Outlook: Lots of Moving Parts. September 22, 2015

Transcription

1 Outlook: Lots of Moving Parts September 22, 2015

2 Moffatt & Nichol Background Established in 1945 in Long Beach, California, currently: Offices in the Americas, Europe, Middle East and Pacific Rim Practices: Goods Movement, Energy, Ports, Coastal, Urban Waterfronts & Marinas, Inspection & Rehabilitation Planning and design of marine and freight transportation Terminal design for all types of freight and passenger movement Freight planning and market analysis Investment/privatization analysis Strategic development plans Port selection/network analysis Coastal engineering Port and waterside construction (marinas) Railroads and capacity expansion Environment issues/emission modeling Port security Commentary and presentation materials on this occasion are based on the personal views of the speaker and may not coincide with opinions held by Moffatt & Nichol or its employees. 2

3 Where is this going US-driven growth becoming broader based imports better supported until 2017 or so Low inflation = little pressure on the Fed to raise interest rates aggressively Europe, Asia and commodity exporters carefully pursuing recovery policies want growth not inflation/bubbles Dollar strengthening and commodity price declines likely ending by 2016 assuming market forces prevail Import growth and structure changing Near-sourcing and on-shoring, but not repatriation Structural congestion affects beneficial cargo owners distribution strategies Demographic and technology trends are driving retail sales strategies Competition for existing infrastructure Can world freight infrastructure handle future demand from the growing global middle class? Cannot piggyback exports on imports maybe some leapfrogging is possible with new technology 3

4 US has led global growth since 2011 REAL GDP GROWTH: MAJOR ECONOMIES INVESTMENT SHARE OF GDP China s GDP growth was driven by investment spending and exports. Since the Year Plan it has focused on domestic demand (Fordism). Europe has sacrificed economic growth on the altar of monetary unification. US recovery from the Wall Street s meltdown is in the last stages, otherwise the virtuous cycle of consumption-employment-consumption continues Source: Bloomberg, IMF, Moffatt & Nichol 4

5 US economy is in a virtuous cycle until the Fed decides it isn t EMPLOYMENT AND RETAIL SALES VOLUMES Source: Source: Bureau of Labor Statistics, National Bureau for Economic Research, Moffatt & Nichol 5

6 Inflation risk is less than growth risk CORE CONSUMER PRICE INFLATION TRENDS 4.0% 3.0% 2.0% US 1.0% Eurozone 0.0% China Japan -1.0% -2.0% -3.0% -4.0% Core inflation (excluding volatile food and energy prices) provides a better indication of consumer price trends. The Federal Reserve is not under pressure from inflation to raise interest rates. Japan finally broke out of deflation but economic growth remains stalled. The Euro Area is struggling to increase inflation. China is actually experiencing deflation. Source: Trading Economics, Moffatt & Nichol 6

7 Strengthening US Dollar may help imports and hurt exports DOLLAR-EURO EXCHANGE RATE AND THE SPREAD BETWEEN US AND GERMAN GOVERNMENT BONDS Currency Actual Monthly Yearly Date United States DXY % 18.90% 17-Aug Canada USDCAD % 20.10% 17-Aug Australia AUDUSD % % 17-Aug Mexico USDMXN % 25.30% 17-Aug Brazil USDBRL % 53.60% 17-Aug Euro Area EURUSD % % 17-Aug United Kingdom GBPUSD % -6.60% 17-Aug Switzerland USDCHF % 7.80% 17-Aug Japan USDJPY % 21.60% 17-Aug China USDCNY % 4.00% 17-Aug India USDINR % 7.60% 17-Aug Russia USDRUB % 80.70% 17-Aug 10 yr Government Bond Actual Monthly Yearly Date United States USGG10YR Aug Canada GCAN10YR Aug Australia GACGB Aug Mexico GMXN10YR Aug Brazil GEBU10Y Aug Euro Area EUROAREAGOVBON10Y Aug United Kingdom GUKG Aug Switzerland GSWISS Aug Japan GJGB Aug China GCNY10YR Aug India GIND10YR Aug Russia RUGE10Y Aug Source: Trading Economics, Moffatt & Nichol 7

8 Stronger USD is correlated with lower commodity prices S&P GLOBAL GOLDMAN SACHS COMMODITY INDEX AND TRADE-WEIGHTED US DOLLAR INDEX OF EXCHANGE RATES Source: Bloomberg, Federal Reserve, Moffatt & Nichol 8

