Fall Summit, HSH Nordbank, Hamburg, Germany, November 15, 2007

Logistics and Global Logistics and Global Commodity ChainsCommodity Chains

Jean-Paul RodrigueAssociate Professor, Dept. of Economics & Geography, Hofstra University, New York, USA

Email: ecojpr@hofstra.eduPaper available at:http://people.hofstra.edu/faculty/Jean-paul_Rodrigue

Introduction: Capital on the MoveIntroduction: Capital on the Move

Trimodal Container Terminal, Willebroek, BelgiumTrimodal Container Terminal, Willebroek, Belgium

Changes in Global TradeChanges in Global Trade

Global Production Networks and Global Production Networks and Commodity ChainsCommodity Chains

The “China Effect” and Global The “China Effect” and Global Commodity ChainsCommodity Chains

Integrating Commodity Chains into Integrating Commodity Chains into Containerized Supply ChainsContainerized Supply Chains

2

The Emergence of Supply Chain The Emergence of Supply Chain Management…Management…

Demand Forecasting

Purchasing

Requirements Planning

Production Planning

Manufacturing Inventory

Warehousing

Materials Handling

Packaging

Inventory

Distribution Planning

Order Processing

Transportation

Customer Service Strategic Planning

MaterialsMaterialsManagementManagement

PhysicalPhysicalDistributionDistribution

LogisticsLogistics Supply ChainSupply ChainManagementManagement

Information Technology

Marketing

1980s1980s 1990s1990s 2000s2000s1960s1960sFragmentation Consolidation

Warehousing

Materials Handling

Packaging

Functional Integration Value Capture

3

Flo

ws

Flo

ws M

arke

t

Transport Chain

Parts and rawmaterials

Manufacturingand assembly Distribution

… … and the Setting of Commodity Chainsand the Setting of Commodity Chains

Mar

ket

Sta

ge

Sta

ge

Bulk shippingBulk shipping Unit shippingUnit shipping

High volumesLow frequency

Low volumesHigh frequency

LTL shippingLTL shipping

Average volumesHigh frequency

4

CommoditiesCommodities Final GoodsFinal GoodsIntermediate GoodsIntermediate Goods

Major Factors Driving the Integration of Major Factors Driving the Integration of Transportation with DistributionTransportation with Distribution

FactorFactor CauseCause ConsequenceConsequenceTechnology Containerization & IT Modal and intermodal

innovations; Tracking shipments and managing fleets

Capital investments

Returns on investments Highs costs and long amortization; Improve utilization to lessen capital costs

Alliances and M&A

Deregulation Easier contractual agreements; joint ownership

Commodity chains

Globalization Coordination of transportation and production (integrated demand)

Networks Consolidation and interconnection

Multiplying effect5

Changes in Global TradeChanges in Global Trade

Acute Trade ImbalancesAcute Trade ImbalancesEconomic CyclesEconomic Cycles

Globalization and ProductionGlobalization and Production

Container yard, Port of Yantian, ChinaContainer yard, Port of Yantian, China6

A Changing Trade Environment…A Changing Trade Environment…

StageStage NatureNature FunctionFunction

Until the 1970s Immobile factors of production

Cope with scarcity

Late 20th century Mobility of factors of production

Promote economic efficiency

Early 21st century Global production networks

Added value within commodity chains

7

… … and the Cycles of International Tradeand the Cycles of International Trade

Changes in the Value World’s Merchandise Trade, Production and GDP, 1950-2005 (in %)

-10

-5

0

5

10

15

20

25

30

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Total Merchandise Trade

World GDP

World Merchandise Production

8

The Cycle is Strongly Upward for Latin The Cycle is Strongly Upward for Latin America…America…

Latin American Trade (1995-2005) Billions USD

0

50

100

150

200

250

300

350

400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Exports

Imports

9

Commodities BoomCommodities Boom

… … as Well as for Eastern Europeas Well as for Eastern Europe

Share of World Trade, Eastern Europe (1995-2005)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Exports

Imports

10

International Trade Involves Acute International Trade Involves Acute Imbalances…Imbalances…

World’s 10 Largest Exporters and Importers, 2005

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

Germany

United States

China

Japan

France

Netherlands

United Kingdom

Italy

Canada

Belgium

Billions of $US

Imports

Exports

11

… … that Resulted in Imbalanced Containerized that Resulted in Imbalanced Containerized Freight Flows …Freight Flows …

