changes In Employment Levels Since 2010 By Sector 4,200 +4.0mn 3,900 Private 3,600 +3.5mn 3,300 3,000 2,700 Non-farm 2,400 2,100 1,800 Federal 1,500 1,200 900 600 State 300 0-500K -300 Local -600 Private sector efforts were offset by public sector cutting 500K jobs since Jan 2010 Employment recovery so far has been weaker than in previous cycles
Investment and Exports Have Led The US Recovery 7% Contribution of Components to Real GDP Growth 5% 3% 1% -1% 2010-Q1 2010-Q2 2010-Q3 2010-Q4 2011-Q1 2011-Q2 2011-Q3 2011-Q4-3% Consumption Fixed Investment Government Exports Imports Change in Inventory Exporting industries have led the recovery and have also been investing: Agriculture, Energy, Automobiles and Machinery for Construction, Transportation and Agriculture
Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Container Volumes Weaker Than Expected in 2011 3,500,000 3,000,000 Monthly Container Volumes 15 Largest Ports Total +14.2% +1.5% 2,500,000 2,000,000 Total Loaded +10.7% +3.4% 1,500,000 Imports +15.2% +0.7% 1,000,000 Exports +5.2% +7.3% 500,000 Empties +27.1% -4.8% 0 Weak import volumes were not in line with consumer spending trends Container volume growth in 2011 was led by exports
The World s Population Is Aging 60% Proportion of Population Above 55 Years of Age 50% Japan Europe China 40% Canada US 30% Brazil Mexico 20% India 10% 0% 1990 2000 2010 2020 2030 2040 2050 Older populations spend more on services and earn higher wages Manufacturers move operations to fast growing but lower income locations
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 160 Long-term Under-employment Trends Non-farm Employment Since 1970 140 120 100 30 Mos 46 Mos 82 Mos Nov 2014? 80 60 18 Mos 15 Mos 10 Mos 26 Mos 40 20 0 Recession Employment (millions) Trend Forecast Since 1980 recovery in employment to pre-recession levels has lengthened
1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% US Consumers Are Deleveraging Consumer Debt-To-Income Ratio and Debt Growth Rate Recession Growth of Debt Debt-to-Income It will take some time for the debt-to-income ratio to become sustainable
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US Trade Balance Components: 1992-2010 Unsustainable Trade Deficit $20 Billions $0 -$20 -$40 45% of the trade deficit is due to petroleum imports -$60 -$80 Goods Balance Services Balance Oil Balance Including oil, the goods deficit is 4.8x the services surplus, 2.8x excluding oil Increased import dependency is unavoidable the US needs to export more and reduce oil consumption
Trade Deficit in Billions US Dollar Index 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Value of US Dollar and Foreign Trade Balance US Trade Balance and Trade Weighted Dollar Index $0 140 -$10 130 -$20 -$30 120 -$40 110 -$50 -$60 -$70 100 90 -$80 Trade Balance USD Index (Right axis) 80 US dollar could appreciate as exports increase
US Export Candidates Bulk commodities and specialized capital goods (project cargo) fit the profile of US comparative advantages Relative to faster growing Emerging Markets, the US has A lower cost of capital, but a higher cost of labor Relative abundance of scare resources such as water More advanced biotechnology More reliable quality control and surveillance of compliance Strong Emerging Market demand for bulk is expected to continue as these economies continue to grow and migrate from rural areas to industrializing urban areas Grains and oilseeds Meat Biofuels wood pellets Gas and Coal Strong bulk demand also means strong demand for capital equipment energy, construction, agricultural US has to develop infrastructure to compete in the global market place Highway Trust Fund is insolvent and Transportation Re-auth is overdue
Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Robust Emerging Market Demand for Resources 600 550 Commodity Prices Indexed To 100 in Dec 2000 Percent Relative to December 2000 500 450 400 350 300 250 200 150 100 50 Copper Oil Corn Sugar Nat Gas 0 Since the middle of the last decade commodity prices have soared Not just speculation but supply-demand balance and infrastructure
US Corn Production Locations Lack of investment in inland waterway infrastructure is a significant bottleneck
US Soy Production Locations Lack of investment in inland waterway infrastructure is a significant bottleneck
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 Soy Yield trends In Large Producer Economies 35,000 Soy Hectogram Yields Per Hectare 30,000 25,000 20,000 15,000 10,000 USA Brazil Argentina Canada World China Indonesia India 5,000 0 US has the highest rate of agricultural productivity in the world Nations with fastest growing consumption have lowest productivity
