Content

1. Economic Cycles and the Organizational and Geographical Attributes of Global Value Chains:Is the Pendulum Changing Direction?Theo NotteboomITMMA - University of Antwerp and Antwerp Maritime AcademyJean-Paul RodrigueDepartment of Global Studies & Geography, Hofstra UniversityMaritime Transport in Value Chains WorkshopMontreal (Canada), June 10-12 2009

2. Content 1 • Maritime Transportation, Trade and Finance in Flux • The Economic Crisis Unraveled • First Ramification: The Strategies of Shipping Lines and Terminal operators • Second and Third Ramifications: Added Value and Cargo Flows 2 3 4 First, they ridicule you because your views portray something they cannot imagine. Then, they deny you because your scenario is said to be impossible. Finally, they hate you because you were right.

3. Paradigm Shift: When a Pendulum Becomes a Wrecking Ball Growth of traffic Investment and leverage Added value capture and expansion Stabilization and decline of traffic Defaults and deleveraging Value debasement 1 Maritime Transportation, Trade and Finance in Flux

4. Leverage Upside Down • Finance and Maritime Shipping • Old relationship (e.g. Lloyd 1871). • Finance used to leverage the opportunities of international transportation: • Providing capital and mitigating risk when needed. • Relationship has become more acute and inverted: • Transportation became a mean to leverage financial opportunities. • Several unintended consequences. 1 Maritime Transportation, Trade and Finance in Flux

5. The Complex and Perverse Role of Finance 1 Maritime Transportation, Trade and Finance in Flux

6. Business Cycles: The Mess that Greenspan Made Credit-Driven Boom Peak Trough Expansion Recession Expansion 1 Maritime Transportation, Trade and Finance in Flux

7. Production of Durable Consumer Goods and Retail Sales, United States, 1990-2009 (2002 = 100) 1 Maritime Transportation, Trade and Finance in Flux

8. Content Maritime Transportation, Trade and Finance in Flux The Economic Crisis Unraveled First Ramification: The Strategies of Shipping Lines and Terminal operators Second and Third Ramifications: Added Value and Cargo Flows 1 2 3 4

9. The Economic Crisis Unraveled CAUSES Monetary system (fractional reserve banking, fiat currencies) SYMPTOMS Debt, asset inflation CONSEQUENCES Misallocations (bubbles) Production Consumption Distribution 2 The Economic Crisis Unraveled

10. Blowing Bubbles: From Technology to Commodities Commodities / Trade Bubble Tech / Stock Bubble Housing Bubble 2 The Economic Crisis Unraveled

11. Impact of Recessions on Consumption, Production and Trade C Significant Consumption D B A – Basic Goods B – Discretionary Goods C – Durable Goods D – Capital Equipment E – Luxury Goods Severity Decline E A None Low High Value of Goods 1 Trade and Production Significant 2 3 1 – Futures Indexes 2 – Production 3 – Container Volumes 4 – Value of Trade Decline 4 None Sequence 2 The Economic Crisis Unraveled

12. Globalization 2000-2008: A Bubble? 2 The Economic Crisis Unraveled

13. Impacts on World Trade • Reconsideration of the export-oriented paradigm • Rebalancing of production, consumption and distribution. Annualized change in first-quarter GDP from fourth quarter of 2008 6.1% USA Germany Japan Mexico Taiwan Singapore 6.3% 14.4% 15.2% 21.5% 9.2% 14.6% China 2 The Economic Crisis Unraveled

14. YOY Changes of Total Exports, February 2009 2 The Economic Crisis Unraveled

15. Monthly Trade between China and the United States, Billions of USD (1985-2009) 2 The Economic Crisis Unraveled

16. Turbulent times for ports 2 The Economic Crisis Unraveled

17. Cars Accumulating at the Long Beach Port Terminal, December 2008 2 The Economic Crisis Unraveled

18. Empty Containers Piling, Hong Kong, February 2009 2 The Economic Crisis Unraveled

19. From a Credit Storm to a Macroeconomic Storm Credit Storm Transactions and investments. Difficulty of clearing international trade transactions. Undue drop in freight volumes. Macroeconomic Storm Decline in aggregate demand. Clearing excess capacity. 2 The Economic Crisis Unraveled

