Vietnam freight transport report q1 2012

... of any information hereto contained Vietnam Freight Transport Report Q1 2012 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q1 2012 CONTENTS Executive Summary ... International Ltd Page Vietnam Freight Transport Report Q1 2012 SWOT Analysis Vietnam Freight Transport SWOT Strengths ƒ ƒ ƒ Weaknesses ƒ ƒ ƒ Opportunities ƒ ƒ ƒ Threats ƒ ƒ ƒ Vietnam' s strong domestic... Ltd Page 11 Vietnam Freight Transport Report Q1 2012 We believe that this expansion in Vietnam' s port capacity is crucial to the country's economic growth as the transportation of freight through

Q1 2012 www.businessmonitor.com VietnaM freight transport Report INCLUDES BMI'S FORECASTS ISSN 1750-5364 Published by Business Monitor International Ltd. VIETNAM FREIGHT TRANSPORT REPORT Q1 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI’s Industry Survey & Forecasts Series Published by: Business Monitor International Copy deadline: November 2011 Business Monitor International 85 Queen Victoria Street London EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 email: subs@businessmonitor.com web: http://www.businessmonitor.com © 2011 Business Monitor International. All rights reserved. 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All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Vietnam Freight Transport Report Q1 2012 © Business Monitor International Ltd Page 2 Vietnam Freight Transport Report Q1 2012 CONTENTS Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 7 Vietnam Freight Transport SWOT ......................................................................................................................................................................... 7 Vietnam Political SWOT ........................................................................................................................................................................................ 7 Vietnam Economic SWOT ...................................................................................................................................................................................... 8 Vietnam Business Environment SWOT................................................................................................................................................................... 9 Industry Trends And Developments ............................................................................................................ 10 Maritime .............................................................................................................................................................................................................. 10 Intermodal And Logistics ..................................................................................................................................................................................... 12 Market Overview ............................................................................................................................................. 14 Global Oil Products Price Outlook ............................................................................................................... 17 Industry Forecast ........................................................................................................................................... 20 Road Freight ........................................................................................................................................................................................................ 20 Table: Road Freight, 2008-2016.......................................................................................................................................................................... 20 Rail Freight ......................................................................................................................................................................................................... 20 Table: Rail Freight .............................................................................................................................................................................................. 20 Air Freight ........................................................................................................................................................................................................... 21 Table: Air Freight ................................................................................................................................................................................................ 21 Maritime And Inland Waterways ......................................................................................................................................................................... 21 Table: Maritime Freight - Throughput, 2008-2016 ('000 tonnes) ........................................................................................................................ 22 Table: Inland Waterway Freight .......................................................................................................................................................................... 22 Trade ................................................................................................................................................................................................................... 22 Table: Trade Overview ........................................................................................................................................................................................ 22 Table: Key Trade Indicators, 2008-2016 (US$mn and % change y-o-y) ............................................................................................................. 23 Table: Main Import Partners, 2002-2009 (US$MN)............................................................................................................................................ 24 Table: Main Export Partners, 2002-2009 (US$MN)............................................................................................................................................ 24 Political Outlook ............................................................................................................................................. 25 Foreign Policy ..................................................................................................................................................................................................... 25 Domestic Politics ................................................................................................................................................................................................. 27 Long-Term Political Outlook ............................................................................................................................................................................... 28 Macroeconomic Outlook ............................................................................................................................... 31 Table: Vietnam – Macroeconomic Activity, 2009-2015 ....................................................................................................................................... 32 Company Profiles ........................................................................................................................................... 34 Vietnam Airlines Cargo ....................................................................................................................................................................................... 34 Vinatrans ............................................................................................................................................................................................................. 36 Vietnam National Shipping Lines (Vinalines) ...................................................................................................................................................... 38 Vietnam Petroleum Transport Company (VIPCO)............................................................................................................................................... 40 Country Snapshot: Vietnam Demographic Data ......................................................................................... 41 Section 1: Population........................................................................................................................................................................................... 41 Table: Demographic Indicators, 2005-2030 ........................................................................................................................................................ 41 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 42 Section 2: Education And Healthcare .................................................................................................................................................................. 42 Table: Education, 2002-2005 .............................................................................................................................................................................. 42 Table: Vital Statistics, 2005-2030 ........................................................................................................................................................................ 42 Section 3: Labour Market And Spending Power .................................................................................................................................................. 43 © Business Monitor International Ltd Page 3 Vietnam Freight Transport Report Q1 2012 Table: Employment Indicators, 1999-2004 .......................................................................................................................................................... 43 Table: Consumer Expenditure, 2000-2012 (US$) ................................................................................................................................................ 43 BMI Methodology ........................................................................................................................................... 44 How We Generate Our Industry Forecasts .......................................................................................................................................................... 44 Transport Industry ............................................................................................................................................................................................... 44 Sources ..................................................................................................................................................................................................................... 