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Changing Trade Trends
Association of Pacific Ports
Annual Meeting
Longview
July 22, 2014
Agenda
• Overall Trade Trends
• Factors in Plant Location
• Examples of Impact to Ports
▫ Containers
▫ Energy Intensive Industries
▫ Autos
▫ Grain
• Closing thoughts
2
Overall Trends
Gross Domestic Product Source: IMF World Economic Outlook April 2014 (Average Annual Growth)
0%
2%
4%
6%
8%
10%
12%
World Em/dev Asia
ASEAN-5 United States
China
% C
ha
ng
e
2002-07 2008-13 2014-19
• GDP is expected to decline. ▫ World GDP grew at 4.5%/yr
from 2002-7,
▫ fell to 2.9% from 2008-13;
▫ expected to grow at 3.9% through 2019
• Growth is expected to be slower in much of Asia. ▫ Particularly in China, GDP
grew at 9% to 11%/yr during past 12 years, expected to be around 7%/yr through 2019.
▫ Some Asian countries (Vietnam etc) expected to grow at double digits.
4
Exports & Imports of Goods Source: IMF World Economic Outlook April 2014 (Average Annual Growth)
0%
5%
10%
15%
20%
25%
World Em/dev Asia
ASEAN-5 United States
China
% C
ha
ng
e
2002-07 2008-13 2014-19
5
0%
5%
10%
15%
20%
25%
World Em/dev Asia
ASEAN-5 United States
China
% C
ha
ng
e
2002-07 2008-13 2014-19
Exports Imports
Growth of Middle Class in Asia Source: IMA Asia, Journal of Commerce
Million people with HHI greater than $20,000
Consumers for US products
322
441
0 200 400 600 800
China
Asia
Change 2022 2012
• 2012
▫ 300 million people in Asia had household income greater than $20,000
▫ ~9% of the population
• By 2022
▫ Expected to be 740 million
▫ ~22% of the population
▫ Gain of 441 million people, with 322 million of them in China.
6
Plant Location Decisions
Manufacturing Sourcing Strategy Source: Hackett Group
8
Changing Cost Structures Source: The Hackett Group 2012
China’s cost advantage is slipping compared with reshoring
Costs in other emerging markets have been more stable than China
51%
38%
30% 31%
23%
16%
0%
10%
20%
30%
40%
50%
60%
2005 2010 2013E
Labor Cost Gap Total Landed Cost Gap
9
39% 37%
34%
21% 19% 18%
-10%
0%
10%
20%
30%
40%
50%
60%
2005 2010 2013E
Labor Cost Gap Total Landed Cost Gap
Measures cost differential between products that are imported versus those built in America
Manufacturing Cost Index Source: Boston Consulting Group, 2014
10
Competition for Manufacturing Source: Boston Consulting Group
• Under Pressure (China, Brazil, Russia et al).
▫ Wage increases, lagging productivity growth, unfavorable currency swings, and a dramatic rise in energy costs.
• Losing Ground (Western Europe)
▫ Higher energy costs and low productivity growth.
• Rising Stars (Mexico and the U.S.):
▫ Stable wage growth, sustained productivity gains, steady exchange rates, and a big energy-cost advantage that is largely driven by the 50 percent fall in natural-gas prices since large-scale production of U.S. shale gas began in 2005.
11
83
87
91
91
96
100
109
109
111
121
123
124
124
125
130
0 50 100 150
Indonesia
India
Mexico
Thailand
China
USA
UK
Spain
Japan
Germany
Italy
France
Brazil
Switzerland
Australia
2014 Index; US = 100
Industry retail price sensitivity analysis Source: accenture
12
Case built on: •Footwear: Nike, Adidas, Puma •Heavy machinery: Caterpillar, John Deere, Terex •Personal Computers: Hewlett Packard, Dell, Apple, Lenovo
1. Wage increases will likely have the greatest impact on COGS in capital-intensive industries such as heavy machinery and personal computers.
2. For industries relying on unskilled labor or labor-intensive industries such as footwear, wage increases in China will have less of an impact on COGS.
