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

You are here

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

CAUSESMonetary system (fractional

reserve banking, fiat currencies)

SYMPTOMSDebt, asset inflation

Production Consumption Distribution

CONSEQUENCESMisallocations (bubbles)

Business Cycles: The Trend that Time Forgot

Expansion Recession

Peak

Trough

Expansion

Credit-Driven Boom

Credit-Driven Bust

Depression

Demand Transfer of future demand into the present.

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

Blowing Bubbles and Compounding Distortions: From Technology to Commodities

Jan-98

May-98

Sep-98

Jan-99

May-99

Sep-99

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

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

NASDAQ (Jan 1998=100)

TOL (Jan 2003=100)

BDI (Jan 2006=100)

Tech / Stock Bubble Housing BubbleCommodities / Trade

Bubble

Impact of Recessions on Consumption, Production and Trade

Value of GoodsLow HighNone

Significant

Decline

A – Basic GoodsB – Discretionary GoodsC – Durable GoodsD – Capital EquipmentE – Luxury Goods

Consumption

None

Significant

Decline

1 – Futures Indexes2 – Production3 – Seaborne Freight Volumes4 – Value of Trade

Trade and Production

A

B

C

D

E

12

3

4

Severity

Sequence

Globalization 2000-2008: A Bubble?

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

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

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

Ratio Exports / Seaborne Trade - Right Axis

Diffusion Cycles in Containerization: Towards Maturity

Adoption

Acceleration

Peak Growth

Maturity

New (niche) servicesProductivity gains

Network developmentProductivity multipliers

Massive diffusionNetwork complexities

Niche markets

World Container Traffic and Throughput, 1980-2008. Reaching Peak Growth?

1980 1985 1990 1995 2000 2005 20100

100

200

300

400

500 World TrafficWorld ThroughputFull ContainersTransshipmentEmpty Containers

Mill

ion

TEU

Paradigm Shift or “V” Shaped Recession?

Jan-0

5Apr-

05Ju

l-05

Oct-05

Jan-0

6Apr-

06Ju

l-06

Oct-06

Jan-0

7Apr-

07Ju

l-07

Oct-07

Jan-0

8Apr-

08Ju

l-08

Oct-08

Jan-0

9Apr-

09Ju

l-09

Oct-09

60

70

80

90

100

110

120

130

140

150Monthly Total Container Traffic at Selected Ports (Jan 2005=100)

Los AngelesNew YorkBusanHong Kong

Monthly Container Traffic at the Port of Los Angeles, 1995-2009

Jan-9

5Ju

l-95Ja

n-96Ju

l-96Ja

n-97Ju

l-97Ja

n-98Ju

l-98Ja

n-99Ju

l-99Ja

n-00Ju

l-00Ja

n-01Ju

l-01Ja

n-02Ju

l-02Ja

n-03Ju

l-03Ja

n-04Ju

l-04Ja

n-05Ju

l-05Ja

n-06Ju

l-06Ja

n-07Ju

l-07Ja

n-08Ju

l-08Ja

n-09Ju

l-09

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

In LoadedPolynomial (In Loaded)Out EmptyPolynomial (Out Empty)Out LoadedPolynomial (Out Loaded)

Reassessing Global Trade and Neomercantilism

Jan-0

6

Mar-06

May-06

Jul-0

6

Sep-06

Nov-06

Jan-0

7

Mar-07

May-07

Jul-0

7

Sep-07

Nov-07

Jan-0

8

Mar-08

May-08

Jul-0

8

Sep-08

Nov-08

Jan-0

9

Mar-09

May-09

Jul-0

9

Sep-09

Nov-09

50.0

75.0

100.0

125.0

150.0

175.0

200.0

225.0 Monthly Value of Exports or Imports (Jan 2006=100)

China (Exports)Japan (Exports)Korea (Exports)Germany (Exports)USA (Imports)UK (Imports)