45 © Business Monitor International Ltd Page 4 Vietnam Freight Transport Report Q1 2012 Executive Summary Vietnam's freight transport sector is set to continue its steady growth trajectory over the medium term with the spectre of overcapacity a looming threat on the horizon. The required pace of expansion continues to pose a problem due to the state of infrastructure in the country and we caution that investment is needed if Vietnam is to fulfil its potential. In terms of year-on-year (y-o-y) tonnage growth, the Port of Ho Chi Minh City is set to lead the way in 2012, with a healthy increase of 7.96% forecast, while air, road and rail are all expected to perform solidly in 2012 and to 2016. There are some dark clouds hovering on the horizon, however. BMI believes that the recent rise in Vietnamese sovereign credit default swaps suggests that investors are pricing in growing risks of a sovereign debt default. We believe that deteriorating global economic headwinds and rising debt servicing costs are among the key reasons behind growing pessimism over the government's credit worthiness. Although the latest rate hike could put further downward pressure on growth and raise debt servicing costs in the near term, we are positive that higher interest rates will help attract more foreign capital into the country. Headline Industry Data ƒ 2012 rail freight tonnage is set to increase by 5.29% to 8.62mn tonnes. ƒ 2012 air freight tonnage is forecast to rise by 5.72% to 206,960 tonnes. ƒ Tonnage handled at the Port of Ho Chi Minh City in 2012 is forecast to grow 7.96% in 2012, whereas tonnage handled at the Port of Da Nang is forecast to increase 3.08%. ƒ 2012 road freight tonnage is forecast to grow by 6.97%. ƒ 2012 total trade is forecast to rise by 7.25% Key Industry Trends Ho Chi Minh Faces Overcapacity And Infrastructure Concerns Vietnam's port sector has seemingly become a victim of its own success as rapid growth has seen the country's underdeveloped port sector struggle to keep pace with increasing volumes of trade. BMI believes this pressure could ease somewhat in 2012 as global economic headwinds continue to act as a dampener on external demand for Vietnamese exports. Upgrade For Mekong Delta Ports Crucial To Economic Growth The Vietnamese government announced major plans in September 2011 to boost the combined port capacity in the Mekong Delta provinces from 15.7mn tonnes in 2010 to 28mn tonnes in 2020. BMI © Business Monitor International Ltd Page 5 Vietnam Freight Transport Report Q1 2012 welcomes such an investment, as we have long held the view that Vietnam's port sector requires considerable investment if it is to handle a projected increase in trade, as mentioned above. Kerry Logistics Invests In Vietnam Hong Kong-based Kerry Logistics announced in September 2011 that it is set to open a new logistics centre in Hanoi, Vietnam. The centre will be located on the road to the main port of Haiphong, providing the company with excellent access to one of Vietnam's major logistics hubs. The 10,000 square metre facility is expected to complete the company's plan to offer a high level of coverage for all the industrial centres in Vietnam, reports Eye for Transport. Key Risks To Outlook On the upside, Vietnamese state-owned port operator Vietnam National Shipping Lines (Vinalines) signed a contract in October 2011 with Japan-based Molyto (a joint venture between three Japanese companies: Mitsui O.S.K. Lines, Nippon Yusen Kabushiki Kaisha and Itochu) to construct two berths at the Lach Hyuen port in Northern Vietnam. BMI notes that it is mainly Japanese companies that are developing Vietnam's northern deep sea ports. We have long highlighted the importance of foreign investment in Vietnam's port infrastructure due to its implications for the country's economic growth. While the southern port of Ho Chi Minh is facing the prospect of overcapacity, there remains a significant demand for deep-water port capacity in the northern parts of Vietnam. This is because the country is looking to develop deep-water ports in key regions, allowing goods to be shipped directly to their destination markets instead of transshipping through Singapore, Malaysia and South Korea. The Lach Hyuen port is located just 100km east of Vietnam's capital Hanoi, and is expected to eventually replace the nearby Hai Phong port - currently the largest port in the northern region of Vietnam. The Hai Phong port is reaching capacity and does not have adequate infrastructure to handle some of the larger container ships. The Lach Hyuen port expansion will be implemented to address this deficit. On the other hand, downside risks exist in Vietnam's port sector, due to the rapid growth in the country's port volumes and subsequent concerns that have been raised over the possibility of overcapacity at the Port of Ho Chi Minh. Additionally, there is some sense of déjà vu in the global infrastructure space. Valuations are falling, credit is drying up, demand risk is rising and investors are avoiding risk; factors seem to be aligning for a repeat of the fall of 2009. While we see several red flags in the infrastructure finance market, we do not believe that the market will come to a standstill. © Business Monitor International Ltd Page 6 Vietnam Freight Transport Report Q1 2012 SWOT Analysis Vietnam Freight Transport SWOT Strengths ƒ ƒ ƒ Weaknesses ƒ ƒ ƒ Opportunities ƒ ƒ ƒ Threats ƒ ƒ ƒ Vietnam's strong domestic growth rate coupled with its geography: it stretches for thousands of kilometres on a north-south axis, creating a need for long-distance freight haulage. Recovery of the nation's ports in 2010 is expected to continue over the mid-term to 2016. Vietnam's location on the South China Sea gives the country access to the main interAsian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics. The generally poor state of the road network. Despite new highway construction, only 13.5% of the network is considered to be in good condition. Just 26% of the network has two or more lanes and only 29% is tarred. Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underutilised. Decades of under-investment have left the country with a port infrastructure system that is poor by international standards. Overcapacity is therefore a growing problem. The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. Chinese investment could bring about much needed improvements in the rail sector. Growing international interest in Vietnam as a growth market within the box shipping sector. Vietnam risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. Vietnam is vulnerable to any slowdown in Chinese investment. A drop in international demand for exports would negatively affect Vietnam's freight transport sector. Vietnam Political SWOT Strengths ƒ ƒ Weaknesses ƒ ƒ Opportunities ƒ ƒ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the next five years. The oneparty system is generally conducive to short-term political stability. Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent. The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances in the system. © Business Monitor International Ltd Page 7 Vietnam Freight Transport Report Q1 2012 Threats ƒ ƒ ƒ Macroeconomic instabilities in 2010 and 2011 are likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage. Vietnam Economic SWOT Strengths ƒ ƒ Weaknesses ƒ ƒ Opportunities ƒ ƒ ƒ Threats ƒ ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.2% annually between 2000 and 2010. The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 12.0% in 2009. Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to global economic uncertainties in 2011. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. The heavily-managed and weak dong currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s. Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis. Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy. © Business Monitor International Ltd Page 8 Vietnam Freight Transport Report Q1 2012 Vietnam Business Environment SWOT Strengths ƒ ƒ Weaknesses ƒ ƒ Opportunities ƒ ƒ Threats ƒ ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country attractive to foreign investors. Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond. Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world. Vietnam remains one of the world's most corrupt countries. Its score in Transparency International's 2010 Corruption Perceptions Index was 2.7, placing it in 22nd in the Asia-Pacific region. Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how. Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points. Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. © Business Monitor International Ltd Page 9 Vietnam Freight Transport Report Q1 2012 Industry Trends And Developments Maritime Ho Chi Minh Faces Overcapacity And Infrastructure Concerns Short Term: Overcapacity Fears Present Downside Risk Throughput at Vietnamese ports has grown dramatically in recent years as the country has sought to position itself as 'the factory of Asia'. Rapid growth has seen the country's underdeveloped port sector struggle to keep pace with increasing volumes of trade. BMI believes this pressure could ease somewhat in 2012 as global economic headwinds continue to act as a dampener on external demand for Vietnamese exports. This presents downside risk for production activity in the manufacturing sector and other export-based industries. While BMI forecasts real GDP growth of 6.5% in 2012 - up from an estimated 6% growth in 2011 - we expect year-on-year (y-o-y) growth in Ho Chi Ming Port's container throughput to slow to 5% in 2012 to 3.1mn twenty-foot equivalent units (TEUs), down from the double-digit growth we saw in the years prior to 2011. We expect total tonnage growth of 8% at the port, to 36mn tonnes. We caution that there are downside risks to our forecasts. The rapid growth in Vietnam's port volumes has attracted ample international investment in port terminals, and concerns are now being raised about the possibility of overcapacity at Ho Chi Minh. In 2006, international terminal operators secured stakes in nine terminals at the port after the government invited foreign investment, believing that rising throughput volumes would be quickly soaked up by increasing capacity. Five of the nine planned terminals are currently in operation in the Cai Mep area. However, they are working well below capacity, according to Alphaliner. With additional new facilities due to come online within the next two years, BMI believes this is a considerable cause for concern. The situation is causing particular concern for companies that have facilities due to come online in the near future. SSIT, a joint venture (JV) between Saigon Port, SSA International Holdings-Vietnam and Vinalines is due to open in 2011. The terminal will have a handling capacity of 1.2mn TEUs and the ability to receive ships of up to 8,000TEUs. John Cushing, general director of international container services at SSIT, said: 'Whenever we look at this much development - and it is unusual anywhere to see so many new terminal operations being built in a region at the same time - it always brings up the question: Are you building to overcapacity?' Medium Term: Upside Potential From Dredging Project Over the medium term we forecast average annual real GDP growth of 7.2% for Vietnam. In line with this, we expect steady growth in the country's port throughput to continue, although not in the doubledigit figures seen previously. We forecast average annual growth of 8.3% in total tonnage to reach 49mn tonnes by 2016, and average annual growth in container throughput of 6.6% to reach 4mn TEUs. © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q1 2012 Upside potential to our forecasts is presented by the Vietnamese government's plans to deepen the port's draught, allowing larger vessels to access the facility. Recognising the need to cater for bigger vessels, Vietnam's prime minister has directed the country's ministry of transport and its Maritime Administration to focus on developing deep water ports. A channel depth of about 14 metres (m) is required for non-tide restricted access for vessels with capacity of up to 8,000TEUs. Vietnam is to develop further deep water ports to allow the country to ship goods directly to