9 Not all commodity prices move together COMMODITY PRICES: Energy Actual Yearly Date Crude oil % 17-Aug Brent crude oil % 17-Aug Ethanol % 17-Aug Natural gas % 17-Aug Coal % 14-Aug Source: Commodity Research Bureau, Moffatt & Nichol Steel Copper Oil Soy Corn Sugar Metals Actual Yearly Date Aluminum 1, % 14-Aug Cobalt 29, % 14-Aug Gold 1, % 17-Aug Copper % 17-Aug Molybden 12, % 14-Aug Nickel 10, % 14-Aug Platinum % 17-Aug Silver % 17-Aug Steel % 14-Aug Zinc 1, % 14-Aug Agricultural Actual Yearly Date Beef % 14-Aug Corn % 17-Aug Cocoa 3, % 17-Aug Cotton % 17-Aug Coffee % 17-Aug Oat % 14-Aug Rice % 17-Aug Soybeans % 17-Aug Sugar % 17-Aug Wheat % 17-Aug Wool 1, % 14-Aug 9

10 Speculation activity is being dialed down Vermillion Asset Management LLC Flagship Viridian commodity fund has shrunk from $2 billion to less than $50 million Private-equity firm Carlyle Group LP bought a 55% stake in Vermillion in 2012 in a bid to expand its investment offerings. But as commodity markets pulled back, the firm s flagship Viridian commodity fund lost 23% in 2014; assets dwindled amid a wave of redemptions and a string of bad bets, including one tied to the price of shipping dry goods. Messrs. Nygard and Gilbert left Vermillion at the end of June. Armajaro Commodity Fund Expected to close at end of July 2015 After the retirement of fund manager John Tilney in March, assets in the $450 million Commodity Fund shrank and executives decided the fund was no longer viable. However, Armajaro Asset Management LLC continues to operate the CC+ fund, managed by Anthony Ward. Known in the press as Choc Finger, Mr. Ward in 2010 bought $1 billion worth of cocoa beans, helping to drive up futures prices. Black River Asset Management Plans to close four hedge funds over the next few months Owned by agricultural conglomerate Cargill Inc., Black River suffered a big blow last year when the California Public Employees Retirement System decided to pull its money from hedge funds, a move that cost Black River about $600 million in assets. Now the firm, citing a lack of investor demand, plans to close four funds including a commodities fund and two emergingmarket funds. Phibro Trading LLC Closed U.S. operations in December 2014 after failing to find a buyer Phibro came to prominence during the 2000s commodities boom. Led by oil trader Andrew Hall, the company reaped big profits from raw-materials trading when it was part of Citigroup; a $100 million payday for Mr. Hall in 2009 sparked public furor. Phibro was bought by Occidental Petroleum Inc., but the oil company later retreated from proprietary oil trading. Mr. Hall continues to run his $3.3 billion hedge fund, Astenbeck Capital Management LLC. LCM Exponential LLC Down more than 25% through midyear Hedge-fund manager Andrew Lahde made his name when he bet against mortgages ahead of the financial crisis, a move that earned him more than 800% returns in His latest venture has stumbled. LCM Exponential is suffering steep losses as it amasses the metal rhodium, a byproduct of platinum and palladium and one of the world s most expensive commodities. Still, Mr. Lahde says he is sticking with his thesis that as production slows, prices will go up. Source: Wall Street Journal 10

11 US Economic Scorecard is positive for Indicator Score Considerations Monetary Policy Neutral The Fed is withdrawing the punchbowl soon but very gently Inflation Positive A bit low, but little inflation risk. Fiscal Policy Neutral Shifting towards deficit and debt reduction, watch for October showdown Financial Sector Neutral FDIC s watch list declining, consumer credit increasing, regulatory stance has been contractionary, corporate bond market may present bubble risk Causes of Last Recession Positive Residential real estate sector is in the long process of recovery Leading Industries Neutral Industries likely to lead growth in this cycle have been investing but energy got ahead of consumption trends Production Costs Positive Low interest rates, wages, commodity prices Labor Markets Global Economy Positive Neutral Employment rising in expected industries, energy sector is shedding employees Central banks have cut interest rates and are increasing liquidity, but Emerging Markets could be impacted by rising US interest rates and weak commodity prices, and Europe is still dealing with the legacy of austerity. Stronger US$ means weaker export and economic growth The most significant factor is the degree to which the Fed feels it needs to tighten. This is a Recovery Period score card, once the Fed starts hiking a different score card will be used. Real GDP growth is forecasted to be 2.4% in 2015 and 2.8% in Source: Moffatt & Nichol 11

