Shifting International Trade Routes Shifting International Trade Routes

15 January 200915 January 2009

11

AgendaAgenda

Today’s ObjectivesEconomic SituationSupply Chain AssessmentThe Global Container FleetNorth American Container MarketShifting Trade Patterns Questions for the Container Shipping Industry

Today’s ObjectivesEconomic SituationSupply Chain AssessmentThe Global Container FleetNorth American Container MarketShifting Trade Patterns Questions for the Container Shipping Industry

22

I. Today’s ObjectivesI. Today’s ObjectivesEndeavor to provide a broad context for today’s program by:Reviewing the North American economic situation and short-term outlookTouching on the affects of today’s economy on shippers’ supply chainsAssessing the status of the global and North American container marketsProviding some observations Asia-North American container routing alternatives

Most importantly, finish on time!

Endeavor to provide a broad context for today’s program by:Reviewing the North American economic situation and short-term outlookTouching on the affects of today’s economy on shippers’ supply chainsAssessing the status of the global and North American container marketsProviding some observations Asia-North American container routing alternatives

Most importantly, finish on time!

33

II. Economic SituationII. Economic Situation

44

The Darkest Hour is…..The Darkest Hour is…..

55

Just before things go pitch black!Just before things go pitch black!

66

US Market FundamentalsUS Market Fundamentals

• The consumer is two thirds or more of the US economy

• When consumers sneeze, the economy catches the flu

• The consumer is two thirds or more of the US economy

• When consumers sneeze, the economy catches the flu

77

The consumer is under substantial pressure

The consumer is under substantial pressure

Looming Tax Increases

Rising unemployment

Rising Health Care Costs

Energy PricesEnergy PricesCredit Crunch Weak

Housing Market

Baby Boomers Retiring

Weakening Dollar

Consumer Spending

Financial Bail Out

88

The U.S. market fundamentalsThe U.S. market fundamentals

2002-2007• Emergence of China• Cheap and plentiful

money• Housing boom fueled

consumption and negative savings rate

• Strong economic growth

• Unbridled optimism

2002-2007• Emergence of China• Cheap and plentiful

money• Housing boom fueled

consumption and negative savings rate

• Strong economic growth

• Unbridled optimism

Today• Housing slump• Financial crisis• No money or

unaffordable money• Unemployment• Confidence crisis• Spreading to the global

economy

Today• Housing slump• Financial crisis• No money or

unaffordable money• Unemployment• Confidence crisis• Spreading to the global

economy

99

U.S. income and consumption levels have grown steadily while savings have declined

U.S. income and consumption levels have grown steadily while savings have declined

Index of US Personal Consumption, Personal Income, and Personal Savings (1980-2008; 1980=100)

-500

50100150200250300350400450500550600650

1980

1981

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

Source: BEA; Norbridge analysis

CAGR (1980-2008) -1.5%6.1%6.4%

SavingsIncomeConsumption

Income

Consumption

Savings

1010

4.4% 4.6% 4.7% 4.9% 5.1%5.6%

6.2%

7.2% 7.4%6.9%

6.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 2009 2010 2011

Une

mpl

oym

ent R

ate

(%)

U.S. Unemployment Rate History and Projections

Source: US Dept. of Labor and The Federal Reserve Board

U.S. employment is increasing and expected to peak in 2009

U.S. employment is increasing and expected to peak in 2009

1111

0200400600800

10001200140016001800200022002400

2000 2001 2002 2003 2004 2005 2006 2007 2008

Billi

ons o

f US

Dol

lars

U.S. private inventories (non-government) have been growing steadily since 2003

U.S. private inventories (non-government) have been growing steadily since 2003

U.S. Private Inventories (2000-2008)

Source: BEA

1212

0

200

400

600

800

1000

1200

1400

1600

2000 2001 2002 2003 2004 2005 2006 2007 2008

Billi

ons o

f US

Dol

lars

U.S. private fixed investment (non-residential) began to level off in 2008 U.S. private fixed investment (non-

residential) began to level off in 2008 US Private Fixed Investment– Nonresidential (2000-2008)

