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1Confidential
Walter Kemmsies, Chief Economist
Moffatt & Nichol
Global Re-balancing
2Confidential
Major Themes
The economy is recovering but
Supply-side recessions are tougher than demand-side recessions. World economy is still struggling with the aftermath of the developed economies’ credit crunch.
Risk aversion and competitive pressures remain high so
Customers are still frugal. Importers are not willing or able to rebuild inventories. Risk of stock-out is balanced with risk of over-stock. Freight rates are higher, enough to cover variable and now fixed costs but not enough to fund investment.
Expect new arrangementsSupply chain elements need to pool their efforts and resources in order to meet requirements of infrastructure improvements and high return on capital
Low inventory and high ROC requirements are not a new normal… more balanced world trade would be a new normal
3Confidential
Macroeconomic Trends
Outlook: Global Re-Balancing
4Confidential
Globally Synchronized Recession and Recovery
Source: Bloomberg, Moffatt & Nichol
Industrial Production Indexes
-50
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20
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80
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120
Recession
Russia
Canada
Brazil
US
Japan
China
Europe
5Confidential
World Economy Recovery Depends On the US
Source: World Trade Organization, US Bureau of Economic Analysis, Moffatt & Nichol
US Consumer Spending Leads Global Real GDP Growth
US consumers account for 17.5% of World GDP – global economic recovery depends on the US outlook
The greatest threat to the global economy and trade is the Mediterranean debt crisis
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US Consumer Spending Real Global GDP
6Confidential
Where The Problems Began
Source: MarAd, US Census Bureau, Moffatt & Nichol
Home Prices and Sales Indexes
US home prices increases began deviating from trend growth around 2000
Falling long term interest rates during most of the decade were a significant but not sole cause
0%
1%
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Home Price Index Single Home Sales
7Confidential
Tampering With The Foreign Exchange Market
Source: MarAd, US Census Bureau, Moffatt & Nichol
US Dollar Exchange Rate Indexes
The US has never officially accused China of manipulating its exchange rate
The Renminbi may be under-valued by as much as 20% to 40%
1999-2009 2009-2014
China 9.8% 9.6%
US 1.9% 2.3%
Japan 0.7% 2.0%
Euro Area 3.9% 1.4%
Average Real GDP Growth
CNY 6.83 per US$ 1
CNY 5.47 per US$ 1
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Japan Yen China Yuan Euro China Yuan Fair Value
8Confidential
A Major Global Imbalance
Source: MarAd, US Census Bureau, Moffatt & Nichol
US Trade With China
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Mil
lio
ns
of U
S D
oll
ars
Load
ed
TEU
Imports Exports Imports from China in US$ Exports to China in US$
China became the largest source of US imports and second largest export destination
China’s holdings of US treasuries increased in line with its trade surplus through Nov 2009
US Treasury bond yields remained unusually low in the last decade
9Confidential
Twin Bubbles
Source: US Department of Energy, US Census Bureau, Reuters/CRB, Moffatt & Nichol
Real Estate and Industrial Commodity Prices
China impacted the World and US economies in several ways
Excess demand for US treasuries contributed to a real estate boom
China’s capacity expansion and US real estate booms drove commodity prices up
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Home Prices Metal Index Oil Price (right axis)
10Confidential
Monetary Policy Response
Source: MarAd, US Census Bureau, Moffatt & Nichol
Home Prices and Sales Indexes; Fed Funds Interest Rate Target
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Home Price Index Single Home Sales Fed Funds Target
Fed Funds policy interest rate was kept at a high level for an unusually long period
Inflation was considered a greater risk than real estate finance
11Confidential
The Fed Made A Dramatic Effort
As Liquidity Dried Up
Adjusted Monetary Base And Business & Consumer Loans
Source: St Louis Federal Reserve, Moffatt & Nichol
The Fed’s response has been in proportion to the magnitude of the crisis
Bank loans could double overnight if the Fed doesn’t pull back as the economy recovers
Need to avoid too much money chasing too few goods
$-
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Bill
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s
Monetary Base
12Confidential
Household Debt Default Rates Are Peaking
Source: Moodys, Moffatt & Nichol
Household Loan Delinquency Rates
The “great recession” is rooted in consumer loan defaults following the real estate bubble
House prices and sales are showing signs of stabilization and default rates are peaking
The real estate and finance sectors are beginning to be less of a drag on recovery
0%
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Mar
-79
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-81
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-84
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Recession Mortgage Delinquency Rate Credit Card Delinquency Rate
13Confidential
Early Signs of Recovery
Year-on-year Unemployment Claims
Source: Bureau of Labor Statistics, Moffatt & Nichol
Unemployment insurance claims growth is declining
Better labor markets will support consumer spending and self-sustaining growth
