1. IX Caribbean Shipping Executives Conference, Willemstad (Curacao), May 17-19 2010 Global Economic & Trade Outlook: Economic Cycles and Maritime Shipping Jean-Paul Rodrigue Associate Professor, Dept. of Global Studies & Geography, Hofstra University, New York, USA

2. The Crisis is over … if you Believe in the Following… ■That the crisis was a random blip (“hoocoodanode”?) ■That debt is wealth (we are now VERY wealthy) ■That deficits do not matter (no risk of confiscation) ■That economists understand economics (no comment…) ■That central banks and governments know what they are doing (blowing bubbles…) ■That no significant commercial and sovereign default are in the pipeline (no more moral hazard) ■That the excess capacity in shipping has been cleared (there is huge latent demand…)

3. The First Crisis of Globalization: Reaping the Consequences of Misallocations CAUSES Monetary system (fractional reserve banking, fiat currencies) CAUSES SYMPTOMS Debt, asset inflation SYMPTOMS Production Consumption Distribution CONSEQUENCES Misallocations (bubbles) CONSEQUENCES Macroeconomic Storm Transactions and investments. Difficulty of clearing international trade transactions. Undue drop in freight volumes. Decline in aggregate demand. Clearing excess capacity. Credit Storm

4. Business Cycles: The Trend that Time Forgot ExpansionRecession Peak Trough Expansion Credit-Driven Boom Credit-Driven Bust Depression DemandTransfer of future demand into the present. SupplyMisallocations because of distorted expectations about the future. Asset price distortions. Higher prices in spite of a low demand!

5. Blowing Bubbles and Compounding Distortions: From Technology to Commodities Tech / Stock Bubble Housing Bubble Commodities / Trade Bubble

6. Globalization 2000-2008: A Bubble?

7. Changes in the Value World’s Merchandise Trade, Production and GDP, 1950-2009 (in %)

8. A Paradigm Shift in Neomercantilism?

9. A Paradigm Shift in the World’s Largest Trade Relation?

10. Keeping Doing the Same Thing? Baltic Dry Index, Monthly Value, 2000-2010 -92%

11. Paradigm Shift or “V” Shaped Recession?

12. Monthly Container Traffic at the Port of Los Angeles, 1995-2010

13. Factors behind the Interest of Equity Firms in Transport Terminals Asset (Intrinsic value) Terminals occupy premium locations (waterfront) that cannot be substituted. Globalization made terminal assets more valuable. Traffic growth linked with valuation. Same amount of land generates a higher income. Terminals as fairly liquid assets. Source of income (Operational value) Income (rent) linked with the traffic volume they handle. Constant revenue stream with limited, or predictable, seasonality. Traffic growth expectations result in income growth expectations. Diversification (Risk mitigation value) Sectoral and geographical asset diversification. Terminals at different locations help mitigate risks linked with a specific regional or national market.

14. Port and Maritime Industry Finance: Who is Leveraging Whom? Brokers Financial Markets Investors Commercial Banks Mortgage Banks Merchant Banks Finance Houses Leasing Companies Money Markets Capital Markets Equity Markets Private Placement Corporations Private Investors Investments Managers Insurance Companies Pension Funds Banks Trust Funds Finance Houses Shipping Companies Port Operators Earnings

15. Reviewing Assumptions: The Impacts of “Financialization” Disconnection Financial sector less aware of the operational and strategic reality. Physical assets are seen and managed strictly as financial assets. Rent seeking strategies Assets are less perceived as they are (port terminals) but simply from their potential (or expected) level of return. Chasing return without understanding well the fundamentals. Low contestability of entry and exit Perceived liquidity. Capacity to enter and exit the terminal market on a short notice. Herd behavior. High amortization Expectations that capital investment will be quickly amortized. Expectations about future growth and the corresponding volumes. Segments of the maritime and terminal operation industries have been subjugated by very smart people lacking wisdom. The financial sector has recently provided ample evidence about the amount of damage very smart people can do when hubris, obfuscation and fraud replace common sense and realistic perspectives.

