Past The Worst Point

Northeast Trade and Transportation Conference 2011

March 23, 2011

Dr. Walter Kemmsies, Chief Economist

Moffatt & Nichol

Moffatt & Nichol Background

ENRTop100company, founded in1945inLongBeach,California

Offices:US,Guam,Canada,Europe,MiddleEast,LatinAmericaandthePacificRim

More than500Employees

M&Ncombinestheexpertiseoftechnicalandcommercialspecialistsgained
over65yearsofplanningandengineeringexperienceonover6,000projects:

Coastal engineering
Coastalengineering

Portandwatersideconstruction(marinas)

Terminaldesignforalltypesoffreightandpassengermovement

Surface transportation connectivity

Surfacetransportationconnectivity

Railroadsandcapacityexpansion

Paygohighwayimprovements

Strategic development plans

Strategicdevelopmentplans

Economicanalysesofinvestment/privatization

IndependentMarketConsultant

Environmental issues/emission modeling

Environmentalissues/emissionmodeling

AmericanSocietyofCivilEngineers
JohnG.Moffatt FrankE.Nichol
HarborandCoastalEngineeringAward

Main Points
Past the worst point but not the best point of the cycle
Exports help the US but this must become a virtuous cycle
4 lost years for healthy segments of the economy, longer for those exposed to real estate
Japan outlook downgraded near term
term, upgraded medium term
Middle East instability so far prompts modest downgrades to global outlook

Too early to give the all

all clear
clear signal due to policymaker reactions
Raw material and transportation cost increases are compressing profit margins
Quantitative Easing: will too much money chase too few goods?
Need a lot of investment in capacity and infrastructure to offset inflation pressures
Not yet clear which industries will lead this cycle

Structural problems and opportunities will define the next decade

Twin deficits more exports
Food shortages more agriculture and equipment exports
Global energy crunch more forest product and equipment exports
China needs to normalize - develop a consumer market

World Economy StrainsTo Recover Without The US

US Consumer Spending
p
g and Global Real GDP Growth
10%
8%
6%
4%
2%

2%

1980
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
2008
2009
2010
2011

0%

4%
6%
8%
8%
WorldGDP

USConsumer

The US accounts for 25% of World GDP

US consumers account for 70% of US GDP, or 17.5% of World GDP

Low Consumer Sentiment Isnt Surprising

Consumer Sentiment and Unemployment Indexes
300

250

200

150

100

50

19
978
19
979
19
980
19
981
19
982
19
983
19
984
19
985
19
986
19
987
19
988
19
989
19
990
19
991
19
992
19
993
19
994
19
995
19
996
19
997
19
998
19
999
20
000
20
001
20
002
20
003
20
004
20
005
20
006
20
007
20
008
20
009
20
010
20
011

Recession

ConsumerConfidenceIndex

Unemployed

Significant rise in employment would improve consumer sentiment

Companies have been focused on cost control not expansion

Private Sector Has Led Employment Recovery

Changes In Employment Levels in 2010 By Sector
1300

AccumulatedPayrolls inthousands

1150
Private

1000
+1 35 million
+1.35million

850

Total

700
+1.12million

550

Federal

400
00
250

State

100
50

Local

200

250thousand

350

Feb2011

Jan2011

Dec2010

Nov2010

Oct2010

Sep2010

Aug2010

Jul2010

Jun2010

May2010

Apr2010

Mar2010

Feb2010

Jan2010

500

Private sector efforts were offset by public sector cutting 222K jobs in 2010

US Retail Sales Recovering - Inventories Lag

700

600

1.75
15
1.5

500

$Billlions

1.25
400
1
300
0.75
200

0.5

100

0.25

Inventory

RetailSales

201
12

201
11

201
10

200
09

200
08

200
07

200
06

200
05

200
04

200
03

200
02

200
01

200
00

199
99

199
98

199
97

199
96

199
95

199
94

199
93

199
92

Inventory//SalesRatio

Retail Sales, Inventory and Inventory-to-Sales Ratio

Inventory/SalesRatio (rightaxis)

Retail sales are recovering above pre-recession levels around May 2011
C ti
Cautious
i
inventory
t
rebuild
b ild supply
l chains
h i are llonger and
d lless responsive
i

Home Prices Still Correcting

Correcting
US Home Prices and Consumer Price Index
250

200

150

100

50

FHFAHomePriceIndex

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1990

CPI

Increases in home sales has been accompanied by falling prices

Mortgage default rates still at peak levels indicates no recovery yet

Industry Is Recovering From A Steep Drop

Industrial Production and Capacity Utilization
95

120

90
100
85
80

80

75
60
70
65

40

60
20
55

CapacityUtilization (leftaxis)

Jaan11

Maar09

Maay07

Ju
ul05

Se
ep03

No
ov01

Jaan00

Maar98

Maay96

Ju
ul94

Se
ep92

No
ov90

Jaan89

Maar87

Maay85

Ju
ul83

Se
ep81

No
ov79

Jaan78

Maar76

Maay74

Ju
ul72

Se
ep70

No
ov68

0
Jaan67

50

IndustrialProduction (rightaxis)

Production rebound since 2009-Q2 not enough to reach pre-recession levels

No surprise that companies are cautious about employment and investment

Source: Federal Reserve, Moffatt & Nichol

US International Container Trade Trends

Monthly TEU Volumes 12 Largest US Ports
3,500,000
3,000,000
+14.2%
10vs
vs '09
09
'10

