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Outlook: Global Re-balancing
2010 AAPA SHIFTING INTERNATIONAL TRADE ROUTES
January 25, 2010
Tampa, FL
Dr. Walter Kemmsies, Chief Economist
Moffatt & Nichol - Commercial Analysis Group
Major Themes
Recovering from Near Depression Experience is hampered by a weak financial system and global imbalances driven by China
Long term trends remain intact for imports but the US needs to export more as trade cannot remain unbalanced indefinitely
Bulk commodity trade could exceed container volume growth as emerging market economies mature
Macroeconomic Trends
Tampering With The Foreign Exchange Market
Source: MarAd, US Census Bureau, Moffatt & Nichol
Renminbi Exchange Rates
In its biannual Currency Manipulators report, the US Treasury has never accused China of manipulating the renminbi’s value against the US dollar.
0.0
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1.25
1.50
1.75
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USD per EUR USD per GBP CNY per USD (right axis)
Right Axis Reverse Scale
Dollar is weaker
Dollar is stronger
A Major Global Imbalance
Source: MarAd, US Census Bureau, Moffatt & Nichol
US Trade With China
China has become the largest source of US imports and the second largest destination of US exports
To sustain this growth, China maintained a low exchange value of yuan for dollars by investing its trade revenue surplus in US treasuries
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
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4,000,000
5,000,000
6,000,000
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8,000,000
9,000,000
10,000,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Mil
lio
ns
of U
S D
oll
ars
Load
ed
TEU
Imports Exports Imports from China in US$ Exports to China in US$
China Became The Largest Owner of US Debt
Source: MarAd, US Census Bureau, Moffatt & Nichol
Treasury International Capital Reported Positions
In October 2008 China became the largest foreign owner of US Treasury debt, surpassing Japan
$0
$500
$1,000
$1,500
$2,000
$2,500
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JAPAN CHINA ROW
Twin Bubbles
Source: US Department of Energy, US Census Bureau, Reuters/CRB, Moffatt & Nichol
Real Estate and Industrial Commodity Prices
China impacted the world and US economy in several ways
Invested surplus trade revenues in US bonds, resulting in lower mortgage interest rates and therefore a housing boom
China’s factory capacity and US real estate investment booms drove commodity prices up
-$10
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Pri
ce
pe
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arr
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of
Oil
Ho
us
e a
nd
CR
B P
ric
e I
nd
ex
House Price Index CRB Metals Index Crude Oil Price
Monetary Policy Response
Source: Federal Reserve, Bureau of Economic Analysis, Moffatt & Nichol
Federal Reserve Policy Interest Rate Target for Federal Funds
Fed Funds policy interest rate was kept at a high level for an unusually long period
Inflation was considered a greater risk than mortgage finance
0%
1%
2%
3%
4%
5%
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Recession Fed Funds Target
One Month
Three Months
Three Months
Six Months
Fif teen MonthsSaving & Loans Crisis
Emerging Markets Crisis
Real Estate Crisis
Home sales peak
The Fed Made A Dramatic Effort As Liquidity Dried Up
Adjusted Monetary Base And Business & Consumer Loans
Source: St Louis Federal Reserve, Moffatt & Nichol
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
2,750
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US$
Bill
ion
s
Monetary Base NSA Loans
The Fed’s response has been in proportion to the magnitude of the crisis
Bank loans could double overnight if the Fed doesn’t pull back as the economy recovers
Need to avoid too much money chasing too few goods
Early Signs of Recovery
Year-on-year Unemployment Claims
Unemployment insurance filings are declining and the unemployment rate will too
Better labor market conditions will support growth in consumer spending and help the economy transition to self-sustaining growth
The recovery will become self-sustaining when employment starts to increase, banks stabilize and if China cooperates
Source: Bureau of Labor Statistics, Moffatt & Nichol
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
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84
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88
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92
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96
20
00
20
04
20
08
20
12
New Claims YOY% Continuing Claims YOY%
The crest in continuing claims signals the end of recession
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
1.60
1.65
1.70
Jan
-99
Jun
-99
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v-9
9
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r-0
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Sep
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Jul-
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v-0
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r-0
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Sep
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-06
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-07
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-07
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-08
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g-0
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v-0
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Inventory/Sales Ratio Inventory/Sales Ratio ex autos
Excess Inventories Appear To Have Been Burned Off
Businesses had to reduce inventories dramatically due to tight credit conditions and rapidly declining consumer spending
The inventory-to-sales ratio is closer to its trend level now than it was in Dec 2008
Inventory-to-Sales Ratio
Rail and Truck Volumes Are Recovering
Source: Railfax, ASI/Transmatch, ATA, Moffatt & Nichol
Intermodal Rail Volumes
Rail volumes bottomed in the second quarter of 2009. In the week ending December 19, total volumes were 3.8% higher than the same week in 2008; intermodal volumes were 8.7% higher.
