A 3 rd Update on West Coast International Trade Economics

1. A 3rd Update on West Coast International Trade Economics Pacific Northwest Waterways Association Annual Meeting June 28, 2011 Coeur De Alene Thomas J. McCollough, P.E. Moffatt & Nichol

2. Special Thanks Dr. Walter Kemmsies, Chief Economist

3. Moffatt & Nichol Background • ENR Top 100 company,founded in 1945 in Long Beach, California • Offices: US, Guam, Canada, Europe, Middle East, Latin America and the Pacific Rim • More than 500 Employees • Practices: Goods Movement, Energy, Ports, Coastal, Urban Waterfronts & Marinas, Inspection & Rehabilitation • M&N combines the expertise of technical and commercial specialists gained over 65 years of planning and engineering experience on over 6,000 projects: • Economic analyses of investment/privatization • Strategic development plans • Independent Market Consultant • Coastal engineering • Port and waterside construction (marinas) • Terminal design for all types of freight and passenger movement • Surface transportation connectivity • Railroads and capacity expansion • Environmental issues/emission modeling American Society of Civil Engineers John G. Moffatt – Frank E. Nichol Harbor and Coastal Engineering Award

4. Observations • It is risky to go forward by staring in the rear-view mirror • Look where we are going and not where we have been • The key question is, “What sector will lead this recovery cycle?” • Not what drove the last one

5. Take-Aways • Recovery is proceeding “as planned”, a bit early for an “all clear” • Sustained World economic recovery depends on the US • Real estate-exposed sectors will take a few more years to recover • Inflation and government debt are a risk but not immediately • Long term concerns could be lessened by more balanced trade • US needs to increase exports and reduce oil dependency • China needs to withdraw from market interventions • Positive outlook for agricultural exports but avoid euphoria • Energy costs are an issue • Need more action and less discussion

6. GDP Growth In DevelopedandEmergingMarkets Developed Economies Are Struggling… … China and India Are Leading • China and India are carrying the load by investing in infrastructure

7. World EconomyStrainsToRecoverWithoutThe US US Consumer Spending and Global Real GDP Growth • The US accounts for 25% of World GDP • US consumers account for 70% of US GDP, or 17.5% of World GDP • US populationaccounts for 4% of the world

8. World’s Major Economies

9. World’s Major Economies

10. GrowthDrivenByInvestment Composition of China’s GDP: 1995 - 2010

11. HighUnemployment, LowConsumerSentiment Consumer Sentiment and Unemployment Indexes

12. Private Sector HasLedEmploymentRecovery Changes In Employment Levels in 2010 By Sector • Private sector efforts were offset by public sector cutting 400K jobs

13. Home Prices Still “Correcting” US Home Prices and Consumer Price Index • Home sales levels have stabilized by falling prices and low financing costs

14. Delinquencies Have Peaked – Inventory Remains High Mortgage Foreclosures and Delinquencies

15. Retail Sales Recovering – Production, Inventories Lag Retail Sales, Inventory and Inventory-to-Sales Ratio • Retail sales above December 2007, driven by replacement purchases • Slow inventory rebuild due to poor home sales and cautious managers

16. US International Container Trade Trends Monthly TEU Volumes – 12 Largest US Ports • Imported and empty containers led growth in 2010 • Exports were surprisingly flat, some likely shifted to bulk • Decline in imports since 2011 peak is out of line with retail sales trends

17. US Non-fuelExport Trends Non-fuel Exports By Weight By Type Of Vessel • Bulk began shifting into containers in 2007, shifted back some in 2010 • Exports grew 12.7% in 2010; containerized 13.4%, other 11.1%

18. Where We Are Going • Where is the bottom – approaching it now Q2 09 was bottom • Recovery may be “W” shaped, i.e. not sustained • When & how inflation will occur • Response of policy makers …labor benefits not extended • Economic drivers have not changed • Aging population (% of total leaving the work force) • Population growth slowed & will slow further • Buying more services than durable goods • Outsourcing will continue & will increase (import substitution) • Efficiency /Reliability vs. Capacity (slow steaming problem for importers, increasing supply chain..decreasing control for merchants)

19. Economic Outlook for Major Trade Lane Economies Real GDP Growth (year on year) By Major Trade Lanes US recession risk in 2011 • Emerging Markets have higher population and productivity growth • Near term is weak due to mature economies • Policy withdrawal creates uncertainty - look for “all clear” in 2011-H2 • World trade patterns will change due to the changing relative size of emerging and mature economies over the forecast horizon Source: International Monetary Fund, US Department of Commerce, Moffatt & Nichol

20. Oil Consumption Trends 1965 - 2009 Crude Oil Consumption • 8 million barrels of crude oil were consumed daily in 2010 • Since 2008 Emerging Markets consume more oil than Developed Economies Source: UN-ILO, Business Monitor, Moffatt & Nichol

21. TheWorld’sPopulation Is Aging Proportion of Population Above 55 Years of Age

22. Unsustainable Trade Deficit US Trade Balance Components: 1992 -2010 45% of the trade deficit is due to petroleum imports • Including oil, the goods deficit is 4.8x the services surplus, 2.8x excluding oil • Increased import dependency is unavoidable – the US needs to export more Source: US Census Bureau

23. US Export Candidates • Bulk commodities and specialized capital goods (project cargo) fit the profile of US comparative advantages • Relative to faster growing Emerging Markets, the US has • A lower cost of capital, but a higher cost of labor • Relative abundance of scare resources such as water • More advanced biotechnology • More reliable quality control and surveillance of compliance • Strong Emerging Market demand for bulk is expected to continue as these economies continue to grow and develop • Grains and oilseeds • Meat • Biofuels – wood pellets • Coal and other raw materials • Strong bulk demand also means strong demand for capital equipment – energy, construction, agricultural • US has to develop infrastructure to compete in the global market place – its rivals have and continue to do so

24. America Is The World’s Bread Basket • Lack of investment in inland waterway infrastructure is a significant bottleneck

25. Shares and Containerization of US Grain Exports Shares of US Grain Exports Containerization of Grain Exports By Port

26. Rail Replaces Inland Waterways • Rail can handle agriculture exports in place of the inland waterway system

27. Containers Concentrate In Population Centers • These are the locations where the bulk of consumption takes place • Containers increasingly retained near ports – hard to containerize exports

28. CurrencyTrends Are GenerallyFavorable US Dollar Exchange Rate Indexes

29. China’sCurrencyPolicy Is A Global EconomicRisk Exchange Rates Between US$, Chinese Yuan and Brazilian Real

30. SummingUp... • Recovery is proceeding “as planned”, a bit early for an “all clear” • Sustained World economic recovery depends on the US • Real estate-exposed sectors will take a few more years to recover • Inflation and government debt are a risk but not immediately • Long term concerns could be lessened by more balanced trade • US needs to increase exports and reduce oil dependency • China needs to withdraw from market interventions • Positive outlook for agricultural exports but avoid euphoria • Energy costs are an issue • Need more action and less discussion

31. Questions & Comments Contact Information: Walter Kemmsies wkemmsies@moffattnichol.com Tom McCollough tmccollough@moffattnichol.com www.moffattnichol.com