IX Caribbean Shipping Executives Conference, Willemstad (Curacao), May 17-19 2010

Global Economic & Trade Outlook:Economic Cycles and Maritime Shipping

Jean-Paul Rodrigue

Associate Professor, Dept. of Global Studies & Geography, Hofstra University, New York, USA

The Crisis is over … if you Believe in the Following…

■ That the crisis was a random blip (“hoocoodanode”?)■ That debt is wealth (we are now VERY wealthy)■ That deficits do not matter (no risk of confiscation)■ That economists understand economics (no

comment…)■ That central banks and governments know what they

are doing (blowing bubbles…)■ That no significant commercial and sovereign default

are in the pipeline (no more moral hazard)■ That the excess capacity in shipping has been cleared

(there is huge latent demand…)

The First Crisis of Globalization: Reaping the Consequences of Misallocations

CAUSESMonetary system (fractional

reserve banking, fiat currencies)

SYMPTOMSDebt, asset inflation

Production Consumption Distribution

CONSEQUENCESMisallocations (bubbles)

Macroeconomic Storm

Transactions and investments.Difficulty of clearing international trade transactions.Undue drop in freight volumes.

Decline in aggregate demand.Clearing excess capacity.

Credit Storm

Business Cycles: The Trend that Time Forgot

Expansion Recession

Peak

Trough

Expansion

Credit-Driven Boom

Credit-Driven Bust

Depression

Demand Transfer of future demand into the present.

Supply Misallocations because of distorted expectations about the future.Asset price distortions.

Higher prices in spite of a low demand!

Blowing Bubbles and Compounding Distortions: From Technology to Commodities

0.0

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NASDAQ (Jan 1998=100)

TOL (Jan 2003=100)

BDI (Jan 2006=100)

Tech / Stock Bubble Housing BubbleCommodities / Trade

Bubble

Globalization 2000-2008: A Bubble?

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Seaborne Trade (billions of tons of goods loaded) - Left Axis

Exports of Goods (trillions of current $US) - Left Axis

Ratio Exports / Seaborne Trade - Right Axis

Changes in the Value World’s Merchandise Trade, Production and GDP, 1950-2009 (in %)

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-10

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Recession

Total Merchandise Trade

World GDP

World Merchandise Production

A Paradigm Shift in Neomercantilism?

Jan-06

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225Monthly Value of Exports or Imports, Selected Traders, 2006-2010

(Jan 2006=100)China (Exports)Japan (Exports)Korea (Exports)Germany (Exports)Canada (Exports)USA (Imports)UK (Imports)

A Paradigm Shift in the World’s Largest Trade Relation?

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Monthly Trade between China and the United States, Billions of USD (1985-2010)

ExportsImportsBalance

Keeping Doing the Same Thing? Baltic Dry Index, Monthly Value, 2000-2010

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-92%

Paradigm Shift or “V” Shaped Recession?

Jan-05

Apr-05

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05Ja

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150Monthly Total Container Traffic at Selected Ports (Jan 2005=100)

Los AngelesNew YorkBusanHong KongAlgeciras

Monthly Container Traffic at the Port of Los Angeles, 1995-2010

Jan-9

5Ju

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Out Loaded

In Loaded

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Factors behind the Interest of Equity Firms in Transport Terminals

Asset (Intrinsic value)

Terminals occupy premium locations (waterfront) that cannot be substituted.Globalization made terminal assets more valuable.Traffic growth linked with valuation.Same amount of land generates a higher income.Terminals as fairly liquid assets.

Source of income (Operational value)

Income (rent) linked with the traffic volume they handle.Constant revenue stream with limited, or predictable, seasonality.Traffic growth expectations result in income growth expectations.

Diversification (Risk mitigation value)

Sectoral and geographical asset diversification.Terminals at different locations help mitigate risks linked with a specific regional or national market.

Port and Maritime Industry Finance: Who is Leveraging Whom?

BrokersFinancial MarketsInvestors

Commercial Banks

Mortgage Banks

Merchant Banks

Finance Houses

Leasing Companies

Money Markets

Capital Markets

Equity Markets

Private Placement

Corporations

Private Investors

Investments Managers

• Insurance Companies• Pension Funds• Banks• Trust Funds• Finance Houses

Shipping Companies

Port Operators

Earnings

Reviewing Assumptions: The Impacts of “Financialization”

Disconnection Financial sector less aware of the operational and strategic reality.Physical assets are seen and managed strictly as financial assets.

Rent seeking strategies

Assets are less perceived as they are (port terminals) but simply from their potential (or expected) level of return.Chasing return without understanding well the fundamentals.

Low contestability of entry and exit

Perceived liquidity.Capacity to enter and exit the terminal market on a short notice.Herd behavior.

High amortization Expectations that capital investment will be quickly amortized.Expectations about future growth and the corresponding volumes.

Segments of the maritime and terminal operation industries have been subjugated by very smart people lacking wisdom. The financial sector has recently provided ample evidence about the amount of damage very smart people can do when hubris, obfuscation and fraud replace common sense and realistic perspectives.

