THE ECONOMY IS MOVING AGAIN BUT WHICH WAY AND HOW FAST? 10/13/2015

THE ECONOMY IS MOVING AGAIN BUT WHICH WAY AND HOW FAST? 10/13/2015

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 Strategic development of marine and freight transportation infrastructure Freight planning and market analysis Investment/privatization analysis Cost-benefit analysis to support public private partnerships Port selection/network analysis Strategic development plans Railroads and capacity expansion Terminal design for all types of freight and passenger movement Coastal engineering Port and waterside construction (marinas) 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

The economy is moving again but which way and how fast? Long term trends continue to drive uncertainty as the global economy transitions to a new equilibrium Aging developed economies are growing more slowly Emerging markets not large or stable enough to offset slowing developed economies Raw material investment boom remains a trouble spot Energy, industrial metals struggling with excess capacity and slower than expected demand growth All commodity prices are impacted by the strong dollar Low global economic growth mostly sustained by consumer spending but it doesn t have to be low Consumer spending outpaces industrial production in the US, EU, Japan and China Little pricing power as competition remains intense An opportune time to invest in infrastructure globally low input and financing costs 3

Developed economies losing dominance TOP 10 COUNTRIES BY GDP These were not in top 10 before 2007 Source: IMF WEO, Moffatt & Nichol 4

1900 1907 1914 1921 1928 1935 1942 1949 1956 1963 1970 1977 1984 1991 1998 2005 2012 2019 2026 2033 2040 2047 Share Thousands of People The Grey Tsunami PEOPLE TURNING 65 AND THEIR SHARE OF US POPULATION: 1900-2050 25% 20% Last Boomers Turn 65 (2026) 2,000 1,800 1,600 60% 50% PROPORTION OF POPULATION ABOVE 55 YEARS OF AGE Japan Europe 1,400 China 15% 1,200 40% Canada 10% First Boomers Turn 65 (2011) 1,000 800 600 30% 20% US Brazil Mexico India 5% 400 200 10% 0% 0 65 and Over Share of Population (left) Increase in Over 65 Population (right) Source: Census Bureau, Moffatt & Nichol 0% 1990 2000 2010 2020 2030 2040 2050

Global growth is rebalancing ANNUAL REAL GDP GROWTH Source: IMF WEO, Moffatt & Nichol 6

US has led global growth since 2011 REAL GDP GROWTH: MAJOR ECONOMIES INVESTMENT SHARE OF GDP Source: Bloomberg, IMF, Moffatt & Nichol 7

Share prices of industrial sectors declined as China slowed S&P 500 AND SECTOR INDEXES SINCE JANUARY 2013 Source: Bloomberg, Federal Reserve, Moffatt & Nichol 8

1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Natural Gas BCFD Thousand Oil BPD US energy production exceeds previous peak levels PETROLEUM AND NATURAL GAS PRODUCTION: 1965-2014 80 14,000 70 60 50 40 30 12,000 10,000 8,000 6,000 20 10 4,000 2,000 - - Billion cubic feet of natural gas per day (LEFT) Thousand barrels of oil daily (RIGHT) Source: British Petroleum, Moffatt & Nichol 9

China has a large impact on commodity flows INVESTMENT SHARE OF GDP AND IMF FORECASTS CHINA S SHARE OF WORLD COMMODITY IMPORTS Source: IMF, UN Comtrade, Moffatt & Nichol 10

US economy is in a virtuous cycle until the Fed decides it isn t EMPLOYMENT AND RETAIL SALES VOLUMES Source: Bureau of Labor Statistics, National Bureau for Economic Research, Moffatt & Nichol 11

US Dollar is cyclically strong but structurally weak DOLLAR-EURO EXCHANGE RATE AND THE SPREAD BETWEEN US AND GERMAN GOVERNMENT BONDS Source: Trading Economics, Moffatt & Nichol 12

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 13

US Dollar exchange rate trends better correlated with exports TWD VS US EXPORTS: INVERSE RELATIONSHIP TWD VS US IMPORTS: SKEWED BY CURRENCY MANIPULATION IN ASIA 35% -10% 30% 12% 30% 25% 10% 25% -5% 20% 8% 20% 0% 15% 6% 15% 10% 4% 5% 5% 2% 10% 5% 10% 0% -5% 2003 2005 2007 2009 2011 2013 2015 0% -2% 0% 2003 2005 2007 2009 2011 2013 2015 15% -10% -4% -5% -15% -6% -10% 20% -20% -8% Export growth (left) TWD (right) Import growth (left) TWD (right) A stronger dollar negatively impacts containerized exports and does not help containerized imports growth. Source: Moffatt & Nichol 14

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 0.1 1 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 15

Weak global manufacturing trends US INDUSTRIAL PRODUCTION (% YEAR AGO) CHINA INDUSTRIAL PRODUCTION (% YEAR AGO) EU INDUSTRIAL PRODUCTION (% YEAR AGO) Slower investment growth in China negatively impacts raw materials producers and heavy equipment manufacturers A stronger dollar negatively impacts US exports but help noncontainerized (bulk) commodities import growth This would be an opportune time for the US to significantly increase infrastructure investment spending Source: Trading Economics 16

