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Logistics Session Part 2 - Transportation

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1 Logistics Session Part 2 - Transportation
Henry L. (Rick) Wen Jr. VP Business Development & Public Affairs OOCL (USA) Inc. 2006 AAFA International Sourcing, Customs & Logistics Integration Conference Savannah, March 22-24, 2006

2 Agenda Introduction to OOCL
Record trade growth from Asia and China’s impact upon US transportation infrastructure California Crisis-Shipping Landscape-How cross industry collaboration improved results Affect on cost and infrastructure investment Future outlook and trends

3 Introducing OOCL Hong Kong’s largest container shipping company
Grand Alliance member Publicly traded and privately held 4M shipments & $4.7B in annual revenue China expert ISO certified and process driven Technology Innovation – IRIS 2 & CargoSmart Highest industry return on revenue in 2004 Green Flag Award environmental recognition

4 (including Australia, Indian Subcontinent and Middle East)
World Container Flow 2005 TRANS-ATLANTIC 5.4 million TEU 5.3% Growth ASIA-EUROPE 12.2 million TEU 10.9% Growth TRANS-PACIFIC 18 million TEU 10.4 % Growth INTRA-ASIA 33 million TEU (including Australia, Indian Subcontinent and Middle East) 12 % Growth OTHER TRADES North-South 19.2 million TEU Intra-Regional 16.1 million TEU We can see that global trade is mostly East-West and the majority of global trade originates from Asia Intra-Asia is the largest trade followed by the Trans-Pacific trade which is almost 4 x trade between the US and all of Europe Source: Drewry Consultants, 2005

5 China’s Share of U.S. Import Volume
1995 China has displaced Mexico to become the second biggest trading partner of the U.S. (after Canada). Based on this trend, by 2010 China will represent >1/2 of total trade with the US In /3rds total import volume via US ports was from Asia (excluding Canada and Mexico) or ½ from China In 2005 Trans-Pacific volume represents >60% of total foreign trade through US ports (15.4M TEU vs M TEU) 2000 2005 Source: PIERS Trade Horizons

6 China’s Share of Trans-Pacific Imports
1995 2000 China including Hong Kong has grown to 2/3rd of the entire Trans-Pacific import trade which includes North Asia: Japan, Taiwan, Korea, and Southeast Asia Malaysia, Singapore, Thailand, Vietnam, the Philippines and sub-continent India-Pakistan-Indonesia Like most trades from Asia, TPT is imbalanced where imports exceed exports by >2.5:1. This trend is growing and worrisome. 2005 Source: PIERS Trade Horizons

7 China’s apparel & footwear trend
China market share China-US growth p.a. Source: US Census Bureau

8 Major Port Throughput Source: Drewry Shipping Consultants Ltd (figures include empties and transshipment)

9 Volume Growth (m Teu) Source: Ports (Dec est.)

10 Projected Growth (POLA/POLB)
(in Million TEUs) Imports over LA-LBH are expected to almost triple over the next 14 years presenting huge infrastructure challenges for US ports, terminals, rail, highway, labor, trucking, environment and safety Through Aug, 8.5 million containers moved through LA/LBH, 10.4% increase from same period last year. About 2/3rds of the volume handled by LA/LBH move intermodal rail intact In /3rds total import volume via US ports was from Asia or ½ from China (not including Canada and Mexico) In 2005 Trans-Pacific volume represents >60% of total foreign trade through US ports (15.4M TEU vs M TEU) Project to reach 16.7 million TEUs by 2010, 35 million TEUs by 2020 PIERS Trade Horizons summer 2005 issue Source: Marine Exchange of Southern California

11 2004 California Crisis West Coast problem was compounded by many issues: Trade growth and inadequate customer forecasting Shortage of longshore labor and lower productivity of new hires Port congestion State and Federal regulations Intermodal equipment (railcar, locomotive) and crew shortages Terminal crane capacity Rail volume capacity (ramp, on dock rail limits, trackage pinch point at Cajon Pass) Strained truck capacity and limited trailer availability Chassis shortage Larger Mega Ships Rising costs of doing business

12 2004 Labor Shortage No. of In-Service Cranes Source:

13 Shipping Landscape New mega ships increase trade capacity
Global trade growth outpaces United States infrastructure, including port, railroad, trucking, terminal and warehouse. Congestion & delays reduce effective vessel capacity Panama Canal approaches 100% capacity Supply chains become pro-longed and segmented West (intermodal) and East (all-water) Cross-industry collaboration and synchronized activities improved shipment performance & efficiency after 2004 crisis Here’s how:

14 2006 Port Congestion: Beyond 2006
US Ports Lag International Productivity: Throughput (Teu) per gross acre: East Coast /Gulf ,100 West Coast ,600 Major world ports 10,000 to 15,000

