Post on 15-Apr-2017
transcript
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TOC Asia Singapore, Marina Bay Sands, 20-21st April 2016
ADAPTING TO THE ‘NEW NORMAL’:
CHINA’S SLOWDOWN & THE
IMPACT ON CONTAINER SHIPPING
Dr Jonathan Beard, Vice President, ICF
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Market Share (by Capacity), LH Axis HHI (cumulative), RH Axis
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Container Shipping Industry – Demand Remains SubduedStructural and Cyclical Factors at Play
Over the medium term world trade growth &
“container trade multiplier” has fallen.1990-
99, container volumes grew 3.5x rate of
global GDP growth; 2000-09 only 2.7x GDP
growth; average GDP-to-trade multiplier of
~1.2 since 2010
2015 H1 global merchandise trade (incl.
non-containerised) fell 13% yoy
Sources: ICF based on World Trade Organization (WTO) and
National Bureau of Statistics China
Cyclical and structural reasons for slowdown:
- Economic uncertainty in Europe, US recovery
relatively strong
- Slowing pace of trade liberalisation
- China (fastest growing & 2nd largest economy)
slowing down: Q1 yoy 6.3%, quarter over
quarter 1.1%...
- …and restructuring away from dependence on
export growth….
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China Re-Balancing – Soft or Hard Landing?Long-term constraints & challenges – re-balancing growth will take time
Rebalancing the Economy
− Infrastructure pump prime is increasingly
played out - returns on capital are diminishing
− Rationalisation of capacity without mass
unemployment? Capacity utilization:
Steel industry 50%, 2015 (~400mil of ~800mil
tonnes pa output)
Cement industry 50%, 2013
Impetus for Belt and Road?
Source: IMF October 2013; Gavekal Dragonomics
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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
− Consumer cannot replace demand over-night - last
decade accounted for small and declining share of
GDP: ~35-36% of GDP.
− Growth of shadow banking and debt overhang?
− Geographical re-balancing also slowing: e.g.
property markets: Shenzhen & Shanghai up +50%;
but smaller cities still struggling with a property glut
Household Debt as a percentage of GDP
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China Re-BalancingDemographics and supply chain re-alignment may suppress trade growth,
but strong upside for agricultural trades
Demographics – labour force has peaked. Will “China grow
old before it gets wealthy”?
- Easing of one child policy may be too late…and can couples
afford it anyway? By 2050 24% of population >65yrs (9% 2015)
Access to resources: water, but also demand from a growing
middle class for imported foodChina’s employed
workforce(million)
Sources: Global Demographics; Department of Statistics, Ministry of Interior, Republic of China.
IMF 2013 and 2014; Australian Bureau of Agricultural and Resource Economics and
Sciences
China producing more semi-
manufactured products – “taking
in more of the supply chain”
- More of China’s manufacturing is
taking place within county: share of
imported components in exports fell
from 60% in 1990s to 35% in 2010s,
depressing trade.
Urgent need to address
environmental degradation and
pollution…
China’s imports of selected agricultural
commodities
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China’s New Normal - Delivering Sustainable Economic GrowthCan high economic growth be delivered whilst addressing environmental degradation & pollution?
China is way ahead of many developing countries in its
environmental policy formulation….and considerably
ahead of any developed economies at similar stages of
development
However the challenges are immense:
– Illnesses and premature deaths linked to China’s pollution cost about 3% of annual GDP (World Bank)
– Bad air contributes to an estimated 1.6 mil deaths a year; ~4,400 people per day
– Firms struggle to fill executive roles. 34.9% of firms in 2013, 48% in 2014, 53% in 2015 (Bain; Amcham China)
Source: www.chinadialogue.net
China’s PM2.5 historical data
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What About “Belt and Road”?Game changing driver of globalisation….or poorly conceived dumping of surplus capacity?
Ambitious plan by Beijing leadership to
build and upgrade highways, railways,
ports, and other infrastructure
throughout Asia & Europe designed to
enrich the economies of China &
~60 of its nearby trading partners.
Has generated enthusiasm and a high
level of interest, but also cynicism and
concern.
Some see the initiative as a solution to
China’s over-capacity at home (e.g. in
the steel & manufacturing sectors) by
accessing / investing in new markets
overseas.
May have significant economic impacts for the smaller economies in central Asia, but less so elsewhere
Funding has been primarily loans rather than grants, and not without “white elephants” / vanity projects of
local politicians – beware the experience of Sri Lanka, now seeking IMF assistance.
Is already influencing investment
decisions by China backed
transportation firms:
“Our development plan mirrors One Belt One Road and this is the
primary driver of our expansion strategy. We continue to look for
more partners to work with overseas.” Bai Jingtao, Managing
Director at CMHI, Mar 2016
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A Subdued China (& Global) Growth Engine
Means Liner Focus on Costs Continues
Global Spot Freight Rates Average vessel load factor
FE-US route
FE-Europe route
Source: Shanghai Shipping Exchange; Shanghai
Containerised Freight Index; Alphaliner; ICF
Growth of Container Ship Capacity and Demand, 2000-16
$/FEU Subdued demand growth and
declining unit revenues….