20. Container Shipping Volumes and Port Throughput • Fooled by the bubble • Container shipping companies have been growing rapidly for years. • Order of container ships with higher capacities. • Globalization: • Widening the distance between production locations and consumer markets • Demand for sea freight had been growing by double digits annually. • Shipping companies assumed that this trend would endure into the foreseeable future. 2 The Economic Crisis Unraveled

21. Changes in Container Traffic at Some Major Ports, 2008-2009 (Preliminary) 2 The Economic Crisis Unraveled

22. Port of Los Angeles (Monthly TEUs), 1995-2009: Falling Off a Cliff… 2 The Economic Crisis Unraveled

23. European port volumes per month and commodity: container volumes hit hard Source: based on data ESPO Rapid Exchange (about 50 ports) 2 The Economic Crisis Unraveled

24. How serious is the throughput issue?The European case 2 The Economic Crisis Unraveled

25. Beware of Future Expectations: The Fallacies of Linear Thinking 2 The Economic Crisis Unraveled

26. World Container Traffic (1980-2008) and Possible Scenarios to 2015 Adoption Acceleration Peak Growth Maturity 1966-1992 1992-2002 2002-2008 2008 - Reference Divergence Depression 2 The Economic Crisis Unraveled

27. Container Traffic Handled by North American Ports, 1990-2008 and Projections up to 2015 2 The Economic Crisis Unraveled

28. Container Traffic Handled by Selected East Coast Ports, 1990-2008 and Projections up to 2015 2 The Economic Crisis Unraveled

29. Content Maritime Transportation, Trade and Finance in Flux The Economic Crisis Unraveled First Ramification: The Strategies of Shipping Lines and Terminal operators Second and Third Ramifications: Added Value and Cargo Flows 1 2 3 4

30. First Ramification: The Strategies of Shipping Lines and Terminal operators • Time to reconsider… • Business strategies: • Shipping lines and terminal operators have tailored their business strategies under the premises of strong growth in container trade, fuelled by the globalization process and the large-scale adoption of the container. • Pricing and investments: • The economic crisis seems to shake the fundamentals of the pricing and investment strategy of shipping lines and terminal operators and their broader involvement in value chains. 3 First ramification

31. The Dynamics Driving the Liner Shipping Industry • Liner shipping: An underperformer? • Underperformed financially compared to other players in the logistics industries. • Capital-intensive and high risks. • Wide variability in cost bases. • Capacity tends to be added as additional loops. • Pressure is on to fill the ships with freight. • Negotiate long-term contracts with shippers. • Accept to take whatever price is offered in the market. 3 First ramification – shipping lines

32. The Reaction of the Liner Shipping Industry to the Downturn • Capacity deployment strategies • Until early 2008, shipyards still struggled to satisfy demand for new and bigger ships. • Late 2008: order postponements, new building cancellations and vessel lay-ups. • But ... total slot capacities in the market would continue climbing until 2012. 3 First ramification – shipping lines

33. Global Bulk and Container Fleet Partially Immobilized (Singapore, January 2009) April 2009; 10.5% of the global container fleet idle (1.4 Million TEU) 3 First ramification – shipping lines

34. Far East – Europe capacity situation 3 First ramification – shipping lines

35. The Reaction of the Liner Shipping Industry to the Downturn • Operations and routing • Many vessels continue to slow steam at around 19 knots, despite cheaper bunker prices. 3 First ramification – shipping lines

36. The Reaction of the Liner Shipping Industry to the Downturn • Pricing strategies & rate erosion: • Not be much of an issue if changes in freight prices had a major impact on demand. • Carriers cannot influence the size of the final market. • Increase their short run market share by reducing prices. • Shipping lines may reduce freight rates without substantially affecting the underlying demand for container freight. 3 First ramification – shipping lines

37. Base freight rate and bunker adjustment factor (BAF) for the maritime transport of one forty foot container (FEU) from Shanghai to Antwerp Recent rate restoration is still vulnerable 3 First ramification – shipping lines

38. Volume and Revenue per FEU, NOL, April 2008 – May 2009 3 First ramification – shipping lines

39. The Reaction of the Liner Shipping Industry to the Downturn • Historic proportions of adjustments • Number of vessels been taken out of service: • Shipping lines may have not gone far enough to combat the situation. • Redesigning liner service networks: • Rationalize services. • Cascade larger vessels to secondary trade routes. • Consequences on vessel size: • Market may not see an increase in the maximum size for the next five years. 3 First ramification – shipping lines