3. Accenture foresees a tipping point at which companies in these industries may have to shift production to other LCCs such as Vietnam or consider other strategic options to remain profitable.
U.S. Apparel Imports Source: BST Associates, US Dept of Commerce
$0
$5
$10
$15
$20
$25
$30
$35
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
$b
illi
on
s
China Viet Nam Indonesia
Bangladesh Mexico India
• Shifts in apparel imports ▫ China’s market share peaked at 41% in
2010, fell to 39% in 2011-13
▫ Most growth in Vietnam (10% in 2013)
• Chinese shift to Vietnam, India
13
Lever Style's employees in China (Shenzen) down by one-third to 5,000 workers. Moving apparel production for Japanese retail chain Uniqlo to Vietnam, where wages can be half those in China. Lever Style also is testing a shift to India for U.S. department-store chain Nordstrom Inc. JWN -0.68% and moving production for other customers (Source WSJ).
Chinese quotas ended in 2005
Focus: Reshoring - Nearshoring
Mexico SWOT for Investment Source: CIDAC(Centro de Investigación para el Desarrollo)
15
Key benefits of producing in Mexico compared to China: 1. Lower transportation and warehousing costs, 2. Improved ability to respond to customer demands, 3. Better control of intellectual property, 4. Ease of proximate time zones between management and production, and 5. Cultural similarities between the U.S. and Mexican markets.
U.S. or Mexico for Nearshoring Source: AlixPartners
63%
49%
37%
28%
19%
36%
37%
42%
0% 10% 20% 30% 40% 50% 60% 70%
2011
2012
2013
2014
USA Mexico
16
U.S. reached parity with Mexico as a nearshoring alternative in 2013 and passed it in 2014. Change due to security/safety.
Based on a survey of 143 senior executives in manufacturing and distribution.
Water Heaters
Bringing Production back from China: • Water-heaters, fridges, and washing machines • Unionized facility in Louisville, KY • 1,300 jobs, renovated facility, $800 million
invested • Reasons:
▫ Tax incentives ▫ High-tech new model ▫ Ease of design collaboration with workers: retail price
-20% ▫ 2 tier contract ▫ Chinese cost: -30% becomes +6% considering
inventory and delivery problems • Will move a “significant piece” of appliance
production back
Top reasons to reshore Source: Reshoring Institute
▫ Reduces Total Cost of Ownership ▫ Improves quality and consistency of inputs ▫ Reduces pipeline and surge inventory impact on just-
in-time operations ▫ Clusters manufacturing near R&D facilities, enhancing
innovation ▫ Reduces intellectual property and regulatory
compliance risk ▫ Eliminates the waste and instability caused by
offshoring ▫ Strengthens companies’ ability to respond quickly to
customers' demands
19
Reshoring Estimates Source: Reshoring Initiative
Manufacturing Jobs/Year
2003 2013 % Change 2016***
New
offshoring ~150,000*
30,000-
50,000* -70% 20,000
New
reshoring
2,000*
30,000-
40,000** +1,500% 70,000
Net
reshoring -148,000 0 -100% +50,000
*Estimated ** Calculated ***Feasible
U.S. Manufacturing Employment Source: St Louis Federal Reserve
0
5,000
10,000
15,000
20,000
25,000
197
0-0
1-0
1
197
1-0
6-0
1
197
2-1
1-0
1
197
4-0
4-0
1
197
5-0
9-0
1
197
7-0
2-0
1
197
8-0
7-0
1
197
9-1
2-0
1
198
1-0
5-0
1
198
2-1
0-0
1
198
4-0
3-0
1
198
5-0
8-0
1
198
7-0
1-0
1
198
8-0
6-0
1
198
9-1
1-0
1
199
1-0
4-0
1
199
2-0
9-0
1
199
4-0
2-0
1
199
5-0
7-0
1
199
6-1
2-0
1
199
8-0
5-0
1
199
9-1
0-0
1
20
01-
03
-01
20
02
-08
-01
20
04
-01-
01
20
05
-06
-01
20
06
-11-
01
20
08
-04
-01
20
09
-09
-01
20
11-0
2-0
1
20
12-0
7-0
1
20
13-1
2-0
1
1,0
00
jo
bs
26 % of Total Employment
9 % of Total Employment
21
Manufacturing jobs fell in absolute terms and also as a percentage of total employment. Recent blip up is most likely a rebound from the recession.
