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

CAUSES
Monetary system (fractional Credit Storm
reserve banking, fiat currencies)
Transactions and investments.
Difficulty of clearing international trade
transactions.
SYMPTOMS Undue drop in freight volumes.
Debt, asset inflation

Macroeconomic
CONSEQUENCES
Misallocations (bubbles)
Storm
Decline in aggregate demand.
Clearing excess capacity.
Production Consumption Distribution
 Business Cycles: The Trend that Time Forgot

Demand Transfer of future demand into the Credit-Driven Boom

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

Higher prices in spite of a low demand!

Peak

Credit-Driven Bust

Trough

Expansion Recession Expansion Depression

 Blowing Bubbles and Compounding Distortions: From
Technology to Commodities

500.0

450.0

400.0

350.0 NASDAQ (Jan 1998=100)

TOL (Jan 2003=100)
300.0 BDI (Jan 2006=100)

250.0

200.0

150.0

100.0

Commodities / Trade
50.0 Tech / Stock Bubble Housing Bubble Bubble

0.0
 Globalization 2000-2008: A Bubble?

14 2

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

1.8
12 Exports of Goods (trillions of current $US) - Left Axis

11 Ratio Exports / Seaborne Trade - Right Axis 1.6

10 1.4
9
1.2
8

7 1

6
0.8
5

4 0.6

3 0.4
2
0.2
1

0 0
55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20
 Changes in the Value World’s Merchandise Trade,
Production and GDP, 1950-2009 (in %)

25

20

15

10

Recession
-5 Total Merchandise Trade
World GDP

-10 World Merchandise Production

-15
 A Paradigm Shift in Neomercantilism?

Monthly Value of Exports or Imports, Selected Traders, 2006-2010 (Jan 2006=100)

225
China (Exports)
200 Japan (Exports)
Korea (Exports)
Germany (Exports)
175
Canada (Exports)
USA (Imports)
150

125

100

75

50
6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 0
n -0 r-0 ul-0 ct-0 n -0 r-0 ul-0 ct-0 n -0 r-0 ul-0 ct-0 n -0 r-0 ul-0 ct-0 n -1
J a Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja
 A Paradigm Shift in the World’s Largest Trade Relation?

Monthly Trade between China and the United States, Billions of USD (1985-2010)
35,000 5,000

30,000 0

25,000 Exports -5,000

Imports
20,000 Balance -10,000

15,000 -15,000

10,000 -20,000

5,000 -25,000

0 -30,000
Jan-85

Jan-87

Jan-99

Jan-05
Sep-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-01
Sep-01

Jan-03

Jan-07
Sep-07

Jan-09
Sep-85

Sep-89
May-90

Sep-91

Sep-93
May-94

Sep-95
May-96

Sep-97

Sep-99

May-02

Sep-03

Sep-05

Sep-09
May-86

May-88

May-92

May-98

May-00

May-04

May-06

May-08
 Keeping Doing the Same Thing? Baltic Dry Index,
Monthly Value, 2000-2010

12,000

10,000

8,000

6,000 -92%

4,000

2,000

0
 Paradigm Shift or “V” Shaped Recession?

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

150
Los Angeles
140 New York
Busan
130 Hong Kong
120 Algeciras

110
100
90
80
70
60
5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 0 0
n -0 r-0 ul-0 ct-0 n-0 r-0 ul-0 ct-0 n-0 r-0 ul-0 ct-0 n-0 r-0 ul-0 ct-0 n-0 r-0 ul-0 ct-0 n-1 r-1
Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap
 Monthly Container Traffic at the Port of Los Angeles,
1995-2010

