Fall Summit, HSH Nordbank, Hamburg, Germany, November 15, 2007

Logistics and Global Commodity Chains

Jean-Paul Rodrigue
Associate Professor, Dept. of Economics & Geography, Hofstra University, New York, USA
Email: ecojpr@hofstra.edu Paper available at: http://people.hofstra.edu/faculty/Jean-paul_Rodrigue

Introduction: Capital on the Move

Changes in Global Trade Global Production Networks and Commodity Chains The China Effect and Global Commodity Chains Integrating Commodity Chains into Containerized Supply Chains
2 Trimodal Container Terminal, Willebroek, Belgium

The Emergence of Supply Chain Management

Fragmentation
Demand Forecasting Purchasing Requirements Planning Production Planning

1960s

Consolidation

1980s

Functional Integration Value Capture

1990s

2000s

Materials Management

Manufacturing Inventory
Warehousing Materials Handling Warehousing Materials Handling

Logistics

Supply Chain Management

Packaging
Inventory Distribution Planning Order Processing Transportation

Packaging

Physical Distribution

Information Technology Marketing

Customer Service

Strategic Planning

 and the Setting of Commodity Chains

Commodities

Intermediate Goods
Manufacturing and assembly

Final Goods
Distribution

Parts and raw materials

Bulk shipping

Unit shipping Transport Chain

LTL shipping Market Low volumes High frequency

High volumes Low frequency

Average volumes High frequency

Market

Stage Flows

Major Factors Driving the Integration of Transportation with Distribution

Factor
Technology

Cause
Containerization & IT

Consequence
Modal and intermodal innovations; Tracking shipments and managing fleets Highs costs and long amortization; Improve utilization to lessen capital costs Easier contractual agreements; joint ownership

Capital investments Alliances and M&A

Returns on investments

Deregulation

Commodity chains
Networks
5

Globalization

Coordination of transportation and production (integrated demand)

Multiplying effect

Consolidation and interconnection

Changes in Global Trade

Acute Trade Imbalances Economic Cycles Globalization and Production

Container yard, Port of Yantian, China

A Changing Trade Environment

Stage Until the 1970s Nature Immobile factors of production Mobility of factors of production Global production networks Function Cope with scarcity

Late 20th century

Promote economic efficiency Added value within commodity chains

Early 21st century

 and the Cycles of International Trade

Changes in the Value Worlds Merchandise Trade, Production and GDP, 1950-2005 (in %)
30 25 20 15 10 5 0
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 20 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20

Total Merchandise Trade World GDP World Merchandise Production

-5 -10

20

04

The Cycle is Strongly Upward for Latin America

Latin American Trade (1995-2005) Billions USD
400 350 300 250 200 150 100 50 0
9

Commodities Boom

Exports Imports

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

 as Well as for Eastern Europe

Share of World Trade, Eastern Europe (1995-2005)
4.0 3.5 3.0 2.5 2.0 1.5 1.0
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Exports Imports

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

International Trade Involves Acute Imbalances

Worlds 10 Largest Exporters and Importers, 2005
Belgium Canada Italy United Kingdom Netherlands France Japan China United States Germany 0
11

Imports Exports

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Billions of $US

 that Resulted in Imbalanced Containerized Freight Flows

Balance of Containerized Cargo Flows along Major Trade Routes, 1995-2006

0 -2 -4 -6 -8 -10 -12 -14
12

1995

1996

1997

1998

2000

2001

2002

2003

2004

2005

2006

-16 -18

Europe/USA Asia/Europe Asia/USA

 with Imbalanced Freight Rates as Well

Maritime Freight Rates (USD per TEU), 1993-2006

$2,500

$2,000

$1,500

$1,000

$500

Asia - US US- Asia Asia - E urope E urope - Asia

$0
1993-4 1994-2 1994-4 1995-2 1995-4 1996-2 1996-4 1997-2 1997-4 1998-2 1998-4 1999-2 1999-4 2000-2 2000-4 2001-2 2001-4 2002-2 2002-4 2003-2 2003-4 2004-2 2004-4 2005-2 2005-4

Globalization; Changing the Profit Structure

High
R&D Globalization Branding Sales / Service Marketing Distribution Manufacturing

Added value

Concept

Design

Logistics

Low

Commodity chain
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 As Well As Disconnecting Production and Distribution