12 Import volumes led US TEU growth in 2014 MONTHLY AND ANNUAL VOLUMES AT MAJOR US PORTS Total Total Loaded Import Load Export Load Empty ,872,549 26,902,788 17,297,240 9,605,548 9,969, ,263,101 28,331,823 17,342,377 10,989,446 8,931, ,382,311 27,641,905 16,060,599 11,581,306 7,740, ,368,529 23,920,945 13,444,526 10,476,419 6,447, ,120,125 26,877,744 15,620,245 11,257,500 8,242, ,650,253 27,722,873 15,780,519 11,942,354 7,927, ,295,886 28,194,242 16,266,504 11,927,738 8,101, ,227,612 29,053,063 16,645,540 12,407,523 8,174, ,973,674 30,127,816 17,783,189 12,344,626 8,845, Q1 9,186,063 7,004,802 4,273,205 2,731,598 2,181, Growth 4.7% 3.7% 6.8% -0.5% 8.2% CAGR 0.7% 1.4% 0.3% 3.2% -1.5% Imports drove volume growth in 2014, this shows how the US has been supporting global growth. But looking back to the years before the recession of , exports have performed a lot better. It is worth noting that there are some months when loaded export TEUs almost exceed loaded import volumes, which seems to have happened in November Peak season import growth is expected to be in the 6% to 8% range. Exports are expected to decline. Source: AAPA, Moffatt & Nichol 12

13 US Trade deficit remains high despite improving oil trade US TRADE DEFICIT 9% of the trade deficit is due to oil, used to be more than 40% The US has helped the world economy develop, particularly emerging market economies, by allowing its trade balance to be in deficit. This isn t sustainable in the long run. Reducing the trade deficit is important for employment and therefore economic growth. The decreasing US oil trade deficit has directly helped strengthen our goods balance and in the process helped US employment recover from the deep recession. But more, a further reduction in the deficit, is needed. Source: US Census Bureau, Moffatt & Nichol 13

14 The world wants to trade WORLD REAL GDP AND TRADE INDEXES ? When will this become an S-curve? China CAGR Manufactured Goods 7.0% Extraction Goods 3.9% Korea, Taiwan GDP 3.6% Agricultural goods 3.6% Japan From 1950 to 2013, manufactured goods trade has grown twice as fast as real GDP. Among other trends, this is due to: Free Trade Agreements Maritime and Inland Connectivity Infrastructure Information/Communication Technology Demographic Trends Source: WTO, Moffatt & Nichol 14

15 The Grey Tsunami The US has an increasing share of its population that is of retirement age. This impacts labor availability and consumer spending not just in the US but across developed economies. This trend is not unique to the US but common across higher income developed economies. Every generation of retirees is different due to improving healthcare. The key question is what will people do when they reach retirement age? Secondarily, is it economically and financially viable to have such a large proportion of the population in retirement? PROPORTION OF POPULATION ABOVE 55 YEARS OF AGE PEOPLE TURNING 65 AND THEIR SHARE OF US POPULATION: % 50% Japan Europe 25% 20% Last Boomers Turn 65 (2026) 2,000 1,800 1,600 40% 30% 20% China Canada US Brazil Mexico India Share 15% 10% First Boomers Turn 65 (2011) 1,400 1,200 1, Thousands of People 5% % 200 0% % and Over Share of Population (left) Increase in Over 65 Population (right) 15

16 Wage differentials drove offshoring, now near and on-shoring MANUFACTURING WAGE COMPARISONS IN US$ IN 2008 AND 2014E $55,000 $50,000 44% of World Population 9% of World Population $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 Developed Market sourcing is shifting from China to Central America and South Asia $10,000 $5,000 $0 It is unlikely that manufactured goods, which are labor intensive, will be produced in the US. In addition to lower production costs, emerging markets also have faster growing demand for manufactured goods. It is not surprising that many factories moved to China and other emerging Asian economies. Now, with wages rising, Chinese households could eventually be able to afford the goods they produce. This deliberate effort at Fordism sets China apart. Source: UN ILO, Moffatt & Nichol 16

