2019 AAPA Planning for Shifting Trade – Tampa, FL

Joshua Hurwitz

January 30, 2019

Moffatt & Nichol Commercial & Technical Advisory Services

Who we serve Port Engineering / Design / Operations

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AAPA 2019 Planning for Shifting Trade

Commercial Advisory Services

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Commentary and presentation materials are based on the personal views of the speaker and may not coincide with opinions held by Moffatt & Nichol or its employees

Agenda

1. You don't know where you're going until you know where you've been2. We don’t know what will happen in the future, but we know what may happen

and therefore can plan for it3. Ports are, and should be, champions of infrastructure development4. Conclusion

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AAPA 2019 Planning for Shifting Trade

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You don’t know where you’re going until you know where you’ve been

Three broad themes discussed at the 2008 AAPA Shifting Trade Lanes conference in Tampa, FL

1. The weakening economic outlook– 60/40 chance of recession– Potential shock housing/sub-prime credit markets

2. The expected future opening of the Panama Canal– Favoring all-water route to US East Coast via Panama Canal– Increase in Caribbean transshipment

3. Capacity limits in Los Angeles & Long Beach lead to new gateways for U.S. cargo, especially in Mexico– Punta Colonet– Intermodal route from Lazaro Cardenas to U.S.

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AAPA 2019 Planning for Shifting Trade

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How well did our predictions pan out?

GREAT FINANCIAL CRISIS (GFC) U.S. EAST COAST GAINS SHARE

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AAPA 2019 Planning for Shifting Trade

PANAMA CANAL EXPANDS

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0%

10%

20%

30%

40%

50%

60%

2002

2004

2006

2008

2010

2012

2014

2016

2018

West Coast East Coast Gulf Coast

US container trade growth continues to outpace overall economic growth at roughly 1.8X GDP

U.S. TOTAL CONTAINER TRADE (2002 – 2018)

Source: AAPA; MN

U.S. CONTAINER TRADE GROWTH & GDP

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-20%

-10%

0%

10%

20%

2002 2004 2006 2008 2010 2012 2014 2016 2018Mu

ltiplie

r

YOY%

Gro

wth

Multiplier (RHS) GDP Growth TEU GrowthSource: AAPA; MN

AAPA 2019 Planning for Shifting Trade

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1.8X Avg Multiplier

3.0X Avg Multiplier

-

10

20

30

40

50

60

2002 2004 2006 2008 2010 2012 2014 2016 2018

TEU

(Milli

ons)

4.2% CAGR

Alliances dominate the Transpacific trade lane, less so on Transatlantic

SHARE OF ALLIANCE SERVICES FROM DEPLOYED CAPACITY

Source: Bluewater

AAPA 2019 Planning for Shifting Trade

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0%

25%

50%

75%

100%

Global - TEU Trans Pacific - TEU Global - TEU Trans Pacific - TEU Trans Atlantic - TEU

Early 2012 2018 YTD (July)

No Alliance 2M Alliance THE Alliance OCEAN Alliance CKYH Alliance G6 Alliance Grand Alliance New World Alliance

Vast majority of Trans-Pac capacity is in alliance services

Average vessel sizes have increased on the order of 50-100% over the past decadeAVERAGE VESSEL SIZE (TEU) AT SELECT U.S. CONTAINER PORTS, 2008-2018

Source: COMPAIR

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AAPA 2019 Planning for Shifting Trade

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

*Mobile 2012-2018 *Tampa 2012-expected average following COSCO service deployment

0

5,000

10,000

15,000

20,000

25,000

Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 Feb-18

Vess

el Ca

pacit

y (TE

U)

LA/LB Max NY/NJ Max Global Max

MAXIMUM VESSEL SIZE DEPLOYMENT BY PORT

Liner Consolidation and Alliances

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AAPA 2019 Planning for Shifting Trade

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COSCO acquires OOCL

Consolidation trickling down to terminals and port authorities

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AAPA 2019 Planning for Shifting Trade

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Strong container growth at many North American ports

New Orleans, 0.6M

Prince Rupert, 1.0M

Houston, 2.7M

Savannah, 4.3M

Norfolk, 2.8M

NYNJ, 7.1M

Charleston, 2.3M

Oakland, 2.5M

LALB, 17.5MNWSA, 3.8M

0%

2%

4%

6%

8%

10%

12%

14%

2018 estimated US port growth: 5.1%

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AAPA 2019 Planning for Shifting Trade

2018 TEU volume (in millions) and year-on-year growth rate for selected ports

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Source: MN estimates, port authority websites

We don’t know what will happen in the future, but we know what may happen and therefore can plan for it

In the U.S., economic fundamentals look ok for now, but headwinds exist and policy uncertainty looms over the near term

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-6%

-4%

-2%

0%

2%

4%

6%

115

120

125

130

135

140

145

150

155

2004 2006 2008 2010 2012 2014 2016 2018 2020

Payr

olls

(Milli

ons)

NonFarm Payrolls YOY%

AAPA 2019 Planning for Shifting Trade

Fed Funds Rate

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2004 2006 2008 2010 2012 2014 2016 2018 2020

Effe

ctiv

e Fe

d Fu

nds

Rat

e

Effective Fed Funds Rate

Retail Sales

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

$-

$50

$100

$150

$200

$250

2004 2006 2008 2010 2012 2014 2016 2018 2020

Ret

ail S

ales

($Bi

llions

)

Retail Sales YOY%

New Home Sales

-50%-40%-30%-20%-10%0%10%20%30%40%50%

0

200

400

600

800

1000

1200

1400

2004 2006 2008 2010 2012 2014 2016 2018

New

Sal

es (T

hous

ands

)

New Home Sales YOY%

! !