R&D

Distribution Core Base

Marketing / Retail

Manufacturing Base

15

Containerization and Global Commodity Chains

Containerization Intermodal Transportation Ports and Terminal Operators

16

Container waiting to be loaded, Shenzhen, China

Containerization has Integrated Different Transport Systems

Container port

Containerization of Maritime Transport Systems

Corridor

Pendulum Services

Intermodal terminal

Containerization of Inland Transport Systems

Inland Port Offshore hub

17

Intermodal and Transmodal Operations

 which Makes the Container more than a Box

Synchronization of inputs and outputs (batches) Flow management (time-based), warehousing unit

Production

Distribution

Container

Transport
18 Modes, terminals, intermodal and transmodal operations

Connecting the Dots: Intermodal Transport Chain

Composition Interchange

Last mile

Transfer

First mile Local / Regional Distribution

Decomposition

National / International Distribution

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Transport Terminal

Composition: Pallets waiting to be loaded in a container (APL DC - Shenzhen, China)

Interchange: Post-Panamax Containership (Le Havre)

Interchange: UPS Willow Springs Distribution Center, Chicago

22

Decomposition: Unloading Containers and Palletizing Shipments (Antwerp)

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The Worlds Largest Maritime Trade Gateways

Seattle Tacoma Long Beach Oakland New York/New Jersey Hampton Roads Charleston Savannah Los Angeles Jeddah

Dubai Salalah Nhava Sheva Colombo

TEU
Less than 2 million 2 to 4 million 4 to 7 million 7 to 10 million More than 10 million
Santos

Melbourne

Traffic at the 50 Largest Container Ports, 2005Pacific Asia Eur ope

Tianjin Quingdao Dalian Hamburg Bremen/Bremerhafen Rotterdam Antwerp Felixstowe LeHavre Hong Kong Shenzhen Guangzhou Xiamen Kaohsiung Keelung Shanghai Ningbo Busan

Laem Chabang Port Kalang Tanjung PelepasSingapore Ho Chi Minh

Tanjung Priok Manila

Kobe Nagoya

Tokyo Yokohama Algeciras

Barcel ona Valencia Gioia Tauro

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 Mainly Controlled by Large Holding Conglomerates

Dedic ated Mar itime Container Ter minals

APM Terminals Dubai Ports World Hutchison Port Holdings Port of Singapore Authority Eurogate Stevedoring Services of America

Major Port Holdings, 2007

Pacific Asia Europe

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 That are Following a Value Capture Strategy

Port Authority

Maritime Services

Port Services Inland Services

Port Holding Horizontal Integration / Vertical

Vertical Integration

Maritime Shipping

Port Terminal Operations

Inland Modes and Terminals

Distribution Centers

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Commodity Chain

Where the Going Gets Tough: The Last Mile in Freight Distribution

Massification

Atomization
Frequency Capacity

GLOBAL Shipping Network

HINTERLAND REGIONAL LOCAL Corridor Segment Inland Terminal Distribution Center

Customer Last Mile

Gateway

27

The China Effect and Global Commodity Chains

Debt and the Currency Leverage Game Production and Distribution Dislocations Shift in the worlds commercial balance

28

Empty trucks waiting to enter China, Hong Kong

The China Effect is Mainly About Low Manufacturing Wages

Major Components to Price Reductions by the Chinese Manufacturing Sector, 2005
Lax Environmental Regulations Lax Health & Safety Regulations Foreign Direct Investments Counterfeiting & Piracy Undervalued Currency Industrial Network Clustering Export Industry Subsidies & Preferences Wages 0%
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2.3% 2.4% 3.1% 8.6% 11.4% 16.0% 16.7% 39.4% 10% 20% 30% 40% 50%

 as Well as the Largest Buyer Financing Scheme in History

USD

$ for goods Unemployment

Interest Rates

Investment

Goods Bonds (IOUs)

Borrowing

Reserves

$ for bonds

Asset Inflation Debt

China 30

USD

United States

 Where Exchange Rates were Used as Leverage

Yuan Exchange Rate ( per USD) , 1981-2007
9 8 7 6 5 4 3 2 1
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

Yuan per USD Real per USD

Export Oriented Debasement

Discount Window Closing of the Discount Window

0
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Integrating Commodity Chains into Containerized Supply Chains

Maritime Shipping Networks Containerized Commodities Cold Chain Logistics

32

Emma Maersk, 12,500 TEU, Rotterdam, Netherlands

The Three Major Corridors of Maritime Circulation Three Major Pendulum Routes Serviced by OOCL, 2006
Atlantic Express (ATX)
Oakland Los Angeles New York Norfolk Charleston Hamburg Le Havre Rotterdam Southampton Fos Genoa Barcelona