17 Ships continue to get larger EVOLUTION OF CONTAINERSHIP SIZE FLEET CAPACITY BREAKDOWN BY TEU SIZE RANGE As of November 1, % > 10K As of August 1, % > 10K Source: Alphaliner, Moffatt & Nichol 17

18 Ocean carriers: An industry in transition SHIPPING ALLIANCES, EAST-WEST G6 CKYHE O3 2M APL Cosco Container Lines CMA GGM Maersk Hapag-Lloyd K Line China Shipping Container Lines MSC Hyundai Merchant Marine Yang Ming Marine Transport Co. UASC Mitsui OSK Lines Hanjin Shipping Co. And Hamburg-Sud? NYK Line Evergreen OOCL Ocean carriers are purchasing bigger and bigger ships in an attempt to lower slot costs. Ocean carriers have also been getting rid of chassis, terminal assets, and other asset holding to cut costs. As a result of these gigantic vessels, the following is true: Fewer ports of call New Mega Alliances have formed to fill the ships and offer weekly schedules Automation of terminals to increase productivity is necessary There is a mismatch between ship infrastructure and landside infrastructure Shipper demands: As fast as possible As reliable as possible As cheap as possible 18

19 More freight in fewer gateways NORTH AMERICAN INTERNATIONAL CONTAINER VOLUMES ,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 Top 10 in 2014 Charleston Hampton Roads Houston Long Beach Los Angeles Metro Port Vancouver (BC) New York/New Jersey Oakland Savannah Seattle/Tacoma Alliance US Int'l + Canada Top 10 As volumes concentrate in fewer ships to reduce average fixed costs per slot, they concentrate in fewer ports. Source: AAPA, Moffatt & Nichol 19

20 Congestion is a global problem that needs local solutions TRUCK TRAFFIC IN ROTTERDAM PORT TRAFFIC IN SOUTHERN CALIFORNIA PORT OF SHANGHAI, CHINA 20

21 Focus on global consumers WORLD POPULATION AND OECD GLOBAL MIDDLE CLASS PROJECTIONS Source: OECD, US Census Bureau 21

22 What can the US can competitively export? TOP 10 HIGH POTENTIAL US NET EXPORTS Containerized Score Bulk/Breakbulk Score Wood Pulp Scrap and Waste 9.4 Oil Seeds (Soy) 32.7 Oil Seeds (Soy) 1.1 Meat and Other Edible Animal Parts 28.7 Raw Hides And Leather 0.8 Cereal Grains 3.9 Cotton - Untreated, Yarn And Woven Fabric 0.7 Animal Feed 3.4 Animal Feed 0.7 Wood And Charcoal 0.4 Meat and Other Edible Animal Parts 0.3 Crude Oil and Refined Petroleum/Natural Gas Products 0.4 Plastics Feedstock and Manufactured Goods 0.2 Live Animals 0.3 Iron And Steel 0.1 Wood Pulp Scrap and Waste 0.2 Paper and Paperboard 0.1 Fish and Crustaceans 0.2 Chemical Products 0.1 Dairy Products, including Eggs and Honey 0.1 Cereals 0.1 Organic Chemicals 0.1 Organic Chemicals 0.1 Plastics Feedstock and Manufactured Goods Based on relative comparative advantage as defined by Bela Belassi Agriculture, Capital goods and Energy. Labor is more expensive and capital is cheaper in the US compared to fast growing emerging market economies such as China. The US has comparative (and competitive) advantages in the production of goods that use little labor. This is shown in the list of goods that the US has been prone to export. Source: US Census Bureau, Moffatt & Nichol 22

23 US energy production exceeds previous peak levels PETROLEUM AND NATURAL GAS PRODUCTION: , , ,000 Natural Gas BCFD ,000 6,000 Thousand Oil BPD 20 4, , Billion cubic feet of natural gas per day (LEFT) Thousand barrels of oil daily (RIGHT) Source: British Petroleum, Moffatt & Nichol 23

24 US manufacturing is growing but using less labor US INDUSTRIAL PRODUCTION AND MANUFACTURING EMPLOYMENT: Index Values (January 1950 = 100) Industrial Production Manufacturing Employment US manufacturing output is almost 8x the level of 1950 while employment is 25% lower. This is due to the changing nature of the commodities manufactured in the US (higher technology content) and automation. Using a minimum of relatively expensive US labor allows capital goods to be cost competitive. Source: Federal Reserve, Labor Department, Moffatt & Nichol 24