Source: BEA

1313

0.5

0.6

0.7

0.8

0.9

1.0

1.1

Jul-01O

ct-01Jan-02A

pr-02Jul-02O

ct-02Jan-03A

pr-03Jul-03O

ct-03Jan-04A

pr-04Jul-04O

ct-04Jan-05A

pr-05Jul-05O

ct-05Jan-06A

pr-06Jul-06O

ct-06Jan-07A

pr-07Jul-07O

ct-07Jan-08A

pr-08Jul-08O

ct-08Jan-09

US

Dol

lar I

ndex

ed V

alue

, (J

uly

01 =

1.0

)US Dollar’s Long-term DeclineUS Dollar’s Long-term Decline

$ vs Yen$ vs Yuan

$ vs Euro

$ vs CDN $

Note: Noon buying rates.Source: Federal Reserve Bank of New York.

• Dollar down 39% vs Euro over 7 years• Dollar down 39% vs Euro over 7 years

1414

US exports – A Modest Bright SpotUS exports – A Modest Bright Spot

U.S. Exports

0%

5%

10%

15%

20%

25%

30%

2007 Total Jan2008

Feb2008

March2008

April2008

May2008

June2008

July2008

Aug2008

Sept2008

Oct2008

Y/Y

Cha

nge

in %

Val

ue (N

omin

al)

Source: U.S. International Trade Commission.

1515

• US recession …

• … Spreading worldwide– US recession expected to be relatively deep and long– Consumption (70% of US GDP) expected to recover slowly– Europe and Asia also impacted

• US recession …

• … Spreading worldwide– US recession expected to be relatively deep and long– Consumption (70% of US GDP) expected to recover slowly– Europe and Asia also impacted

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2004 2005 2006 2007 '08 Q1 '08 Q2 '08 Q3 '08 Q4est

2009F/C

2010F/C

2011F/C

Cha

nge

in R

eal G

DP

(P

erce

nt)

Source: BEA historical data; recent estimates for Q4 ’08; EIU forecasts (Dec ‘08).

2008 meltdown

The US economy is projected to struggle in 2009 and into 2010

The US economy is projected to struggle in 2009 and into 2010

1616

-5%

0%

5%

10%

15%

20%

-2 0 2 4 6 8 10 12

2002

-200

7 C

AG

R

China N. Far East SE Asia N. EuropeC. America Mediterannean Caribbean Indian SubcontinentANZ ECSA

China dominates North American container trade

China dominates North American container trade

Source: AAPA; Port Authorities; Norbridge research and analysis

Bubble radius is 2007 TEU throughput

China

Size and Growth of North America Container Trade Regions

(1997-2007)

2002-2007 Change (Millions of TEU)

1717

-15%

-5%

5%

15%

25%

35%19

99

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

China Japan India EU United States

China and India rapid GDP growth has come to at least a near-term end . . .

China and India rapid GDP growth has come to at least a near-term end . . .

Year-over-Year China, Japan, India, and EU Historical and Projected GDP Growth

Source: Eurostat; World Bank, Global Insight, BEA

1818

US imports from China are deceleratingUS imports from China are decelerating• US import growth from China is down

sharply• US import growth from China is down

sharply

Y/Y Change on $ Value of Imports from China

29.4%

23.7%

18.3%

12.6%

6.4%

0%

5%

10%

15%

20%

25%

30%

2004 2005 2006 2007 2008 YTD

Y/Y

cha

nge

in $

val

ue (n

omin

al)

Note: Customs value of U.S. Imports For Consumption. 2008 YTD is through October.Source: U.S. International Trade Commission.

1919

So How Full is the Glass?So How Full is the Glass?