South China Express (SCX) European Union / Mediterranean (EUM)

Kaohsiung Hong Kong Laem Chabang Singapore Port Kelang Tokyo Ningbo Shanghai

27 Days

39 Days

49 Days

Note: Paths are approximate

Three Major Pendulum Routes Serviced by OOCL, 2006

European Union / Mediterranean (EUM) South China Express (SCX)

Atlantic Express (ATX)

Origin Southampton New York Norfolk Charleston Rotterdam Hamburg Le Havre

Destination New York Norfolk Charleston Rotterdam Hamburg Le Havre Southampton

Transit Time (days) 8 2 2 10 2 2 1

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Note: Transit time includes port time

Origin Port Kelang Genoa Barcelona Fos Singapore Hong Kong Shanghai Ningbo Shekou Hong Kong Singapore

Destination Genoa Barcelona Fos Singapore Hong Kong Shanghai Ningbo Shekou Hong Kong Singapore Port Kelang

Transit Time (days) 14 2 2 15 4 2 2 2 1 4 1

Origin Tokyo Kaohsiung Shekou Laem Chabang Singapore Kaohsiung Los Angeles Oakland

Destination Kaohsiung Shekou Laem Chabang Singapore Kaohsiung Los Angeles Oakland Tokyo

Transit Time (days) 4 1 4 3 3 11 4 9

Source: OOCL Web Site

 Which Implies the Emergence of Global Trade Highways

Eq

ua to

North American Landbridge Eurasian Landbridge Arctic Routes

Circum-Equatorial Maritime Highway

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The Potential of Containerization of Commodities

For bulk transport
Economies of scale confer a net benefit. Specialization:
Low utilization levels and time delays for the assembly of loads. At most 50% due to empty backhauls, but much lower in reality.

Containerization:
Flow concept; lower transshipment costs. Its own warehouse unit. Faster distribution (extending the realm of perishables). Levels the playing field, particularly in view of established commodity shippers. Respective benefits for bulk and container carriers. Handle variety requirements.

35

Rise in commodity prices makes them increasingly suitable for containerization.

 Where Each System has its own Advantages

Bulk (Grain, Oil) Driving force Mode of shipment Flows Cost / Volume Large output Specialized Containerized Time / Flexibility Small shipments Mixed

Terminals
Markets
36

Dedicated
Mass

General Container
Niche

 Will Likely See the Emergence of a Complementarity

Bulk Commodity Chain
Supplier Port Point-to-Point Customer

Consolidation center

Complementarity
Container port Pendulum Services

Intermodal terminal

Containerized Commodity Chain 37

Commodities are more Containerized than Expected

US Containerized Trade, 2003

25,000 20,000 15,000 10,000 5,000 0 Total
38

Food Consumer products Technology products Capital equipment Raw materials

Thousand TEU

Imports

Exports

 Leading to the Setting of New Containerized Commodity Chains

Shipping Time between Bulk Handling and Containerization (Canadian Wheat)
Bulk Handling System Farm storage Local delivery Primary elevator Rail hopper cars Export terminal Bulk ship Import terminal Local delivery Final customer
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Days Start 1 40 11 19 15 10 1 End 97

Container System Farm storage Local delivery Intermodal terminal Double stack train Container port Containership Container port Local delivery Final customer Total

Days Start 1 2 2 2 11 2 1 End 21

Total

What Could be the Impacts on Commodity Markets?

Containerization and commodity markets
Futures / forward contracts are often conditioned by the capacity for delivery. What would be the impacts of containerization on this market structure?
A contract could involve the allocation of containers.

What type of price discovery this would entail. From futures to spot markets? Transportation flexibility will increase financial flexibility.

40

Cold Chain Logistics is Getting Increasingly Reliable

"Banana" Pharmaceutical Chill
Frozen Deep Freeze Pharmaceutical Chill "Banana"

Frozen

Degrees Celcius Deep Freeze

-20 -10 0 10 20

-30

Potential integrity breach Temperature Range

Temperature Time

Potential integrity breach

41

Transport

Unloading Warehousing Loading Transport

Conclusion: Commodities on the Move

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 Adapting to a Challenging Environment with many Opportunities Global trade

Imbalances and dislocations.

Global commodity chains

Added value and value capture.

The China Effect

Trade and financial process.

Containerized commodity chains

Opportunities to rectify imbalances. Setting of new commodity chains.

Global prospects
Positive for commodities. New markets and investment opportunities.
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