Year to date total volumes for the seven Class I North American railroads and KCS Mexico are down 15.8% compared to the same period in 2008 and 18.1% compared to 2007.
Truck volumes also bottomed in the second quarter of 2009 but remain well below year ago levels
90
95
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120
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
SA 2007 SA 2008 SA 2009
Seasonally Adjusted ATA Truck Tonnage Index
Container Volumes Recovering From A 7-year Low
Source: Seattle, Tacoma, Oakland, LA, LB, Savannah, Moffatt & Nichol
Monthly Int’l Container Volumes (in TEUs) For 6 Of The Largest US Ports
0
500,000
1,000,000
1,500,000
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2,500,000
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Jan-June Imports Exports Empties Total Total Loaded
Volumes increased 46% from the February trough through the October peak.
Through November volumes were 15.5% below the same period in 2009 and 37% above the February trough
World Economy Struggles To Recover Without the US
Source: World Trade Organization, US Bureau of Economic Analysis, Moffatt & Nichol
US Consumer Spending and Global Real GDP Growth
The US economy accounts for 25% of World GDP, US consumers account for 17.5% of World GDP – weak US outlook underlies the below average global growth forecast
In 2010 the process of weaning the global economy off policy support will begin
-8%
-6%
-4%
-2%
0%
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6%
8%
10%
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11
World GDP US Consumer
Economic Outlook for Major Trade Lane Economies
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1998
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2000
2001
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2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
US Europe Nort Asia South Asia South East Asia
Near term is weak due to mature economies
Policy withdrawal creates uncertainty - look for “all clear” in 2011
Long term outlook is more robust due to Emerging Markets trends
World trade patterns will change due to the changing relative size of emerging and mature economies over the forecast horizon
Real GDP Growth (year on year) By Major Trade Lanes
Source: International Monetary Fund, US Department of Commerce, Moffatt & Nichol
US recession risk in 2011
Long Term Trends
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Nu
mb
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of
Po
rts
Re
po
rtin
g C
on
tain
er
Vo
lum
es
Tra
de
an
d G
DP
Vo
lum
e In
de
xe
s
Int'l Ports Reporting TEU Volumes (right axis) Manufactured Exports Volume Real GDP
Oil shocks and global recessions
NAFTA and Maastricht Treaty
Global recession, China enters WTO
Oil shocks and global recessions
NAFTA and Maastricht Treaty
Global recession, China enters WTO
Data indexed to 100 in 1950
Global Trade Has Exceeded GDP Growth
Source: World Trade Organization, World Bank, Moffatt & Nichol
Cyclical Drivers
Trade has grown faster
than GDP
Macro shocks have not
impacted trends
Structural Drivers
Containerization; lowers
freight cost
Trade Agreements;
lowers trade costs
World Wide Web; allows
“globalization”
Demographics; drives
off-shoring/import
substitution
World Trade and GDP Volume Indexes
Real Exports Real GDP Export to GDP Growth
Period CAGR CAGR Ratio
1950 - 2008 7.6% 3.8% 2.0
1980 - 2008 6.3% 2.8% 2.3
1998 - 2008 6.7% 3.0% 2.2
Containerization of Trade
Source: US Census Bureau, Moffatt & Nichol
Shares of Non-fuel US Imports and Exports Arriving on Container Vessels
0%
10%
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100%
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Imports Exports
Percentage of total weight
The 8% increase in the share of imported and exported goods moving on container vessels between 2002 and 2008 represents 2.6 million additional loaded TEUs flowing through US ports
Both import and export goods could see further containerization
19
Demographics
Source: Census Bureau, Moffatt & Nichol
Percentage of Population Over 55 Years of Age
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1990 1995 2000 2005 2010 2015 2020 2025 2030
US Canada EU
Average Age in 1990
US 35.2 years
Canada 35.2 years
EU 37.5 years
Average Age in 2030
US 40.2 years
Canada 43.3 years
EU 45.4 years
That industrialized nations’ populations are aging is not news, but the significant rise in their elderly populations over the next 20 years will reinforce the consequences already evident in the structure of their economies.