2,500,000
2,000,000
+10.7%
'10vs'09

1,500,000
+15.2%
'10vs'09

1,000,000
+5.2%
5 2%
'10vs'09

500,000
+27.1%
'10vs'09

Index

Total

TotalLoaded

Exports

Empties

Imported and empty containers led growth in 2010

Exports were surprisingly flat, some likely shifted to bulk

Dec11

Sep11

Jun11

Mar11

Dec10

Sep10

Jun10

Mar10

Dec09

Sep09

Jun09

Mar09

Dec08

Sep08

Jun08

Mar08

Dec07

Sep07

Jun07

Mar07

Dec06

Sep06

Jun06

Mar06

Dec05

US Non
Non--fuel Export Trends
Non-fuel Exports By Weight By Type Of Vessel
350

331

MillionsofMetric Tons

317
295

300

294

263

250

247

247

235

235
220

200

211
187

178

207
207

191
182

150

100
97

96
87

84

50

56

60

2003

2004

65

72

0
2005
Total

2006
Containerized

2007

2008

2009

2010

NotContainerized

Bulk began shifting into containers in 2007, some shifted back in 2010
Exports grew 12.7% in 2010, containerized 13.4% and other 11.1%

Positive Outlook for the Americas ...

Annual Real GDP Growth Rates
9%
8%
7%
6%
5%
WCSA

4%

Caribbean
CentAmerica

3%

ECSA

2%

NAmerica

1%

2
2019
2020
2

2
2009
2010
2
2011
2
2012
2
2013
2
2014
2
2015
2
2016
2
2017
2
2018
2

1%

2
2000
2001
2
2002
2
2003
2
2004
2
2005
2
2006
2
2007
2
2008
2

0%

2%
3%

Except for Argentina and Venezuela,

Venezuela the outlook is for robust growth
in Latin America

... and Asia

Annual Real GDP Growth Rates
9%

7%

5%
SAsia
NAsia

3%

SEAsia
Mediterranean
NAmerica

1%

1%

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

NEurope

3%

5%

Except
p for developed
p economies, the outlook is for robust g
growth
Forecasts for Japan need to be trimmed in the near term, raised in the
medium term

What Are Commodity Prices Telling Us?

Commodity Prices Indexed To 100 in Dec 2000
600

500
Copper
400
Oil
300
Corn
200

NatGas

100

Jun11

Nov10

Apr10

Sep09

Feb09

Jul08

Dec07

May07

Oct06

Mar06

Aug05

Jan05

Jun04

Nov03

Apr03

Sep02

Feb02

Jul01

Dec00

Since the middle of the last decade commodity prices have soared
Not speculation but supply-demand balance and infrastructure
Source:UNILO,BusinessMonitor,Moffatt&Nichol

Oil Consumption Trends 1965 - 2009

Crude Oil Consumption
$120

100
90

$100

MillionsofB
BarrelsPerDay

80
70

$80

60
50

$60

40
$40

30
20

$20

10

DevelopedEconomies

EmergingMarkets

World

2010

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

$0

1965

WTIAnnualAverage(rightaxis)

8 million barrels of crude oil were consumed daily in 2010

Si
Since
2008 E
Emerging
i M
Markets
k t consume more oilil th
than D
Developed
l
dE
Economies
i

Source:UNILO,BusinessMonitor,Moffatt&Nichol

Unsustainable Trade Deficit

US Trade Balance Components:
p
1992 -2010
$20

Billions

$20

$40

2011

2010

2009

2008

2007

2007

2006

2005

2004

2003

2002

2002

2001

2000

1999

1998

1997

1997

1996

1995

1994

1993

1992

1992

$0

45% of the
trade
deficit is
due to
petroleum
imports

$60

$80
GoodsBalance

ServicesBalance

Including oil, the goods deficit is 4.8x the services surplus, excluding oil it is 2.75x
Deficit is due to demographics,
demographics containerization,
containerization trade policies and
communication/information processing technology
Increased import dependency is unavoidable the US needs to export more

Source: US Census Bureau

US Export Candidates

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

Bulk commodities and specialized capital goods (project cargo) fit the
profile of US comparative advantages

Strong Emerging Market demand for bulk is expected to continue as

these economies continue to grow and develop

Grains and oilseeds

Meat
Coal

Strong energy demand from Emerging Markets means strong forest

product demand wood pellets in particular

Strong bulk demand also means strong demand for capital equipment
energy, construction, agricultural

The Worlds Population Is Aging

Proportion of Population Above 55 Years of Age
60%
Japan
50%

Europe
p
China

40%

Canada
US

30%

Brazil
Mexico

20%

India

10%

0%
1990

2000

2010

2020

2030

2040

What will this booming

g consumer segment
g
do next?

2050

Chinas Currency Policy Is A Global Economic Risk

Exchange Rates Between US$, Chinese Yuan and Brazilian Real
9
8
7
YuanPerDollar
6
5
YuanPerReal

4
3
2

RealPerDollar

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Summing Up...
Recovery iis proceeding
R
di as
planned
l
d
Sustained World economic recovery depends on the US
Too early
y to g
give the all clear signal
g
risk of policy
p
y errors
Fiscal and monetary stimulus help but create new risks

Long term clouded by structural issues that will drive the next cycle

Thank you for your attention

Walter Kemmsies
Moffatt & Nichol
New York
+1 212 768 7454
wkemmsies@moffattnichol.com