20/20 On 2010

     Over the past two decades, fuel costs have remained relatively low, accounting for between 10 and 30 percent of operating costs, depending on transportation modes. When oil prices began their sharp rise in 2007, the freight industry woke up to a new reality. Petroleum’s supply curve, reflecting the end of cheap oil and its replacement by expensive sources, such as deep-sea exploration and tar sands, suggests a medium-term equilibrium price of around $70 to $80 per barrel. Of course, excessive speculation and political disruptions in sensitive countries or along critical shipping lanes could lead to spikes well above that level.
     In addition, the Obama Administration’s commitment to eradicate global warming may give full global momentum to the carbon-trading mechanisms described in the Kyoto Protocol. The EU has expressed hope that its Emissions Trading Scheme (ETS) after 2012 will include all greenhouse gases and all sectors, including aviation and maritime transport.
     Although polluting rights were initially given to companies for free, the EU may auction up to 60 percent of the next allocations. It is a safe bet that the value of a ton of carbon will rise substantially. Once the current excess capacity is absorbed, the combination of higher fuel costs and carbon permits will have a substantial impact on carriers.
     Assuming a global application of carbon permits, we estimate that at $70 per barrel of oil and $42 per ton of carbon fully auctioned, air and ocean carrier costs would rise by 6 percent and 4 percent, respectively. At $100 per barrel and $70 a ton, those costs would rise by 14 percent and 6 percent, respectively.

     Deregulation of the transportation industry began with the 1980 Staggers Act in the U.S., which led to the revival of the U.S. railroads. This was soon followed by deregulation of the aviation, road and maritime industries in the U.S. In Europe, the creation of the single market led to a defragmentation of these same industries. At the same time a wave of privatization, starting in the United Kingdom and spreading to the rest of Europe and Asia, led to deep restructuring and improved efficiency among airlines, ports, airports and to a smaller extent railways.
      These productivity gains have substantially transformed the transportation industry.
     Looking forward, there is still progress to be made, particularly in aviation (with “open skies” regulations), European rail and some emerging countries, but the major advances are mostly behind us. While pessimists may argue that we are entering an era in which more interventionist governments will turn back the clock, there seems to be recognition across the political spectrum that the gains of deregulation were positive and should not be discarded in the name of political expediency. Future regulation will likely focus on sustainability more than industry structure.
     Structurally, the main trend in the freight industry has been horizontal integration, namely mergers and acquisitions among competitors and overlapping or complementary networks. In container shipping, for example, Maersk acquired rivals Sealand, P&O Nedlloyd and Safmarine. Other deals include CMA’s purchase of CGM and NOL’s acquisition of APL. In 2000, the top eight container shipping lines accounted for 37 percent of global capacity. Today that number is 54 percent.
     Consolidation also resulted in the formation of global container port companies, in particular Dubai Ports (which includes the acquisition of P&O Ports), PSA and Hutchison Port Holdings.
     In air, the trend is still hampered by bilateral regulations, but that has not stopped the merger of Air France and KLM, the acquisition of smaller carriers by Lufthansa, the long merger discussions between British Airways and Iberia, and interest from Middle Eastern carriers in European ones. Global airport groups have also been formed.
     In parcels, DHL has built its European road network, as has TNT. The GeoPost group was formed from various DPD franchises. In rail, the number of Class I railroads in the United States has consolidated into just five. In Europe, Deutsche Bahn Cargo has acquired the incumbent cargo railways in Denmark, the Netherlands and the United Kingdom, and other rail freight operators in Spain, Switzerland and Italy.
     A few giant operators led by DHL, Schenker, Kühne & Nagel, Panalpina, Expeditors and a few others, although still fragmented, now dominate the freight forwarding industry.
     Vertical integration, upstream or downstream into other components of the same value chain, has occurred but not as often as horizontal integration. For example, some ocean carriers increased their “retail” capabilities by reducing their reliance on forwarders and offering a door-to-door product. They integrated into port terminal operations and inland road and rail transport. Others, mostly air carriers, have tried to emulate integrators by creating different classes of products and forming partnerships with forwarders. However, carrier and forwarder fragmentation has made it difficult to offer truly “integrated” products, particularly on the air side. Different information systems, multiple networks and the fear of alienating other partners have proven to be substantial hurdles.
     “One-stop-shop” integration—offering a broad range of more or less related services— went through a new wave after the dismantling of the P&O and Nedlloyd transport conglomerates. However, synergies proved too elusive for a number of these groups, and the jury is still out for others. In most cases, there is little overlap between traditional freight forwarder volumes and rail cargo (except in North America, where intermodal freight is big business), and between project-based contract logistics and freight forwarder activities.
Gordon Feller