Without immigration and trade, these economies face an output shortfall
Percentage of Population Over 55 Years of Age
10%
20%
30%
40%
50%
60%
70%
80%
90%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Europe US Canada Japan
20
Mature Industrialized Economies Are Increasingly Service Intensive
Source: OECD, Moffatt & Nichol
Manufacturing Sector Share of Employment
Developed economies are becoming more service-intensive and less manufacturing-intensive, as a function of domestic and international demographic change
10%
20%
30%
40%
50%
60%
70%
80%
90%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Europe US Canada Japan
Service Sector Share of Employment
Manufacturing Industry Wage Comparisons
Source: UN-ILO, Business Monitor, Moffatt & Nichol
Low wages in emerging markets are partly due to their younger populations
Outsourcing services maturing markets more cheaply and accesses growing markets
Low wages in Latin America indicate they are prime locations for manufacturing “near-sourcing”
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Manufacturing Wage Comparisons in US Dollars At Prevailing Exchange Rates
Plenty of Outsourcing Left
Source: U.S. Bureau of Labor Statistics, Moffatt & Nichol
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130
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Food Manufacturing
Misc Manufacturing
Nonmetallic Mineral Products
Plastic and Rubber Products
Wood Products
Beverage & Tobacco Products
Machinery
Motor Vehicles and Parts
Furniture
Printing and related support
Petroleum and coal products
Paper and Paper Products
Electrical Equipment and Appliances
Computer and Electronic Products
Textiles
Leather and Allied Products
Apparel
Ranked in order of decline
Dec-90 = 100
12 Month Moving Average
Autos and housing-related sectors lagged other industries in terms of outsourcing due to strong demand for their products until recently
A lot of outsourcing still to come – many industries lag the leaders
Similar expectations have been expressed by analysts at the US Dept of Labor
US Manufacturing Employment Trends By Industry
Eventually The US Will Have To Balance Its Trade
It is unlikely that the service sector will ever offset the goods trade deficit
The US will have to reduce dependency on fuel imports and start selling goods, or the dollar will have to decline a lot
Source: US Department of Commerce, Moffatt & Nichol
US Goods and Services Trade Balance
-$1,000
-$800
-$600
-$400
-$200
$00
$200
$400
1970 1975 1980 1985 1990 1995 2000 2005 2010
$ B
illi
on
s
Service Surplus Goods Deficit
55% of the goods deficit is due to oil imports
Global Trade: Commodities Lag Manufactured Goods
Source: World Trade Organization, World Bank, Moffatt & Nichol
Manufactured goods and non-agricultural products trade have grown faster than GDP
Agricultural products trade has lagged GDP and other products
Gap between manufactured goods and other products trade must narrow
Bulk commodity trade depends on manufactured goods trade and other structural factors
100
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1,300
1,500
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1,900
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06
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08
0
1,000
2,000
3,000
4,000
5,000
6,000
Agricultural Products Fuels and Mining Products Real GDP Manufactured Goods (right axis)
CAGRs Manufactured Agricultural Fuels and Mining Real
Period Goods Products Products GDP
1950-2006 7.6% 3.6% 4.2% 3.8%
1980-2006 6.3% 3.0% 2.6% 2.8%
1995-2006 6.9% 3.7% 3.2% 3.0%
World Trade and GDP Volume Indexes
Globalization Begins
0
50
100
150
200
250
300
0 10 20 30 40 50 60 70
Co
nta
ine
r Tr
ade
Inte
nsi
ty (G
ate
way
TEU
Vo
lum
e /
'00
0 C
apit
a)
Income (GDP $'000 USD / Capita)
S. Asia
China
Peru
S. Korea
UKJapan
Chile
S. Africa
Taiwan
Brazil
Italy
Scandinavia
Israel
Colombia
EcuadorPhilippin
N. Europe
Argentina
Turkey
Uruguay
Greece
Arabia
Iberia
ANZ
Source: Moffatt & Nichol research; IMF
N. Africa
USA
Canada
Country Groups
S.E. Asia: Vietnam, Thailand, Malaysia, Indonesia, Singapore,
Brunei, Papua New Guinea
S. Asia: India, Pakistan, Bangladesh
N. Europe: Germany, France, Netherlands,
Belgium
Scandinavia: Sweden, Norway, Finland, Denmark
Iberia: Spain, PortugalN. Africa: Morocco, Libya, Algeria, Tunisia, Egypt
Arabia: UAE, Saudi Arabia, Oman, Yemen
ANZ: Australia & New Zealand
Central America: Mexico, Guatemala, Honduras,
El Salvador, Costa Rica, Nicaragua, Belize
SE AsiaCentral America
Production
Economies
Service
Economies
Developing
Economies
Low Container Trade Intensity in Emerging Markets
Source: International Monetary Fund, AAPA, Containerisation International, Moffatt & Nichol research
As per capita incomes rise in developing economies and they invest in transportation infrastructure,
the trade intensity of these economies will catch up with those of more developed economies
For countries like Peru, with about 30 containers of foreign trade per 1,000 people, to close the gap
with the US, which has 140 containers per 1,000 people, its volumes would have to grow 20% for the
better part of a decade.