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New Claims YOY% Continuing Claims YOY%
The crest in continuing claims signals the end of recession
14Confidential
Retail Sales Are Recovering But Inventories lag
Retail sales troughed in Q2-2009 despite continuing increases in unemployment
Businesses are rebuilding inventories but not very quickly
Retail Sales and Inventory-to-Sales Ratio
Source: Conference Board, Bureau of Economic Analysis, Moffatt & Nichol
1.25
1.3
1.35
1.4
1.45
1.5
1.55
1.6
1.65
1.7
1.75
$0
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-90
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-03
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-04
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Jul-
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-07
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-08
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r-0
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-10
$ M
illio
ns
Retail Sales (left) Inventory-to-Sales Ratio (right)
15Confidential
US Manufacturing Is Recovering
US manufacturing capacity utilization fell dramatically between 2008 and 2009
Low inventories and private sector spending are bringing US capacity back on line
Capacity utilization and employment are not high enough to push inflation up
Capacity Utilization
Source: Conference Board, Bureau of Economic Analysis, Moffatt & Nichol
60%
65%
70%
75%
80%
85%
90%
95%
Jan
-67
Jul-
68
Jan
-70
Jul-
71
Jan
-73
Jul-
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Jan
-76
Jul-
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Jan
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Jan
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Jan
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Jul-
98
Jan
-00
Jul-
01
Jan
-03
Jul-
04
Jan
-06
Jul-
07
Jan
-09
Jul-
10
Recession Capacity Utilization
16Confidential
70
80
90
100
110
120
130
De
c-0
7
Mar
-08
Jun
-08
Sep
-08
De
c-0
8
Mar
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Jun
-09
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-09
De
c-0
9
Mar
-10
Jun
-10
Sep
-10
Truck Top 15 Ports Intermodal Rail (3 Mth Moving Avg)
+8.2% Jan-Mar '10 vs '09
+10.1% Jan-Feb '10 vs '09
+3.1% Jan- Feb '10 vs '09
Volume Indexes
Rail, Truck and Port Volumes Are
Recovering
Source: Railfax, ASI/Transmatch, ATA, AAPA, Moffatt & Nichol
Truck and Intermodal Rail volumes bottomed in 2009-Q2
Port volumes bottomed in 2009-Q1
17Confidential
Port Volumes Sustained Recovery From 2009-H1
Source: Seattle, Tacoma, Oakland, LA, LB, Savannah, Moffatt & Nichol
Monthly Int’l Container Volumes (in TEUs) For 6 Of The Largest US Ports
Export volumes have led overall growth and drive empties’ volume lower
Import volumes are recovering as US businesses rebuild inventories
Both import and export volumes are expected to deliver double digit growth in 2010
0
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TEU
s P
er
Mo
nth
Total Total Loaded Imports Exports Empties
+12.6% Jan-Mar '10 vs '09
+15.0% Jan-Mar '10 vs '09
+11.0% Jan-Mar '10 vs '09
+21.2% Jan-Mar '10 vs '09
+4.2% Jan-Mar '10 vs '09
18Confidential
Economic Outlook for Major Trade Lane Economies
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1998
1999
2000
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2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
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2015
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2020
US Europe Nort Asia South Asia South East Asia
Emerging Markets have higher population and productivity growth
Near term is weak due to mature economies
Policy withdrawal creates uncertainty - look for “all clear” in 2011-H2
World trade patterns will change due to the changing relative size of emerging and mature economies over the forecast horizon
Real GDP Growth (year on year) By Major Trade Lanes
Source: International Monetary Fund, US Department of Commerce, Moffatt & Nichol
US recession risk in 2011
19Confidential
Long Term Trends
Outlook: Global Re-Balancing
20ConfidentialSource: World Trade Organization, World Bank, Moffatt & Nichol
Cyclical Drivers
Trade has grown faster than
GDP
Macro shocks have not
impacted trends
Structural Drivers
Containerization; lowers
freight cost
Trade Agreements; lowers
trade costs
World Wide Web; allows
“globalization”
Demographics; drives off-
shoring/import substitution
World Trade and GDP Volume Indexes
Global Trade Has Exceeded GDP Growth
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700
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500
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mb
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of P
ort
s R
ep
ort
ing
Co
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r V
olu
me
s
GD
P a
nd
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ufa
ctu
red
Go
od
s V
olu
me
Ind
exe
s
Container Ports GDP Manufactured Goods
Data indexed to 100 in 1950
Oil shocks and global recessions
Maastricht Treaty, NAFTA
Global recession, China joins WTO
21ConfidentialSource: Census Bureau, Moffatt & Nichol
Percentage of Population Over 55 Years of Age
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1990 1995 2000 2005 2010 2015 2020 2025 2030
US Canada EU
Average Age in 1990
US 35.2 years
Canada 35.2 years
EU 37.5 years
Average Age in 2030
US 40.2 years
Canada 43.3 years
EU 45.4 years
Aging industrialized nations’ populations is not news, but the significant rise in their elderly populations over the next 20 years will reinforce the consequences already evident in the structure of their economies.
