www.drewry.co.uk

Logistics and the Brexit Effect

RISI European Conference8th March 2017

Martin Dixon, Director - Head of Research Products supplychains@drewry.co.uk

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Agenda

• Brexit & geopolitical risk

• Developments in world trade

• Service provider impacts

• Logistics costs & risk implications

• Conclusions and Q&A

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Increasing Economic UncertaintyGeopolitical risk is rising

Geopolitical Risk

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Key logistics concerns to consider:‒ Customs & border controls ‒ Availability of key logistics services to/from UK:

• Road – next day• Rail/Intermodal – direct services• Air – direct intercontinental services• Sea – direct deep-sea services

Key logistics cost impacts‒ Cost of compliance with border controls & delays‒ Reduced UK migrant labour ‒ Exchange rate volatility

Implications for customer proposition:‒ Ability to serve UK customers from EU‒ Ability to serve EU customers from UK‒ Ability to serve ROW customers from UK

Brexit Risks Increasing Logistics CostsMuch depends on the outcome of EU/UK exist negotiations

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Agenda

• Brexit & geopolitical risk

• Developments in world trade

• Service provider impacts

• Logistics costs & risk implications

• Conclusions and Q&A

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0%

2%

4%

6%

8%

10%

12%

14%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

World Container Shipping Trade (left hand axis)Container Shipping Growth (right hand axis)GDP Growth (right hand axis)

World Trade FlaggingTrade & GDP Growth are converging

+8% +5% +4%+5% +1% +2% +3%

+3% +3%

+14%

Global Container Shipping Trade (teu) & GDP Growth

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World Trade FlaggingDrivers of trade deceleration

Global Trade

Nearshoring / regionalisation

Product Miniaturisation

Digital Disrupters

3D/4D Printing

Protectionism

Economic Growth

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Agenda

• Brexit & geopolitical risk

• Developments in world trade

• Service provider impacts

• Logistics costs & risk implications

• Conclusions and Q&A

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Increased Risk of Service Provider FailureLower world trade growth has impacted financial returns

-6%

-4%

-2%

0%

2%

4%

6%

8%

-3

-2

-1

0

1

2

3

4

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

EBIT profit/loss ($bn) EBIT margin (right axis)

Container Shipping Average EBIT Margins (2014-16)

Source: Drewry’s Container Forecaster (www.drewry.co.uk/research)

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Increased Risk of Service Provider FailureLower world trade growth has impacted financial returns

Safe

Caution

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15

High Risk

Average Z-Scores of Logistics Providers (2008-16)

Source: Drewry’s Sea & Air Shipping Insight

Borderline

Safe

‐4 ‐2 0 2 4 6 8

Hanjin ShippingZim

Yang MingHyundai Merchant Marine

China Cosco (parent of…CEVA Logistics

Evergreen Marine CorpCMA CGMMOL group

Pacific International LinesNYK group

Regional Container LinesK Line groupMatson, Inc.

Hapag‐Lloyd HoldingWan Hai

OOIL (parent of OOCL)AP Moller‐MaerskDeutsche Post DHL

AgilityUPS

Kuehne + NagelSeaboard Corp.…

PanalpinaExpeditors International

CH Robinson

Logistics Providers’ Z‐Scores

Forwarders have a “safe” Z score (>2.99)Maersk and OOCL have a “grey” Z score (1.8-2.99)All other ocean carriers who report financial results have a “risky” Z scoreHanjin (based on previous data) was by far the riskiest

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Source: Drewry’s Container Forecaster (www.drewry.co.uk)

5 of the top 20 global ocean carriers have been acquired or merged with others

Other top 20 carriers which have been acquired/exited the container market since 2005

Rapid carrier consolidation

Bankrupt Merged Acquired

Poor Returns Driving Industry ConsolidationMergers & acquisitions reducing carrier choice

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Poor Returns Driving Industry ConsolidationNew carrier alliances on East-West trades from April 2017

Source: Drewry’s Container Forecaster (www.drewry.co.uk/research)

NewOld

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Agenda

• Brexit & geopolitical risk

• Developments in world trade

• Service provider impacts

• Logistics costs & risk implications

• Conclusions and Q&A

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Shipping’s Overcapacity WoesDiminishing trade growth has not been the negative

Source: Drewry’s Container Forecaster (www.drewry.co.uk/research)