15 Port Terminal Capacity Constraint
All major US ports listed For all trades Capacity based on 4,000 TEU activity per acre/year 2004 average During 2004, Only Oakland, NY-NJ and Baltimore have surplus capacity in this scenario (Tacoma swapped w/Portland due to migration of CKHY) Million TEU Source: SSA

16 Port Terminal Capacity Constraint
Based on operating grounded operations with throughput increase to 7,650 moves per acre year terminal capacity increases dramatically Every terminal location except Vancouver BC will be able to meet forecasted growth through 2010 But grounding is costly Source: SSA Million TEU

17 Cross Industry Collaboration: Ocean Carrier and Terminal Action
More labor, high capacity cranes and terminal equipment (resources) Convert from wheeled to grounded operations: increase terminal capacity (space) Extend Terminal’s Hours of Service “Pier-Pass” appointment system to increase capacity (time) Implemented on July 23, 2005 Over 30% of daily cargo moves during off-peak 1 Million container milestone December 2005

18 Cross Industry Collaboration: Ocean Carrier and Terminal Action
Redeploy ships to East Coast and Pacific Northwest ports to balance port capacity: (asset utilization) Reduce terminal free time from 5 to 4 days to accelerate goods movement (velocity) Implement 1st receiving dates for exports to minimize terminal congestion (space) Synchronize block stowage and promote on dock rail to improve intermodal rail performance and maximize terminal efficiency (congestion) Develop off-dock Container Yards to relieve terminal congestion (overflow capacity)

19 Cargo Interest Order earlier and prepare to hold more inventory in your pipeline Move information up your supply chain (at origin) and available at least 24 hours prior vessel loading Align your delivery schedules with changes in the international delivery process Focus more on time definite vs. time to market and avoid “double dipping” Use “cost of goods sold” profit model (20 cents a kilo vs. 6 dollars a kilo?) to build your supply chain You will need the resources to retain more inventory. Terminal, Railroads and carriers want to restrict holding your inventory for you. Focus on origin vendor and information management to promote predictable downstream performance Understand that lower costs of goods made in China should afford more inventory in your supply chain. Do you want to pay 20 cents a kilo for ocean transport or $5 a kilo for expedited parcel delivery? Especially if the product costs $10.00 per kilo. Predictable and flexible supply chains replace just in time inventory when goods are coming from halfway around the world.

20 Value per kg of shipment
Source: US Census Bureau

21 Increased Cost of Liner Shipping
Bunker fuel and inland fuel Additional labor Terminal Extended operation hours Wheeled to ground operation (expensive yard machinery) Terminal appointment system Storage charges have increased Equipment Trade imbalance (import: export) increases empty repositioning Cost of equipment is up as steel costs doubled Carriers are building larger vessels but equipment supply lags behind Rail Trucking OOCL operating costs increased by 14-17% in 2005 vs. 2006 Based on fuel on fuel voyage costs increased $200M Empty repositioning just from NAT was $126M last year and is expected to grow based on unfavorable import vs. export ratios. In the future expect roundtrip pricing on imports. Railroads empty repo charges from % of loaded move

22 TSA Revenue Index Trending
Revenue per container is lower in 2005 than 2004 and >15% below 1999 levels Carriers achieved record profits based on market growth and lower unit costs afforded by mega ships Infrastructure problems and fuel cost increases are squeezing our margins the next 2-3 years will be painful for carriers especially if supply of capacity exceeds demand of consumption

23 Future Outlook & Trends
Intermodal rail service improves More “Hub and Spoke” shipments (inland distribution) Less West Coast transloading More East Coast distribution using trucks instead of rail Integration of international with domestic transportation International intermodal outpaces domestic growth Railroads drive double stack intermodal Smaller and more frequent shipments favor container vs. trailer Cost and environmentally friendly for shipments >700 miles Domestic infrastructure changes to accommodate international CPRR bans cross Canada intermodal trailers effective January 1st 2006 (others to follow) TTX converting 48’ car wells to 40’ wells New flatcar wells will be mostly 40’ Significant railroad performance improvements: BN Double tracking from LA-LBH to Chicago offering directional train service $8B infrastructure private investment >1B for new improvements More 40’ wells improve intermodal train capacity by 30% better locomotive utilization. Currently only 25% of wells Prince Rupert and Lazaro Cardenas become options to US West Coast into Gulf, Midwest markets Panama Canal becomes a “pinch point” by 2007 compromising schedule reliability

24 Future Outlook and Trends
Economy of Scale & Asset Utilization More and larger container vessels More and larger consortia of carriers More mergers and Acquisitions Don’t put all your eggs in one basket Liner shipping logistics plays a more strategic role in supply chain including domestic applications Technology drives standardized efficiency, shipment visibility and Home Land Security applications Moving towards a global economy Maersk’s parent company A P Moller acquires PONL Hapag Lloyd’s parent company TUI acquires CP Ships CMA CGM acquires Delmas Deutsche Poste/DHL acquires Exel

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