20/20 On Asia Growth Engine

In 2010, Asia will again be the growth engine of the world economy, with Chinese domestic demand as an important pillar of the recovery. Expect to see a further rise of domestic demand in China this year. However, it's unrealistic to think that Chinese consumers alone can save the world.
     Many observers predict that Asia will again perform better than the rest of the world in 2010. But can it meet those expectations? Unlike most Western countries, the Asian economies haven’t suffered structural damage in their banking system. They certainly have been hit by the financial crisis, but not as severely as Europe or the United States. Asian banks' balance sheets are healthy and consumers are underleveraged.      That's why the region can recover more quickly than the western world, with more solid growth. This process will go on in 2010.
     There are mainly three reasons. The first is China. China has proven that the government is willing and able to stimulate its own economy quickly and that its growth proved to be very fast. Besides China, keep an eye on India and Indonesia – both economies where the banking system has been largely unaffected by the crisis. The second story is the rebounding of exports. By no means will Asian exports be as strong as over the past ten years, but some rebound seems to be taking place. And third, Asia is still a Dollar zone and it therefore benefits from the very loose U.S. monetary policy. The excess liquidity situation is likely to remain.
China has domestic demand, it has a functioning banking sector, which is absolutely willing to lend. And Chinese consumers are underleveraged and are willing to spend. Combining these three factors, the Chinese economy is doing quite well, but even so it is not going back to the kind of double-digit growth that it posted between 2003-2007. That growth phase was mainly driven by China joining the World Trade Organization (WTO) and the housing boom. For the moment, analysts are not seeing such a new ‘super factor’ emerging. It is doubtful that China can get back to sustainable double-digit growth any time soon. But it will still be able to keep its growth between 8 and 10 percent of GDP this year and next year, which is fairly good by global standards.
     As U.S. consumers save more, the Chinese export industry has to look for new markets. Chinese domestic consumers will step in to fill the gap. The boom will not come from the Chinese export sector, although this sector will see some recovery. The current crisis not only marks the end of American consumerism lifestyle, it marks also the end of Asia’s export story. Unless U.S. consumers deleverage, Asia in general will need to find new customers to sell to.
     The new customer is China. Last year, there were more cars sold in China than in the U.S. That's quite amazing: about ten years ago, the Chinese bought less than one tenth of what the Americans were buying.      Again, it's unrealistic to think that Chinese consumers alone can save the world. They can save their own country, ease some of the recession pains in the region and probably provide some demand momentum for machinery and commodities. But be realistic: The Chinese economy is only about one third of the U.S. economy. China won't be able to lift the entire world out of the recession.
     There are two things that China needs: commodities and machinery. China is in the midst of a massive urbanization process. It is building two cities of the size of Boston every year. Forty percent of the steel and the cement produced in the world are used by China. On the other hand, China is also conducting massive infrastructure investments, which drives its demand for machinery. This benefits countries like Japan, Korea and Germany.
     Other than some very common characteristics such as the size of the country, a large population and a long history, India and China are two different animals. What China has, India doesn't – and vice versa. Consider the execution ability of the government, the infrastructure and the strength of the export sector: China is well ahead of India. But, in the realm of demographics, India looks better than China. On the other hand, India does have an inflation problem, which is bigger than in most other countries of the region.
     India also has a problem with its budget deficit. In the short term the country will not find its way back to budget discipline. It’s rather a long-term problem. China had a deficit as well during the 80s and 90s. But they managed to grow the economy big enough to get out of it. For India, this would be the more constructive way of dealing with its fiscal deficit. Of course, the government is also taking action to trim down the deficit, but overall, the deficit problem will stay with India in the foreseeable future. At the same time, this fiscal constraint makes it impossible for India to put on a stimulus program of the size of the Chinese.
     As exports start to rebound, the export-oriented countries in Asia will benefit from that. Others, like Hong Kong or Singapore, will profit from the excessive liquidity in the money market. But obviously there are some risks. If the U.S. falls into a double dip recession, many export sectors will get hurt. Also, if the financial markets are reversing the current trend, especially if the dollar starts to trigger the carry trades to unwind, Asia's growth prospects could be undermined more than in many other parts of the world.
     The biggest risk for Asia however – especially in the fast growing economies – is coming from inflationary risk. That risk is asymmetric: China and India are more exposed to inflationary risk than the other countries of the region. So far, none of the Asian countries has raised interest rates. However, some of the region’s central banks have sent a message to the market that they may do something. But for the time being, not much of concrete action has been taken in normalizing monetary conditions. China and India will likely start normalizing interest rates in the second half of the year. But Asian rate hikes are likely to only have a limited impact: ultimately, it’s the Federal Reserve, which to a great extent is controlling the magnitude of monetary liquidity.
Gordon Feller

20/20 On Middle East And Africa

      Africa and the Middle East will emerge from the recession in 2010. Rising commodity prices and increased demand for their exports will fuel the region's economic growth,
      Emerging markets show much greater growth potential than the developed world. Is this assertion also true with regard to the Middle East in 2010? The downturn in four key countries in the region - Kuwait, Saudi Arabia, Qatar and the United Arab Emirates (UAE) - was not as dramatic as that seen in other emerging markets -- such as Russia and Turkey in 2009. Nevertheless, these four countries fared quite differently from each other: in 2009, the UAE contracted the most at an estimated 3% and Kuwait by 1.3% - worse than the global contraction forecast of 0.8%. On the other hand, Saudi Arabia probably averted the recession and grew 0.5% while Qatar stood out with an impressive (projected) growth rate of 7.3%.

