A 3rd Update on West Coast International

Trade Economics

Pacific Northwest Waterways AssociationAnnual Meeting

June 28, 2011

Coeur De Alene

Thomas J. McCollough, P.E.Moffatt & Nichol

Special Thanks

Dr. Walter Kemmsies, Chief Economist

• 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

Moffatt & Nichol Background

American Society of Civil EngineersJohn G. Moffatt – Frank E. Nichol

Harbor and Coastal Engineering Award

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

Take-Aways

Recovery is proceeding “as planned”, a bit early for an “all clear”Sustained World economic recovery depends on the USReal estate-exposed sectors will take a few more years to recoverInflation and government debt are a risk but not immediately

Long term concerns could be lessened by more balanced tradeUS needs to increase exports and reduce oil dependencyChina needs to withdraw from market interventions

Positive outlook for agricultural exports but avoid euphoriaEnergy costs are an issueNeed more action and less discussion

GDP Growth In Developed and Emerging Markets

• China and India are carrying the load by investing in infrastructure

Developed Economies Are Struggling…

-12%

-10%

-8%

-6%

-4%

-2%

0%

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6%

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12%

Mar

-08

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08

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-11

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United StatesCanada

Euro Area

United KingdomJapan

-12%

-10%

-8%

-6%

-4%

-2%

0%

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4%

6%

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12%

Mar

-08

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08

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Mar

-10

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-11

Jun-

11

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ChinaIndiaUnited StatesMexicoBrazil

… China and India Are Leading

World Economy StrainsTo Recover Without The US

• The US accounts for 25% of World GDP• US consumers account for 70% of US GDP, or 17.5% of World GDP• US population accounts for 4% of the world

US Consumer Spending and Global Real GDP Growth

-8%

-6%

-4%

-2%

0%

2%

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6%

8%

10%

1980

1981

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2011

World GDP US Consumer

World’s Major Economies

Country Millions Share Rank Current $ Rank PPP RankUS 310 4.5% 3 47,284$ 9 47,284 7China 1,341 19.7% 1 4,382$ 93 7,519 94Japan 127 1.9% 10 42,820$ 16 33,805 25Germany 82 1.2% 15 40,631$ 19 36,033 20France 63 0.9% 21 41,019$ 18 34,077 24UK 62 0.9% 22 36,120$ 22 34,920 22Brazil 193 2.8% 5 10,816$ 53 11,239 71Italy 60 0.9% 24 34,059$ 23 29,392 29Canada 34 0.5% 36 46,215$ 11 39,057 13India 1,216 17.8% 3 1,265$ 134 3,339 126Russia 140 2.1% 9 10,437$ 56 15,837 52

Population

World’s Major Economies

Country Millions Share Rank Current $ Rank PPP RankUS 310 4.5% 3 47,284$ 9 47,284 7China 1,341 19.7% 1 4,382$ 93 7,519 94Japan 127 1.9% 10 42,820$ 16 33,805 25Germany 82 1.2% 15 40,631$ 19 36,033 20France 63 0.9% 21 41,019$ 18 34,077 24UK 62 0.9% 22 36,120$ 22 34,920 22Brazil 193 2.8% 5 10,816$ 53 11,239 71Italy 60 0.9% 24 34,059$ 23 29,392 29Canada 34 0.5% 36 46,215$ 11 39,057 13India 1,216 17.8% 3 1,265$ 134 3,339 126Russia 140 2.1% 9 10,437$ 56 15,837 52

Population GDP per Capita

Growth Driven By Investment

Composition of China’s GDP: 1995 - 2010

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90

1992

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ChinaIndiaMexicoSaudi ArabiaWorldJapanBrazilUnited StatesGermany

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Recession Consumer Confidence Index Unemployed

High Unemployment, Low Consumer SentimentConsumer Sentiment and Unemployment Indexes

-600

-400

-200

0

200

400

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800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-

10

Feb-

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-10

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Jul-1

0

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Mar

-11

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Private

Non-farm

Federal

State

Local

Accumulated Payrolls in thousands

Private Sector Has Led Employment Recovery

• Private sector efforts were offset by public sector cutting 400K jobs

Changes In Employment Levels in 2010 By Sector

Home Prices Still “Correcting”

• Home sales levels have stabilized by falling prices and low financing costs

US Home Prices and Consumer Price Index

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FHFA Home Price Index CPI Home Sales

Delinquencies Have Peaked – Inventory Remains High

Mortgage Foreclosures and Delinquencies

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92

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7

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98

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-01

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8

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Billi

ons

of D

olla

rs

Retail Sales Inventories Industrial Production (right axix)

Retail Sales Recovering – Production, Inventories Lag

• Retail sales above December 2007, driven by replacement purchases • Slow inventory rebuild due to poor home sales and cautious managers

