2009 Terminal Operators Conference (TOC) Americas, Buenos Aires (Argentina), Nov 9-11 The First Crisis of Globalization: Legacy Scenarios for Maritime Container Trade and Ports Jean-Paul Rodrigue Associate Professor, Dept. of Global Studies & Geography, Hofstra University, New York, USA Turbulent Times for Ports: From a Credit Storm to a Macroeconomic Storm Credit Storm Macroeconomic Storm Transactions and investments. Difficulty of clearing international trade transactions. Undue drop in freight volumes. Decline in aggregate demand. Clearing excess capacity. The First Crisis of Globalization: Reaping the Consequences of Misallocations CAUSES Monetary system (fractional reserve banking, fiat currencies) SYMPTOMS Debt, asset inflation CONSEQUENCES Misallocations (bubbles) Production Consumption Distribution 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 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 Impact of Recessions on Consumption, Production and Trade Significant Consumption A – Basic Goods B – Discretionary Goods C – Durable Goods D – Capital Equipment E – Luxury Goods Severity Decline None Low Value of Goods High Trade and Production Significant 1 – Futures Indexes 2 – Production 3 – Seaborne Freight Volumes 4 – Value of Trade Decline None Sequence 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 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 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 150 120 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 Paradigm Shift or “V” Shaped Recession? Monthly Total Container Traffic at Selected Ports (Jan 2005=100) 140 Los Angeles New York 130 Busan Hong Kong 110 100 90 80 70 Jul-09 Jan-09 Jul-08 Jan-08 Jul-07 Jan-07 Jul-06 Jan-06 Jul-05 Jan-05 Jul-04 Jan-04 Jul-03 Jan-03 Jul-02 Jan-02 Jul-01 Jan-01 Jul-00 Jan-00 Jul-99 Jan-99 Jul-98 Jan-98 Jul-97 300,000 Jan-97 350,000 Jul-96 400,000 Jan-96 Jul-95 Jan-95 Monthly Container Traffic at the Port of Los Angeles, 1995-2009 450,000 In Loaded Out Empty Out Loaded In Empty 250,000 200,000 150,000 100,000 50,000 0 Reassessing Global Trade and Neomercantilism 225.0 200.0 175.0 150.0 Monthly Value of Exports or Imports (Jan 2006=100) China (Exports) Japan (Exports) Korea (Exports) Germany (Exports) USA (Imports) UK (Imports) 125.0 100.0 75.0 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 50.0 Reassessing Global Trade and Neomercantilism 300.0 275.0 250.0 225.0 200.0 Monthly Value of Exports or Imports (Jan 2006=100) Argentina (Exports) Argentina (Imports) Brazil (Exports) Brazil (Imports) Chile (Exports) Chile (Imports) 175.0 150.0 125.0 100.0 75.0 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 50.0 15 -15 10 -20 5 -25 0 -30 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 Jan-91 Jan-90 20 Jan-89 25 Jan-88 Jan-87 Jan-86 Jan-85 Monthly Trade between China and the United States, Billions of USD (1985-2009) 35 5 30 0 Exports -5 Imports -10 Balance 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. Shipping Equity and Equity-linked Offerings in Public Markets (2000-2007) 18,000 16,998 16,000 14,000 12,000 10,000 8,000 6,999 5,757 6,000 3,513 4,000 2,000 0 313 395 2000 2001 855 1,056 2002 2003 2004 2005 2006 2007 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 Here Comes the Bankers: The Double Edged Sword of Leveraging and Deleveraging Leveraging Deleveraging Capital intensiveness Intermodal transportation highly capital intensive (modes, terminals and equipment). Amortization over longer periods. Overcapacity (compounded by economies of scale). Redundancy. Financial firms involved in ownership and operations Intermodal transportation as an investment class. Capital scale factor. Disintermediation (dumb money) Lower returns. Renegotiation of contracts? Consolidation of ownership? Financing international transactions Letters of credit. 90% of international trade transactions. Inventory stuck in transit (drop in demand and financing). More stringent conditions. Shipping derivatives Hedge against risk of fluctuations (rates, bunker prices, vessel prices, scrap prices, interest rates, and foreign exchange rates). Unwinding positions in a frozen / deflating market. 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 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 So, What are the Prospects for Terminal Operators? 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 Americas: Gateways, Corridors and Transshipment Gateway Port Region Transshipment Port Region 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 Anchoring Traffic: The Inland Port / Empty Container Depot Storage Accommodate container storage demand. Storage before reutilization and repositioning. Container exchange market between different supply chains (neutral location). Terminal Flexibility in opening hours and gate extension access. Shuttles between the terminal (port or rail) and the depot. Buffer for the terminal (reduce congestion). Favorable Closer to main freight distribution location activities (periphery). Reduce the frequency and distance of repositioning (cargo rotation). Better response to freight distribution requirements. Port Port Terminal A Importer Shuttles Inland Port / Depot B C Exporter Importer Exporter Continuous Commodity Index and Baltic Dry Index, 2000-2009 (2000=100) 900 800 700 600 500 400 300 200 100 0 Continuous Commodity Index Baltic Dry Index Continuous Commodity Index and Average Container Shipping Rates, 1994-2009 (1994=100) 250 Continuous Commodity Index Container Shipping Rates 200 150 100 50 The Calm after the Storm: Legacy Scenarios for Maritime Container Trade and Ports Rebalancing of the global economy From growth to rationalization The regionalization of globalization? Anchoring Freight Through Inland Strategies