       In 2010, these countries should benefit from the rebound in global demand and the increase in oil prices. But the recovery dynamics will be somewhat different across these four countries just as their experiences during the downturn were different from each other. Some now forecast growth rates in Saudi Arabia, the UAE and Kuwait to range between 2.1% and 2.6% in 2010, below the expected global growth rate of 4.3%. On the other hand, expect Qatar to nearly double its growth rate to 14.2% in 2010, remaining one of the world's fastest growing economies. Qatar's economy is buoyed by the expansion of its natural gas sector.
      What is in general driving the economies of these four Gulf countries? The region's economic performance is still heavily contingent on oil prices and oil production. Since the onset of the global crisis, the oil output quotas of the OPEC members have been reduced, in an effort by the cartel to stabilize the global oil market. So, now, rising oil prices and stabilizing/increasing oil production should have a positive impact on the region's 2010 growth.
      Non-oil GDP growth will also likely pick up in 2010. Governments in these oil-exporting countries, notably Saudi Arabia and the UAE, were able to increase public spending in order to support non-oil GDP growth in 2009. One can expect the government's stimulus measures to support the rebound in non-oil GDP growth in 2010, but non-oil GDP growth will likely remain below the average observed during the boom years of 2003-2008.
      One can reasonably expect Qatar to remain one of the fastest growing economies in the world, but it is also one of the smallest economies in the EMEA (Eastern Europe, Middle East and Africa) region. Saudi Arabia is the fourth largest economy in the EMEA region and is a member of the G-20, but its forecast growth rates in the next couple of years is either lower or in line with the regional average now being forecast.
      Oil prices are forecast to continue to rise in 2010. In macro forecasts, the average global oil price assumption for both 2010 and 2011 is 80 dollars per barrel. The OPEC in late 2009 gave a strong indication that it wants to maintain oil prices between 70 to 80 dollars per barrel.
      The region's dependency on oil an issue, at least in the medium to longer term. This is why there has been an increased focus on the non-oil GDP growth during the boom years of 2003-2008. The governments of the four oil-exporting countries have made efforts to diversify their economies; expect this focus to continue.
      One recent study looked at the longer-term growth potential of the 6 GCC countries (Gulf Cooperation Council comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE). In this study, it was assumed that the GCC countries will continue to invest a large proportion of their oil revenues into non-oil sectors such as education, health care or infrastructure in the coming years. Only under this scenario, the GCC countries will be able to maintain respectable overall GDP growth rates of 4%-6% in the next decade.
      The financial problems vexing Dubai are real, but the emirate is too small to matter for the broader regional economic prospects. Its economy accounts for about 8% of the GCC's overall GDP and about 2% of the overall GDP of the EMEA region. Nevertheless, the announcement by Dubai World – a state owned conglomerate – on 25 November that it would request a debt standstill from its creditors was a reminder that the global economy is still working its way out of the credit crisis of 2008 and the Great Recession of 2009.
      The moderation in cross-border funding and the decline in domestic asset prices have exerted pressure on the balance sheets of those banks that have borrowed externally and were exposed to the property and equity markets in the region. However, the authorities responded appropriately to the deterioration in the banking sector through liquidity and capital injections, and the banks seem to have absorbed the shock. But regulators will have to remain vigilant. Recent developments have highlighted growing interlinkages between the region's various state conglomerates and the region's banking sector. There is an overall need for increased cooperation between the regulators of the region to maintain and even enhance the credibility of the region's banking system.
      Bahrain, Kuwait, Qatar and Saudi Arabia have announced plans to launch a common currency. There is talk that currency might be introduced during the course of 2010. Others thinks that it’s reasonable to expect some progress in 2010 towards a common currency, but a common Gulf currency is probably still many years away. The central bank governors of these four countries will be meeting up shortly to start preparations for the GCC monetary authority. Once the monetary authority is established, it will be mandated to establish a fully-fledged central bank which will start the preparations for the currency union. But there is no official time frame.
      Countries on the African continent with stronger linkages to the international capital markets -- such as South Africa and Kenya -- were the first ones hit by the global financial crisis, through an adjustment in their exchange rates. But as the financial crisis evolved into the Great Recession of 2009, the fall in commodity prices and the weakening external demand for commodities led to a broad-based slowdown on the continent.
      Nevertheless, some African countries such as South Africa had the capacity to implement countercyclical policies, which supported domestic demand. With the recovery in commodity prices and the global economic activity, Africa's economic outlook has also improved recently.
      Africa's economic outlook depends to a large extent on global developments such as commodity prices, external demand and availability of cross-border credit. But growth on the continent will also continue to be underpinned by improved macroeconomic policies, lower public debt, as well as a reduction in political conflicts.
South Africa and Nigeria will benefit from the improvement in global economic activity, higher commodity prices and buoyant domestic demand growth. In South Africa – the continent's largest economy –the growth rate is likely to be rebounding to 2.7% in 2010 from a contraction of 1.8% in 2009. Nigeria should grow by about 6.5% in 2010 compared with 5.3% in 2009.
      Nigeria's 2009 growth was driven by a very strong harvest and quite buoyant retail and wholesale trade sectors. Another growth factor is the improved security situation in the Niger Delta, with the ceasefire agreement between the government and the militants in effect since mid-2009. Early 2010 saw a marked deterioration of the security situation in the Niger Delta – but continuing buoyancy of domestic demand will push growth higher in Nigeria in 2010.
      South Africa’s economy has already been benefiting from the investment spending aimed at preparing the country for the 2010 World Cup. This investment spending program has been at the core of the government's expansionary fiscal policy. However, in addition to the expansionary policies, developments in the global economy in 2010 will also support the South African economy.
      South Africa will benefit from the strong recovery in non-Japan Asia, which is the country's main trading partner and absorbs nearly a third of its exports. South Africa's non-oil commodities such as platinum, copper, iron ore, nickel and coal will also spur its growth. All of these commodities are likely to benefit from increasing prices in 2010.
      The country's high unemployment rate does, however, remain a big challenge for the South African government. The unemployment rate declined to 21% in 2007, but was about 23% on average during the boom years of 2003-2008. Expect it to decline from a projected 24.5% in 2009 but stay above 20% in the foreseeable future. There are structural reasons behind this high unemployment rate.
Gordon Feller