Without immigration and trade, these economies face an output shortfall
Percentage of Population Over 55 Years of Age
Demographics
22Confidential
10%
20%
30%
40%
50%
60%
70%
80%
90%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Europe US Canada Japan
Source: OECD, Moffatt & Nichol
Manufacturing Sector Share of Employment
Developed economies are becoming more service-intensive and less manufacturing-intensive, as a function of domestic and international demographic change
10%
20%
30%
40%
50%
60%
70%
80%
90%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Europe US Canada Japan
Service Sector Share of Employment
Maturing Industrialized Economies Are
Increasingly Service Intensive
23Confidential
Manufacturing Industry Wage Comparisons
Source: UN-ILO, Business Monitor, Moffatt & Nichol
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”
$-
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$20,000
$30,000
$40,000
$50,000
$60,000
Manufacturing Wage Comparisons in US Dollars At Prevailing Exchange Rates
24Confidential
Plenty of Outsourcing Left
Source: U.S. Bureau of Labor Statistics, Moffatt & Nichol
Autos and housing-related sectors lagged other industries in terms of outsourcing due to strong demand for their products… until recently
Similar expectations have been expressed by analysts at the US Dept of Labor
US Manufacturing Employment Trends By Industry
10
20
30
40
50
60
70
80
90
100
110
120
130
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Ind
exe
d: 1
99
0 =
10
0
Food Manufacturing
Misc Manufacturing
Beverage & Tobacco Products
Plastic and Rubber Products
Chemicals
Petroleum and coal products
Machinery
Metals
Wood Products
Transportation Equipment
Motor Vehicles and Parts
Paper and Paper Products
Computer and Elect Products
Elect Equip and Appliances
Textiles
Leather and Allied Products
Apparel
Ranked in order of decline
12 Month Moving Average
25Confidential
Eventually The US Will Have To Balance Its
Trade
It is unlikely that the service sector will ever offset the goods trade deficit
The US will have to reduce dependency on fuel imports and start selling goods, or the dollar will cease to be the world’s reserve currency
Source: US Department of Commerce, Moffatt & Nichol
US Goods and Services Trade Balances
About 55% of the goods deficit is due to oil imports
-$80
-$70
-$60
-$50
-$40
-$30
-$20
-$10
$0
$10
$20
19
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Bill
ion
s
Goods Services
26ConfidentialSource: World Trade Organization, World Bank, Moffatt & Nichol
Manufactured goods and non-agricultural products trade have grown faster than GDP
Agricultural products trade has lagged GDP and other products
Gap between manufactured goods and other products trade must narrow
Bulk commodity trade depends on manufactured goods trade and other structural factors
World Trade and GDP Volume Indexes
Global Trade Commodities Lag Manufactured
Goods
0
200
400
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800
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1,200
1,400
1,600
1,800
2,000
0
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71
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98
20
01
20
04
20
07
20
10
Manufactured Goods GDP Fuels & Metals Agriculture
Globalization Begins
27Confidential
Transportation Infrastructure Issues
Outlook: Global Re-Balancing
28Confidential
Global Infrastructure Change: Panama Canal
Expansion
Some ports will eventually have to increase channel or air draft
Ocean carriers will eventually have to adapt their fleets
Source: Panama Canal Authority
29Confidential
Demographic Trends Are Changing The
Economy’s Structure
Source: US Census Bureau, Moffatt & Nichol
US population is moving to urban, coastal and Southern locations
Its not just baby boomers retiring to the south, but mostly younger people to work in those growing markets
30Confidential
Competitive US Export Candidates
Relative to faster growing Emerging Markets, the US has
Lower cost of capital, higher cost of labor
More advanced biotechnology
