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
reserve banking, fiat
currencies)
SYMPTOMS
Debt, asset inflation
Consumption
Transactions and investments.
Difficulty of clearing international trade
transactions.
Undue drop in freight volumes.
Macroeconomic
Storm
CONSEQUENCES
Misallocations (bubbles)
Production
Credit Storm
Distribution
Decline in aggregate demand.
Clearing excess capacity.
Business Cycles: The Trend that Time Forgot
Demand
Transfer of future demand into the
present.
Supply
Misallocations because of distorted
expectations about the future.
Asset price distortions.
Credit-Driven Boom
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
NASDAQ (Jan 1998=100)
350.0
TOL (Jan 2003=100)
300.0
BDI (Jan 2006=100)
250.0
200.0
150.0
100.0
50.0
0.0
Jan-98
Tech / Stock Bubble
Jan-99
Jan-00
Commodities / Trade
Bubble
Housing Bubble
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Globalization 2000-2008: A Bubble?
14
2
13
Seaborne Trade (billions of tons of goods loaded) - Left Axis
12
Exports of Goods (trillions of current $US) - Left Axis
11
Ratio Exports / Seaborne Trade - Right Axis
10
1.8
1.6
1.4
9
8
7
6
1.2
1
0.8
5
4
0.6
3
0.4
2
1
0
0.2
0
Changes in the Value World’s Merchandise Trade,
Production and GDP, 1950-2009 (in %)
25.00
20.00
15.00
10.00
5.00
0.00
-5.00
Recession
Total Merchandise Trade
-10.00
World GDP
World Merchandise Production
-15.00
A Paradigm Shift in Neomercantilism?
Monthly Value of Exports or Imports, Selected Traders, 2006-2010
(Jan 2006=100)
225
China (Exports)
Japan (Exports)
Korea (Exports)
Germany (Exports)
Canada (Exports)
USA (Imports)
UK (Imports)
200
175
150
125
100
75
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Nov-06
Sep-06
Jul-06
May-06
Mar-06
Jan-06
50
A Paradigm Shift in the World’s Largest Trade
Relation?
Monthly Trade between China and the United States, Billions of USD
(1985-2010)
35
5
30
0
Exports
25
-5
Imports
Balance
20
-10
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
-30
Jan-91
0
Jan-90
-25
Jan-89
5
Jan-88
-20
Jan-87
10
Jan-86
-15
Jan-85
15
6,000
0
Jan-00
May-00
Sep-00
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Keeping Doing the Same Thing? Baltic Dry Index,
Monthly Value, 2000-2010
12,000
10,000
8,000
-92%
4,000
2,000
150
140
130
120
60
Jan-05
Mar-05
May-05
Jul-05
Sep-09
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
Paradigm Shift or “V” Shaped Recession?
Monthly Total Container Traffic at Selected Ports (Jan 2005=100)
Los Angeles
New York
Busan
Hong Kong
Algeciras
110
100
90
80
70
400,000
350,000
Jan-95
Jul-95
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Monthly Container Traffic at the Port of Los Angeles,
1995-2010
450,000
Out Loaded
In Loaded
In Empty
Out Empty
300,000
250,000
200,000
150,000
100,000
50,000
0
Factors behind the Interest of Equity Firms in
Transport Terminals
Asset (Intrinsic
value)
Terminals occupy premium locations (waterfront) that cannot be
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
(Operational
value)
Income (rent) linked with the traffic volume they handle.
Constant revenue stream with limited, or predictable, seasonality.
Traffic growth expectations result in income growth expectations.
Diversification
(Risk mitigation
value)
Sectoral and geographical asset diversification.
Terminals at different locations help mitigate risks linked with a
specific regional or national market.
Port and Maritime Industry Finance: Who is
Leveraging Whom?
Investors
Financial
Markets
Brokers
Corporations
Money Markets
Commercial
Banks
Private
Investors
Capital Markets
Mortgage
Banks
Investments
Managers
Equity Markets
Merchant Banks
Private
Placement
Finance Houses
•Insurance Companies
•Pension Funds
•Banks
•Trust Funds
•Finance Houses
Leasing
Companies
Shipping
Companies
Port
Operators
Earnings
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
strategies
Assets are less perceived as they are (port terminals) but simply
from their potential (or expected) level of return.
Chasing return without understanding well the fundamentals.
Low contestability
of entry and exit
Perceived liquidity.
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
2005
DP World takes over CSX World
Terminals
Early 2006 PSA acquires a 20% stake in HPH
Mid 2006
DP World acquires P&O Ports
Mid 2006
Goldman Sachs Consortium acquires
ABP
End 2006 AIG acquires P&O Ports North America
Early 2007 Ontario Teachers’ Pension Fund
acquires OOIL Terminals
Mid 2007
RREEF acquires Maher Terminals
Price compared to
EBITD
14 times
17 times
19 times
14.5 times
24 times
23.5 times
25 times
EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization
The Double Squeeze on Ports and Maritime Shipping
“Cruel” Overcapacity
New terminals coming
online
New ships coming
online (+
cancellations)
Contestability for
gateways
Contestability for
hubs
Rebalancing
Lower profitability
Less pressures on terminal resources
Less financial appeal
World Container Traffic and Throughput, 1980-2008.
Reaching Peak Growth?
500
Million TEU
400
World Traffic
World Throughput
Full Containers
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, M TEU
R2 / CAG (19982007)
Traffic 2020 (Linear
Scenario) / CAG
Traffic 2020 (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
Massive diffusion
Network complexities
Peak Growth
Network development
Productivity multipliers
New (niche) services
Productivity gains
Adoption
Acceleration
Maturity
Containerization Growth Factors: Which
Opportunities are Left?
A
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).
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:
Time for realism
Abandoning the compound annual growth paradigm:
• 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
Paying attention to competition drivers:
Entry: Competition • Growth may no longer mitigate competitiveness as it did
matters
previously.
• Transshipment is a particularly vulnerable segment.
5) Amortization:
Modest times
Volume & pricing assumptions more modest:
• Longer amortization periods.
• PPP rent sharing more probable.