25 China s increasing food consumption ahead of GDP growth FOOD CONSUMPTION VS GDP/CAPITA, PERCENT OF CHINA S POPULATION UNDERNOURISHED Source: FAO, IMF WEO, Moffatt & Nichol 25

26 Water is the overlooked looming resource crisis GLOBAL DISTRIBUTION OF PHYSICAL WATER SCARCITY Changes In The Ogallala Aquifer Water Level Water is becoming increasingly scarce in Asia, the Middle East and in the Western half of the US. The Americas otherwise have abundant water and are likely to grow in importance as the world s breadbasket. Source: UN-FAO, US Government Agencies 26

27 Deteriorating US inland infrastructure a serious problem Hours of Lock Outages by Year and by Type of Outage CHANGES IN SHARE OF CROP PRODUCTION: 1997 VS 2012 SHARES OF US GRAIN AND OIL SEED EXPORTS /- Share New Orleans 61% 52% 51% 52% 48% 49% 52% -8.7% Columbia-Snake 14% 16% 16% 15% 18% 20% 19% 5.2% Seattle, WA 8% 13% 11% 12% 12% 8% 8% 0.2% Los Angeles, CA 1% 2% 4% 3% 4% 4% 3% 2.1% Norfolk, VA 1% 1% 2% 2% 2% 3% 2% 1.9% Other 15% 16% 17% 15% 17% 16% 14% -0.6% 100% 100% 100% 100% 100% 100% 100% Soybean Transportation Coalition studied US inland waterways. Key points: 54% of the Inland Marine Transportation System s (IMTS) structures are more than 50 years old and 36% are more than 70 years old. Along with water issues probably, this has impacted where grain is produced and exported. Grain increasingly moves on steel rivers (railways). 27

28 Brazil is becoming a competitive soy supplier Cerrado Region - Larger than US Cornbelt - 3 growing seasons Source: U.S. Department of Agriculture, Agronegocios 28

29 Empty container availability is very poor in less urban areas CONTAINER SHORTAGE INCIDENCE BY CITY Dry Reefer 20ft 40ft 40ft High Average 20ft Average Average West South Central North Central East New York 0% 0% 0% 0% 0% 0% 0% Norfolk 0% 0% 0% 0% 0% 2% 1% Charleston 2% 0% 0% 1% 4% 4% 4% Savannah 0% 0% 0% 0% 0% 0% 0% Minneapolis 44% 44% 17% 35% 100% 92% 96% Chicago 0% 10% 2% 4% 0% 2% 1% Cincinnati 0% 2% 4% 2% 2% 42% 22% Columbus 2% 2% 0% 1% 10% 31% 20% Kansas City 2% 19% 13% 12% 0% 29% 14% Memphis 2% 0% 0% 1% 8% 94% 51% New Orleans 4% 23% 12% 13% 0% 17% 9% Dallas 0% 0% 0% 0% 0% 98% 49% Houston 2% 29% 0% 10% 0% 0% 0% Denver 0% 0% 0% 0% 44% 98% 71% LALB 0% 0% 0% 0% 0% 0% 0% Oakland 0% 0% 2% 1% 0% 2% 1% Seattle 4% 0% 17% 7% 0% 0% 0% Tacoma 0% 6% 19% 8% 48% 12% 30% Exporters in areas of the Midwest that are not very urban have the least amounts of containers available. This hampers agricultural exports that are best suited for containerization. Less congestion in port gateways could improve container availability in the Midwest. Source: US Department of Agriculture, Moffatt & Nichol 29

30 Where is this going US-driven growth becoming broader based imports better supported until 2017 or so Low inflation = little pressure on the Fed to raise interest rates aggressively Europe, Asia and commodity exporters carefully pursuing recovery policies want growth not inflation/bubbles Dollar strengthening and commodity price declines likely ending by 2016 assuming market forces prevail Import growth and structure changing Near-sourcing and on-shoring, but not repatriation Structural congestion affects beneficial cargo owners distribution strategies Demographic and technology trends are driving retail sales strategies Competition for existing infrastructure Can world freight infrastructure handle future demand from the growing global middle class? Cannot piggyback exports on imports maybe some leapfrogging is possible with new technology 30

31 Dr. Walter Kemmsies, Chief Economist Moffatt & Nichol, New York th Ave 14 th Floor New York, NY T F