Retail Sales, Inventory and Inventory-to-Sales Ratio

0

500,000

1,000,000

1,500,000

2,000,000

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3,500,000

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05M

ar-0

6Ju

n-06

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c-06

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p-07

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ar-0

8Ju

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ar-1

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n-10

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c-10

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11Se

p-11

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11

Index Total Total Loaded Exports Empties

+14.2%

+10.7%

+15.2%

+5.2%

+27.1%

US International Container Trade Trends

• 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

Monthly TEU Volumes – 12 Largest US Ports

235 247 247

263

295

317

294

331

56 60 65 72

84 96

87 97

178 187 182

191

211 220

207

235

0

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100

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350

2003 2004 2005 2006 2007 2008 2009 2010

Total Containerized Not-Containerized

Millions of Metric Tons

US Non-fuel Export Trends

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

Non-fuel Exports By Weight By Type Of Vessel

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)

Economic Outlook for Major Trade Lane Economies

-10%

-8%

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-2%

0%

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1998

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2020

US Europe Nort Asia South Asia South East Asia

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

Real GDP Growth (year on year) By Major Trade Lanes

Source: International Monetary Fund, US Department of Commerce, Moffatt & Nichol

US recession risk in 2011

Oil Consumption Trends 1965 - 2009

• 8 million barrels of crude oil were consumed daily in 2010• Since 2008 Emerging Markets consume more oil than Developed Economies

Crude Oil Consumption

Source: UN-ILO, Business Monitor, Moffatt & Nichol

$0

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Mill

ions

of B

arre

ls P

er D

ay

Developed Economies Emerging Markets World WTI Annual Average (right axis)

Proportion of Population Above 55 Years of Age

The World’s Population Is Aging

0%

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1990 2000 2010 2020 2030 2040 2050

Japan

Europe

China

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Brazil

Mexico

India

-$80

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$20

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Goods Balance Services Balance

Billions

Unsustainable Trade Deficit

• 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

US Trade Balance Components: 1992 -2010

Source: US Census Bureau

45% of the trade deficit is due to petroleum imports

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

America Is The World’s Bread Basket

• Lack of investment in inland waterway infrastructure is a significant bottleneck

Shares and Containerization of US Grain Exports Shares of US Grain Exports

Port 2003 2004 2005 2006 2007 2008 2009 2010 GainColumbia-snake 16% 19% 18% 16% 17% 19% 19% 18% 1%Los Angeles, CA 0% 0% 1% 1% 2% 2% 2% 1% 1%Minneapolis, MN 0% 0% 1% 2% 3% 1% 1% 2% 2%New Orleans, LA 59% 53% 50% 53% 50% 45% 51% 48% -7%Norfolk, VA 0% 0% 1% 1% 2% 2% 2% 1% 1%San Francisco, CA 1% 1% 1% 1% 1% 1% 2% 1% 1%Seattle, WA 5% 9% 10% 9% 8% 10% 9% 10% 2%

Containerization of Grain Exports By PortPort 2003 2004 2005 2006 2007 2008 2009 2010Total All Ports 1% 2% 2% 3% 4% 5% 5% 3%Columbia-snake 3% 2% 1% 5% 5% 3% 3% 1%Los Angeles, CA 32% 88% 76% 81% 80% 77% 91% 93%Minneapolis, MN 0% 0% 0% 5% 0% 0%New Orleans, LA 1% 0% 0% 0% 0% 0% 0% 0%Norfolk, VA 8% 14% 3% 3% 5% 10% 14% 8%San Francisco, CA 26% 32% 42% 46% 60% 68% 61% 53%Seattle, WA 1% 3% 7% 12% 14% 8% 4% 4%

Rail Replaces Inland Waterways

• Rail can handle agriculture exports in place of the inland waterway system

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

Currency Trends Are Generally FavorableUS Dollar Exchange Rate Indexes

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Emerging Markets

Broad

Developed Markets

China’s Currency Policy Is A Global Economic Risk

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920

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Yuan Per Dollar

Yuan Per Real

Real Per Dollar

Exchange Rates Between US$, Chinese Yuan and Brazilian Real

Summing Up...Recovery is proceeding “as planned”, a bit early for an “all clear”

Sustained World economic recovery depends on the USReal estate-exposed sectors will take a few more years to recoverInflation and government debt are a risk but not immediately

Long term concerns could be lessened by more balanced tradeUS needs to increase exports and reduce oil dependencyChina needs to withdraw from market interventions

Positive outlook for agricultural exports but avoid euphoriaEnergy costs are an issueNeed more action and less discussion

Questions & Comments

Contact Information:

Walter Kemmsieswkemmsies@moffattnichol.com

Tom McColloughtmccollough@moffattnichol.com

www.moffattnichol.com