destination markets instead of transshipping through Singapore, Malaysia and South Korea. Priority will be given to the Lach Huyen port complex in the northern city of Hai Phong, and to the Cai Mep and Ben Dinh port complexes over the next five years. Long Term: Infrastructure Improvements Needed As previously stated, capacity at the port of Ho Chi Minh has expanded to the level that we are now concerned about overcapacity at the facility. However, capacity expansion alone is not enough to equip Ho Chi Minh to handle growing volumes of trade. We also need to see investment in landside supply chains, such as road and rail networks. These developments are particularly vital if Vietnam is to achieve its aim of enabling Ho Chi Minh to handle larger container vessels so that it can ship goods directly to destination markets. Upgrade For Mekong Delta Ports Crucial To Economic Growth The Vietnamese government announced major plans in September 2011 to boost the combined port capacity in the Mekong Delta provinces from 15.7mn tonnes in 2010 to 28mn tonnes in 2020. BMI welcomes such an investment, as we have long held the view that Vietnam's port sector requires considerable investment if it is to handle a projected increase in trade. According to the government's proposals, the expansion in capacity would focus on river ports and seaports located on the Tien and Hau rivers - the main tributaries of the Mekong River. In the Tien River basin, the improvements will focus on: the Cao Lanh-Sa Dec port in Dong Thap province, the My Tho port in the Tien Giang province, the Vinh Thai port in the Vinh Long province and the Ham Luong port in the Ben Tre province. In the Hau River basin, the upgrades will involve: the Cai Cui, Tra Noc and Can Tho ports in the city of Can Tho; the My Thoi port in the An Giang province; the Dai Ngai port in the Soc Trang province; and the Tra Cu port in the Tra Vinh province. The upgrades will enable these ports to accommodate vessels with a capacity of 5,000 deadweight tonnes (DWT) or, in some ports, up to 10,000DWT. Furthermore, new sea ports will be constructed in the Ca Mau peninsula and in the Gulf of Thailand. They include the Nam Can seaport in the Ca Mau province as well as the Hon Chong, Bai No, and Binh Tri ports in the Kien Giang province. These ports, once completed, will also be able to receive vessels of between 5,000DWT and 10,000DWT. © Business Monitor International Ltd Page 11 Vietnam Freight Transport Report Q1 2012 We believe that this expansion in Vietnam's port capacity is crucial to the country's economic growth as the transportation of freight through inland waterways accounts for a sizeable portion - 25-30% - of total domestic cargo transport. Vietnam's waterway system is one of the largest in relation to its land area in the world: according to data from the World Bank, Vietnam has around 41,000km of natural waterways. Waterways are also crucial to Vietnam's export output, as they are an important means of transport for heavy goods including: coal, rice, sand, stone and gravel. This is especially true for the Mekong delta provinces, which is one of the leading rice growing regions in Vietnam and the world. A lack of adequate port facilities in the region would definitely have a negative impact on Vietnam's agricultural exports, a key component in the country's economy. As such we welcome the government's plan and have taken it into account in our forecasts; real growth in the value of Vietnam's ports, harbours and waterways infrastructure averages 8.3% per annum between 2011 and 2015. Intra-Asia Road Route To Enhance Shippers' Operations It was announced in August 2011 that southeast Asia is to be linked to China through a new intra-Asia route built by Panalpina, in a bid to improve transit times for regional shippers. The countries connected by the route would be Vietnam, Laos, Thailand, Malaysia and Singapore. It is hoped that the new service will provide a better alternative to costly air freight or the much slower ocean freight, as well as offering a more eco-friendly option to both of these modes. The new freight solution will cater for full-truck-load (FTL) and less-than-truck-load (LTL) shipments. Andreas Wolff, Panalpina's area trade lane development manager for intra-Asia, explained: 'The service covers a number of major cities in western China such as Chengdu and Chongqing, where the entire market still struggles to find adequate capacity for air and ocean transport. Our trucking solution will come in very handy here.' District Manager of the Yangtze and Bohai Bay at Panalpina, Stefan Gustafsson, said: 'All trucks are equipped with GPS devices, and CCTV systems are installed inside each container to survey the cargo, ensuring highest security standards. Considering that it is still a relatively fresh and new way for high-end transportation, we will further tailor the service to the customer and market requirements.' Intermodal And Logistics Gemadept Predicts 2012 Rise In Fees In September 2011, Vietnam's biggest listed freight company, Gemadept, predicted that local cargo rates will rise as smaller firms drop out of the market. According to the Business Times, the firm expects rates changes to begin affecting the industry from mid-2012, as rival companies who have lowered their charges fail to survive. The issue is part of a wider malaise, as smaller firms struggle with higher fuel costs, overcapacity and lower demands from the US and EU. © Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q1 2012 Kerry Logistics Invests In Vietnam Hong Kong-based Kerry Logistics announced in September 2011 that it is set to open a new logistics centre in Hanoi, Vietnam. The centre will be located on the road to the main port of Haiphong, providing the company with excellent access to one of Vietnam's major logistics hubs. The 10,000 square metre facility is expected to complete the company's plan to offer a high level of coverage for all the industrial centres in Vietnam, reports Eye for Transport. Robert Tan, managing director of the South Asia region at Kerry Logistics, said: 'We have invested in developing a national logistics network in Vietnam during the last few years and the new Hanoi facility completes our coverage of the key industrial areas in North, South and Central Vietnam.' © Business Monitor International Ltd Page 13 Vietnam Freight Transport Report Q1 2012 Market Overview Slightly Slower Growth In 2011 We remain optimistic that we could see a pickup in GDP growth to reach 6.5% in 2012, after estimated growth of 6% in 2011. Leading indicators suggest that economic activity should continue to moderate, and we see this as a positive sign that government efforts to iron out the country's macroeconomic imbalances remain on track. Prevailing economic headwinds in the US and Eurozone should continue to act as a dampener on external demand. This in turn suggests that production activity in the manufacturing sector and other export-based industries could face difficulties, with negative effects for the freight transport industry. Retail sales have moderated considerably since November 2010, when the State Bank of Vietnam (SBV) initiated its monetary tightening cycle. Retail sales growth slowed from 32.5% in November 2010 to 22.6% in June 2011, indicating that the measures have dampened private consumption growth. Nonetheless, retail sales remain at double-digit growth rates, indicating that private consumption growth remains resilient. This supports our view that private consumption would remain resilient on the back of robust labour market conditions and rising wages in Vietnam, boding well for containerised imports. However, public spending cuts and a subdued outlook on gross fixed capital formation (GFCF) growth due to high lending rates would lead to continued moderation in domestic demand throughout the year. Underperforming Port And Road Infrastructure Rankings Source: World Economic Forum Road Freight Remains Dominant Road transport is the most advanced in terms of freight sector privatisation and is the dominant mode for © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q1 2012 freight, with a market share of around 60% of domestic cargo. Few foreign companies are present in the market, and there are many small, family owned road freight companies operating informally. Vietnam has a national road network of 171,392km. BMI believes the sector requires substantial investment. The quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142 nations surveyed in its Global Competitiveness Report 2011-2012. Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC), established in April 2003 as a state corporation operating railway transport and related services. Vietnam's rail network totals 2,347km.The network is of mixed-gauge, comprising 2,169km of 1.000m gauge and 178km of 1.435m gauge. Railway infrastructure in Vietnam was ranked 101 out of 123 by the WEF. Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Investment Flowing Top Five Vietnam Transport Infrastructure Projects Source: BMI Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, like Hai Phong and Ho Chi Minh City, with limited © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q1 2012 depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion. Vietnam's port infrastructure is poor by international standards. The WEF's 2011 Global Competitiveness Report ranks it 111th out of 142 countries, placing it 12th in the region, just one place ahead of the Philippines, the regional underperformer. Investment And Development Outlook According to our key infrastructure projects database, there are US$171bn worth of infrastructure projects planned, or underway, in Vietnam's transport sector. One of the most expensive of these is a US$3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9000 TEUs and the capacity to handle 0.5mn TEUs per year. The project is currently suspended due to an ongoing review of geological conditions at the site. © Business Monitor International Ltd Page 16 Vietnam Freight Transport Report Q1 2012 Global Oil Products Price Outlook Refined Products Price Outlook BMI View: In line with our longer-term crude price forecasts, we see refined products' prices easing through to 2015. Gasoline (a composite of Rotterdam, New York and Singapore) is set to fall from US$110.47/bbl in 2012 to US$105.41/bbl at the end of the forecast period. We see declines of 1.25% and 6.1% in the prices of jet kerosene and gasoil/diesel over the same period. The smallest relative product price decrease is for naphtha, which we see falling from US$107.12/bbl to US$100.53/bbl. Since our last global oil products outlook, the irrational exuberance that gripped the oil market in H111 has given way to pessimism. Brent crude had fallen below US$100/bbl in trading on October 4 2011 – a level not breached since January. Supply considerations that were paramount in traders' minds earlier in the year began to fade as unrest in the Middle East and North Africa (MENA) failed to disrupt oil production from the Persian Gulf states. Upward pressure on light, sweet grades began to ease following the winding-down of the Libyan civil war, as well as the restart of production from a number of North Sea fields. The OPEC Basket price fell from a July average of around US$111/bbl to less than US$108/bbl in September, and October looks set to be significantly lower still. One Track Mind? US Gasoline and Diesel Prices (US$/gallon) Source: EIA The 2011 summer driving season in the US was a disappointment. Although WTI prices dissociated from Brent and fell significantly in Q311, US East Coast products' prices