+5% +8% +1%+3%

+4%+3%

80

85

90

95

100

105

10,000

12,000

14,000

16,000

18,000

20,000

22,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

'000

teu

Effective capacity Global S/D Index RH axis (100 = equilibrium) Physical market index RH axis

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Shipping’s Overcapacity WoesNew vessel orders have dried up

Source: Drewry’s Container Forecaster (www.drewry.co.uk)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

< 8,000 teu 8,000 teu+ Scrapping

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$250

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,250

$2,500

$2,750

$3,000

$3,250

Jan‐14 Apr‐14 Jul‐14 Oct‐14 Jan‐15 Apr‐15 Jul‐15 Oct‐15 Jan‐16 Apr‐16 Jul‐16 Oct‐16 Jan‐17

US$

 per 40ft C

ontainer

 Shanghai‐Rotterdam Shanghai‐Los Angeles

Container Shipping Rates Are RisingAsia to Europe & US Exports (US$ per 40ft)

Weaker volume and lower bunkers

reduces rates

Spot rates pick up after Hanjin

bankruptcy; pre-CNY surge

Source: Drewry’s Container Freight Rate Insight (http://drewry.co.uk/cfri)

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$300

$400

$500

$600

$700

$800

$900

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

US$

 per 40ft C

ontainer

Rotterdam-Shanghai Los Angeles-Shanghai

Container Shipping Rates Are Rising Europe & US to Asia Exports (US$ per 40ft)

Weaker volume and lower bunkers

reduces rates

Spot rates pick up after Hanjin

bankruptcy

Source: Drewry’s Container Freight Rate Insight (http://drewry.co.uk/cfri)

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Container Shipping Rates Are Rising 4 years of big rate reductions will see partial reversal

Source: Drewry’s Container Forecaster (http://drewry.co.uk/research)

$500

$600

$700

$800

$900

$1,000

$1,100

2013 2014 2015 2016 2017

East‐West rate Global rate

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94

95

96

97

98

99

100

101

102

2012 2013 2014 2015 2016 2017 2018

Break Bulk Shipping Rates Are Rising Capacity conditions to tighten (Index: 100 = 2007)

Source: Drewry’s Multipurpose Shipping Forecaster (http://drewry.co.uk/research)

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Logistics Costs & Risks Are RisingPerfect storm of trade & supply-side impacts

Trade & Regulatory

Uncertainties

Tightening Shipping Capacity

Diminishing Economies of

Scale

Provider Consolidation

Oil Prices

Costs &

Risks

Costs &

Risks

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Recent trend:‒ Contract freight rates on Transpacific

and Asia-Europe increased by 3% between 3Q16 and 4Q16

‒ Follows six consecutive quarterly decreases

‒ Based on contract freight rate data ‒ Provided by Asian, American, &

European retailers and manufacturers across Paper & Pulp, Industrial, Chemical & FMCG sectors

‒ Shipping annual volumes from 3,000 to 300,000+ TEU

Outlook: ‒ Rises of up to 40% on inbound

rates this year

Remedies: Benchmark CostsContract rates rising following 6 consecutive quarterly falls

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Remedies: Seek Advice With Logistics Provider NegotiationsDrewry’s e-Sourcing Ocean Freight Solution

ExecutionTools, Resources, EventsAdvisory services

Design & Manage e-Sourcing

Optimization Event

Analyse historical Costs & Service vs spot, contracts and

future trends

Conduct Competitive

e-Sourcing event

Perform real-time analysis

Design go forward plan

Audit & Review

Map & Measure CurrentServices

Compare vs Market actuals

Obtain global Agreement &

Implement decisions

Monitor contracts

Design & Measure carrier

performance KPIs

Jointly Manage QBR’s

Measuresavings &

performance

Train for next event

Implement Audit Optimize

Provide advice on e-Sourcing Optimization

Evaluate Current &

Future MarketplaceDynamics

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Conclusions

• Rising geopolitical risk is a challenge for all organisations

• Brexit is one of many such risks with cost & market access implications

• However, Brexit will not diminish direct intercontinental transport services

• Slowing world trade & excess capacity are diminishing logistics provider returns

• Increasing risk of failure amongst top shipping providers

• Poor returns are driving consolidation with more expected

• Hanjin’s failure marked a turning point in liner shipping commercial behaviour

• Scarce capital availability in shipping is dampening new vessel ordering

• Diminishing economies of scale will reduce shipping overcapacity

• Shipping costs are rising & could increase as much as 40% on some lanes

• Making the right carrier selections is critical to mitigate these risks

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