Valentines Flower Air Cargo

     Now comes the time of year when the favorite story is who flew how many flowers just in time for the romance of Valentine’s Day (Sunday February 14) or upcoming Eastertide on Sunday April 4, 2010.
     As example, here are the Germans leading the romantic rush to endless love while hoisting some 500 tons of roses to Germany in times for Valentine’s Day.
     The flowers on wing from Kenya, the main countries where roses are grown also arrive from Colombia, Ecuador and Ethiopia.
     Ever mindful of the green nature of things these days, Lufthansa is quick to point out that despite the air transport involved, cultivating roses in Kenya produces less CO2 than growing them in greenhouses in Europe.
     So everybody can pause, take a deep breath and smell the roses.
     So it probably is no coincidence that as Valentine’s Day dawns from time to time in Amsterdam at Schiphol International Airport have appeared some artistic treasures of Vincent Van Gogh including the immortal "Sunflowers" painting.
     "Van Gogh and The Modern Masters" comes to mind as an exhibition that ran in 2004.
     At the center of the presentation Vincent’s famous Self-Portrait of 1887, was accompanied by seven paintings by renowned Dutch contemporaries from the Amsterdam Rijksmuseum collection, including Breitner, Israëls, Toorop and Witsen.
     But if flowers are at the heart of it, why not venture down the road a few klicks and see the inspiration for these Dutch masters for yourself, where the mother lode, the largest display in the world resides.
     Located near Amsterdam in the Netherlands, the Keukenhof is a magnificent display of color, created by more than 7 million tulips and other bulbs in bloom.
     If you are in the flower shipment business, or are thinking about getting into it, here is the place to ponder your future surrounded by the product in all possible glory.
     The Keukenhof is in a word, inspirational.
     The area now occupied by Keukenhof was covered in forests and unspoiled sand dunes in the 15th century, when the land belonged to one guy named Jacoba van Beieren.
     People hunted on the land and came to gather herbs for the castle kitchen, which explains how the area got its name.
     Keukenhof in Dutch means kitchen garden.
     Around 1830, the landscape architect Zocher was invited to design a garden. He was inspired by the English style of landscaping and he designed the basis for the present park.
     The idea of holding an open-air exhibition of flowers as a shop window for the bulb industry originated in 1949, with a group of flower bulb growers and exporters.
     These "Royal Warrant Holders", numbering 90 in total, make sure that the best and most beautiful flowers are exhibited, making this a display case for ornamental plant cultivation and flower bulbs in particular.
     This year 2010 (open March 18 until May 16) is the 61st time the largest spring flower exhibition in the world is organized.
www.keukenhof.nl

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