Hall Full• The severity of the

challenges is universally recognized

• The Federal Government appears committed to turning the tide– Fed actions– Financial bail out???– Auto bail out????– Infrastructure spending– Acquiring toxic debt

Hall Full• The severity of the

challenges is universally recognized

• The Federal Government appears committed to turning the tide– Fed actions– Financial bail out???– Auto bail out????– Infrastructure spending– Acquiring toxic debt

Half Empty• The lead indicators have

probably not bottomed out• Consumers are saving, not

spending• The Federal Government

deficit spending will take time to make a difference

• Bankruptcies will continue• Unemployment will rise• It is not a question of if the

economy will improve, but when

Half Empty• The lead indicators have

probably not bottomed out• Consumers are saving, not

spending• The Federal Government

deficit spending will take time to make a difference

• Bankruptcies will continue• Unemployment will rise• It is not a question of if the

economy will improve, but when

2020

So when is when?So when is when?

2009 will be a very difficult year

The economy will likely to begin recovering in 2010

It will likely be 2011 before the global economy and trade are back on the tracks

2121

III. Supply Chain ImplicationsIII. Supply Chain Implications

2222

We live in challenging timesWe live in challenging times

• Addressing risk in the global supply chain• How to live with congestion, high fuel prices,

driver shortages, volatile exchange rates, disease, political uncertainty

• Fuel, in the longer-term threatens to rewrite supply chain economics

• Addressing risk in the global supply chain• How to live with congestion, high fuel prices,

driver shortages, volatile exchange rates, disease, political uncertainty

• Fuel, in the longer-term threatens to rewrite supply chain economics

2323

Supply Chain ResponsesSupply Chain Responses

Tough, shifting environment

Tough, shifting environment

Supply chain moves– Sourcing– Making– Moving– Integrating

2424

Twelve Key ResponsesTwelve Key Responses

Raise visibility and collaboration across the supply chainPromote sustainability that drives productivity

Integrating

Downshift modes—slower sailingRevise DC network and flow pathsCreate a more agile distribution system

Moving

Maximize plant utilizationMove closer to marketIncrease exports

Balance supply and demand by world regionsFind sources closer to homeSeek situations where “far-shoring”still worksMitigate risk

MakingSourcing

2525

Agility is needed to confront today’s challengesAgility is needed to confront today’s challenges

Ops analytical teamOps analytical team

Postponement strategies

Plant and DC redundancy

Dual sourcing on key items

2626

Global Container Fleet TrendsGlobal Container Fleet Trends

2727

The increasing supply of large container ships poses challenges

The increasing supply of large container ships poses challenges

4,600

1,300

210

Active On-Order Laid-Up

6.5

0.55

12.0

Active On-Order Laid-Up

Number of Vessels Vessel Capacity(TEUs, millions)

Note: January 2009. Various sources.

4.5% of Active Fleet

2828

Container shipping industry responsesContainer shipping industry responses

More partneringSlow steaming: originally to reduce fuel costs, now to absorb capacityLay-upsPostponing deliveriesNew deployment strategies: potentially web networks with more port to port operations

More partneringSlow steaming: originally to reduce fuel costs, now to absorb capacityLay-upsPostponing deliveriesNew deployment strategies: potentially web networks with more port to port operations

2929

North American Container MarketNorth American Container Market

3030

0

5

10

15

20

25

30

35

40

45

50

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(E)

TEU

s (M

illio

ns)

CanadaUS

*Note: Excludes AK, HI, Guam and Puerto Rico (largely domestic) trafficSource: AAPA; Port Reported Throughput; Norbridge Analysis

1997-2006 CAGR: 7.3%2006-2007: 0.3%

2007-2008E: -5.8%

North America Ocean Container Traffic Growth (1997-2008E)

North American container traffic has reversed sharplyNorth American container

traffic has reversed sharply

3131

West Coast container imports are down

West Coast container imports are down

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Seattle Tacoma Vancouver Oakland Long Beach Los Angeles

Imports Exports

Major West Coast Port Container Traffic Growth(YTD 2008 vs 2007)

Note: Seattle is January to October data (International containers only). Tacoma is January to November data (International full containers only). Vancouver is January to November. Los Angeles is January to November (full containers only). Oakland and Long Beach is January to October data (full containers only).