More reliable quality control and surveillance of compliance
Relative abundance of scare resources such as water
A partial list of high potential exports fitting these advantages:
Low labor-content capital goods
Grain and oilseed
Meat
Wood pellets
31Confidential
America Is The World’s Bread Basket
Source: Moffatt & Nichol
Lack of investment in inland waterway infrastructure is a significant bottleneck
32Confidential
Connecting The US and World Economies
Source: US Census Bureau, Moffatt & Nichol
The rail network can handle agriculture exports in place of the inland waterway system
33Confidential
West Coast Ports Are Gaining Share of Grain
Exports
2
4
6
8
10
12
2003 2004 2005 2006 2007 2008
Co
nta
ine
rize
d G
rain
& O
ilse
ed
Exp
ort
s (M
illio
n M
etr
ic T
on
s)
California Ports Pacific Northwest Other Ports
Source: Moffatt & Nichol analysis of US Census Bureau data
West Coast ports have gained share of agricultural exports aided by containerization
34Confidential
0
50
100
150
200
250
300
0 10 20 30 40 50 60 70
Co
nta
ine
r Tr
ade
Inte
nsi
ty (G
ate
way
TEU
Vo
lum
e /
'00
0 C
apit
a)
Income (GDP $'000 USD / Capita)
S. Asia
China
Peru
S. Korea
UKJapan
Chile
S. Africa
Taiwan
Brazil
Italy
Scandinavia
Israel
Colombia
EcuadorPhilippin
N. Europe
Argentina
Turkey
Uruguay
Greece
Arabia
Iberia
ANZ
Source: Moffatt & Nichol research; IMF
N. Africa
USA
Canada
Country Groups
S.E. Asia: Vietnam, Thailand, Malaysia, Indonesia, Singapore,
Brunei, Papua New Guinea
S. Asia: India, Pakistan, Bangladesh
N. Europe: Germany, France, Netherlands,
Belgium
Scandinavia: Sweden, Norway, Finland, Denmark
Iberia: Spain, PortugalN. Africa: Morocco, Libya, Algeria, Tunisia, Egypt
Arabia: UAE, Saudi Arabia, Oman, Yemen
ANZ: Australia & New Zealand
Central America: Mexico, Guatemala, Honduras,
El Salvador, Costa Rica, Nicaragua, Belize
SE AsiaCentral America
Production
Economies
Service
Economies
Developing
Economies
Source: International Monetary Fund, AAPA, Containerisation International, Moffatt & Nichol research
As incomes rise in emerging markets, the trade intensity of these economies will catch up with those of more developed economies
International Comparison of Gateway Container Trade Intensity
Low Container Trade Intensity in Emerging
Markets
35Confidential
Containers Concentrate In Population Centers
Source: US Census Bureau, Moffatt & Nichol
These are the locations where the bulk of consumption takes place
Containers are increasingly retained near ports
36Confidential
Rail Capacity in 2035 Without Improvements
Source: AAR
37Confidential3
7
Potentially Congested Highways (2020)
Source: US Department of Transportation/Federal Highway Administration
At the end of 2007, the US had 4,048,529 miles of public roads
Highways need expansion and repairs – AASHTO estimates $140 billion to repair and modernize the nation's 600,000 bridges
38Confidential
Container Trade Forecasts
Outlook: Global Re-Balancing
39Confidential
Long Term Outlook For US Container Volume
Trade
US International Maritime Container Volume Trade
Source: MarAd, PIERS, Moffatt & Nichol
Global macroeconomic trends remain supportive of trade growing faster than GDP
China is expected to moderate its currency stance and increase the consumer’s share of GDP
International policy is expected to further remove trade barriers and reduce the environmental impact of economic activity
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
TEU
s
Forecasts Imports Exports Empties Total
40Confidential
Takeaways
The recovery is on the verge of self sustaining, negative growth risks remain but continue to moderate – policymakers are aware of these risks
Global rebalancing is the new normal – outsourcing, not debt-fueled consumer spending will drive imports, US exports have to grow to pay for imports.
Low inventory and high ROC are not the new normal, but new arrangements are partnerships will be
Transportation is a first-mover advantage industry. The time to make investment decisions is now. The winners are those who acted when others were afraid to look.
Thank you for your time