International Comparison of Gateway Container Trade Intensity
Container Trade Forecasts
Long Term Outlook For US Container Volume TradeUS International Maritime Container Volume Trade
Source: MarAd, PIERS, Moffatt & Nichol
Global macroeconomic trends remain supportive of trade growing faster than GDP
China is expected to moderate its currency stance and increase the consumer’s share of GDP
International policy is expected to further remove trade barriers and gradually reduce the environmental impact of economic activity
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
TEU
s
Forecasts Imports Exports Empties Total
US Container Volume Trade Outlook By Trade Lane
Source: MarAd, PIERS, Moffatt & Nichol
2008 US IMPORTS US EXPORTS 2020 US IMPORTS US EXPORTS
TRADE ROUTE TEUS SHARE TEUS SHARE TRADE ROUTE TEUS SHARE TEUS SHARE
North Asia 11,542,916 64% 4,355,308 39% North Asia 21,664,763 65% 8,586,494 43%
South Asia 575,977 4% 298,761 2% South Asia 1,329,121 5% 870,992 3%
SE Asia 1,600,483 10% 788,903 9% SE Asia 3,070,658 12% 1,658,495 9%
EU 1,701,699 7% 1,477,121 13% EU 2,244,643 6% 2,031,015 9%
Mediterranean 852,215 9% 687,011 18% Mediterranean 1,176,380 7% 1,182,633 19%
Middle East 38,080 0% 260,027 4% Middle East 86,871 0% 516,232 5%
EC S America 417,802 3% 313,498 3% EC S America 826,412 3% 452,912 2%
WC S America 282,773 1% 206,014 1% WC S America 444,920 1% 528,272 1%
Australia-NZ 130,936 1% 200,732 4% Australia-NZ 264,052 1% 270,531 3%
Caribbean 374,172 0% 1,213,130 4% Caribbean 528,335 0% 1,630,191 3%
Cent America 569,303 0% 530,210 1% Cent America 841,942 0% 780,177 1%
Canada 6,228 0% 5,960 0% Canada 12,240 0% 10,074 0%
Mexico 56,715 0% 50,040 0% Mexico 92,585 0% 108,271 0%
WC Africa 16,761 0% 89,494 1% WC Africa 25,611 0% 332,160 2%
S Africa 44,175 0% 55,615 0% S Africa 67,109 0% 125,063 0%
EC Africa 8,627 0% 21,184 0% EC Africa 14,906 0% 73,987 0%
Other Regions 30,951 0% 62,598 0% Other Regions 55,808 0% 79,607 0%
TOTAL 18,249,813 100% 10,615,606 100% TOTAL 32,746,356 100% 19,237,105 100%
Latin America and South Asia have the greatest potential to surprise positively
Demographic Trends Are Changing The Economy’s Structure
Source: US Census Bureau, Moffatt & Nichol
US population is moving to urban, coastal and Southern locations
National container forecasts do not apply uniformly across US transportation infrastructure due to regional population and international trade lane growth differentials
Self-sustaining recovery requires financial system stabilization and adjustment of China’s policies
Long term trends remain intact for imports –demographics matter more than balance sheets
Bulk commodity trade could exceed container volume growth as the global economy rebalances
Now is the time to make investment decisions -transportation is a “first mover advantage” industry
Takeaways