Source: Journal of Commerce; Port authorities; Norbridge analysis

3232

East Coast container traffic: Mixed in 2008

East Coast container traffic: Mixed in 2008

-20%

-15%

-10%-5%

0%5%

10%

15%20%

25%30%

Halifax Montreal PANYNJ Hampton Roads Savannah

Imports Exports

Note: Hampton Roads is imports and exports (January to October). New York-New Jersey is January to October. Montreal is January to November. Savannah is January to November. Halifax is January to June.Source: Port authorities; Norbridge analysis

Major East Coast Port Container Traffic Growth

(YTD 2008 vs 2007)

Overall No Change

3333

Are Trade Patterns Shifting?Are Trade Patterns Shifting?

3434

There were 72 services between Asia/India and North American during 3Q08

There were 72 services between Asia/India and North American during 3Q08

Source: Com Pair Q3 2006-2008

Total Number of Services & Average Weekly TEU Capacity by Year to North America from India, SE Asia, N Asia, and China

North Asia/China, SE

Asia, India

3535

The Pacific Coast remains the dominant gateway for Asia-North American TrafficThe Pacific Coast remains the dominant gateway for Asia-North American Traffic

North Asia/China Number of Services & Average Weekly TEU Capacity by Year by First North American Region of Call

3636

In 2005, the U.S. container port industry was viewed as nearing capacity

In 2005, the U.S. container port industry was viewed as nearing capacity

• Trade was growing at 7+%• LA/LB had experienced a “reported

meltdown• The western U.S. railroads faced major

bottlenecks: power, crews, track capacity

• Industry growth reportedly equated to one new container port per year

• Trade was growing at 7+%• LA/LB had experienced a “reported

meltdown• The western U.S. railroads faced major

bottlenecks: power, crews, track capacity

• Industry growth reportedly equated to one new container port per year

3737

Since numerous projects have come on-line or are in progress

Since numerous projects have come on-line or are in progress

Prince Rupert:Phase 1: 500K TEU

NorfolkNew APMT terminal:

1M TEU

Mobile:New term: 350K TEU

Jacksonville

Evergreen Tacoma

SavannahCT-9

BayportPhase 1

TampaLazaro Cardenas

Phase I: 700K TEU

MOL & Hanjin

3838

There are numerous projects currently in the planning stage

There are numerous projects currently in the planning stage

Prince Rupert:Phase 2: 1.5M TEU

Long Beach New Pier S

198 Acres; TEU TBD

Lazaro CardenasFut. Phase: 2M TEU

Melford, Nova Scotia

1.5M TEU

Charleston, SCNavy Base Terminal

1.3M TEU

JacksonvilleHanjin

VancouverTerminal II

NYK, SSA Tacoma

Los AngelesTraPac Redevelopment

Corpus Christi

Tampa

3939

North American Intermodal NetworkNorth American Intermodal Network

Source: Norbridge analysis of US National Transportation Atlas Data, 2005 (US DOT).

CN

CP

CSX

BNSF

FEC

NS

KCS

UP

The North American rail industry continues to spend $4-$6 billion per year on infrastructure and capacity

4040

Asia-US Atlantic TradeAsia-US Atlantic Trade

• 2008 volume of nearly five million TEU is a peak

• Handled by 15 major shipping lines through six major gateways

• Six strings of 10,000 TEU ships could handle what sixteen strings carry today

• Twelve strings could handle the 2018 volume at an average 5 percent growth per year

• 2008 volume of nearly five million TEU is a peak

• Handled by 15 major shipping lines through six major gateways

• Six strings of 10,000 TEU ships could handle what sixteen strings carry today

• Twelve strings could handle the 2018 volume at an average 5 percent growth per year

4141

Container Shipping Industry QuestionsContainer Shipping Industry Questions

4242

• Will the US container trades return to 7% annual growth or is 4-5% the new norm?

• How will shippers’ supply chain strategies evolve?

• What will the container shipping industry look like in 2012?

• What will the North American rail network look like in 2014?

• Will the US container trades return to 7% annual growth or is 4-5% the new norm?

• How will shippers’ supply chain strategies evolve?

• What will the container shipping industry look like in 2012?

• What will the North American rail network look like in 2014?