Employment

Fewer levers left to manage the next recession; global growth slowingAAPA 2019 Planning for Shifting Trade

THE US BUDGET DEFICIT IS INCREASING OECD: GLOBAL GDP GROWTH IS LOSING MOMENTUM

OECD Economic Outlook, 21 November 2018

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Global EPU Index

There is a lot of near-term uncertainty, but infrastructure is long-term

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2019 AAPA Annual Conference

GLOBAL ECONOMIC POLICY UNCERTAINTY, JANUARY 1997 TO DECEMBER 2018

Source: PolicyUncertainty.com; Baker, Bloom and Davis

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Asian & Russian Financial Crises

9/11 Invasion of Iraq

Global Financial Crisis

Eurozone Crisis, U.S. Fiscal Battles, China Leadership Transition

Brexit Referendum

Immigration Crisis, China

Economy Fears

U.S. Elections & Politics in Brazil, China, France, South Korea and the UK

Shifting global economy, Brexit, US

government shutdown, tariff policy

US Containerized Volume Growth Projections

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AAPA 2019 Planning for Shifting Trade

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-

20

40

60

80

100

2005 2010 2015 2020 2025 2030 2035 2040

TEU

(milli

on)

Import Export Empty

3.0% CAGR

1.9% CAGR

2.9% CAGR

US CONTAINER GROWTH PROJECTIONS

0%

10%

20%

30%

40%

50%

60%

2010 2015 2020 2025 2030 2035 2040

Shar

e of U

S

West East Gulf

MARKET SHARE PROJECTIONS BY COAST

2018-2030 CAGR: 2.7%

2040 CAGR:

Several factors have the potential to alter our planning for trade lane growth

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China’s effort to reduce waste imports is shifting US waste paper export trading partners

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AAPA 2019 Planning for Shifting Trade

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EXPORTS OF US WASTE PAPER (6-MONTH MOVING AVERAGE)

Source: US Trade Online

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

TEU

China India Korea, South Indonesia Vietnam Taiwan Thailand Other NonContainerized Equivalent

IMO 2020 could (temporarily?) shift up to 1.2 million TEU of discretionary cargo to the West Coast

Cost Advantage of LALB over NYNJ for North Asian Import destined for Chicago

LALB – NORTH ASIAN IMPORTS – BASE CASE LALB – NORTH ASIAN IMPORTS – LOW SULFUR HFO

Source: MN

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AAPA 2019 Planning for Shifting Trade

LALB's Cost AdvantageMore than $200$151 to $200$101 to 150$51 to 100$1 to $50$0 or less

12%

18%

BaseCase

LowSulfurHFO

LALB's Cost AdvantageMore than $200$151 to $200$101 to 150$51 to 100$1 to $50$0 or less

US – China tariff hikes would slow GDP growth

-2.0

-1.6

-1.2

-0.8

-0.4

0.0

USA GDP China GDP World GDP World Trade Trade excl. USA & China

%

Total tariffs plus higheruncertainty

Tariffs on rest of US-Chinatrade in 2019

Current tariffs rise to 25%(The Jan increasepostponed 90 days)

Current US-China tariffs

AAPA 2019 Planning for Shifting Trade

IMPACT ON GDP AND TRADE BY 2021, PERCENT DIFFERENCE FROM BASELINE

Source: OECD

Conflicting trends and a diversity of business strategies for serving inland marketsHIGHLY CONGESTED HIGHWAYS, 2045 PRECISION RAILROADING

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AAPA 2019 Planning for Shifting Trade

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Source: USDOT, Bureau of Transportation Statistics, 2017

Ports are, and should be, champions of infrastructure development

Smart infrastructure investment precedes, follows and facilitates trade growth

SAVANNAH, GA: MASON MEGA RAIL 2020

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AAPA 2019 Planning for Shifting Trade

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Source: GPA / Stephen A. Morton

Smart infrastructure investment precedes, follows and facilitates trade growthTAMPA, FL: MASTER PLAN: VISION 2030

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AAPA 2019 Planning for Shifting Trade

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Source: Port Tampa Bay

Conclusion

Major Themes

1. US economy strong but showing signs of weakness; Global growth slowing2. Near-term uncertainty over major economic policies, including trade policy3. IMO 2020 has potential to cause short-term congestion challenges in West

Coast4. Longer-term macro fundamentals favor continuation of slow shift to East and

Gulf Coasts, provided proper planning5. Landside connectivity is an evolving challenge6. Efficient freight networks require multiple entities working together7. Infrastructure needs a champion: port authorities are that champion

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THANK YOU

Josh u a Hu r w i t zMof fa t t & N i ch o ljh u r w i t z @ mof fa t tn i ch o l . com510-788-8963