450,000
Out Loaded
400,000
In Loaded
In Empty
350,000
Out Empty

300,000

250,000

200,000

150,000

100,000

50,000

0
5 5 6 6 7 8 8 9 9 0 0 1 2 2 3 3 4 5 5 6 6 7 7 8 9 9 0
an-9 ug-9 ar-9 ct-9 un-9 an-9 ug-9 ar-9 ct-9 ay-0 ec-0 Jul-0 eb-0 ep-0 pr-0 ov-0 un-0 an-0 ug-0 ar-0 ct-0 ay-0 ec-0 Jul-0 eb-0 ep-0 pr-1
J A M O J J A M O M D F S A N J J A M O M D F S A
 Factors behind the Interest of Equity Firms in Transport
Terminals

Asset (Intrinsic Terminals occupy premium locations (waterfront) that cannot be

value) 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 Income (rent) linked with the traffic volume they handle.
(Operational value) Constant revenue stream with limited, or predictable, seasonality.
Traffic growth expectations result in income growth expectations.
Diversification (Risk Sectoral and geographical asset diversification.
mitigation value) Terminals at different locations help mitigate risks linked with a
specific regional or national market.
 Port and Maritime Industry Finance: Who is Leveraging
Whom?

Financial
Investors Brokers
Markets
Commercial
Corporations Money Markets Shipping
Banks
Companies
Private Investors Capital Markets Mortgage Banks
Port Operators
Investments
Equity Markets Merchant Banks
Managers
• Insurance Companies Private
• Pension Funds Finance Houses Earnings
Placement
• Banks
• Trust Funds Leasing
• Finance Houses Companies
 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 Assets are less perceived as they are (port terminals) but simply
strategies from their potential (or expected) level of return.
Chasing return without understanding well the fundamentals.
Low contestability of Perceived liquidity.
entry and exit 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 14 times
Terminals
Early 2006 PSA acquires a 20% stake in HPH 17 times
Mid 2006 DP World acquires P&O Ports 19 times
Mid 2006 Goldman Sachs Consortium acquires 14.5 times
ABP
End 2006 AIG acquires P&O Ports North America 24 times

Early 2007 Ontario Teachers’ Pension Fund 23.5 times

acquires OOIL Terminals
Mid 2007 RREEF acquires Maher Terminals 25 times

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

 The Double Squeeze on Ports and Maritime Shipping

Maritime Shipping

“Cruel”
“Cruel” Overcapacity
Overcapacity Contestability
Contestability for
for
New
New terminals
terminals coming
coming gateways
gateways
online
online Contestability
Contestability for
for
New
New ships
ships coming
coming Supply Demand hubs
hubs
online
online (+
(+ Rebalancing
Rebalancing
cancellations)
cancellations)
Port Operations

Lower
Lower profitability
profitability
Less
Less pressures
pressures on
on terminal
terminal resources
resources
Less
Less financial
financial appeal
appeal
 World Container Traffic and Throughput, 1980-2008.
Reaching Peak Growth?

World Traffic
500 World
Million TEU

Throughput
Full Containers
400 Transshipment
Empty Containers

300

200

100

0
1980 1985 1990 1995 2000 2005 2010
 Fallacies of Forecasting: 2020 Throughput Forecast,
Selected Large Ports, Linear and CAG Scenario

Port / Traffic 2007, R2 / CAG (1998- Traffic 2020 (Linear Traffic 2020 (CAG
M TEU 2007) Scenario) / 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 trends

Linearity prevalent in growth trends (1998-2007)
Compound annual growth common in forecasts
Non-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

Niche markets

Maturity
Massive diffusion
Network complexities

Peak Growth

Network development
Productivity multipliers

Acceleration
New (niche) services
Productivity gains

Adoption
 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 The assumption that larger players have more information
Asymmetries than 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: Abandoning the compound annual growth paradigm:

Time for realism • 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: Paying attention to competition drivers:
Competition matters • Growth may no longer mitigate competitiveness as it did
previously.
• Transshipment is a particularly vulnerable segment.
5) Amortization: Volume & pricing assumptions more modest:
Modest times • Longer amortization periods.
• PPP rent sharing more probable.