Shares and Containerization of US Grain Exports Shares of US Grain Exports Port 2003 2004 2005 2006 2007 2008 2009 2010 Gain Columbia-snake 16% 19% 18% 16% 17% 19% 19% 18% 1% Los Angeles, CA 0% 0% 1% 1% 2% 2% 2% 1% 1% Minneapolis, MN 0% 0% 1% 2% 3% 1% 1% 2% 2% New Orleans, LA 59% 53% 50% 53% 50% 45% 51% 48% -7% Norfolk, VA 0% 0% 1% 1% 2% 2% 2% 1% 1% San Francisco, CA 1% 1% 1% 1% 1% 1% 2% 1% 1% Seattle, WA 5% 9% 10% 9% 8% 10% 9% 10% 2% Containerization of Grain Exports By Port Port 2003 2004 2005 2006 2007 2008 2009 2010 Total All Ports 1% 2% 2% 3% 4% 5% 5% 3% Columbia-snake 3% 2% 1% 5% 5% 3% 3% 1% Los Angeles, CA 32% 88% 76% 81% 80% 77% 91% 93% Minneapolis, MN 0% 0% 0% 5% 0% 0% New Orleans, LA 1% 0% 0% 0% 0% 0% 0% 0% Norfolk, VA 8% 14% 3% 3% 5% 10% 14% 8% San Francisco, CA 26% 32% 42% 46% 60% 68% 61% 53% Seattle, WA 1% 3% 7% 12% 14% 8% 4% 4%
Millions of Barrels of Oil Consumerd Per Day 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Oil Consumption Trends 1965-2011 100 Crude Oil Consumption and Price Per Barrel $120 90 80 $100 70 60 50 $80 $60 40 30 20 10 0 $40 $20 $0 Developed Economies Emerging Markets World Annual Average Oil Price (right axis) Since 1993 the growth in oil consumption has come from Developing Economies Since 2008 Emerging Markets consume more oil than Developed Economies
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Loaded truck containers per month Shifts in Offshoring: Mexico may get some more 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Loaded container movements at US border crossings TX: Hidalgo TX: Laredo TX: El Paso CA: Otay Mesa Since June 2009, average growth : 19.6% AZ: Nogales Source: US Bureau of Transportation Statistics, Moffatt & Nichol Analysis Talk of shifts in offshoring locations have multiple risk drivers: Demand: Uncertain consumer demand outlook Credit: Tight credit conditions for OEMs & suppliers Labor: Costs & discontent in offshore locations FX: Currency fluctuations less predictable and increase hedging costs IP: Difficulty in enforcing IP protection Quality: Some manufacturers have experienced quality fade with offshore production resulting in recalls and lawsuits Mitigation steps: Shorten the supply chain: Use of near-sourcing options may reduce working capital requirements (cash) and offset labor cost differentials While most key border crossing volumes have been stable, the Laredo crossing has experienced double-digit growth since mid-2009
Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Retailers Are Maintaining Lower Inventory Levels 1.8 Retail Sales and Monthly Imported Containers (In TEUs) 1.7 1.6 1.5 1.4 1.3 1.2 Retail Wholsesale 1.1 Wholesale inventories are now back in line with pre-2008 levels Retail inventories are much lower than before 2008
Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Imported Containers And Retail Sales Disconnected Retail Sales and Monthly Imported Containers (In TEUs) $500 $450 Billions 1,800,000 1,700,000 1,600,000 $400 1,500,000 1,400,000 $350 1,300,000 1,200,000 $300 1,100,000 1,000,000 $250 900,000 Recession Monthly Retail Sales (left axis) Monthly Imported TEUs (right axis) Based on retail sales, peak season container imports should have been higher US domestic production is unlikely to have filled the gap Mexico? What were importers afraid of?
Manufacturing Industry Wage Comparisons Manufacturing Wage Comparisons in US Dollars At Prevailing Exchange Rates $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $- Low wages in emerging markets are partly due to their younger populations Outsourcing services maturing markets more cheaply and accesses growing markets Low wages in Latin America indicate they are prime locations for manufacturing near-sourcing Source: UN-ILO, Business Monitor, Moffatt & Nichol
KCS/KCSM Rail System Map KCSM/KCS benefits from near-sourcing growth Lazaro Cardenas has direct rail access to the KCS/KCSM rail system Direct rail access to the Southeast and Midwest US is also possible with a border crossing at Laredo, Texas Laredo, Texas Mexico City Lazaro Cardenas 2
Ensenada CAGR 2000-2010 18% 143,660TEU Mexican Pacific Coast Ports Volumes and Growth Rates CAGR 2000-2010 3% Mazatlan 21,730TEU CAGR 2000-2010 2% CAGR 2000-2010 13% Manzanillo Lazaro Cardenas Veracruz 796,011TEU 662,537TEU 1,509,378TEU CAGR 2000-2010 100% Salina Cruz 5,434TEU CAGR 2000-2010 0%
Summary Positive near term trends with US leading global recovery Inflation driven by rising costs and demand is a medium term risk Structure of global supply chains is changing It is hard to succeed by looking backwards Thank you for your attention Anne Landstrom Moffatt & Nichol 510-645-1238 alandstrom@moffattnichol.com www.moffattnichol.com