Global economic growth supported by consumer spending US RETAIL SALES (% YEAR AGO) CHINA RETAIL SALES (% YEAR AGO) EU RETAIL SALES (% YEAR AGO) Source: Trading Economics Lower fuel prices allows consumers to spend their income on other goods note that retail sales shown here includes spending on fuel The Fed and the ECB are not under pressure to raise interest rates. PBOC is lowering interest rates In Europe and North America consumers spend more on services than on goods this could be even more pronounced as their populations age Consumers in North America, Europe and Asia are increasingly favoring ecommerce over bricks and mortar shopping this could reduce impulse buying 17

US Economic Scorecard is not negative for 2015-2016 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 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 and mining 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 and an embargo. Stronger U$ 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 2016. Source: Moffatt & Nichol 18

Slowing world trade growth WORLD REAL GDP AND TRADE INDEXES 1950-2013? China 1950 2014 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 19

Background: uneven container volume recovery ANNUAL PORT CONTAINER VOLUMES 2006 2007 2008 2009 2010 2011 2012 2013 2014 Baltimore 621,714 608,355 614,818 533,319 604,885 627,558 678,262 705,230 770,139 Charleston 1,968,494 1,754,381 1,635,537 1,181,357 1,364,504 1,381,353 1,514,585 1,601,366 1,791,986 Houston 1,580,983 1,744,668 1,794,243 1,797,155 1,812,268 1,866,439 1,921,529 1,950,071 1,951,088 Jacksonville 761,070 683,415 718,466 767,590 856,845 900,351 923,009 924,534 922,255 Long Beach 7,290,365 7,312,465 6,487,816 5,067,597 6,263,500 6,061,091 6,045,662 6,730,573 6,820,808 Los Angeles 8,469,853 8,355,039 7,849,985 6,748,995 7,831,902 7,940,511 8,077,714 7,868,572 8,340,066 Miami 974,727 853,977 847,809 789,570 844,996 914,913 915,705 893,462 898,070 New York/New Jersey 5,142,059 5,299,104 5,265,058 4,561,527 5,292,025 5,503,485 5,529,913 5,467,345 5,772,303 Norfolk 2,029,799 2,111,264 2,083,278 1,745,228 1,895,018 1,918,036 2,105,886 2,223,534 2,393,040 Oakland 2,390,262 2,386,363 2,236,244 2,051,175 2,330,202 2,342,504 2,343,944 2,346,460 2,394,069 Port Everglades 891,514 960,860 954,249 785,289 798,150 911,802 926,180 1,284,941 1,420,478 Savannah 2,160,113 2,604,401 2,616,185 2,356,574 2,825,184 2,944,668 2,966,217 3,034,014 3,346,024 SEATAC (NWSA) 3,188,539 3,031,378 2,724,207 2,360,183 2,812,284 2,772,260 2,804,447 2,635,306 2,556,828 Container volume recovery has varied across ports due to a host of factors such as the uneven recovery of US domestic regions and trade lane regions, the increase in the value of the US dollar in foreign exchange markets, and a host of industry issues. Source: AAPA 20

Ships continue to get larger Need deeper depth EVOLUTION OF CONTAINERSHIP SIZE SHARE OF FLEET CAPACITY 2012 2015 VESSEL SHARING ALLIANCES (EAST-WEST TRADES) 88% 78% 12% 22% Source: Alphaliner, Panama Canal Authority, Moffatt & Nichol 21

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 More freight in fewer gateways NORTH AMERICAN INTERNATIONAL CONTAINER VOLUMES 1974-2014 50,000,000 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 22

Congestion is a global problem that needs local solutions TRUCK TRAFFIC IN ROTTERDAM PORT TRAFFIC IN SOUTHERN CALIFORNIA PORT OF SHANGHAI, CHINA US problems are compounded in some areas due to chassis supply and changing industry practices 23

Intermodal capacity is needed to reduce congestion PORT OF NEW YORK AND NEW JERSEY CONTAINER TERMINALS AND INLAND CONNECTIVITY INFRASTRUCTURE 24

Ports are investing At least $28.9 billion of $46 billion infrastructure investment gap needed by 2025 (AAPA) HMT SPENDING TARGETS IN WRRDA FY2015 67% FY2016 69% FY 2017 71% FY 2018 74% FY 2019 77% FY 2020 80% FY 2021 83% FY 2022 87% FY 2023 91% FY 2024 95% FY 2025+ 100% 25

Deteriorating US inland infrastructure a serious problem HOURS OF LOCK OUTAGES BY YEAR AND TYPE 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 2003 2005 2007 2009 2011 2013 2014 +/- 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). 26

West South Central North Central East 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 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 27

The economy is moving again but which way and how fast? Long term trends continue to drive uncertainty as the global economy transitions to a new equilibrium Raw material investment boom remains a trouble spot Low global economic growth mostly sustained by consumer spending but it doesn t have to be low 28

Dr. Walter Kemmsies, Chief Economist Moffatt & Nichol, New York 529 5 th Ave 14 th Floor New York, NY 10017 T 212.768.7454 F 212.768.7936 www.moffattnichol.com