are more closely linked to Brent. The sharp rise in international crude prices that started in late 2010 and continued through May 2011 fed © Business Monitor International Ltd Page 17 Vietnam Freight Transport Report Q1 2012 through to pump prices, leading almost invariably to demand destruction. In H111, according to US Department of Energy data, US gasoline consumption averaged 180,000 barrels per day (b/d) (or 2%) lower year-on-year (y-o-y), while data for July and August showed a 1.6% y-o-y decline in consumption. Poor macroeconomic sentiment in the US, marked by weak hiring and sluggish growth, also acted as a dampener. Fears of a second global economic slowdown have led many to cut expectations for oil consumption. The IEA, in its September 2011 oil market report, said that it was slashing its forecast for 2011 and 2012 global oil demand by 200,000b/d and 400,000b/d respectively. It did so after revising its GDP growth rate expectations for North America and Europe. IEA preliminary data from July 2011 showed a 1.3% fall in total product consumption across the OECD, with the sharpest drop in Europe (Germany, France, Italy, Spain and the UK). Among non-OECD economies, however, demand for oil products is holding up, with IEA July 2011 preliminary data showing a 3.8% y-o-y rise in product demand. Chinese oil demand has begun moderating, although it has yet to fall. Treading Water Selected Products Prices (FOB Singapore, US$/bbl) Source: Bloomberg We have re-calculated our product prices on the basis of our most recent crude oil price forecast revision, which was released on September 29. Since our last products outlook, US per-gallon diesel and gasoline prices fell by 3.8% and 6.3% respectively. We see New York Harbour unleaded gasoline averaging US$111.73/bbl in 2011, down from our previous forecast of US$114.53/bbl. We see a smaller easing in Singapore premium unleaded, although Rotterdam remains unchanged. We see Singapore diesel 2.4% less expensive in 2011 than in our July forecast. We see naphtha more expensive in 2011 than we forecast © Business Monitor International Ltd Page 18 Vietnam Freight Transport Report Q1 2012 in July. Our jet-kerosene forecasts for the year see a big drop for New York Harbour and a slight appreciation for Singapore. In line with our longer-term crude price forecasts, we see refined product prices easing through to 2015. Gasoline (a composite of Rotterdam, New York and Singapore) is set to fall from US$110.47/bbl in 2012 to US$105.41/bbl at the end of the forecast period. We see declines of 1.25% and 6.1% in the prices of jet kerosene and gasoil/diesel over the same period. The smallest relative product price decrease is for naphtha, which we see falling from US$107.12/bbl to US$100.53/bbl. New Assumptions Oil Products Price Forecast, US$/bbl Source: BMI © Business Monitor International Ltd Page 19 Vietnam Freight Transport Report Q1 2012 Industry Forecast Road Freight Steady Growth On Horizon We are once again maintaining our forecasts for road haulage over our forecast period to 2016. Steady growth is projected, with 2012 set to see similar year-on-year (y-o-y) tonnage growth as that of 2011 (6.97% compared to 6.47% respectively). This equates to 599.86mn tonnes of road freight handled in 2011, a figure which will rise to 641.69mn tonnes in 2012. Over the mid term to 2016, we predict average annual tonnage growth in this sector to come in at 7.14%, whereas tonnes-km growth will follow a similar trend, averaging 7.50%. Table: Road Freight, 2008-2016 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f 455,89 8.40 494,64 9.80 563,40 6.12 599,86 3.21 641,68 9.03 688,53 1.87 738,56 4.31 789,14 0.46 846,81 9.22 - % change y-o-y 13.02 8.50 13.90 6.47 6.97 7.30 7.27 6.85 7.31 Road freight, mn tonnes/km 27,968. 00 30,261. 40 34,467. 73 36,840. 47 39,562. 62 42,611. 29 45,867. 56 49,182. 10 52,896. 00 - % change y-o-y 13.47 8.20 13.90 6.88 7.39 7.71 7.64 7.23 7.55 Road freight, '000 tonnes f = forecast. Source: General Statistics Office of Vietnam Rail Freight Table: Rail Freight Rail freight, '000 tonnes - % change y-o-y Rail freight, mn tonnes/km - % change y-o-y 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f 8,481.1 0 8,068.1 0 7,809.9 2 8,187.2 8 8,620.2 0 9,105.0 6 9,622.9 3 10,199. 06 10,612. 12 -6.29 -4.87 -3.20 4.83 5.29 5.62 5.69 5.99 4.05 4,170.9 0 3,805.1 0 3,717.5 8 3,893.0 5 4,094.3 6 4,319.8 2 4,560.6 3 4,799.4 3 5,120.3 5 7.43 -8.77 -2.30 4.72 5.17 5.51 5.57 5.24 6.69 f = BMI forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q1 2012 Rail Freight Growth Remains On Track Rail freight is set to continue its steady recovery from the contractions of recent years. We estimate that rail freight tonnage grew by 4.83% y-o-y in 2011, and project this to rise by 5.29% in 2012 to 8.62mn tonnes. In 2012-2016 we forecast average annual tonnage growth of 5.33% to 10.61mn tonnes, while tonnes-km will enjoy a slightly stronger average growth of 5.64% to 5.12mn tonnes-km. Air Freight Growth To Stay Healthy Over Medium Term In terms of air cargo volume, BMI forecasts annual growth of 5.72% to 206,960 tonnes in 2012, up from 195,760 tonnes in 2011. Over our forecast period to 2016, we expect tonnage growth to average 6.23% a year. For freight carried (volume x distance), we expect growth of 5.34% in 2012 to 543.79mn tonneskm, compared with 2011's 4.88% growth and 2010's double digit increase of 55.46%. Over the mid term, we forecast average annual growth of 5.87%. Table: Air Freight Air freight, '000 tonnes 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f 131.40 139.60 186.00 195.76 206.96 219.51 232.90 248.23 264.79 1.39 6.24 33.24 5.25 5.72 6.06 6.10 6.58 6.67 295.60 316.60 492.20 516.23 543.79 574.66 607.63 643.02 686.44 5.61 7.10 55.46 4.88 5.34 5.68 5.74 5.82 6.75 - % change y-o-y Air freight, mn tonnes/km - % change y-o-y f = BMI forecast. Source: General Statistics Office of Vietnam Maritime And Inland Waterways Ho Chi Minh City Leads The Way In Terms Of Tonnage At the Port of Ho Chi Minh City, we expect container throughput to grow by 5% in 2012 to 3.1mn twenty-foot equivalent units (TEUs), a slowdown from double-digit growth in the years prior to 2011. We expect total tonnage growth of 8% at the port, to reach 36mn tonnes. Meanwhile, our growth forecasts for Da Nang reflect our moderating view for Vietnamese growth. We expect the port's container throughput growth to drop from double to single digits, achieving 7.6% growth in 2012 to 102,775.74TEUs. In terms of total tonnage, we expect growth of 3% to reach 3.5mn tonnes. Meanwhile, inland waterways will see y-o-y growth of 5.11% to 155.96mn tonnes in 2012, a figure which will break the 196mn barrier in 2016. © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q1 2012 Table: Maritime Freight - Throughput, 2008-2016 ('000 tonnes) 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f Port of Ho Chi Minh City * 20,180.00 19,140.00 31,132.00 33,450.71 36,111.78 39,148.54 42,406.25 45,959.94 49,772.44 -% change y-o-y -21.17 -5.15 62.65 7.45 7.96 8.41 8.32 8.38 8.30 2,742.26 3,132.00 3,303.04 3,394.27 3,498.97 3,618.45 3,746.62 3,911.86 4,089.14 0.19 14.21 5.46 2.76 3.08 3.41 3.54 4.41 4.53 Port of Da Nang -% change y-o-y f = BMI forecast; * Saigon New. Source: Port authorities Table: Inland Waterway Freight Inland waterway freight, '000 tonnes - % change y-o-y Inland waterway freight, mn tonnes/km - % change y-o-y 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f 133,02 8.00 135,68 8.40 142,20 1.44 148,37 8.09 155,96 0.44 164,65 9.38 174,40 1.76 184,80 7.51 196,02 4.58 -1.67 2.00 4.80 4.34 5.11 5.58 5.92 5.97 6.07 24,869. 00 25,365. 20 25,593. 49 26,752. 09 28,084. 60 29,568. 40 31,159. 70 32,622. 02 34,543. 64 11.84 2.00 0.90 4.53 4.98 5.28 5.38 4.69 5.89 f = BMI forecast. Source: General Statistics Office of Vietnam Trade Table: Trade Overview 2008 2009e 2010e 2011e 2012f 2013f 2014f 2013f 2016f Imports, real growth, % y-o-y 11.92 -13.81 17.9 11.6 6.5 6.5 6.5 6.5 6.5 Exports, real growth, % y-o-y 10.85 -15 21 11 8 8 8 8 8 Total trade, real growth, % 11.38 -14.4 19.45 11.3 7.25 7.25 7.25 7.25 7.25 Real © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q1 2012 Table: Trade Overview 2008 2009e 2010e 2011e 2012f 2013f 2014f 2013f 2016f 83.6 73 87.57 101.43 116.31 135.12 156.16 179.28 205.97 - % change y-o-y 26.71 -12.68 19.97 15.82 14.68 16.17 15.57 14.81 14.89 Exports, US$bn 69.95 63.39 78.05 89.91 104.56 123.17 144.35 168.06 195.8 - % change y-o-y 27.88 -9.38 23.12 15.2 16.29 17.8 17.2 16.42 16.51 153.55 136.39 165.62 191.34 220.87 258.29 300.51 347.34 401.77 27.24 -11.18 21.43 15.53 15.43 16.94 16.34 15.58 15.67 y-o-y Nominal Imports, US$bn Total trade, US$bn - % change y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Table: Key Trade Indicators, 2008-2016 (US$mn and % change y-o-y) 2008 2009f 2010e 2011e 2012f 2013f 2014f 2015f 2016f 2,215.20 2,720.81 3,130.03 3,635.25 4,277.40 5,008.00 5,825.82 6,779.61 17.66 17.08 16.33 16.37 2,099.17 2,563.83 3,005.54 3,480.04 4,079.54 4,750.09 5,487.17 6,344.63 Agricultural raw materials Imports 2,415.93 - % change Exports 24.45 2,416.63 - % change -8.31 22.82 15.04 16.14 30.15 -13.14 22.14 17.23 15.79 17.23 16.44 15.52 15.63 553.33 437.13 546.13 634.35 743.27 881.71 1,039.21 1,215.52 1,412.84 47.72 -21 24.94 16.15 17.17 18.63 17.86 16.97 16.23 2,649.93 3,247.65 3,815.85 4,426.22 5,197.38 6,059.95 7,008.09 8,059.18 Ores and metals Exports - % change Imports - % change 2,824.71 6.42 -6.19 22.56 17.5 16 17.42 16.6 15.65 15 Exports 411.02 442.56 558.23 651.85 767.44 914.36 1,081.51 1,268.61 1,462.08 - % change -20.82 7.67 26.14 16.77 17.73 19.14 18.28 17.3 15.25 5,304.42 6,418.02 7,476.63 8,613.80 10,050.55 11,657.60 13,424.08 15,333.32 16.68 15.99 15.15 14.22 28,748.03 35,341.47 40,677.97 47,266.51 55,640.60 65,168.17 75,833.11 87,816.73 17.12 16.37 15.8 Iron and steel Imports - % change 4,946.04 -14.85 7.25 20.99 16.49 15.21 Manufactured goods Exports - % change Imports 32,534.78 23.16 54,527.27 -11.64 22.94 15.1 16.2 17.72 47,929.54 57,491.36 66,581.02 76,345.25 88,681.81 102,480.59 117,648.28 135,065.90 © Business Monitor International Ltd Page 23 Vietnam Freight Transport Report Q1 2012 Table: Key Trade Indicators, 2008-2016 (US$mn and % change y-o-y) - % change 2008 2009f 2010e 2011e 2012f 2013f 2014f 2015f 2016f 24.31 -12.1 19.95 15.81 14.67 16.16 15.56 14.8 14.8 12,788.78 15,696.53 18,049.96 20,955.55 24,648.58 28,850.29 33,553.60 39,212.24 17.62 17.05 16.3 16.86 11,047.46 13,527.95 15,885.97 18,418.97 21,619.28 25,198.92 29,133.67 33,843.86 16.56 15.61 16.17 Fuel Exports - % change Imports - % change 14,833.69 47.44 13,811.07 -13.79 57.95 -20.01 22.74 22.45 14.99 17.43 16.1 15.94 17.38 e/f = BMI estimate/forecast. Source: UNCTAD, BMI Table: Main Import Partners, 2002-2009 (US$MN) 2002 2003 2004 2005 2006 2007 2008 2009 China Mainland 2,158.84 3,138.55 4,595.10 5,899.70 7,391.30 12,710.00 15,652.10 16,441.00 Japan 2,504.65 2,982.06 3,552.60 4,074.10 4,702.10 6,188.90 na 7,468.09 Korea 2,279.60 2,625.44 3,359.40 3,594.10 3,908.40 5,340.40 7,066.30 6,976.36 955.24 1,282.19 1,858.60 2,374.10 3,034.40 3,744.20 4,905.60 4,514.07 2,533.49 2,875.82 3,618.40 4,482.30 6,273.90 7,613.70 9,392.50 4,248.36 Thailand Singapore na = not available/applicable. Source: IMF's Direction of Trade Statistics Table: Main Export Partners, 2002-2009 (US$MN) 2002 2003 2004 2005 2006 2007 2008 2009 US 2,453.15 3,939.56 5,024.80 5,924.00 7,845.10 10,104.50 11,868.50 11,355.80 Japan 2,436.96 2,908.60 3,542.10 4,340.30 5,240.10 6,090.00 8,537.90 6,291.81 China Mainland 1,518.33 1,883.12 2,899.10 3,228.10 3,242.80 3,646.10 4,535.70 4,909.03 66.67 