Reduce unit costs, including via
mega-vessels, but this has
exacerbated the supply-demand
gap and depressed utilisation
levels (and hence revenues)
Situation will prevail for the
medium terms, during which
profitability and sustainability
relies on further cost reductions
and potentially M&A activities
Line’s will be ever more focused
on mainline network costs
Ports and Terminals will
continue to face downwards
pressure on revenues and
demands for higher service
levels (faster turnaround)
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And Financial Sustainability Remains Illusive Terminal operators have generated healthy EBITDA margins - carriers have not
Some recent improvement, not least given a ~50% decrease in fuel costs, but liners’ return on capital is
still horribly weak. Can lines shift the balance to their favour?
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APMT HHLA Eurogate DP World ICTSI HPH HPH Trust CMHI PSA
EBITDA Margin - CT Operators 2009 2010 2011 2012 2013 2014 2015
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EBITDA Margin - Liners 2009 2010 2011 2012 2013 2014 2015
Source: ICF; Annual Reports
Notes: EBITDA / Revenue; recent PSA performance to be confirmed
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Continued financial stress and loosening of Government ‘support’,
finally driving consolidation in a traditionally fragmented industry?
Limited concentration of industry: top 5 operators account for about 47% of capacity;
86% for top 20 operators. Relatively little consolidation, but change underway?
Notes: Herfindahl-Hirschman index (HHI) measure for market concentration widely used by EU Directorate General for Competition, U.S. Federal Maritime Commission (FMC) and U.S. Department of Justice. Calculated by squaring market share of each firm competing in a market, and then summing the resulting numbers. E.g. if only one firm in an industry, that firm would have 100 per cent market share, and HHI would equal 10,000 (100^2), indicating a monopoly. Or, if there hundreds of firms competing, each would have nearly zero market share, and HHI would be close to zero, indicating nearly perfect competition.U.S. DoJ considers a market with HHI <1,000 to be a competitive; 1,000-1,800 to be a moderately concentrated marketplace; and > 1,800 to be a highly concentrated marketplace. As a general rule, mergers that increase the HHI by more than 100 points in concentrated markets raise antitrust concerns
Herfindahl-Hirschman
index (HHI) for industry*
of 753, well below the
trigger point of 1,000
Even after CMA-APL
and COSCO-CSCL
mergers HHI still ~833*
Much higher for certain
routes, where cabotage
restrictions limit
competition
Alliances aiding or
hindering consolidation?
Market Analysis top 20 Carriers
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Notes: *whole industry not just top 20
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Huge challenges for Beijing leadership to restructure the economy, address environmental concerns and
deliver a “soft landing”. The economic miracle of the last two decades has hugely benefited China’s citizens
and helped legitimize continued one party rule by the CCP
Response to last year’s stock market collapse, indicates that Beijing will reverse reform when control comes
under threat. Implications for Renminbi convertibility and easing of capital controls?
“Belt and Road”?
– Details still unclear, but impacts for smaller economies of land-locked central Asian countries more significant
than for larger more established players – beware loans for economically ill-conceived projects.
– Impacts for China backed transportation companies (e.g. CMHI) are clearer – investment decisions will be
influenced. Long-term strategic & political considerations versus pure financial returns / market analysis?
Scale, relative stability and quality of China labour & infrastructure, versus Asian competitors, ensures
China’s dominance will not be threatened in the medium-term
Subdued demand will continue. PRC port market is maturing, led by S China / PRD port cluster – days of
sustained double digit or high single digit throughput growth have gone. Mainland China’s top 8 ports YoY
3% 2015; YoY 0% 2016 Q1 YTD
Relaxation of cabotage regulations would spur some growth at Mainland ports, primarily at expense of Asian
competitors, but China Cosco Shipping will continue to lobby fiercely against
Lines have fared less well than container terminal operators (CTOs) in the low demand growth environment,
although even the latter can expect EBITDA margins to be eroded.
Continued market exits from liner shipping (M&A)? Will lines finally secure a stable financial footing? Will
that lead to a re-balancing of the relative financial performances of CTOs vs Liners, or “win-win”?
Wrap - China’s “New Normal” Low demand growth in China (and globally) for liners / terminal operators - will the lines finally operate
sustainably…and can they re-set the customer relationship at terminals to their favour?
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Wrap – Liner Shipping’s “New Normal?”
Are we seeing the liner market finally clear and financial discipline take over?
Asked by ICF at TPM Los Angeles March 2009
67% of audience disagreed….they were right.
Will it finally be different this time?
“Shipping lines will emerge from the recession leaner, more commercially
focused and the over-capacity binge of the last three years will not be
repeated.” Agree / disagree?
“Those who don’t know history are
doomed to repeat it.”
Edmund Burke
“Learn from history or you're
doomed to repeat it.”
Jesse Ventura
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Ports, Logistics & Transport Services
Regional Contacts
Jonathan Beard
Hong Kong & Beijing
+852.2868.6980
+86.10.6562.8300
jonathan.beard@icfi.com
Wai-Duen Lee
Hong Kong
+852.2868.6980
waiduen.lee@icfi.com
Ben Hackett
Singapore
+65.8653.3263
ben.hackett@icfi.com
Thank You – Any Questions?
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