Dumb Money at Work?

Date Transaction Price compared to EBITD

2005 DP World takes over CSX World Terminals

14 times

Early 2006 PSA acquires a 20% stake in HPH 17 timesMid 2006 DP World acquires P&O Ports 19 timesMid 2006 Goldman Sachs Consortium acquires

ABP14.5 times

End 2006 AIG acquires P&O Ports North America 24 times

Early 2007 Ontario Teachers’ Pension Fund acquires OOIL Terminals

23.5 times

Mid 2007 RREEF acquires Maher Terminals 25 times

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

The Double Squeeze on Ports and Maritime Shipping

Supply Demand

“Cruel” OvercapacityNew terminals coming onlineNew ships coming online (+ cancellations)

Lower profitabilityLess pressures on terminal resources

Less financial appeal

Contestability for gatewaysContestability for hubsRebalancing

Maritime Shipping

Port Operations

World Container Traffic and Throughput, 1980-2008. Reaching Peak Growth?

1980 1985 1990 1995 2000 2005 20100

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500 World TrafficWorld ThroughputFull ContainersTransshipmentEmpty Containers

Millio

n TE

U

Fallacies of Forecasting: 2020 Throughput Forecast, Selected Large Ports, Linear and CAG Scenario

Port / Traffic 2007, M TEU

R2 / CAG (1998-2007)

Traffic 2020 (Linear Scenario) / CAG

Traffic 2020 (CAG 1998-2007 Scenario)

New York / 5.3 0.996 / +7.9% 9.6 M TEU / +4.7% 14.2 M TEU

Savannah / 2.6 0.968 / +13.5% 4.9 M TEU / +5.1% 13.6 M TEU

Los Angeles / 8.3 0.966 / +9.5% 16.6 M TEU / +5.4% 27.1 M TEU

Antwerp / 8.2 0.974 / +9.6% 14.5 M TEU / +4.5% 26.9 M TEU

Algeciras / 3.4 0.961 / +6.5% 6.0 M TEU / +4.4% 7.7 M TEU

Busan /13.3 0.983 / +8.4% 24.3 M TEU / +4.8% 38.1 M TEU

Shanghai / 26.1 0.948 / +23.9% 56.5 M TEU / +6.1% 423.8 M TEU

From under estimating to over estimating trendsLinearity prevalent in growth trends (1998-2007)Compound annual growth common in forecastsNon-contestability assumption

Terminal Operators; Well Positioned or Overextended?

Liner Shipping Connectivity Index and Container Port Throughput

Container Terminal Portfolio of the four Main Global Terminal Operators, 2009

Container Terminal Portfolio of Other Global Terminal Operators, 2009

The Caribbean System: The Transshipment Triangle and the Panama Canal Funnel

Lower aggregate demand.The “curse” of economies of scale.Response from West Coast ports.Response from railways (East vs. West).New gateways (Canada: CN, Mexico: KCS).Costs (fuel prices and Panama Canal toll rates).Competition from Suez and the Mediterranean.Regionalization of production.

Diffusion Cycles in Containerization: Towards Maturity

Adoption

Acceleration

Peak Growth

Maturity

New (niche) servicesProductivity gains

Network developmentProductivity multipliers

Massive diffusionNetwork complexities

Niche markets

Containerization Growth Factors: Which Opportunities are Left?

Derived / Organic (A) Economic and income growth.Globalization (outsourcing and global sourcing).Fragmentation of production and consumption.

Substitution (B) Functional and geographical diffusion.New niches (commodities and cold chain)Capture of bulk and break-bulk markets.

Incidental (C) Trade imbalances.Repositioning of empty containers.

Induced (D) Transshipment (hub, relay and interlining).

A B C D

Keeping Track of the Big Picture: Emerging Global Maritime Freight Transport System

The “Calm” after the Storm: A Paradigm Shift for Maritime Container Trade and Ports

1) Risk Allocation Desire to allocate greater risks onto private sector in PPPs:• Requires clear policy goals and stable regulation.• Moral hazard risks will continue to be tested.More demanding capital markets and less access to (cheap) credit:• Focus on performance to meet financial metrics.• New projects more critically assessed.Greater consideration of cost recovery of port infrastructure investment:• From the deal / financial structure to quality of the asset.

2) Reviewing False Asymmetries

The assumption that larger players have more informationthan smaller players:• The larger players appear to have lost the most.

The “Calm” after the Storm: A Paradigm Shift for Maritime Container Trade and Ports

3) Growth Story:Time for realism

Abandoning the compound annual growth paradigm:• Port traffic assumptions likely to be less backward looking.• Stronger cyclical effects than perhaps first assumed.Greater attention on market fundamentals:• Globalization or regionalization?

4) Barriers to Entry: Competition matters

Paying attention to competition drivers:• Growth may no longer mitigate competitiveness as it did previously.• Transshipment is a particularly vulnerable segment.

5) Amortization: Modest times

Volume & pricing assumptions more modest:• Longer amortization periods.• PPP rent sharing more probable.