Containers
US Imports from Asia (Full TEUs) Source: BST Associates, using data from PIERS
0
2
4
6
8
10
12
14
16
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Fu
ll T
EU
s (
Mil
lio
ns
)
China NE Asia SE Asia
S Asia Vietnam
• US imports from Asia increased 5.0%/year from 2000 to 2013. ▫ Growth peaked in 2007, fell 2.8
million TEUs from 2007 to 2009 ▫ Reached 97% of 2007 volumes in
2013 • China growth
▫ Down -0.9%/yr from 2007 to 2013 but up 3.9% in 2013 over 2012
▫ Accounted for 68% of Asian imports in 2013 (lost 2% share 2007-13)
• Others (2007-13): ▫ S Asia share up +0.7% ▫ SE Asia share up +1.3%
Vietnam rapid growth of 8.8% reaching 608,000 TEUs in 2013 (35% of SE Asia)
▫ NE Asia share down -0.2%
23
US Exports to Asia (Full TEUs) Source: BST Associates, using data from PIERS
0
1
2
3
4
5
6
7
8
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Fu
ll T
EU
s (
Mil
lio
ns
)
China NE Asia SE Asia S Asia
• US exports to Asia increased 5.6%/yr from 2000 to 2013.
▫ Growth 2.2% in 2013
• China - strong growth
▫ Up 6.1%/yr 2007- 2013
▫ Accounts for ~half of US exports to Asia (share up 7.3% 07-13)
• Others (2007-13):
▫ S Asia share up +1.0%
▫ SE Asia share down -0.3% Vietnam ~200,000 full TEUs in
2013 (20% of SE Asia)
▫ NE Asia share down -8.0%
24
Changing Market Share (2000 to 2013) Source: BST Associates, using data from PIERS
-6%
-7%
2%
3%
7%
-10% -5% 0% 5% 10%
Northwest
Southwest
Gulf
Southeast
Northeast
Market Share Shift 2000-2013
US
Po
rt
Re
gio
n
• Between 2000 and 2013, there has been a large shift of containerized market share of Asian trade (China, NE Asia and SE Asia) ▫ Northwest down 6%
▫ Southwest down 7%
▫ Gulf up 2%
▫ Southeast up 3%
▫ Northeast up 7%
• Future shift uncertain ▫ Region from Ohio Valley to Atlanta
▫ Depends on Canal and rail rates; productivity etc.
25
Western Canada Intermodal Traffic Source: IANA
-
100,000
200,000
300,000
400,000
500,000
600,000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
TE
Us
Midwest Northeast
South Central Southeast
• ISO containers from Western Canada (PMV and PR) have increased rapidly from around 20,000 TEUs in 2000 to 500,000 TEUs in 2013.
• Most of these Asian imports are destined for the U.S. Midwest and Southeast.
• Strong competition for NW and SW ports.
• WC intermodal traffic to US is due to:
▫ Rail cost
▫ HMT
26
Energy Intensive Industries
Increase in Production Source: ‘IHS Global Insight
0% 2% 4% 6% 8% 10%
Iron and steel prds
Resins, syn material prds
Basic organic chem prds
Plastics and rubber prds
Fabricated metal prds
Agricultural chem prds
Nonmetallic mineral prds
Petroleum and coal prds
Machinery
Average ALL
2025 2012
• Key energy-intensive sectors are expected to increase their US operations in response to declining prices for their energy inputs.
• Export Opportunities ▫ Methanol ▫ Butane, propane ▫ Crude oil ▫ Petroleum products ▫ LNG
• Import substitution ▫ Steel ▫ Fabricated metal prds
28
Chemical Plants linked to Shale Gas Source: American Chemistry Council
• As of May 2014, 178 projects valued at $113 billion have been announced ▫ New factories, expansions and process changes to
increase capacity ▫ Up from 97 projects and $72 billion as of March
2013 ▫ Could lead to $81 billion per year in new chemical
industry output and 637,000 permanent new jobs by 2023.