40. The Reaction of the Liner Shipping Industry to the Downturn • Towards a new market structure? • A wave of acquisitions and mergers appears inevitable in the medium term, if the recession continues in 2010 • Changes in the market: • CMA CGM and Maersk increasingly cooperate on Asia-Europe trade. • MISC steps out of Grand Alliance (only two vessels) • Anti-cyclical capacity strategy of MSC • Overcapacity situation will not be solved straight away, even if economy recovers • Financial markets and the financing of ships (shipping derivatives) 3 First ramification – shipping lines

41. Temporary Adjustment or Paradigm Shift? • Unintended consequences • Some actions which, at first glance, have a temporary character might have long-term effects on shipping. • Rate restoration process might be undermined by shipping lines wanting to reverse their strategy. • Rediscovery of the Cape route? • High Suez Canal fees, low vessel loading factors and high insurance fees caused by piracy problems near Somalia. • Opportunity for ports in Sub-Saharan Africa to take up a more prominent role in the world shipping networks. 3 First ramification – shipping lines

42. Cape route versus Suez route Suez Canal toll: 13,000 TEU: USD 655,000 10,000 TEU: USD 537,000 8,000 TEU: USD 456,000 6,000 TEU: USD 374,000 Cape route transit time: +5 to 7 days 3 First ramification – shipping lines

43. Temporary Adjustment or Paradigm Shift? • Review of business models • Carriers cannot assume that the market conditions will get back to ‘normal’: • Have to cope with structural economic factors. • Covering the accumulated debt (paying it back or default) • Impact of higher unemployment on consumption. • Develop appropriate strategies to cope with different potential scenarios. • Redeploy resources and equipment step by step. • Larger companies: • Likely to expand their control of the market. • Reassess vertical integration strategies in the chain. • Take over slots and terminals from smaller competitors. 3 First ramification – shipping lines

44. The Dynamics Driving the Terminal Operating Business • Confronted with bigger and fewer shipping lines demanding more for less. • Growing demands (terminal productivity, priority servicing and flexibility, landside, etc..) • Emergence of global terminal operators • Building of strongholds in selected ports. • Advanced know how on the construction and management of container terminals. 3 First ramification – terminal operators

45. The Dynamics Driving the Terminal Operating Business • Vertical integration • Extend control over the transport chain. • Hedging the risks by setting up dedicated terminal joint ventures. • Long term contracts to shipping lines with gain sharing clauses. • Integration of terminals in supply chains. 3 First ramification – terminal operators

46. The Dynamics Driving the Terminal Operating Business • Financial appeal • Scarcity of land for terminal development. • Excellent prospects for container growth. • High ROIs (in many cases 15% or more). • Banks, hedge funds, private equity groups and investors entered the terminal business. • The assumption of liquidity • Driver in the acquisition of port terminals. • Possible to rapidly sell terminal assets if needs be. • Can quickly turn to be illiquid if market conditions change. 3 First ramification – terminal operators

47. Dumb Money at Work? EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization 3 First ramification – terminal operators

48. Reaction of the Terminal Operating Industry to the Downturn • Stalling of vertical integration • From an hinterland strategy to seaport terminal operations. • Reversal of direct involvement in barge services, rail services and inland terminals? • In times of immense pressure on capital, terminal operators give priority to their terminal investment programs. 3 First ramification – terminal operators

49. Reaction of the Terminal Operating Industry to the Downturn • “Lost appeal” • Cash problems among many companies. • Fear for structural overcapacity in the market: • Underutilization of terminals: on average only 60% utilization by 2013 based on the March 2009 forecasts, while the September 2008 still predicted 90%. • Cancellation of or the delay in a number of capacity expansions plans. • Overcapacity is expected to force down tariffs and undermine the ROI: • Terminal business less interesting to financial firms. • Potential difficulties for financing of large terminal projects. • Renegotiation of existing concession agreements inevitable? 3 First ramification – terminal operators

50. Reaction of the Terminal Operating Industry to the Downturn • Revising terminal operations • Shift on the pressures on terminal resources: • Stretching available resources to cope with the high growth in containerized cargo volumes no longer the case. • A number of terminal operators are benefiting from this opportunity: • Reorganize, update and consolidate their terminal operations. • Temporary closures of parts of terminals for renovation purposes. 3 First ramification – terminal operators