Balance of Containerized Cargo Flows along Major Trade Routes, 1995-2006

-18

-16

-14

-12

-10

-8

-6

-4

-2

01995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006

Europe/USA

Asia/Europe

Asia/USA12

… … with Imbalanced Freight Rates as Wellwith Imbalanced Freight Rates as Well

Maritime Freight Rates (USD per TEU), 1993-2006

$0

$500

$1,000

$1,500

$2,000

$2,500

1993

-4

1994

-2

1994

-4

1995

-2

1995

-4

1996

-2

1996

-4

1997

-2

1997

-4

1998

-2

1998

-4

1999

-2

1999

-4

2000

-2

2000

-4

2001

-2

2001

-4

2002

-2

2002

-4

2003

-2

2003

-4

2004

-2

2004

-4

2005

-2

2005

-4

Asia - US

US - Asia

Asia - EuropeEurope - Asia

Globalization; Changing the Profit Structure… Globalization; Changing the Profit Structure…

Commodity chain

Adde

d va

lue

Low

High

Manufacturing

R&D GlobalizationGlobalization

DistributionDesign

Branding Marketing

Sales / Service

ConceptConcept LogisticsLogistics

14

… … As Well As Disconnecting Production and As Well As Disconnecting Production and DistributionDistribution

Manufacturing Base

Core BaseDistribution Marketing / RetailR&D

15

Containerization and Global Commodity Containerization and Global Commodity ChainsChains

ContainerizationContainerizationIntermodal TransportationIntermodal Transportation

Ports and Terminal OperatorsPorts and Terminal Operators

Container waiting to be loaded, Shenzhen, ChinaContainer waiting to be loaded, Shenzhen, China16

Containerization has Integrated Different Containerization has Integrated Different Transport Systems …Transport Systems …

17

Containerization of Maritime Transport SystemsContainerization of Maritime Transport Systems

Containerport

Containerization of Inland Transport SystemsContainerization of Inland Transport Systems

Intermodalterminal

PendulumServices

Intermodal and Transmodal OperationsIntermodal and Transmodal Operations

Corridor

Offshorehub

InlandPort

… … which Makes the Container more than a which Makes the Container more than a BoxBox

ContainerContainer

ProductionProduction DistributionDistribution

TransportTransport

Modes, terminals, intermodal and transmodal operations

Flow management (time-based), warehousing unit

Synchronization of inputs and outputs (batches)

18

Connecting the Dots: Intermodal Transport Connecting the Dots: Intermodal Transport ChainChain

CompositionComposition

Transfer

InterchangeInterchange

DecompositionDecomposition

Local / Regional Distribution

National / International Distribution

Transport Terminal

‘‘First mile’First mile’

‘‘Last mile’Last mile’

19

Composition: Pallets waiting to be loaded in a Composition: Pallets waiting to be loaded in a container (APL DC - Shenzhen, China)container (APL DC - Shenzhen, China)

Interchange: Post-Panamax Containership (Le Interchange: Post-Panamax Containership (Le Havre)Havre)

Interchange: UPS Willow Springs Distribution Interchange: UPS Willow Springs Distribution Center, ChicagoCenter, Chicago

22

Decomposition: Unloading Containers and Decomposition: Unloading Containers and Palletizing Shipments (Antwerp)Palletizing Shipments (Antwerp)

23

The World’s Largest Maritime Trade The World’s Largest Maritime Trade Gateways…Gateways…

Dubai

Tacoma

Santos

Jeddah

Seattle

Salalah

Oakland

Colombo

Savannah

Melbourne

Long BeachCharleston

Nhava Sheva

Los Angeles

Hampton Roads

New York/New Jersey

Kobe

Tokyo

BusanXiamen

Ningbo

Nagoya

Manila

Dalian

Tianjin

Keelung

Yokohama

Shenzhen Shanghai

Quingdao

Singapore

Kaohsiung

Hong KongGuangzhou

Port Kalang

Ho Chi Minh

Laem Chabang

Tanjung Priok

Tanjung Pelepas

LeHavre

Hamburg

Antwerp

Valencia

Rotterdam

Barcelona

Algeciras

Felixstowe

Gioia Tauro

Bremen/Bremerhafen

Pacific Asia Europe

TEU

Less than 2 million

2 to 4 million

4 to 7 million

7 to 10 million

More than 10 million

24

Traffic at the 50 Largest Container Traffic at the 50 Largest Container Ports, 2005Ports, 2005