• 61% of the investment is by firms based outside the United States.
29
US Outpacing Europe Source: American Chemistry Council
• U.S. chemical industry is poised to capture market share from around the world
▫ North American chemicals and plastics production will double by 2020 while Western Europe’s falls by 1/3
• European chemical producers are very concerned about loss of markets:
▫ “When people choose whether to invest in Europe or the US, what they think about most is the cost of energy. The loss of competitiveness is frightening.” [Antonio Tajani, European Industry Commissioner]
▫ “Natural gas prices in Europe are three times as high as in America, and electricity prices are twice as high…It's very hard to imagine how Europe can recover.” [Paolo Scaroni, CEO, Eni]
30
31
Tesoro Feedstock Project
• New Petrochemical Feedstock Project (xylene extraction) planned at Tesoro Anacortes refinery.
▫ Initial investment of $400 million
▫ Recover up to 15,000 barrels per day of mixed xylene.
• The mixed xylene will be exported to Asia
▫ Polyester fibers and films for clothing, food packaging and beverage containers.
• The global xylene market is growing about 5% to 7% annually, primarily driven by demand in Asia.
32
Autos
U.S. Domestic Sales
34
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
0
2
4
6
8
10
12
14
16
18
20
20
00
2
00
1 2
00
2
20
03
2
00
4
20
05
2
00
6
20
07
2
00
8
20
09
2
010
2
011
20
12
20
13
Do
me
sti
c S
ha
re
Un
its
(m
illi
on
s)
Domestic Canada
Mexico Other
Domestic Share
• U.S. domestic share at 55% in 2013 up from 50% in 2008.
• Mexico replaced Japan as 2nd largest exporter to U.S.
▫ Mexican auto industry is in the midst of a $10 billion USD auto manufacturer factory (Reuters).
U.S. Auto Exports Sources: Exports USDOC; PNW PMA
35
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
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08
20
09
20
10
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20
12
20
13
Ex
po
rts
(u
nit
s)
Canada Mexico China
Other Asia Other
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
20
00
20
01
20
02
20
03
20
04
20
05
20
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20
07
20
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20
13
Re
ve
nu
e T
on
s i
n P
NW
Portland Grays Harbor Tacoma
U.S. exports have doubled since 2000
Grays Harbor is biggest in the PNW
Grain
Ethanol and Corn Prices • In 2000, over 90%
of the U.S. corn crop went to feed people and livestock, less than 5% used to produce ethanol.
• In 2013, however, 40% went to produce ethanol, 45% was used to feed livestock, and only 15% was used for food and beverage (USDA).
• Average price of corn has soared.
37
UP Plant to Port – DDGS, Grain
Dried Distiller's Grains with Solubles (DDGS)
Containerized Grain Exports
0
2,000
4,000
6,000
8,000
10,000
12,000
2009 2010 2011 2012 2013
1,0
00
MT
DDGS Soybeans Corn Other
• More than 10 million tons of grain products exported by container in 2013.
• DDGS is highest volume:
▫ 60% via Los Angeles District
▫ 12% via Seattle District
• Soybeans second:
▫ 46% via Los Angeles District
▫ 10% via Seattle District
• Corn is third:
▫ 62% via Los Angeles District
▫ 12% via Seattle District
39
Conclusions
Changing Trade Trends
• World economic growth and trade will be slower in the near-term future than in the past.
• Some reshoring will occur but much has focused on assembly and services, not manufacturing. ▫ Effect is uncertain. ▫ Opportunities exist for energy intensive products and
for exports. • Ports will be impacted:
▫ U.S. container trade under stress. ▫ Autos – shifting from import to export. ▫ Grain – ethanol could be challenged. ▫ Good opportunities in dry/liquid products.
41
Questions?
Paul Sorensen
BST Associates
PO Box 82388
Kenmore, WA 98028
(425) 486-7722
42