Reassessing Global Trade and Neomercantilism

Jan-0

6

Mar-06

May-06

Jul-0

6

Sep-06

Nov-06

Jan-0

7

Mar-07

May-07

Jul-0

7

Sep-07

Nov-07

Jan-0

8

Mar-08

May-08

Jul-0

8

Sep-08

Nov-08

Jan-0

9

Mar-09

May-09

Jul-0

9

Sep-09

Nov-09

50.0

75.0

100.0

125.0

150.0

175.0

200.0

225.0

250.0

275.0

300.0 Monthly Value of Exports or Imports (Jan 2006=100)

Argentina (Exports)Argentina (Imports)Brazil (Exports)Brazil (Imports)Chile (Exports)Chile (Imports)

Monthly Trade between China and the United States, Billions of USD (1985-2009)

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

Exports

Imports

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)

2000 2001 2002 2003 2004 2005 2006 20070

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

313 395855 1,056

3,513

6,999

5,757

16,998

Port and Maritime Industry Finance: Who is Leveraging Whom?

BrokersFinancial Markets

Investors

Commercial Banks

Mortgage Banks

Merchant Banks

Finance Houses

Leasing Companies

Money Markets

Capital Markets

Equity Markets

Private Placement

Corporations

Private Investors

Investments Managers

• Insurance Companies• Pension Funds• Banks• Trust Funds• Finance Houses

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 Price compared to EBITD

2005 DP World takes over CSX World Terminals

14 times

Early 2006 PSA acquires a 20% stake in HPH 17 timesMid 2006 DP World acquires P&O Ports 19 timesMid 2006 Goldman Sachs Consortium acquires

ABP14.5 times

End 2006 AIG acquires P&O Ports North America 24 times

Early 2007 Ontario Teachers’ Pension Fund acquires OOIL Terminals

23.5 times

Mid 2007 RREEF acquires Maher Terminals 25 times

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

The Double Squeeze on Ports and Maritime Shipping

Supply Demand

“Cruel” OvercapacityNew terminals coming onlineNew ships coming online (+ cancellations)

Lower profitabilityLess pressures on terminal resources

Less financial appeal

Contestability for gatewaysContestability for hubsRebalancing

Maritime Shipping

Port Operations

Fallacies of Forecasting: 2020 Throughput Forecast, Selected Large Ports, Linear and CAG Scenario

Port / Traffic 2007, M TEU

R2 / CAG (1998-2007)

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 trendsLinearity prevalent in growth trends (1998-2007)Compound annual growth common in forecastsNon-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?

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

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 extension

Flexibility in opening hours and gate access.Shuttles between the terminal (port or rail) and the depot.Buffer for the terminal (reduce congestion).

Favorable location

Closer to main freight distribution activities (periphery).Reduce the frequency and distance of repositioning (cargo rotation).Better response to freight distribution requirements.

Port Terminal

ExporterImporter

A B

C

Inland Port / Depot

ExporterImporter

Port

Shuttles

Continuous Commodity Index and Baltic Dry Index, 2000-2009 (2000=100)

Jan-0

0Ju

n-00

Nov-00

Apr-01

Sep-01

Feb-02

Jul-0

2

Dec-02

May-03

Oct-03Mar-

04

Aug-04

Jan-0

5Ju

n-05

Nov-05

Apr-06

Sep-06

Feb-07

Jul-0

7

Dec-07

May-08

Oct-08Mar-

09

Aug-09

0

100

200

300

400

500

600

700

800

900Continuous Commodity IndexBaltic Dry Index

Continuous Commodity Index and Average Container Shipping Rates, 1994-2009 (1994=100)

Jan-9

4

Aug-94

Mar-95Oct-

95

May-96

Dec-96Ju

l-97

Feb-98

Sep-98

Apr-99

Nov-99Ju

n-00Ja

n-01

Aug-01

Mar-02Oct-

02

May-03

Dec-03Ju

l-04

Feb-05

Sep-05

Apr-06

Nov-06Ju

n-07Ja

n-08

Aug-08

Mar-09

50

100

150

200

250 Continuous Commodity Index

Container Shipping Rates

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