… … Mainly Controlled by Large Holding Mainly Controlled by Large Holding Conglomerates … Conglomerates …

Pacific Asia Europe

APM Terminals

Dubai Ports World

Hutchison Port Holdings

Port of Singapore Authority

Eurogate

Stevedoring Services of America

Dedicated Maritime Container Terminals

25

Major Port Holdings, 2007Major Port Holdings, 2007

Commodity Chain

… … That are Following a “Value Capture” That are Following a “Value Capture” StrategyStrategy

Port HoldingPort HoldingPort

Au

thori

tyP

ort

Au

thori

ty

Maritime Services

Inland Services

Port Services

Horizontal Integration / VerticalVertical Integration

Maritime Shipping

Port Terminal Operations

Inland Modes and Terminals

Distribution Centers

26

Where the Going Gets Tough: The “Last Mile” Where the Going Gets Tough: The “Last Mile” in Freight Distributionin Freight Distribution

GatewayGateway Inland Inland TerminalTerminal

DistributionDistributionCenterCenter

Capacity

Frequency

CorridorCustomerCustomer

“Last Mile”

Segment

GLOBALGLOBAL HINTERLANDHINTERLAND REGIONALREGIONAL LOCALLOCAL

Shipping Network

MassificationMassification AtomizationAtomization

27

Empty trucks waiting to enter China, Hong KongEmpty trucks waiting to enter China, Hong Kong

The “China Effect” and Global Commodity The “China Effect” and Global Commodity ChainsChains

Debt and the Currency Leverage GameDebt and the Currency Leverage GameProduction and Distribution DislocationsProduction and Distribution DislocationsShift in the world’s commercial balanceShift in the world’s commercial balance

28

The “China Effect” is Mainly About Low The “China Effect” is Mainly About Low Manufacturing Wages…Manufacturing Wages…

Major Components to Price Reductions by the Chinese Manufacturing Sector, 2005

39.4%

16.7%

16.0%

11.4%

8.6%

3.1%

2.4%

2.3%

0% 10% 20% 30% 40% 50%

Wages

Export Industry Subsidies & Preferences

Industrial Network Clustering

Undervalued Currency

Counterfeiting & Piracy

Foreign Direct Investments

Lax Health & Safety Regulations

Lax Environmental Regulations

29

… … as Well as the Largest Buyer Financing as Well as the Largest Buyer Financing Scheme in History…Scheme in History…

Goods

Bonds (IOUs)

Asset InflationDebt

Reserves

Interest RatesUnemployment

$ for goods

$ for bonds

United StatesUnited StatesChinaChina USD

USD

BorrowingInvestment

30

… … Where Exchange Rates were Used as Where Exchange Rates were Used as LeverageLeverage

Yuan Exchange Rate (per USD), 1981-2007

0

1

2

3

4

5

6

7

8

9

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Yuan per USDReal per USD

31

Discount WindowDiscount WindowExport OrientedExport Oriented

DebasementDebasement Closing of the Closing of the Discount WindowDiscount Window

““Emma Maersk”, 12,500 TEU, Rotterdam, NetherlandsEmma Maersk”, 12,500 TEU, Rotterdam, Netherlands

Integrating Commodity Chains into Integrating Commodity Chains into Containerized Supply ChainsContainerized Supply Chains

Maritime Shipping NetworksMaritime Shipping NetworksContainerized CommoditiesContainerized Commodities

Cold Chain LogisticsCold Chain Logistics

32

The Three Major Corridors of Maritime The Three Major Corridors of Maritime Circulation …Circulation …

Fos

Tokyo

Genoa

Ningbo

Hamburg

Shanghai

Le Havre

KaohsiungHong Kong

Singapore

Barcelona

Rotterdam

Port Kelang

Southampton

Laem Chabang

OaklandLos Angeles

NorfolkNew York

Charleston

Origin Destination Transit Time (days)Southampton New York 8New York Norfolk 2Norfolk Charleston 2Charleston Rotterdam 10Rotterdam Hamburg 2Hamburg Le Havre 2Le Havre Southampton 1

Origin Destination Transit Time (days)Tokyo Kaohsiung 4Kaohsiung Shekou 1Shekou Laem Chabang 4Laem Chabang Singapore 3Singapore Kaohsiung 3Kaohsiung Los Angeles 11Los Angeles Oakland 4Oakland Tokyo 9

Origin Destination Transit Time (days)Port Kelang Genoa 14Genoa Barcelona 2Barcelona Fos 2Fos Singapore 15Singapore Hong Kong 4Hong Kong Shanghai 2Shanghai Ningbo 2Ningbo Shekou 2Shekou Hong Kong 1Hong Kong Singapore 4Singapore Port Kelang 133

Three Major Pendulum Routes Serviced by OOCL, 2006Three Major Pendulum Routes Serviced by OOCL, 2006

… … Which Implies the Emergence of Global Which Implies the Emergence of Global Trade HighwaysTrade Highways

Equator

North American Landbridge

Eurasian Landbridge

Circum-Equatorial Maritime Highway

Arctic Routes

Atlantic Connector

Pacific Connector

34

The Potential of Containerization of The Potential of Containerization of Commodities …Commodities …

■ For bulk transport• Economies of scale confer a net benefit.• Specialization:

• Low utilization levels and time delays for the assembly of loads.• At most 50% due to empty backhauls, but much lower in reality.

• Containerization:• Flow concept; lower transshipment costs.• Its own warehouse unit.• Faster distribution (extending the realm of perishables).• Levels the playing field, particularly in view of established commodity

shippers.• Respective benefits for bulk and container carriers.• Handle variety requirements.

• Rise in commodity prices makes them increasingly suitable for containerization.

35

… … Where Each System has its own Where Each System has its own Advantages …Advantages …

Bulk (Grain, Oil)Bulk (Grain, Oil) ContainerizedContainerized

Driving force Cost / Volume Time / Flexibility

Mode of shipment Large output Small shipments

Flows Specialized Mixed

Terminals Dedicated General Container

Markets Mass Niche36

… … Will Likely See the Emergence of a Will Likely See the Emergence of a ComplementarityComplementarity

Bulk Commodity Chain

Containerized Commodity Chain

Consolidationcenter

PortSupplier Customer

Intermodalterminal

Containerport

PendulumServices

Point-to-Point

ComplementarityComplementarity

37

Commodities are more Containerized than Commodities are more Containerized than Expected …Expected …

US Containerized Trade, 2003

0

5,000

10,000

15,000

20,000

25,000

Total Imports Exports

Thou

sand

TE

U Food

Consumer products

Technology products

Capital equipment

Raw materials

38

… … Leading to the Setting of New Leading to the Setting of New Containerized Commodity ChainsContainerized Commodity Chains

Shipping Time between Bulk Handling and Containerization (Canadian Wheat)

Bulk Handling System Days Container System Days

Farm storage Start Farm storage Start

Local delivery 1 Local delivery 1

Primary elevator 40 Intermodal terminal 2

Rail hopper cars 11 Double stack train 2

Export terminal 19 Container port 2

Bulk ship 15 Containership 11

Import terminal 10 Container port 2

Local delivery 1 Local delivery 1

Final customer End Final customer End

Total 97 Total 2139

What Could be the Impacts on Commodity What Could be the Impacts on Commodity Markets?Markets?

■ Containerization and commodity markets• Futures / forward contracts are often conditioned by the

capacity for delivery.• What would be the impacts of containerization on this market

structure?• A contract could involve the allocation of containers.

• What type of “price discovery” this would entail.• From futures to spot markets?• Transportation flexibility will increase financial flexibility.

40

Cold Chain Logistics is Getting Increasingly Cold Chain Logistics is Getting Increasingly ReliableReliable

Potential integrity breachTem

pera

ture

Temperature Range

Potential integrity breach

Transport

Time

Unloading – Warehousing – LoadingTransport41

Deep Freeze

Frozen

Chill

Pharmaceutical

"Banana"

-30 -20 -10 0 10 20

Deep Freeze

Frozen

Chill

Pharmaceutical

"Banana"

Degrees Celcius

Conclusion: Commodities on the Move…Conclusion: Commodities on the Move…

42

… … Adapting to a Challenging Environment with many Adapting to a Challenging Environment with many OpportunitiesOpportunities

■ Global trade• Imbalances and dislocations.

■ Global commodity chains• Added value and value capture.

■ The “China Effect”• Trade and financial process.

■ Containerized commodity chains• Opportunities to rectify imbalances.• Setting of new commodity chains.

■ Global prospects• Positive for commodities.• New markets and investment opportunities.

43