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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.

Examples of Reshorers

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

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05

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06

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07

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08

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09

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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

06

20

07

20

08

20

09

20

10

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11

20

12

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

bstassoc@seanet.com

(425) 486-7722

42