16. Dumb Money at Work? DateTransactionPrice compared to EBITD 2005 DP World takes over CSX World Terminals 14 times Early 2006 PSA acquires a 20% stake in HPH17 times Mid 2006 DP World acquires P&O Ports19 times Mid 2006 Goldman Sachs Consortium acquires ABP 14.5 times End 2006 AIG acquires P&O Ports North America24 times Early 2007 Ontario Teachers’ Pension Fund acquires OOIL Terminals 23.5 times Mid 2007 RREEF acquires Maher Terminals25 times EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

17. The Double Squeeze on Ports and Maritime Shipping “Cruel” Overcapacity New terminals coming online New ships coming online (+ cancellations) “Cruel” Overcapacity New terminals coming online New ships coming online (+ cancellations) Lower profitability Less pressures on terminal resources Less financial appeal Lower profitability Less pressures on terminal resources Less financial appeal Contestability for gateways Contestability for hubs Rebalancing Contestability for gateways Contestability for hubs Rebalancing

18. World Container Traffic and Throughput, 1980-2008. Reaching Peak Growth?

19. Fallacies of Forecasting: 2020 Throughput Forecast, Selected Large Ports, Linear and CAG Scenario Port / Traffic 2007, M TEU R 2 / CAG (1998- 2007) Traffic 2020 (Linear Scenario) / CAG Traffic 2020 (CAG 1998-2007 Scenario) New York / 5.30.996 / +7.9%9.6 M TEU / +4.7%14.2 M TEU Savannah / 2.60.968 / +13.5%4.9 M TEU / +5.1%13.6 M TEU Los Angeles / 8.30.966 / +9.5%16.6 M TEU / +5.4%27.1 M TEU Antwerp / 8.20.974 / +9.6%14.5 M TEU / +4.5%26.9 M TEU Algeciras / 3.40.961 / +6.5%6.0 M TEU / +4.4%7.7 M TEU Busan /13.30.983 / +8.4%24.3 M TEU / +4.8%38.1 M TEU Shanghai / 26.10.948 / +23.9%56.5 M TEU / +6.1%423.8 M TEU From under estimating to over estimating trends Linearity prevalent in growth trends (1998-2007) Compound annual growth common in forecasts Non-contestability assumption

20. Terminal Operators; Well Positioned or Overextended?

21. Liner Shipping Connectivity Index and Container Port Throughput

22. Container Terminal Portfolio of the four Main Global Terminal Operators, 2009

23. Container Terminal Portfolio of Other Global Terminal Operators, 2009

24. The Caribbean System: The Transshipment Triangle and the Panama Canal Funnel Lower aggregate demand. The “curse” of economies of scale. Response from West Coast ports. Response from railways (East vs. West). New gateways (Canada: CN, Mexico: KCS). Costs (fuel prices and Panama Canal toll rates). Competition from Suez and the Mediterranean. Regionalization of production.

25. Diffusion Cycles in Containerization: Towards Maturity Adoption Acceleration Peak Growth Maturity New (niche) services Productivity gains Network development Productivity multipliers Massive diffusion Network complexities Niche markets

26. Containerization Growth Factors: Which Opportunities are Left? Derived / Organic (A) Economic and income growth. Globalization (outsourcing and global sourcing). Fragmentation of production and consumption. Substitution (B) Functional and geographical diffusion. New niches (commodities and cold chain) Capture of bulk and break-bulk markets. Incidental (C) Trade imbalances. Repositioning of empty containers. Induced (D) Transshipment (hub, relay and interlining). ABCD

27. Keeping Track of the Big Picture: Emerging Global Maritime Freight Transport System

28. The “Calm” after the Storm: A Paradigm Shift for Maritime Container Trade and Ports 1) Risk AllocationDesire to allocate greater risks onto private sector in PPPs: Requires clear policy goals and stable regulation. Moral hazard risks will continue to be tested. More demanding capital markets and less access to (cheap) credit: Focus on performance to meet financial metrics. New projects more critically assessed. Greater consideration of cost recovery of port infrastructure investment: From the deal / financial structure to quality of the asset. 2) Reviewing False Asymmetries The assumption that larger players have more information than smaller players : The larger players appear to have lost the most.

29. The “Calm” after the Storm: A Paradigm Shift for Maritime Container Trade and Ports 3) Growth Story: Time for realism Abandoning the compound annual growth paradigm: Port traffic assumptions likely to be less backward looking. Stronger cyclical effects than perhaps first assumed. Greater attention on market fundamentals: Globalization or regionalization? 4) Barriers to Entry: Competition matters Paying attention to competition drivers: Growth may no longer mitigate competitiveness as it did previously. Transshipment is a particularly vulnerable segment. 5) Amortization: Modest times Volume & pricing assumptions more modest: Longer amortization periods. PPP rent sharing more probable.