74.67 120.20 103.90 155.70 236.90 516.90 2,486.49 1,328.33 1,420.86 1,884.70 2,722.80 3,744.70 3,802.20 4,225.20 2,276.72 Switzerland Australia Source: IMF's Direction of Trade Statistics © Business Monitor International Ltd Page 24 Vietnam Freight Transport Report Q1 2012 Political Outlook Foreign Policy South China Sea: Territorial Disputes A Growing Threat To Regional Stability BMI View: Beijing's increasing assertiveness in the South China Sea in recent years has prompted other countries that lay also claim to the waters to toughen their stance on the long-standing dispute. Escalating tensions could severely undermine the chance of re-establishing dialogue and peaceful negotiations between these countries. However, we believe that the chance of a large-scale military conflict remains remote for now. Tensions in the South China Sea have escalated following a recent territorial dispute between Vietnam and China. Beijing's increasing assertiveness in recent years has had the effect of encouraging other countries that lay claim to the territory to toughen their stance on the issue. Should tensions continue to escalate over the coming months, this could severely undermine the chance of re-establishing dialogue and peaceful negotiations between these countries. In the worst-case scenario, deteriorating multilateral relations could eventually cause Beijing's neighbours to step away from negotiations and enforce their individual claims on the territory. This would certainly raise the risk of future conflicts and undermine stability in the region over the coming years. Although such a scenario remains a low risk for now, we are discouraged by the strongly worded statements issued by China and Vietnam following the territorial dispute in May. Consequently, tensions should remain high over the coming weeks, and we believe that a resolution to bring both parties back to the negotiating table is unlikely to materialise in the near term. Long-Standing Dispute Resurfaces Tensions flared after Vietnam accused China of deliberately sabotaging underwater cables deployed by Vietnamese oil exploration vessels in what the country claims as part of its territory. In response, Beijing argued that Hanoi has violated its indisputable claim to the South China Sea and has warned the country to stop its oil exploration activities in the area. The long-standing territorial dispute was responsible for deadly clashes between the two countries' naval forces in the past. Back in 1988, a confrontation between the two navies resulted in the deaths of more than 70 Vietnamese sailors as Chinese vessels sank two Vietnamese ships in the Spratly Islands. As a result of the unresolved dispute, bilateral relations between the two countries have remained fragile over the years. Not surprisingly, China's growing assertiveness over the Paracel and Spratly islands in recent years has heightened concerns among international observers that fragile relations with Vietnam could be reaching a tipping point. Just days following the latest dispute, Hanoi announced its decision to conduct live-fire military exercises in the area this week, a move that would certainly be regarded as a provocation by Beijing. Vietnam is also playing catch up with Beijing's growing military presence in the South China Sea. Back in December 2009, Vietnam signed a series of major arms deals with Russia that included six Kilo-class submarines and 20 Su-30 fighter-bombers. The deals amounted to around US$2.6bn, the © Business Monitor International Ltd Page 25 Vietnam Freight Transport Report Q1 2012 biggest since Moscow began winding down its remaining military interests in Vietnam at the end of the Cold War about 20 years ago. These developments further indicate that the animosity between the two countries has yet to subside over the years. Raising The Stakes For China From our standpoint, what is more worrying is that the latest incident has prompted other countries to reiterate their sovereignty over parts of the South China Sea. Several countries including China, Vietnam, the Philippines, Taiwan, Malaysia, Brunei and Indonesia have competing claims over parts of the territory. The Spratly Islands remain one of the most heavily contested parts of the region, largely due to the vast oil and gas deposits that the surrounding area is believed to hold. In what we see as an attempt to deter Beijing's assertiveness over the Spratly Islands, both the Philippines and Taiwan have explicitly signalled their intentions to defend their respective claims over parts of the South China Sea. The Philippine government issued a statement on June 13 that it was renaming the South China Sea as the West Philippine Sea. Philippine lawmakers claimed that the move is not just a simple matter of nomenclature but signifies Manila's assertion of its sovereignty over the waters close to its territory. We acknowledge that countries in contention of the territory are unlikely to recognise Manila's move. Meanwhile, the Taiwanese government has also announced that it is planning to deploy missile boats in the South China Sea and tanks on parts of the Spratly Islands. Taiwan has argued that territorial disputes in recent weeks have raised concerns that the country's coast guard units may not be able to handle potential conflicts. We see increasing risks that surrounding countries could be tempted to issue similar responses in an attempt to reiterate their claims on the territory. This would significantly widen the scope for further disputes in the region over the coming months. No Signs Of A Large-Scale Conflict... For Now Certainly, there is a possibility that the situation could continue to escalate into a military confrontation given that there have been repeated incidents of clashes among military forces in the region. However, we believe that a large-scale military conflict remains remote, at least for now. In the past, Beijing has openly rejected proposals to participate in multi-party talks on the territorial dispute. South East Asian countries are fully aware of Beijing's reluctance to engage in multi-party negotiations, especially with the US and UN. Thus, countries in the region with limited political influence against Beijing have used the threat of internationalising the dispute as a bargaining chip against China. Vietnam has pressed for the Association of Southeast Asian Nations to play a central role in resolving tensions in the region, and the Philippines has shown increased support for the move in recent years. We believe that it remains in Beijing's interests to avoid Washington's involvement in the matter, and we expect this to serve as an effective deterrent against China's assertiveness in the region. Although China's growing economic footprint in South East Asia has bolstered its political influence over smaller South East Asian countries in recent years, the country continues to rely heavily on global trade. Thus, any disruption to major shipping routes through the South China Sea would have a negative impact on China's economy. China has invested heavily in Myanmar to establish a maritime hub and build oil © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q1 2012 and gas pipelines linking the two countries. Although the move could significantly reduce China's reliance on shipping routes passing through the Straits of Malacca and South China Sea, the project is only expected to be fully completed by 2015. Consequently, we believe that the risk of allowing tensions to escalate into a military conflict in the South China Sea remains too costly for China's economy. Vietnam, Taiwan and the Philippines appear to be fully aware of this and may be attempting to call China's bluff in the latest dispute. Domestic Politics Not Expecting A Change In Politburo's Policy Direction BMI View: The appointment of Truong Tan Sang as Vietnam's new president reflects a normal course of leadership renewal and does not imply a change in the direction of the government's economic policies, in our view. The expected reappointment of Prime Minister Nguyen Tan Dung by the National Assembly supports our view that the government is likely to stick to its priority in fixing the economy's imbalances in the near term. Provided that our views on the economy turn out to be largely accurate over the coming months, Dung's position within the politburo should remain secure. Vietnam's National Assembly (NA) has approved Truong Tan Sang as the country's new president with 98% (487 out of 496) of NA members voting in favour of the appointment on July 25. Sang will immediately succeed outgoing President Nguyen Minh Triet, who is set to retire after having completed his five-year term in government. From our standpoint, the appointment reflects a normal course of leadership renewal and does not imply a change in the direction of the government's economic policies. The president's position within the politburo has traditionally been limited to a largely ceremonial role, whereas the prime minister has played a bigger role in determining the country's economic policies. Prime Nguyen Tan Dung Set To Be Reappointed Immediately after his appointment, President Sang announced the nomination of Prime Minister Nguyen Tan Dung as the sole candidate to continue his second five-year term in office. We expect Dung, who survived a no-confidence motion in November 2010 over the mishandling of state-owned shipping company Vietnam Shipbuilding Industry Group, to be successfully reappointed by the NA. Furthermore, we do not expect significant changes among key members of the politburo in the medium term. The expected reappointment of Dung by the NA would suggest no change to the direction of the government's economic policies and, in turn, our outlook on the economy. Accordingly, we assign a relatively high score of 90 (out of 100) for the 'Policy Continuity' component of our short-term political risk rating for Vietnam. Staying Optimistic On the Economy In light of the deteriorating macroeconomic conditions in Vietnam - the government is struggling to contain mounting inflationary pressures and fix stubborn trade and fiscal deficits - the new government is expected to face increased scrutiny by members of the NA over the effectiveness of the government's economic policies over the coming months. Failure to address these issues could severely undermine the © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q1 2012 government's credibility among members of the NA and set the stage for yet another no-confidence motion against Dung. This suggests to us that the government is likely to stick to its priority in fixing the economy's imbalances in the near term. We remain optimistic that inflationary pressures should moderate as money supply growth, which came in at 2.3% year-on-year in H111, remains well below the government's full-year target of 15.0-16.0%. This, in combination with the 8.5% devaluation in the Vietnamese dong in February, should also help to reduce the trade deficit over the coming months. Provided that our views on the economy turn out to be largely accurate over the coming months, Dung's position within the politburo should remain secure. Long-Term Political Outlook Key Political Challenges Over The Coming Decade BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US. Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam's (CPV) monopoly on political power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a more pluralistic society over the coming decade and beyond. Indeed, the CPV's strict control of the media and political opinion is already cracking, with a growing number of internet bloggers becoming increasingly critical of government policy. Challenges And Threats To Stability Inflation And Devaluation As Drivers Of Discontent As in neighbouring China, economic growth has brought sizeable material gains for the majority of the population. However, the Vietnamese government's loose fiscal and monetary policies have led to high levels of inflation and repeated devaluations of the dong in recent years, which have eroded the real value of wages and savings. A failure to contain inflation at a reasonable level and uphold the real value of the dong could undermine confidence in the regime. Divisions Within The Communist Party High inflation and devaluation have opened schisms within the CPV leadership between proponents of continued economic reform and a more conservative wing which believes that a deceleration or even reversal of reform policies would benefit macroeconomic stability. Ethnic And Regional Tensions Vietnam is relatively homogeneous, with ethnic Viet comprising almost 90% of the population. Ethnic © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q1 2012 minorities in the Central Highlands have previously objected to government policies promoting migration of ethnic Viet into the highland region. While protests have died down, they could emerge in future. A potential spark could be the Chinese-financed bauxite mining project in Lam Dong and Dak Nong provinces, which is currently causing widespread environmental damage and raising ire among the local population. There are also continued cultural differences between the population of the Red River Delta around the capital Hanoi in the north and the population of the Mekong Delta in the south, where Ho Chi Minh City (formerly Saigon, the ex-capital of South Vietnam) remains the commercial capital. While the general perception is that northerners are more supportive of socialist rule and the southerners more inclined to support continued economic reform, a strong concept of national unity nevertheless exists in both parts of the country. Demands For Increased Religious Rights One of the most concerted challenges against the CPV in recent years has come from Catholics wishing for a stronger recognition of their right to worship in what is still a nominally atheist country. Hanoi has ceded to pressure from the US to allow a higher degree of religious freedom, but is wary of the Catholic Church becoming a rallying point of political opposition, as was the case in Communist Poland and the Philippines during the Marcos dictatorship. The Vietnamese government has thus slapped heavy sentences on Catholic activists who have extended their fight to encompass increased political freedom. Relations With China Relations with China have become increasingly strained in recent years as Beijing has expanded its economic, political and military influence southwards. The main point of contention is the conflicting territorial claims for the Paracel and Spratly Islands in the South China Sea. Vietnam's relations with China have also been strained by the large bilateral trade deficit it runs with its northern neighbour, which amounts to more than 10% of GDP, and criticism of a Chinese-financed bauxite mining project in the central highlands. That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respective politburos have decreased tension between them. Nonetheless, we believe Vietnam will seek increasingly close relations with the US - and potentially India and Japan - in the defence sphere, as a hedge against China's rising power in the region. Vietnam's long-term political risk rating of 53.8/100 is weighed down by a score of 27.6 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up three scenarios for Vietnam's political future: © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q1 2012 Scenarios For Political Change Core Scenario: CPV Turns Into Technocratic Regime Our core scenario is for the Communist Party of Vietnam (CPV) to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older more traditionally-minded party members. However, intermittent periods of harsh repression against prodemocracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best Case Scenario: Gradual Political Liberalisation Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held but only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan, and Japan have shown that even dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario: Mass Unrest And Violent Suppression Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe that at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Ltd Page 30 Vietnam Freight Transport Report Q1 2012 Macroeconomic Outlook Growth To Moderate Despite Improvement In Net Exports BMI View: Vietnam's real GDP growth figure came in slightly better than expected at 5.7% y-o-y in Q211. However, we expect economic activity to continue to moderate in H211, and we see this as a positive sign that government efforts to iron out macroeconomic imbalances in the economy remain on track. Despite incipient evidence of a narrowing trade deficit, we warn that global economic headwinds remain a downside risk to external demand. Accordingly, we are projecting real GDP growth to remain subdued at 6.3% for 2011 (below the government's target of 6.5%), but we remain optimistic that we could see a pickup in growth towards 7.2% in 2012. Vietnam's real GDP growth figure came in slightly better than expected at 5.7% y-o-y in Q211. However, leading indicators suggest that economic activity should continue to moderate, and we see this as a positive sign that government efforts to iron out the country's macroeconomic imbalances remain on track. Prevailing economic headwinds in the US and Eurozone should continue to act as a dampener on external demand. This in turn suggests that production activity in the manufacturing sector and other export-based industries should remain depressed in H211. Furthermore, lending rates, which have surged to around 25.0-27.0% as a result of the State Bank of Vietnam's (SBV) aggressive monetary tightening in recent months, suggests that gross fixed capital formation (GFCF) growth would remain subdued in H211. Although the SBV has cut its reverse repurchase rate by 100bps from 15.00% to 14.00% on July 4, we see the move as an attempt to ease liquidity in the banking system rather than a signal for further rate cuts. We note that the SBV's benchmark policy rate (refinance rate) remains unchanged at 14.00% and we expect the rate to remain on hold through 2011. Growth Slows In Construction And Agricultural Sectors According to figures published by the General Statistics Office, output in the agricultural sector has slowed to around multi-year lows of just 1.8% y-o-y in Q211 compared to 2.0% in Q111. Meanwhile, growth in the construction sector also witnessed a significant slowdown from 7.0% y-o-y in Q111 to 4.2% y-o-y in Q211. We believe that exorbitant lending rates due to aggressive monetary tightening by the central bank were mainly responsible for stemming growth in the construction sector. Indeed, construction and infrastructure companies have complained about having to cope with higher debt servicing costs due to their capital-intensive structure. Meanwhile, tight credit conditions may have prompted commercial banks to adjust their loan portfolios towards higher return industries over the agricultural sector (which traditionally provide lower returns and are given preferential interest rates by state-owned banks). Given that the agricultural sector accounts for a significant 18.4% of nominal GDP, we note that high lending rates should continue to depress agricultural production and in turn broader economic growth this year. Private Consumption To Remain Resilient In 2011 Retail sales have moderated considerably since November 2010 when the SBV initiated its monetary © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q1 2012 tightening cycle. As the accompanying chart shows, retail sales growth slowed from 32.5% in November 2010 to 22.6% in June, indicating that monetary tightening has dampened private consumption growth. Nonetheless, retail sales remain at double-digit growth rates, indicating that private consumption growth remains resilient. This supports our view that private consumption would remain resilient on the back of robust labour market conditions and rising wages in Vietnam. However, public spending cuts and a subdued outlook on GFCF growth due to high lending rates, mean that domestic demand would continue to moderate throughout the year. Table: Vietnam – Macroeconomic Activity, 2009-2015 2009 2010 2011f 2012f 2013f 2014f 2015f 1,658,389 1,953,223 2,379,025 2,783,319 3,152,968 3,547,057 3,972,116 92.8 101.9 115.5 136.6 159.2 184.3 211.8 5.3 6.8 6.3 7.2 7.2 7.2 7.2 1,063 1,153 1,294 1,515 1,749 2,004 2,282 87.3 88.4 89.3 90.2 91.1 92.0 92.8 Industrial production index, % y-o-y, 1 average 6.7 14.1 10.0 15.0 16.0 17.0 16.0 Unemployment, % of labour force, end of 1 period 6.0 5.0 6.0 5.0 5.0 5.0 5.0 Nominal GDP, 1 VNDbn – US$bn 1 Real GDP growth, % 1 y-o-y GDP per capita, 1 US$ Population, mn 2 1 2 f = BMI forecast. Source: General Statistics Office; World Bank, BMI Narrowing Trade Deficit To Help Cushion Against Slowdown In Domestic Demand Following a significant 8.5% devaluation in the Vietnamese dong in February, we are finally beginning to see incipient signs of a narrowing trade deficit (see chart). Trade export growth accelerated to 23.5% y-oy in June from 14.6% in May, while imports growth slowed to 16.2% y-o-y from 20.5% in May. The latest trade figures showed a smaller trade deficit of US$0.4bn in June (the smallest deficit since August 2010) compared to US$1.4mn in May, providing relief to concerns that further deterioration in the trade balance would suggest another devaluation in the coming months. Industrial production, which provides a reliable gauge for export orders, also indicate that demand for exports remained resilient. As the accompanying chart shows, industrial production growth has begun to pick up in recent months, rising from 11.8% y-o-y in April to 17.0% in June. Although we are optimistic that trade exports are beginning to show signs of strength, we caution that global economic headwinds in the US and Eurozone remains a downside risk to external demand. © Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q1 2012 Nonetheless, trade imports, which are beginning to slow on the back of moderating domestic demand and a slowdown in the broader economy, should help reduce the trade deficit over the coming months. Although, we remain optimistic that an improvement in net exports would help cushion against the impact of a slowdown in domestic demand, headline economic growth should continue to moderate throughout the year. Looking ahead into 2012, we expect the SBV to ease monetary policy in light of moderating inflation and this should support a pickup in economic growth. Accordingly, we are maintaining our real GDP growth forecast of 6.3% for 2011, followed by a pickup towards 7.2% in 2012 © Business Monitor International Ltd Page 33 Vietnam Freight Transport Report Q1 2012 Company Profiles Vietnam Airlines Cargo Strengths ƒ Vietnam Airlines Cargo is the main air cargo provider in Vietnam. Weaknesses ƒ Unlike its peers Vietnam Airlines Cargo does not have a freighter fleet and is reliant on using the belly hold of its parent company's planes. Opportunities ƒ The air carrier is well placed to benefit from Vietnam's growing role in the trade sector. The country has flooded money into the development of the country's port sector, but BMI believes aviation also stands to benefit. ƒ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could result in cargo being transported in the belly holds of aircraft in the future. Threats ƒ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the domestic market. In 1993, it was established as Vietnam's national carrier. The cargo carrier's operations are concentrated in Asia, catering for the domestic market. The airline operates its cargo business by transporting goods in the belly holds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing: China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to other Chinese airports. It has also developed routes to Australia, with freight connections to Melbourne and Sydney. Allied to Vietnam Airlines Cargo's cargo links to three destinations in Europe (Paris Frankfurt and Moscow), as of July 2011, parent company Vietnam Airlines declared that it was ready to open a direct air route to the UK, scheduled to begin operating in the last months of 2011. The service will fly to Gatwick Airport, and opens the possibility of cargo being transported in the belly holds of planes going to and from London. Financials Results 2011 Not available Latest Activity Vietnam Airlines Links Up With Jet Airways In October 2011 Vietnam Airlines signed a memorandum of understanding (MoU) with Jet Airways, covering commercial, technical and training opportunities, in order to strengthen © Business Monitor International Ltd Page 34 Vietnam Freight Transport Report Q1 2012 the links between Vietnam and India. Naresh Goyal, chairman of Jet Airways said: 'This agreement with Vietnam Airlines is an integral part of our strategy for increased international growth and providing seamless service for travellers between India and Vietnam. Today's milestone is a momentous occasion in our history and we look forward to the future of cooperation and collaboration with Vietnam Airlines, bringing greater benefits to our distinguished passengers.' © Business Monitor International Ltd Page 35 Vietnam Freight Transport Report Q1 2012 Vinatrans Strengths ƒ Vinatrans is a diversified logistics company, offering a wide variety of services. Weaknesses ƒ The company is exposed to the weaknesses inherent in state-owned companies, such as inefficiency and underfunding. Opportunities ƒ BMI has identified intra-Asia trade as a market to watch, as consumer demand in the traditional markets of the US and Europe remains sluggish. ƒ Vietnam is part of the ASEAN 5. As such, it should see an uptick in trade as a result of the group's FTA with China. Threats ƒ ƒ Rising fuel prices pose a threat to logistics companies' profit margins. The rate of economic growth in Vietnam has far outpaced the country's infrastructure. Road, railways and ports are all badly in need of upgrades. Overview Vinatrans is a state-owned Vietnamese freight forwarding company, providing door-to-door logistics worldwide and a number of related services. These include air freight and sea freight forwarding (including customs clearance, cargo surveying, insurance, air consolidation for inbound and export cargoes, and exhibition or project handling), shipping (including chartering, husbandry, crewing, and brokerage services) as well as warehousing and cold storage provision. The company is 100% owned by the Vietnamese Ministry of Trade and acts as an agent for several foreign organisations including BAX Global, Hapag-Lloyd Container, Zim Israel Navigation Company and Panalpina. The firm's warehousing and storage facilities in 2 Vietnam include: a 2,500m Container Freight Station (CFS) for sea and air cargo; a joint 2 venture (JV) cold storage facility of 2,800m , run by Vinatrans and Konoike Transport 2 2 Company of Japan; 40,000m of covered warehousing; and 50,000m of open storage. Strategy BMI has been following the trend of increasing investment in the Vietnamese port sector as the country establishes itself as a centre of production, particularly for the textile industry. We caution, however, that as many factories are situated inland, investment in the supply chain as a whole, including road, air, rail and storage, will be needed to deal with increasing demand. Having declined by 10% year-on-year (y-o-y) in 2009, Vietnamese exports returned to growth in 2010. The volume of imports and exports is forecast to grow by 20% in 2011. According to the Civil Aviation Authority of Vietnam, air freight to and from the country increased by 37% y-o-y to reach 340,000 tonnes in 2010. As such, we see growth opportunities for Vinatrans in the sector. We note that several air cargo carriers have already spotted the potential in the market. Chinese carrier Jade Cargo has recently opened the first air freight link between Vietnam and Amsterdam. In 2009 Lufthansa Cargo, the air freight subsidiary of Deutsche Lufthansa, launched a weekly direct service between Frankfurt and Hanoi, which it is considering doubling in the future to keep up with demand. From late-June 2011, Vietnam Airlines is planning to increase its flights between Hanoi and Paris, Hanoi and Moscow, and Hanoi and Frankfurt, which could potentially mean an increase in the amount of freight carried on the routes. © Business Monitor International Ltd Page 36 Vietnam Freight Transport Report Q1 2012 Financials Results Vinatrans has reported consolidated earnings for the second quarter and first half of 2010. In Q210, the company made a net profit of VND5.06bn on revenues of VND 109.42bn, versus VND 3.42bn and VND62.99bn respectively in the same period of 2009. The company made a net profit of VND9.94bn in H110, down 14.16% on a year earlier. Net revenues, however, rose 44.05% y-o-y to VND189.08bn during the period. Its six-month earnings per share (EPS) was VND 1,816, compared to VND2,117 in the same period in 2009. The company was targeting pre-tax profit of VND23bn on revenues of VND 300bn for 2010, and a dividend payout equivalent to VND1,500 per share for the year. Latest Activity Vietnam Freight Forwarders Association Fears Logistics Companies Too Small According to the Vietnam Freight Forwarders Association (Viffas) Vietnam now has more than 1,000 enterprises which provide logistics services, most of which - about 600-700 enterprises - are located in Ho Chi Minh City. Commenting on the capabilities of the enterprises, Mai Xuan Thieu, Head of the Vietnam Logistics Institute said the majority of enterprises have a modest capital of VND1-1.5bn. As a result, the majority of their work is as agents for multinational groups. Thieu said that Vietnamese enterprises are not capable of providing enough transport services throughout Vietnamese territory with competitive costs. Currently, Vietnamese companies can only meet 25% of total domestic demand. BMI believes this is a cause for concern, given that we expect the country's trade volumes to continue growing. © Business Monitor International Ltd Page 37 Vietnam Freight Transport Report Q1 2012 Vietnam National Shipping Lines (Vinalines) Strengths Weaknesses ƒ Diversified fleet operating in dry bulk, container and oil transport. ƒ Largest commercial shipping line in Vietnam. ƒ Does not play a role on the major Asia-Europe routes, despite Vietnam developing as a direct port of call on these routes. ƒ In June 2011, it was announced that the US$3.6bn Van Phong International Port project, which is primarily constructed by state-owned Vinalines, was suspended following a reassessment of the geological conditions at the project site. Opportunities ƒ Vietnam is expanding its role in the global box market and it's fast becoming a mainstay port of call on Asia-Europe services. ƒ Potential to increase its intra-Asia role, shown by the expansion work at Cai Mep, and well placed to be chosen as partner on these services by the bigger lines. Threats ƒ While Vietnam has invested heavily in the port network, the logistics supply chain could be let down by the landside freight network, which will have a negative impact on operators. ƒ In 2011 Vinalines posted its first ever loss in 15 years of operations, with further losses in expected. Overview Vinalines is Vietnam's largest commercial shipping line, and was established in 1996. It caters for domestic trade in Vietnam and also offers intra-Asia services. The company also has a port operating division that is the largest in Vietnam, controlling and managing ports in Quang Ninh, Hai Phong, Da Nang, Ho Chi Minh and Can Tho. Strategy Vinalines' 14 shipping companies operate a diverse fleet, dominated by dry bulk vessels but also boasting container ships, oil and product oil vessels. As of the end of Q210 (latest published data), Vinalines fleet consisted of 150 vessels with a capacity of 3.1mn deadweight tonnes (DWT). The line is looking to expand, with a mid-term plan to increase the line's capacity to 6-7mn DWT by 2010. The plan centres on increasing the proportion of specialised vessels such as box ships or oil tankers. In order to achieve this, the line was seeking to spend US$2bn on ordering new ships from Vietnamese yards seeking state funding for the plan. Vinalines has in fact ended up expanding its fleet quicker than it first planned with the shipping line taking on 36 vessels from the debt laden Vietnamese shipbuilder Vinashin in July 2010. Vinaline's chair, Duong Chi Dung, said at the time that up to two-thirds of the acquired vessels cannot be used currently as they fail to meet technical requirements. He estimated that the company will need to spend US$26mn to repair the vessels and purchase insurance cover. Dung said he expected some financial aid from the government for the project. Vinalines services the trade needs of Vietnam's domestic shipping market but also has exposure to the intra-Asia trade lane by joining forces with NYK in December 2010 to launch © Business Monitor International Ltd Page 38 Vietnam Freight Transport Report Q1 2012 a Thailand-Vietnam-Singapore (TVS) service providing a 1,100TEU vessel for the service. BMI believes Vinalines' presence on the intra-Asia trade route will increase, with major lines looking to expand into the route and Vinalines well placed to play a role in partnering with these big lines on the route. Vinalines is increasing its contacts in container sector partnering with a number of the majors on container terminal projects in Vietnam. Of rising interest in East Asia is Vietnam, according to Port Strategy due to the fact that the country is focusing on being better connected with both short and long haul destinations. Providing the bedrock to this strategy are the new terminals constructed in the Cai Mep area. Financials Results Vinalines recorded a loss of VND660bn (US$32mn) in H111; the first time this has ever occurred in the company's 15 years of operations. Although the company's three core services - marine transport, ports and logistics - had seen revenues grow by 5% to US$492mn in the first quarter, in the second quarter, lower freight rates and higher fuel costs hit the operator badly. Latest Activity Vinalines Braces For Further Losses Following Vinalines' first ever loss in 15 years, the company is predicting a further decline in Q311, before a slight recovery in the fourth quarter. Although there is no breakdown of the company's results available as yet, BMI believes the company's container, dry-bulk and liquid shipping segments will have been hardest hit, while the company's port-operating and logistics arms are unlikely to have suffered as much. Despite the loss posted, BMI notes that Vinalines, like some other carriers, is looking to take advantage of low new-build prices and expand its fleet. Vinalines plans to raise its fleet capacity from 3.1mn DWT to 6-7mn DWT in 2020. We have been seeing new-build prices drop, indicating that shipbuilders are trying to encourage orders, while lines are watching their bottom lines and do not want to spend. In August 2010, prices for new-build Handysize, Panamax and Capesize vessels stood at US$27mn, US$35mn and US$59mn respectively. In June 2011 prices had eased to US$25mn, US$33mn and US$54mn. Despite falling revenues, some lines have been seeking to take advantage of the low prices, which is reflected in the fact that the week ending August 7 closed with 56 new orders reported worldwide, up 87% from the same period in 2010. Although any orders made now will not be due online until the end of 2012 at the earliest, it remains unclear whether the sector will have regained the supply/demand equilibrium by then. With vessel supply continuing to outweigh demand in the container, dry-bulk and liquid shipping segments, BMI believes this is a worrying trend. © Business Monitor International Ltd Page 39 Vietnam Freight Transport Report Q1 2012 Vietnam Petroleum Transport Company (VIPCO) Strengths ƒ 60% of the company's fleet is employed by Petrolimex. ƒ The company boasts a relatively young fleet. ƒ The company has diversified away from operating in a single sector, with a real estate arm. Weaknesses ƒ The company only operates in one shipping sector. Opportunities ƒ The company plans to expand its fleet. Threats ƒ Vietnam's reliance on imported refined products is decreasing as the country brings online more refining capacity, which could negatively affect VIPCO. In the longer term Vietnam's refining capacity could allow the state to export. Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime transport for petroleum products. The company has a diversified portfolio and units that support its product tanker fleet such as its port operations and freight forwarding services. It is also engaged in real estate. Strategy VIPCO's has developed a fleet of six product tankers with a total capacity of 176,111 deadweight tonnes (DWT). The fleet is relatively young with an average age of 16 years. VIPCO has a fleet expansion strategy in place and is prepared to invest in either via new builds or purchasing tankers under the age of 10 years. The company plans to boost its fleet to 200,000DWT. VIPCO's employment strategy for its tankers divides the fleet's employment up, with 60% of the fleet meeting the transport needs of the Vietnam National Petroleum Corporation (Petrolimex) and the other 40% charted to other consignees. Via its connection with Petrolimex, the company is able to cater for Vietnam's oil sector. While the country has estimated oil reserves of 4.6bn barrels, it imports refined products. The company's shipping unit is complemented by its petrochemical terminal's sector. Financials Results 2010 Not available at the time of writing. Latest Activity VIPCO stands to benefit from a deal signed between Petrolimex and SK Energy in February 2011. The South Korean firm will supply Petrolimex with 900,000bcm of RON 92 gasoline and diesel oil in 2011. © Business Monitor International Ltd Page 40 Vietnam Freight Transport Report Q1 2012 Country Snapshot: Vietnam Demographic Data Section 1: Population Population By Age, 2005 (mn) Population By Age, 2005 And 2030 (mn, total) 70-74 70-74 60-64 60-64 50-54 50-54 40-44 40-44 30-34 30-34 20-24 20-24 10-14 10-14 0-4 0-4 -6.0 -4.0 -2.0 0.0 Male 2.0 4.0 6.0 -10.0 -5.0 0.0 2030 Female 5.0 10.0 2005 Source: UN Population Division Table: Demographic Indicators, 2005-2030 2005 2010f 2020f 2030f Dependent population, % of total 34.1 29.9 30.4 31.2 Dependent population, total, ‘000 28,318 26,225 30,950 34,499 Active population, % of total 65.8 70.0 69.5 68.7 Active population, total, ‘000 54,650 61,263 70,706 75,927 Youth population*, % of total 28.8 25.0 23.4 20.3 Youth population*, total, ‘000 23,972 21,887 23,807 22,508 Pensionable population, % of total 5.2 4.9 7.0 10.8 Pensionable population, total, ‘000 4,346 4,338 7,143 11,991 f = forecast. * Youth = under 15. Source: UN Population Division © Business Monitor International Ltd Page 41 Vietnam Freight Transport Report Q1 2012 Table: Rural/Urban Breakdown, 2005-2030 2005 2010f 2020f 2030f Urban population, % of total 26.7 29.4 34.7 41.8 Rural population, % of total 73.3 70.6 65.3 58.2 Urban population, total, ‘000 22,509 26,395 35230 46,123 Rural population, total, ‘000 61,729 63,323 66426 64,306 Total population, '000 84,238 89,718 101,656 110,429 f = forecast. Source: UN Population Division Section 2: Education And Healthcare Table: Education, 2002-2005 2002/03 2004/05 Gross enrolment, primary 98 93 Gross enrolment, secondary 73 75 Gross enrolment, tertiary 10 16 Adult literacy, male, % na 93.9 Adult literacy, female, % na 86.9 Gross enrolment is the number of pupils enrolled in a given level of education regardless of age expressed as a percentage of the population in the theoretical age group for that level of education. na = not available. Source: UNESCO Table: Vital Statistics, 2005-2030 2005 2010f 2020f 2030f Life expectancy at birth, males (years) 68.4 69.9 74.2 75.8 Life expectancy at birth, females (years) 72.4 73.9 78.4 80.0 Life expectancy estimated at 2005. f = forecast. Source: UNESCO © Business Monitor International Ltd Page 42 Vietnam Freight Transport Report Q1 2012 Section 3: Labour Market And Spending Power Table: Employment Indicators, 1999-2004 1999 2000 2001 2002 2003 2004 Employment, '000 38,120 38,368 39,000 40,162 41,176 42,316 – % change y-o-y 3.1 0.6 1.6 2.9 2.5 2.7 – male 19,029 19,292 19,744 20,356 20,959 21,649 – female 19,091 19,076 19,257 19,807 20,217 20,666 — female, % of total 50.0 49.7 49.3 49.3 49.1 48.8 Unemployment, '000 909 886 1,107 871 949 926 – male 439 468 458 398 402 410 – female 470 418 650 473 547 517 – unemployment rate, % 2.3 2.2 2.7 2.1 2.2 2.1 Source: ILO Table: Consumer Expenditure, 2000-2012 (US$) 2000 2007e 2008f 2009f 2010f 2012f 110 265 301 368 386 427 Poorest 20%, expenditure per capita 49 119 136 166 174 192 Richest 20%, expenditure per capita 243 587 668 815 855 946 Richest 10%, expenditure per capita 316 763 868 1,060 1,112 1,230 Middle 60%, expenditure per capita 85 206 235 286 301 332 Consumer expenditure per capita 556 1,196 1,297 na na na Poorest 20%, expenditure per capita 250 538 583 na na na Richest 20%, expenditure per capita 1,231 2,649 2,872 na na na Richest 10%, expenditure per capita 1,600 3,444 3,734 na na na 433 931 1,009 na na na Consumer expenditure per capita Purchasing power parity Middle 60%, expenditure per capita e/f = BMI estimate/forecast. na = not available. Source: World Bank, Country data; BMI calculation © Business Monitor International Ltd Page 43 Vietnam Freight Transport Report Q1 2012 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part of all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Transport Industry There are a number of principal criteria that drive our forecasts for each transport variable: GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI’s own macroeconomic and demographic forecasts. Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small © Business Monitor International Ltd Page 44 Vietnam Freight Transport Report Q1 2012 domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ƒ Trends manifested through historical data; ƒ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). Port Traffic Port traffic levels act as a ‘second opinion’ on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ƒ Trends in historical modal split data; ƒ Evidence of government policy favouring one or more modes over others; ƒ Government and or private sector investment plans in specific modes. Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Ltd Page 45 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... 5,000DWT and 10,000DWT © Business Monitor International Ltd Page 11 Vietnam Freight Transport Report Q1 2012 We believe that this expansion in Vietnam' s port capacity is crucial to the country's economic growth as the transportation of freight through inland waterways accounts for a sizeable portion - 25-30% - of total domestic cargo transport Vietnam' s waterway system is one of the largest in relation to... Vietnam © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q1 2012 Rail Freight Growth Remains On Track Rail freight is set to continue its steady recovery from the contractions of recent years We estimate that rail freight tonnage grew by 4.83% y-o-y in 2011, and project this to rise by 5.29% in 2012 to 8.62mn tonnes In 2012- 2016 we forecast average annual tonnage growth... is the most advanced in terms of freight sector privatisation and is the dominant mode for © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q1 2012 freight, with a market share of around 60% of domestic cargo Few foreign companies are present in the market, and there are many small, family owned road freight companies operating informally Vietnam has a national road network... into 2012, we expect the SBV to ease monetary policy in light of moderating inflation and this should support a pickup in economic growth Accordingly, we are maintaining our real GDP growth forecast of 6.3% for 2011, followed by a pickup towards 7.2% in 2012 © Business Monitor International Ltd Page 33 Vietnam Freight Transport Report Q1 2012 Company Profiles Vietnam Airlines Cargo Strengths ƒ Vietnam. .. Ltd Page 19 Vietnam Freight Transport Report Q1 2012 Industry Forecast Road Freight Steady Growth On Horizon We are once again maintaining our forecasts for road haulage over our forecast period to 2016 Steady growth is projected, with 2012 set to see similar year-on-year (y-o-y) tonnage growth as that of 2011 (6.97% compared to 6.47% respectively) This equates to 599.86mn tonnes of road freight handled... Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q1 2012 Kerry Logistics Invests In Vietnam Hong Kong-based Kerry Logistics announced in September 2011 that it is set to open a new logistics centre in Hanoi, Vietnam The centre will be located on the road to the main port of Haiphong, providing the company with excellent access to one of Vietnam' s major logistics hubs The 10,000... Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q1 2012 depth at the entrance Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion Vietnam' s port infrastructure is poor by international standards The WEF's 2011 Global Competitiveness Report ranks it 111th out of 142 countries,... centres in Vietnam, reports Eye for Transport Robert Tan, managing director of the South Asia region at Kerry Logistics, said: 'We have invested in developing a national logistics network in Vietnam during the last few years and the new Hanoi facility completes our coverage of the key industrial areas in North, South and Central Vietnam. ' © Business Monitor International Ltd Page 13 Vietnam Freight Transport. .. growth of 5.11% to 155.96mn tonnes in 2012, a figure which will break the 196mn barrier in 2016 © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q1 2012 Table: Maritime Freight - Throughput, 2008-2016 ('000 tonnes) 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f Port of Ho Chi Minh City * 20,180.00 19,140.00 31,132.00 33,450.71 36,111.78 39,148.54 42,406.25 45,959.94 49,772.44... Office of Vietnam Trade Table: Trade Overview 2008 2009e 2010e 2011e 2012f 2013f 2014f 2013f 2016f Imports, real growth, % y-o-y 11.92 -13.81 17.9 11.6 6.5 6.5 6.5 6.5 6.5 Exports, real growth, % y-o-y 10.85 -15 21 11 8 8 8 8 8 Total trade, real growth, % 11.38 -14.4 19.45 11.3 7.25 7.25 7.25 7.25 7.25 Real © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q1 2012 Table: