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... affect Vietnam' s freight transport sector © Business Monitor International Page 12 Vietnam Freight Transport Report Q1 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam. .. continue to so © Business Monitor International Page 22 Vietnam Freight Transport Report Q1 2014 Table: Vietnam Transport Network Length (km) Vietnam Transport Network Road Length (km) 180,549 km Railway... Vietnam Freight Transport Report Q1 2014 Taking Off Vietnam Air Freight, '000 tonnes e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam BMI expects the increase of air freight
Q1 2014 www.businessmonitor.com VIETNAM FREIGHT TRANSPORT REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 1750-5364 Published by:Business Monitor International Vietnam Freight Transport Report Q1 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: October 2013 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2013 Business Monitor International All rights reserved. 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Vietnam Freight Transport Report Q1 2014 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................. 10 Freight Transport .................................................................................................................................... 10 Political ................................................................................................................................................. 13 Economic ............................................................................................................................................... 14 Business Environment .............................................................................................................................. 15 Industry Forecast .............................................................................................................. 16 Road Freight ......................................................................................................................................... 19 Table: Road Freight 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Inland Waterways .................................................................................................................................. 20 Table: Inland Waterway Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Rail Freight .......................................................................................................................................... 22 Table: Vietnam Transport Network Length (km) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Table: Rail Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Air Freight ............................................................................................................................................ 24 Table: Air Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Maritime Freight ................................................................................................................................... 26 Table: Maritime Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Trade ................................................................................................................................................... 28 Table: Trade Overview, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table: Key Trade Indicators, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Table: Top Import Destinations, 2004-2011, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Table: Top Export Destinations, 2004-2011, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Market Overview ............................................................................................................... 32 Industry Trends And Developments ................................................................................ 38 Maritime .............................................................................................................................................. Multimodal ........................................................................................................................................... Air ...................................................................................................................................................... Road .................................................................................................................................................... 38 38 39 40 Company Profile ................................................................................................................ 42 Vietnam Airlines Cargo ............................................................................................................................ 42 Vietnam Petroleum Transport Company (VIPCO) .......................................................................................... 45 Vietnam National Shipping Lines (Vinalines) ................................................................................................ 47 Political Outlook ................................................................................................................ 51 Political Risk Analysis .............................................................................................................................. 51 Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 © Business Monitor International Page 4 Vietnam Freight Transport Report Q1 2014 Long-Term Political Outlook ..................................................................................................................... 54 Oil Price Outlook ............................................................................................................... 58 Global Oil Products Price Outlook ............................................................................................................. 58 Methodology ......................................................................................................................................... 58 Crude Price Forecasts ............................................................................................................................ 58 Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Variance Across Product Markets ............................................................................................................. 60 Narrower US Market Crude-Product Spreads .............................................................................................. 62 Weak Demand Persists ............................................................................................................................ 64 Risks To Outlook .................................................................................................................................... 65 Table: BMI's Refined Products Forecasts, US$/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Supply: Supported By Global Refining Capacity ........................................................................................... Naphtha: US Gas Hits Demand ................................................................................................................ Gasoline And Gasoil/Diesel: Subsidies & Fuel Efficiency Cap Upward Movement ............................................. Jet Fuel: Limited Upward Movement ......................................................................................................... 66 70 72 74 Table: Total Air Freight And Passenger Volumes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest ............................................................................. 76 Macroeconomic Forecasts ............................................................................................... 80 Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Demographic Forecast ..................................................................................................... 84 Demographic Outlook .............................................................................................................................. 84 Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Methodology ...................................................................................................................... 88 Industry Forecast Methodology ................................................................................................................ 88 Sector-Specific Methodology .................................................................................................................... 89 Sources ................................................................................................................................................ 90 © Business Monitor International Page 5 Vietnam Freight Transport Report Q1 2014 BMI Industry View Although we expect the Vietnamese economy to record yet another quarter of sub-par growth in Q4 2013 (at the time of writing), we are beginning to see potential for upside surprises to domestic demand over the coming quarters, providing potential comfort to the country's freight mix. Recent data on foreign direct investment inflows, remittances, passenger car sales, and property market launches, suggests to us that domestic demand is on a nascent recovery, setting the stage for stronger 2014 growth. The general consensus is expecting the Vietnamese economy to suffer yet another quarter of sub-par growth mainly due to subdued external demand and the lack of progress on banking sector reforms. This is closely in line with our view that real GDP growth will come in at just 5.3% in 2013, a slight improvement from 5.2% in 2012. Looking ahead to 2014, however, evidence of improving macroeconomic fundamentals in Vietnam (especially with regards to the outlook for domestic demand) suggests to us the balance of risks to our growth forecast of 6.0% is gradually tilting towards the upside. Total foreign direct investment (FDI) inflows are also set to surpass the government's full-year target of US $13bn, after data released by the Ministry of Planning and Investment showed that inflows surged by 19.5% year-on-year (y-o-y) growth over the first eight months of the year. The strong reading chimes with our view that the country's solid long-term growth story should continue to attract foreign investors over the coming years. In terms of the Vietnamese freight industry, 2014 is set to see healthy growth across the board, albeit slightly slower than 12 months previous for most modes. Leading the way for year-on-year growth will be road freight with impressive double digit increases expected (11.90%). The air freight sector will see annual tonnage growth of 5.11% in 2014, while the ports of Da Nang and Ho Chi Minh City will both perform well (7.00% and 6.06% respectively. Rail freight lags a little in y-o-y growth terms, with 3.12% annual growth pencilled in for 2014. © Business Monitor International Page 7 Vietnam Freight Transport Report Q1 2014 Headline Industry Data ■ 2014 rail freight tonnage is set to increase by 3.12% to 7.52mn tonnes. ■ 2014 air freight tonnage is forecast to rise by 5.11% to 198,700 tonnes. ■ Tonnage handled at the Port of Ho Chi Minh City in 2014 is forecast to grow 6.06%, whereas tonnage handled at the Port of Da Nang is forecast to increase 7.00%. ■ 2014 road freight tonnage is forecast to grow by 11.90% to 902.64mn tonnes. ■ 2014 total trade is forecast to rise by 5.30%. Key Industry Trends Vinashinlines Completes Sale Of 90% Of Fleet - Vinashinlines, the Vietnamese shipping company, has sold off 90% of its vessels, according to Hellenic Shipping News in October 2013. The firm added that a number of the carriers had been purchased for prices above their original valuation. Vinashinlines' bankrupt parent company Vinalines has revealed plans to reduce its operations, after reaching agreements with crediting organisations and assessing industry demand. Vanguard Opens New Vietnamese Offices - Vanguard Logistics Services announced that it had extended its reach in Vietnam with the establishment of new offices in Hanoi and Haiphong, following on from the opening of its inaugural office in Ho Chi Minh City six years ago. Airport Clears Cargolux 747-8 Operations - The first Boeing 747-8 freighter flight has been operated by Luxembourg-based cargo airline Cargolux at Tan Son Nhat International Airport in Ho Chi Minh City it was reported at the end of July 2013. The move comes after the aircraft secured certification from the airport. The first-ever Boeing 747-8 freighter revenue flight was operated by the airline to Hanoi's Noi Bai International Airport in March, thereby making this destination the 100th 747-8 certified airport worldwide. Meanwhile, Cargolux has also managed to raise its air cargo services destined to Hanoi to three times on a weekly basis. © Business Monitor International Page 8 Vietnam Freight Transport Report Q1 2014 Key Risks To Outlook Vietnam's transport ministry has announced that it will not issue any licenses for the construction of new container ports in Ba Ria-Vung Tau, Ho Chi Minh City and Dong Nai until 2015. This comes as ports in Cai Mep-Thi Vai have been carrying out operations at far below capacity. This forms part of measures by the government to enhance operation efficiency of the port system in the three localities. Meanwhile, the government has also decided not to expand existing ports in Ho Chi Minh City to move goods to Cai MepThi Vai. The ministry will consider granting permission for new ports only after 2015 depending on market demand. Headwinds are expected in the short term for coffee exports in Vietnam. The country's coffee exports are likely to stagnate over the coming quarters due to lower robusta prices and a coffee export sector crisis. Coffee prices in Vietnam have been on a declining trend for the past two years, and have averaged US $1,918/tonne since the start of 2013, down 3.8% y-o-y. As a result, coffee farmers have been hoarding beans in order to obtain better prices later on. Meanwhile, of the 127 local coffee export firms that operated in Vietnam a year ago, 56 have ceased trading, as the industry is plagued by insolvency, and a credit squeeze, according to industry reports. © Business Monitor International Page 9 Vietnam Freight Transport Report Q1 2014 SWOT Freight Transport SWOT Analysis Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for thousands of kilometres on a north-south axis, creates a need for long-distance freight haulage. ■ A recovery of activity levels at the nation's ports in 2010 is expected to continue over the mid-term to 2018. ■ 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. Weaknesses ■ 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 a growing problem. ■ Unresolved business environment issues and lack of significant improvement in access to infrastructure financing means that we remain very conservative on the growth potential of Vietnam's freight sector. ■ A slowdown affecting the US economy has a knock-on effect on Vietnam due to it being the Asian country's largest export partner. Opportunities ■ 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. © Business Monitor International Page 10 Vietnam Freight Transport Report Q1 2014 SWOT Analysis - Continued ■ Growing international interest in Vietnam as a growth market within the box shipping sector. ■ The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. ■ Germany-based freight company Logwin has seen growth on its Eastern China to Vietnam trade lane across a range of industries, including IT hardware and garments, in 2012, reported JOC at the end of February 2013. ■ The president of Russian Railways (RZD) has explained his belief that an investment in the construction of a new rail line in southern Vietnam will come in at more than US $2bn. Speaking to IA Prime, Vladimir Yakunin said that 'it is difficult to talk about it now, because there is no project', but as it stands, an agreement of intent was signed on March 11 2013 between RZD, Vietnamese Railways and the mineral deposit company An Vien, also from Vietnam. ■ It was announced in June 2013 that the Laos government is to build a new railway line between the country and its Asian neighbours, Vietnam and Thailand. The 220km line will run from Laos's Western border with Thailand to the Lao Bao border gate in Vietnam. Construction will commence in August 2013 with an expected completion date of the second half of 2017. ■ The 900,000 twenty-foot equivalent units (TEUs) deepwater Lach Huyen terminal project will entail a total investment of US$1.2bn and is likely to become operational in 2015. The terminal, likely to ease port congestion in Haiphong, will be able to accommodate vessels with a capacity ranging between 8,000TEUs and 9,000TEUs. Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. © Business Monitor International Page 11 Vietnam Freight Transport Report Q1 2014 SWOT Analysis - Continued ■ Vietnam is vulnerable to any slowdown in Chinese investment and to political risk in the sensitive South China Sea, subject to competing sovereignty claims. ■ A drop in international demand for exports would negatively affect Vietnam's freight transport sector. © Business Monitor International Page 12 Vietnam Freight Transport Report Q1 2014 Political SWOT Analysis Strengths ■ 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. Weaknesses ■ 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. Opportunities ■ 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 within the one-party system. Threats ■ Macroeconomic instabilities in 2012 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. © Business Monitor International Page 13 Vietnam Freight Transport Report Q1 2014 Economic SWOT Analysis Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2012. ■ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 14.0% in 2010. Weaknesses ■ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to global economic uncertainties in 2012. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. ■ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. Opportunities ■ 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. Threats ■ 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 Page 14 Vietnam Freight Transport Report Q1 2014 Business Environment SWOT Analysis Strengths ■ Vietnam has a large, skilled and low-cost workforce, which 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. Weaknesses ■ 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. According to Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123 out of 176 countries. Opportunities ■ 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. Threats ■ 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 Page 15 Vietnam Freight Transport Report Q1 2014 Industry Forecast Latest data published by the General Statistics Office (GSO) showed that the Vietnamese economy expanded by 5.1% in the first nine months of 2013, closely in line with our forecast for real GDP growth to come in at 5.3% for 2013. We note that the final quarter has traditionally been the strongest for the Vietnamese economy over the years. This is partly due to seasonal factors such as the timing of business spending and the implementation of government-led investment projects that typically pick up in the final quarter. Accordingly, we expect economic activity to have accelerated as we head into 2014. The latest figures published by the General Statistics Office (at the time of writing in October 2013) showed that headline consumer price inflation (CPI) slowed from 7.5% year-on-year (y-o-y) in August to 6.3% in September, despite concerns that fuel price hikes in July could generate inflationary pressures. The latest reading is closely in line with our expectations that over the medium term, stable commodity prices and subdued credit growth will continue to keep headline CPI anchored around our full-year average forecast of 7.0% for 2013. GDP To Enjoy Healthy Mid Term Vietnam Real GDP growth, % change y-o-y 7.5 7 6.5 6 5.5 2018f 2017f 2016f 2015f 2014f 2013f 2012 2011 2010 5 e/f = BMI estimate/forecast. Source: Asian Development Bank, General Statistics Office © Business Monitor International Page 16 Vietnam Freight Transport Report Q1 2014 To keep pace with growth, Vietnam will continue to need to invest in its logistics sector, but BMI expects a lot of this investment to come from outside logistic and freight transport companies which will be keen to enter and expand into this high growth market. We have already witnessed this to some extent in Vietnam's port sector, with considerable investment being made by container shipping lines and global port operators in the development of modern box terminals at Vietnam's ports. This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can be achieved with greater links between the country and its main export partner the US. Direct container shipping links between Vietnam and the US have been in operation since 2009, which have cut both time and cost, as previously Vietnamese shipments had to be transhipped via Singapore. Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam's exports set to benefit from the slow, but steady recovery in the US economy. China And The US To Drive Export Growth LHC: Vietnam's Main Export Partners By % 2011. RHC: China and US Real GDP growth, % change yo-y *2012 data is a BMI estimate. f = BMI forecast. Source: CIA World Factbook, National Bureau of Statistics and BEA © Business Monitor International Page 17 Vietnam Freight Transport Report Q1 2014 Vietnam's export outlook will also continue to be bolstered by China's growth outlook. Although we project China's economic growth to slow over the medium term, the country's real GDP growth outlook remains robust. Vietnam plays a key role in China's coal supply chain. Vietnam is China's fifth-largest coal supplier providing the country with the thermal coal it requires for its power stations. Vietnam's role in this supply chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors' reliance on coal. While we believe that the percentage supplied by coal fired power plants within China's overall energy mix will slip over the medium term, it will nevertheless remain above 70%. Playing A Major Role In China's Coal Supply Chain China Coal Imports By Partner 2012 (tonnes) Source: China Custom BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class, as the country starts to import more from abroad. © Business Monitor International Page 18 Vietnam Freight Transport Report Q1 2014 Road Freight Road Dominates And Offers Best Links Into China Despite its low standing in road infrastructure, with the Global Economic Forum ranking Vietnam's roads at 123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logistics needs are primarily met by road. In 2013, we predict that road freight volumes in Vietnam will account for the majority of freight carried in the country. Road Reliant Vietnam Freight Mode Breakdown By Market Share 2013e Source: BMI We forecast that growth in road freight volume will continue to impress, with double-digit growth once more expected in 2014 (11.90%). This figure is up slightly from 2013's 11.70% and over the medium term, we forecast road freight volume growth will average 11.54% per annum reaching a projected 1.39bn tonnes in 2018. © Business Monitor International Page 19 Vietnam Freight Transport Report Q1 2014 There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road freight expertise expand in Vietnam. Recently, both FedEx and DHL have been expanding their role in Vietnam. While some companies are breaking into Vietnam by developing their own operations in the country, others are getting a head start by acquiring and joining up with domestic freight operators. This is the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group. Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's export supply chain. Road is the main form of transport linking Vietnam's factories to the country's ports and also plays a key role in linking Vietnam with its second-largest export partner China. Vietnam's northern border links the country's with the south of China. Road links continue to be developed between the two and with them trucking services. Kerry Asia Road Transport (Kart), for example, offers a twice-weekly trucking link connecting Shenzhen and Hanoi. Table: Road Freight 2011-2018 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Road freight, '000 tonnes 654,127 722,156 806,649 902,640 1,010,054 1,126,210 1,253,472 1,392,607 - % change y-o-y 11.43 10.4 11.7 11.9 11.9 11.5 11.3 11.1 Road freight, mn tonnes/km 40,130 43,902 46,995 50,183 53,542 57,058 60,692 64,436 - % change y-o-y 10.92 9.4 7.04 6.78 6.69 6.57 6.37 6.17 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Inland Waterways Mekong Offers Trade Links With Neighbours Vietnam's inland waterways play a considerable role in the country's freight transport sector making it the second-largest freight transport mode in the country. In 2013, we estimate that 177.46mn tonnes of freight were carried by the nation's waterways, a y-o-y growth of 5.32%. In 2014 and over our forecast period to 2018, we forecast y-o-y growth to remain over 5%. © Business Monitor International Page 20 Vietnam Freight Transport Report Q1 2014 Mekong Offers Trade Connections Map of the Mekong River Source: BMI The country's inland waterways stretch for 17,702km, of which 5,000km is navigable for vessels with a draught of up to 1.8m. Vietnam's dense network of waterways ranks its seventh in the world in terms of length. The country's inland waterways include the Mekong River, which enables freight connections with Vietnam's neighbours. Although we highlight that the River's full potential has not been reached and so development in the River is an area for potential investment. © Business Monitor International Page 21 Vietnam Freight Transport Report Q1 2014 Table: Inland Waterway Freight, 2011-2018 Inland waterway freight, '000 tonnes - % change y-o-y Inland waterway freight, mn tonnes/km* - % change y-o-y 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 160,165 168,493 177,455 186,691 196,424 206,615 217,144 228,011 11.05 5.20 5.32 5.21 5.21 5.19 5.10 5.00 34,372 37,018 38,970 40,981 43,100 45,319 47,611 49,977 8.50 7.70 5.27 5.16 5.17 5.15 5.06 4.97 *2012 data is an estimate. e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Rail Freight Network Lacking And No Impetus To Develop It Despite rail's potential as an overland trade link for Vietnam with its three neighbours, the mode's role in the country's freight transport sector remains small. In 2013, we estimate Vietnam's rail freight volumes accounted for just 1.8% of the total with the country's rail network transporting just 7.29mn tonnes of freight. Although like the other freight modes, we expect volumes to increase in line with Vietnam's economic growth outlook, rail freight volumes (while forecast to grow by around 18% over the next five years) will only be handling 8.54mn tonnes in 2018; this is still way below that which we forecast for the nation's other main freight modes, road and inland waterways. There are two key factors that we believe have held back Vietnam's rail freight development and will continue to do so. © Business Monitor International Page 22 Vietnam Freight Transport Report Q1 2014 Table: Vietnam Transport Network Length (km) Vietnam Transport Network Road Length (km) 180,549 km Railway 17,702 km Inland Waterway 2,632 km Source: CIA World Factbook The first is the quality of Vietnam's railway infrastructure. The Global Economic Formula gives Vietnam's rail infrastructure a low ranking, placing it 71st globally out of 123 countries measured. This ranking places it 12th out of its 13 Asian peers. A major problem for Vietnam's rail freight development is the relative shortness of the country's rail network. Vietnam's railway lines extend for just 2,632km; this compares with the country's 180,549km network of roads and 17,702km network of inland waterways. The second drawback for freight rail development in Vietnam is its gauge incompatibility with China. Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total. While the country has some standard gauge track, this system only accounts for 20% of the total. This means that rail freight trade between Vietnam and China is slowed by gauge changes, making road freight a more cost- and time-effective alternative; this stymies potential rail-freight projects between the two nations. BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam and Laos). © Business Monitor International Page 23 Vietnam Freight Transport Report Q1 2014 Table: Rail Freight, 2011-2018 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Rail freight, '000 tonnes 7,285 7,004 7,292 7,520 7,759 8,010 8,270 8,538 - % change y-o-y -7.33 -3.87 4.12 3.12 3.19 3.24 3.24 3.24 Rail freight, mn tonnes/km 4,162 4,025 4,218 4,457 4,709 4,973 5,246 5,528 5.08 -3.30 4.80 5.67 5.66 5.61 5.49 5.36 - % change y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Air Freight On Growth Trajectory As Vietnam Gets Better Connected Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector; although this is not expected to change there is a lot of growth potential in this sector. As intra-Asia air freight routes develop, Vietnam is becoming better connected with air freight routes internationally. The key sectors that are demanding air freight as a transport option, include consumer electronics and pharmaceuticals. In line with Vietnam's economic growth and the projected pick up in international air freight, BMI forecasts the country's air freight volume growth to remain healthy in 2014. We forecast Vietnam's air freight volumes to increase by 5.11% to reach 198,700 tonnes in 2013. Over the medium term (2014-2018), we forecast Vietnam's air freight levels to grow on average per annum by 5.95% to reach 252,350 tonnes. There are upside risks to these forecasts stemming from the continued interest of international air freight operators in Vietnam. Throughout 2012, Vietnam's Ho Chi Minh City airport became better connected with more air freight routes and BMI expects this trend to have continued in 2013 and beyond. © Business Monitor International Page 24 Vietnam Freight Transport Report Q1 2014 Taking Off Vietnam Air Freight, '000 tonnes e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes. In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi Minh City. Vietnam is also becoming globally better connected by air. In 2012, Emirates added a link with the country and Dubai, and in 2013, Finnair announced that it planned to launch new cargo routes to Hanoi. While still at the development stage, Vietnam is seeking to play a greater role in the electronics supply chain, a key source of demand for air freight transport options. One example has been the impact the local production of iPhones has had on China's air freight sector. Plans are in place for Vietnam-based facilities to produce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand. Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot. Vietnam's trade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term. The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, with the sector offering savings in transport time, along with environment controlled options, which are vital for the transport of some medicines and vaccinations. © Business Monitor International Page 25 Vietnam Freight Transport Report Q1 2014 Table: Air Freight, 2011-2018 Air freight, '000 tonnes - % change y-o-y Air freight, mn tonnes/ km - % change y-o-y 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 200.30 178.70 189.03 198.70 210.27 223.61 238.57 252.35 5.37 -10.78 5.78 5.11 5.82 6.35 6.69 5.78 426.70 480.90 499.51 527.98 557.98 589.38 621.84 655.31 -0.02 12.70 3.87 5.70 5.68 5.63 5.51 5.38 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Maritime Freight Box Role To Continue Expanding Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector. As highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulk commodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao. Vietnam is an oil-producing nation, but its consumption needs have come to outweigh its supply and so the country is making use of the liquid bulk shipping sector to import oil. It is in the container shipping sector that Vietnam has seen the most development, a trend which is expected to continue. As Vietnam has become the factory of Asia, with an emphasis on the development of clothing and shoe exports, the country's ports and shipping links have had to keep up. As mentioned, considerable investment was ploughed into Vietnam's container terminal sector over the past five years, with international players participating. This investment is now starting to yield results, with Vietnam now directly connected to the key demand market of the US (in 2009) and Europe (in 2010). © Business Monitor International Page 26 Vietnam Freight Transport Report Q1 2014 Getting Better Connected UNCTADstat Liner Connectivity Index For Asia 2004 and 2013 Source: UNCTADstat The development of Vietnam's liner connections has been highlighted by data from UNCTAD's liner connectivity index. In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container line connectivity, but by 2013, it had jumped up the rankings to ninth place out of its 14 Asian neighbours. Vietnam's growing role in the global container shipping sector is also in evidence in the port of Ho Chi Minh's box throughput. In 2013, we expect container volumes to have increased by 7.2% and over the medium term by an annual average of 8%. For more information on data and analysis of Vietnam's shipping sector, please see BMI's Vietnam Shipping Report. © Business Monitor International Page 27 Vietnam Freight Transport Report Q1 2014 Table: Maritime Freight, 2011-2018 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 33,451 36,029 38,867 41,223 43,986 47,176 50,748 54,212 7.45 7.71 7.87 6.06 6.70 7.25 7.57 6.83 Port of Da Nang throughput, tonnes '000 3,868 4,423 4,812 5,149 5,484 5,766 6,083 6,390 - % change y-o-y 17.10 14.35 8.80 7.00 6.50 5.15 5.49 5.05 Port of Ho Chi Minh City (Saigon New) throughput, tonnes '000 - % change y-o-y e/f = BMI estimate/forecast. Source: Port authorities Trade Table: Trade Overview, 2011-2018 Real 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Imports, real growth, % y-o-y 4.10 9.09 7.90 4.70 5.30 6.00 6.50 5.20 Exports, real growth, % y-o-y 10.78 15.71 5.60 5.90 6.50 6.84 7.00 7.10 7.44 12.40 6.75 5.30 5.90 6.42 6.75 6.15 112.40 118.98 137.19 155.11 173.89 194.64 219.24 242.54 24.17 5.86 15.30 13.06 12.11 11.93 12.64 10.63 106.84 124.43 140.42 160.57 182.06 205.40 232.45 261.80 - % change y-o-y 31.49 16.46 12.85 14.35 13.39 12.82 13.17 12.63 Total trade, US$bn 219.24 243.41 277.61 315.67 355.95 400.04 451.69 504.35 - % change y-o-y 27.63 11.03 14.05 13.71 12.76 12.39 12.91 11.66 Total trade, real growth, % y-o-y Nominal Imports, US$bn - % change y-o-y Exports, US$bn e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI © Business Monitor International Page 28 Vietnam Freight Transport Report Q1 2014 Table: Key Trade Indicators, 2011-2018 Agricultural raw materials 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Imports, US$mn 3,732 4,359 4,928 5,646 6,412 7,254 8,210 9,274 - % change y-o-y 39.98 16.79 13.06 14.56 13.56 13.15 13.17 12.96 Exports, US$mn 3,394 3,609 4,202 4,785 5,397 6,173 6,905 7,756 - % change y-o-y -1.23 6.31 16.43 13.88 12.78 14.39 11.86 12.31 794 935 1,064 1,226 1,398 1,585 1,803 2,036 - % change y-o-y 33.63 17.79 13.72 15.21 14.09 13.32 13.76 12.94 Imports, US$mn 4,378 4,656 5,425 6,182 6,976 7,806 8,876 9,821 - % change y-o-y 32.66 6.35 16.52 13.95 12.83 11.90 13.72 10.64 Exports, US$mn 2,000 2,392 2,747 3,196 3,674 4,239 4,811 5,494 - % change y-o-y 23.25 19.56 14.87 16.32 14.96 15.37 13.49 14.20 Ores and metals Exports, US$mn Iron and steel Imports, US$mn - % change y-o-y 75,011 79,418 91,612 103,606 116,183 129,903 146,492 161,938 23.89 5.88 15.35 13.09 54,310 63,656 72,150 82,857 12.14 11.81 12.77 10.54 Manufactured goods Exports, US$mn - % change y-o-y Imports, US$mn - % change y-o-y 33.09 17.21 13.34 14.84 94,278 106,540 121,002 136,440 13.78 13.01 13.57 12.76 74,001 78,335 90,328 102,124 114,493 128,060 144,326 159,592 24.18 5.86 15.31 13.06 12.11 11.85 12.70 10.58 17,073 19,771 22,223 25,314 28,610 32,280 36,370 41,043 12.40 13.91 13.02 12.82 12.67 12.85 14,085 14,936 17,291 19,607 22,035 24,721 27,900 30,946 13.40 12.39 12.19 12.86 10.92 Fuel Exports, US$mn - % change y-o-y Imports, US$mn - % change y-o-y 54.01 45.81 15.80 6.04 15.77 e/f = BMI estimate/forecast. Source: UNCTAD, BMI © Business Monitor International Page 29 Vietnam Freight Transport Report Q1 2014 Table: Top Import Destinations, 2004-2011, US$mn 2004 2005 2006 2007 2008 2009 2010 2011 China, Mainland, US$mn 4,595 5,900 7,391 12,710 15,974 16,441 20,019 24,594 China, Mainland, US$mn, % of total 14.37 16.05 16.46 20.25 19.79 23.50 24.01 23.53 Korea, Republic Of, US$mn 3,359 3,594 3,908 5,340 7,255 6,976 9,761 13,176 Korea, Republic Of, US$mn, % of total 10.51 9.78 8.71 8.51 8.99 9.97 11.71 12.61 Japan, US$mn 3,553 4,074 4,702 6,189 8,240 7,468 9,016 10,400 Japan, US$mn, % of total 11.11 11.08 10.47 9.86 10.21 10.68 10.82 9.95 Singapore, US$mn 3,618 4,482 6,274 7,614 9,378 4,248 4,101 6,391 Singapore, US$mn, % of total 11.32 12.19 13.98 12.13 11.62 6.07 4.92 6.11 Thailand, US$mn 1,859 2,374 3,034 3,744 4,906 4,514 5,602 6,384 5.81 6.46 6.76 5.97 6.08 6.45 6.72 6.11 31,969 36,761 44,891 62,765 80,714 69,949 83,365 104,510 53.28 55.69 56.49 56.80 56.75 56.75 58.24 58.36 Thailand, US$mn, % of total TOTAL % from top 5 trade partners Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report Table: Top Export Destinations, 2004-2011, US$mn 2004 2005 2006 2007 2008 2009 2010 2011 United States, US$mn 5,025 5,924 7,845 10,105 11,887 11,356 14,238 16,928 United States, US$mn, % of total 18.97 18.26 19.70 20.81 18.96 19.85 20.39 18.23 China, Mainland, US$mn 2,899 3,228 3,243 3,646 4,850 4,909 7,309 11,125 China, Mainland, US$mn, % of total 10.95 9.95 8.14 7.51 7.74 8.58 10.47 11.98 Japan, US$mn 3,542 4,340 5,240 6,090 8,468 6,292 7,728 10,781 Japan, US$mn, % of total 13.37 13.38 13.16 12.54 13.51 11.00 11.07 11.61 Korea, Republic Of, US$mn 608 664 843 1,243 1,794 2,065 3,092 4,715 Korea, Republic Of, US$mn, % of total 2.30 2.05 2.12 2.56 2.86 3.61 4.43 5.08 1,065 1,086 1,445 1,855 2,073 1,885 2,373 3,367 4.02 3.35 3.63 3.82 3.31 3.30 3.40 3.62 26,485 32,447 39,826 48,561 62,685 57,196 69,820 92,881 Germany, US$mn Germany, US$mn, % of total TOTAL © Business Monitor International Page 30 Vietnam Freight Transport Report Q1 2014 Top Export Destinations, 2004-2011, US$mn - Continued % from top 5 trade partners 2004 2005 2006 2007 2008 2009 2010 2011 49.78 47.11 46.85 47.33 46.45 46.42 49.82 50.56 Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report © Business Monitor International Page 31 Vietnam Freight Transport Report Q1 2014 Market Overview Signs of Strong Momentum Abound We have witnessed some highly positive data at the time of writing that indicate strong momentum for growth over the coming months, and potentially into 2014. We highlight the rebound in manufacturing production activity, with the HSBC Purchasing Managers' Index (PMI) recording a robust 51.5 reading in September, the strongest reading since April 2011 (see 'PMI Surprises To The Upside, VNI Testing Resistance', October 3 2013). More importantly, foreign direct investment (FDI) inflows into the country have accelerated significantly in recent months and are expected to surpass the government's full-year target of US$13bn - usually an indication of improving business sentiment, and a precursor for an acceleration in private sector investment. We believe that the positive ripple effects from the factors above will serve as strong tailwinds for 2014 growth. Chinese and US demand remain integral factors influencing the performance of the Vietnamese freight picture over the mid term. In terms of the former, the import picture was slightly stronger in September, with imports growing by 7.4% y-o-y versus expectations of 7.0% growth. Oil imports hit an all-time high in a signal that domestic demand is bouncing back. That said, as we have previously argued, it seems as though the main growth driver continues to be unsustainable infrastructure and housing-related spending, which we believe will begin to fade as we head into 2014. While we recently become more upbeat about on the direction of the yuan, essentially calling for stability as opposed to weakness, we expect relative weakness versus the rest of the region. We also believe that we could see a potentially rapid collapse in the current account surplus over the coming quarters as past currency strength continues to support imports and hurt exports. In terms of the US, at the time of writing the country had only just sorted out the government shutdown debacle. Gallup's three-day tracking poll of economic confidence has collapsed in recent days, in line with our view that the first government shutdown in 17 years and contentious debates about the debt limit could weigh heavily on the US economy (see 'Shutdown Illustrates Political Risks To Economy And Markets', October 1). The indicator fell 12 points in the wake of the shutdown, the largest drop since the collapse of Lehman Brothers in 2008, and a larger decline than the nine-point drop that coincided with the federal budget sequester earlier this year. The index currently stands at -35, the weakest level since December 2011. That said, we remain positive on the growth trajectory for the US economy over the next several years, as we believe that many structural factors are aligning for a period of sustained growth, underpinning our © Business Monitor International Page 32 Vietnam Freight Transport Report Q1 2014 forecast for real GDP growth to average 2.4% per year from 2013-2018, up from 0.8% per year from 2008-2012. The labour market recovery, while well under way, has further to go, meaning that modest increases in job creation will prove to be a boon to spending over the medium term. Consumer deleveraging continues, meaning that a future upswing in credit will also accelerate private consumption. Furthermore, the cyclical components of GDP remain quite low as a share of the economy but have begun to turn higher, and improving trade dynamics will help reduce the drag of net exports on growth. A marked uptick in the PMI manufacturing index starting in summer 2013 confirmed many of these trends had begun to take hold (see 'PMI & Employment Data Point To Further Strength', August 5). We believe secular improvements in the US external account picture will contribute to the stronger real GDP growth that we forecast over the medium term. As US domestic energy production has increased rapidly in the last few years, imports of oil and petroleum products have trended lower, a dynamic that will help narrow the country's substantial energy trade deficit and reduce a long-running drag on net exports. Our Oil & Gas team forecasts that domestic oil production will average 3.8% growth per year over the next five years and net oil imports will contract by an average of 6.5% per year over the same period. Domestically, over the longer term, imports will be boosted by Vietnam's young population, as younger populations are generally more supportive of private consumption. The country has a population of 90.7mn, according to estimates for 2013 by BMI, 60% of which is under 35. We forecast that the population will be 94.1mn by 2017, with 57% under 35, and will rise to 97.7mn by 2022. Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo. Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally. © Business Monitor International Page 33 Vietnam Freight Transport Report Q1 2014 Investment Needed Across The Board Vietnam Transport Infrastructure Rankings * Rail infrastructure is measured out of 123. Source: Global Economic Forums Competitiveness Index Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's World Factbook. BMI believes the sector requires substantial investment as the quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142 countries 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 2,632km. The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and 527km of 1.435m gauge. Vietnam's Ministry of Transport has decided to classify the country's airports with an aim to attract investment in the country's aviation sector. The ministry believes that it is a difficult task to attract investment in the sector as it requires huge investment capital and high techniques and a longer time frame to take back the investment capital. The country recorded an increase in capacity of its domestic airports from 6mn passengers in 2000 to 52mn in 2012. © Business Monitor International Page 34 Vietnam Freight Transport Report Q1 2014 Meanwhile, an airport development programme approved in 2009 is moving ahead as per the schedule, according to the Civil Aviation Authorities of Vietnam. Vietnam is currently operating a state-owned airline Vietnam Airlines as well as private airlines, namely Vietjet Air, Air Mekong and a foreign invested airline Jetstar Pacific. Additionally, the government has also granted approval to the development of 25 airports. Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved. This total puts the country in a poor 97th place in comparison with other countries. Road Dominates Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013e) Source: General Statistics Office of Vietnam 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. Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited © Business Monitor International Page 35 Vietnam Freight Transport Report Q1 2014 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. BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep International Terminal (CMIT) since it opened in March 2011 as an important driver of growth. In addition to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011. Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks 111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Quality of Port Infrastructure. As such, APMT's commitment to improving CMIT's facilities is an important step both for the terminal and the country's shipping sector as a whole. The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger vessels to access the facility. BMI notes that these works are badly needed, as we are seeing a growing trend for shipping lines to order larger container vessels. The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping sector. State-owned shipbuilder Vinashin was bailed out in 2010 when its US$4.5bn debt threatened to bring down the entire Vietnamese economy. Widespread investment in the country's infrastructure is necessary if Vietnam is to compete with regional peers. Investment And Development Outlook The Vietnamese transport sector requires vast levels of investment. The majority of infrastructure investment in Vietnam over the next 10 years will be in the transport sphere, accounting for 65% by the end of 2021. Vietnam still suffers from a significant deficit in transportation infrastructure, and we believe the Vietnamese government will continue to develop this sector over the medium term. This is reflected in our forecast for transport infrastructure industry value, which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016. According to our key infrastructure projects database, there are US$171bn worth of infrastructure projects planned or currently under way 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 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs a year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. © Business Monitor International Page 36 Vietnam Freight Transport Report Q1 2014 The air freight sector will undoubtedly benefit from the planned construction work on a new passenger terminal at Long Thanh international airport. Costing an estimated US$6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities, it was announced in April 2013. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. The airport, which was approved in 2011 at a cost of US$6.74bn, will be the country's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year after becoming operational in 2020. Meanwhile, Shipowners in Vietnam are expected to offload more vessels form their fleets by the close of 2013, according to the Hellenic Shipping News. Firms planning to pare down their fleets include the Vinashin Joint Stock Company and Northern Shipping. Market analysts have previously warned that the economic potential of the Vietnamese shipping market has been limited by an excessive focus on non-core businesses. © Business Monitor International Page 37 Vietnam Freight Transport Report Q1 2014 Industry Trends And Developments Maritime Vinashinlines Completes Sale Of 90% Of Fleet Vietnamese shipping company Vinashinlines has announced that 90% of its vessels, including Diamond Way and Sea Eagle, have been sold. The firm added that a number of the carriers had been purchased for prices above their original valuation, Hellenic Shipping News reported in early October 2013. Vinashinlines' bankrupt parent company Vinalines has revealed plans to reduce it operations, after reaching agreements with crediting organisations and assessing industry demand. Berths At Cai Mep-Thi Vai Up For Lease Two berths at Vietnam's first state-built seaport, the Cai Mep-Thi Vai international port in Ba RiaVung Tau province, are set to be leased for 30 years, according to official sources. The Vietnam Ports Association has set the annual price at US$219.5mn for Cai Mep and US$130.5mn for the Thi Vai terminal. The search for qualified operators was under way at the berths built with help from the Japan Official Development Assistance programme as of August 2013 and Le Tuan Anh, head of international cooperation at the Vietnam Marine Administration, explained: 'This is the first time a state-invested infrastructure project has been put up for a 30-year lease.' Meanwhile, the director of the administration, Nguyen Nhat, said: 'This is a solution to help the state to more quickly recoup its investment capital. Operators that offer the highest price and have the best business plans will win the tender.' Multimodal has expanded its presence in Vietnam with the establishment of new offices in Hanoi and Haiphong, following on from the opening of its inaugural office in Ho Chi Minh City six years ago. Managing director of Southeast Asia, Mideast and the Indian subcontinent Jeff Lee explained in July 2013: 'I am eager to announce the establishment of Vanguard Hanoi and Haiphong. We have had agents in both of these locations since 2004, but now we are officially adding these points to our Vanguard network of offices.' © Business Monitor International Page 38 Vietnam Freight Transport Report Q1 2014 With the extended presence, the company aims to improve its services in the country, offering as it does more than 20 direct export services from Vietnam to countries such as the USA, Singapore and Hong Kong. Lee added: 'By expanding our global coverage through extending our presence in Vietnam, we are able to offer our customers greater visibility over a more seamless connection of our Vanguard-to-Vanguard network.' Air Airport Clears Cargolux 747-8 Operations The first Boeing 747-8 freighter flight has been operated by Luxembourg-based cargo airline Cargolux at Tan Son Nhat International Airport in Ho Chi Minh City, Vietnam it was reported at the end of July 2013. The move comes after the aircraft secured certification from the airport. The first-ever Boeing 747-8 freighter revenue flight was operated by the airline to Hanoi's Noi Bai International Airport in March, thereby making this destination the 100th 747-8 certified airport worldwide. Meanwhile, Cargolux has also managed to raise its air cargo services destined to Hanoi to three times on a weekly basis. Cargolux's interim president and chief executive Richard Forson said: 'A lot of production is moving to Vietnam and the country shows great determination in boosting its trade by approving its airports for B747-8F operations. We are happy to now be able to offer advanced B747-8 freighter services to all Cargolux destinations in Vietnam, a market that is of significant commercial importance to us.' Rang Dong Seeks Airport Construction Approval Vietnam-based Rang Dong Group has filed a petition to secure approval for developing Phan Thiet airport, reported the Daily in August 2013, citing the company's chairman Nguyen Van Dong. The company's estimated cost of the project is VND1trn (US$50mn). Rang Dong would also consider a plan to purchase airplanes to serve local and international flights in the future, provided the approval is secured, Dong added. The project, which has been planned for both civil aviation and military services, would be able to serve 500,000 passengers annually by 2020, according to a zoning plan drafted by the Civil Aviation Authority of Vietnam. © Business Monitor International Page 39 Vietnam Freight Transport Report Q1 2014 Road PPP Momentum On The Express But Not Without Road Blocks On September 19 2013, the Vietnam Ministry of Transport (MOT) and the World Bank completed the fourth and final investor conference for the US$757mn Dau Giay-Phan Thiet expressway project. The conference was aimed at showcasing the 98.7km expressway to international investors interested in becoming the project's secondary investor. In July 2013, the Vietnamese government had selected Vietnambased Binh Minh Import-Export Production and Trade Company (Bitexco) as the primary developer of the 4-lane project, with Bitexco providing up to 60% of total equity investment and the remaining 40% by the secondary investor. Applications for a Request for Qualification are due on November 29 2013, with the project to be awarded in the fourth quarter of 2014 under a 30-year Design, Build, Finance, Operate, Maintain and Transfer concession. The project is expected to start construction in June 2015 and be ready for commercial operations in January 2019. Potential Not In DoubtThe project has garnered significant private-sector interest, with over 100 participants attending the final conference at Hanoi. We find this unsurprising as the project has significant scope to achieve an impressive return on investment. The Dau Giay-Phan Thiet expressway will serve an area that includes some of Vietnam's major economic regions - namely, Ho Chi Minh City, Dong Nai, Binh Thuan and Vung Tau provinces. According to documents from the project's lead transaction advisor, CRISIL Infrastructure Advisory, 47% of industrial zones in Vietnam are located in the expressway's proximity, while figures from the World Bank in 2011 showed that the area that will be served by the expressway accounted for 44% of total foreign direct investment (FDI) into Vietnam. The Dau Giay-Phan Thiet expressway project is also the first road project and the largest infrastructure project to be developed under a public-private partnership (PPP) format in Vietnam. As such, it serves as a reflection of the country's ability to implement infrastructure projects under a PPP framework and any failures would be a significant blow to investor confidence. ADB To Provide US$410mn Road Loan To Vietnam The Asian Development Bank (ADB) has announced that it will provide a US$410mn loan for the Vietnamese government, reports KHL Group. The loan will enable the government to develop a new © Business Monitor International Page 40 Vietnam Freight Transport Report Q1 2014 arterial road between Ho Chi Minh City, the Mekong Delta and the south of the country. The estimated cost of the project is US$860mn. © Business Monitor International Page 41 Vietnam Freight Transport Report Q1 2014 Company Profile Vietnam Airlines Cargo SWOT Analysis Strengths ■ Vietnam Airlines Cargo is the main air cargo provider in Vietnam. ■ The recent green light given to the purchase of Jetstar Pacific will only strengthen the company's domestic position. Weaknesses ■ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant on using the bellyholds of its parent company's planes. Opportunities ■ 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. ■ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could result in cargo being transported in the bellyholds of aircraft in the future. ■ At the end of 2012, Vietnam Airlines announced that it was to introduce a new air route linking the Vietnamese capital with Jakarta, in a bid to 'boost tourism and economic links between Vietnam and Indonesia', according to Bloomberg Business Week. The flights will depart on Tuesdays, Wednesdays, Fridays and Sundays, leaving Ho Chi Minh City at 10am local time, and arriving in Jakarta at 1pm local time. Jakarta is now connected to six ASEAN countries in total. ■ Vietnam Airlines has increased the frequency of its flights to Gatwick Airport, London, it was announced in April 2013, potentially opening the door for further link ups between the two countries. ■ In order to ease congestion at Ho Chi Minh City's Tan Son Nhat International Airport, Vietnam, officials at a meeting in Hanoi in July 2013 called for a new airport to be built in the country. Thanh Nien News reported the chairman of the board, Airports Corporation of Vietnam, Nguyen Nguyen Hung as stating: 'We should have started construction by now, in order to have the first phase completed by 2020.' © Business Monitor International Page 42 Vietnam Freight Transport Report Q1 2014 SWOT Analysis - Continued Threats ■ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Company 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 bellyholds 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), parent company Vietnam Airlines began operating a direct air route to the UK in the last months of 2011. The service flies to Gatwick Airport, with cargo space available in the bellyholds of planes going to and from London. Latest Activity US and Vietnam Forge Aviation Ties There is further room for co-operation between Vietnam and the US in the coming years, it was declared at the US-Viet Nam Aviation Co-operation Working Group held in Ho Chi Minh City in September 2013.The US Consul General in Ho Chi Minh City, Rena Bitter explained that the event reinforced the two governments' growing relationship: 'The US and Vietnam's co-operation in the aviation industry is robust,' she asserted. Bitter stated that the US Trade Development Agency had provided more than US$1mn in funding to the Civil Aviation Administration of Vietnam in order to support its safety efforts. According to the general director of the Airport Corporation of Vietnam, Le Manh Hung: 'The number of domestic and international passengers has risen but Vietnam's aviation © Business Monitor International Page 43 Vietnam Freight Transport Report Q1 2014 sector still faces challenges as it is somehow influenced by an economic downturn and infrastructure development. Infrastructure for aviation should be further improved to meet travel demand.' © Business Monitor International Page 44 Vietnam Freight Transport Report Q1 2014 Vietnam Petroleum Transport Company (VIPCO) SWOT Analysis Strengths ■ Around 60% of VIPCO's fleet is employed by Petrolimex. ■ The company boasts a relatively young fleet. ■ It has diversified away from operating in a single sector, with a real estate arm. Weaknesses ■ VIPCO only operates in one shipping sector. Opportunities ■ The company plans to expand its fleet, although no further information is currently forthcoming. Threats ■ 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. Company Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime transport for petroleum products. The company has a diversified portfolio, including 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 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 either in newbuilds or purchasing tankers under the age of 10 years. The company plans to boost its fleet to 200,000DWT. The majority of VIPCO's tanker fleet (60%) is employed to meet the transport needs of the Vietnam National Petroleum Corporation (Petrolimex). The remaining 40% is charted to other consignees. Via its connection with Petrolimex, the company is able to cater for Vietnam's oil sector. While Vietnam 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. The board of directors of Petrolimex announced the establishment of a new whollyowned subsidiary, PG Tanker, in 2013, with Nguyen Anh Dung made chief executive © Business Monitor International Page 45 Vietnam Freight Transport Report Q1 2014 officer. Headquartered in Hanoi, the subsidiary will be charged with transporting oil products, marine services and the repair and building of tankers. Financial Data 2011 For the final quarter of 2011, VIPCO registered a drop in net income to VDN8bn, down from VDN51.7bn a year previously. Meanwhile, in mid-February 2012, the company saw its share price fall 2.2% to VND4,500. For the first half ended June 2011, the company reported a net profit of VND38.66bn (US$1.88mn), which represents a 121% year-on-year (y-o-y) increase. Revenues rose 36% y-o-y to VND943.12bn during this period, while six-month earnings per share were VND647, compared with less than half of that for the corresponding period of 2010. Latest Activity New MoU Signed Vietnam National Petroleum Group (Petrolimex) made a company announcement at the end of July 2013 relating to a newly signed memorandum of understanding (moU) with Japan International Cooperation Agency (JICA) and Tamada Industries, Inc. (Tamada) relating to 'cooperation in the trial project of double-shell tank against harmful matters.' The tanks will also enable cost savings for installation, inspection and repair, compared to the bitumen-coated tanks currently used. The trial will last 18 months, from July 2013 to December 2014. © Business Monitor International Page 46 Vietnam Freight Transport Report Q1 2014 Vietnam National Shipping Lines (Vinalines) SWOT Analysis Strengths ■ Diversified fleet operating in dry bulk, container and oil transport. ■ Largest commercial shipping line in Vietnam. ■ On December 16 2012, Vinalines launched the second biggest bulk carrier in Vietnam in Hai Phong city. Named Vosco Sunrise, the bulk carrier has been designed to cater for a deadweight of 56,200DWT. Weaknesses ■ Vietnam does not play a role on the major Asia-Europe routes, despite developing as a direct port of call on these routes. ■ The US$3.6bn Van Phong International Port project, primarily constructed by stateowned Vinalines, was suspended in June 2011 following a reassessment of the geological conditions at the project site. ■ Vietnamese shipping company Vinalines is currently US$2.1bn in debt, reported Reuters in June 2012. ■ Vinalines' heavy exposure to Vietnam's domestic transport sector, which has been performing well recently, indicates that the firm's struggles go beyond the troubles facing the global industry. ■ According to chairman of Vietnam Shipowners' Association Vu Xuan Quynh, a large sell off of old tonnage is needed, with Vinalines seeking to offload around 1.4m dwt of ships, Sea Ship News reported in July 2013. ■ Vinalines was asked by the government to withdraw its plans to participate in the development of the northern Lach Huyen Port, reported Sea Ship News in March 2013. The company will continue to concentrate on its ongoing port projects; however, Hanoi said that it needs to make arrangement of funds before it can mull over additional expansion. Vinalines teamed up with Japan's Itochu, MOL and NYK for the development of the port. Opportunities ■ Vietnam is expanding its role in the global box market and it is fast becoming a mainstay port of call on Asia-Europe services. © Business Monitor International Page 47 Vietnam Freight Transport Report Q1 2014 SWOT Analysis - Continued ■ Potential to increase its intra-Asia role, shown by the expansion work at Cai Mep, and well placed to be chosen as a partner on these services by major lines. Threats ■ While Vietnam has invested heavily in its port network, the logistics supply chain could be let down by the landside freight network, which will have a negative impact on operators. ■ In 2011, Vinalines posted its first ever loss in 15 years of operations, with further losses expected. ■ Overcapacity is a threat over the medium term, unless money is pumped into port facilities and infrastructure. ■ Vietnamese police issued an arrest warrant for the former chairman due to the scandal rocking the debt-mired company. Duong Chi Dung has been accused of deliberately mismanaging Vinalines during his tenure. ■ Vinalines has been stung by the poor performance of the three container terminals it has joint venture interests in. Company Overview Vinalines is Vietnam's largest commercial shipping line. Established in 1996, it caters for domestic trade in Vietnam and 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. According to the company's website, Vinalines' fleet consisted of 128 vessels. The line is looking to expand, with a plan centred 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 intended, with the shipping line taking on 36 vessels from the debt laden Vietnamese shipbuilder Vinashin in July 2010. Vinaline's chairman, Duong Chi Dung, said at the time that up to two-thirds of the acquired vessels could not be used as they failed to meet technical requirements. He estimated that the company © Business Monitor International Page 48 Vietnam Freight Transport Report Q1 2014 would need to spend US$26mn to repair the vessels and purchase insurance cover. Dung added that the company 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 after joining forces with NYK in December 2010 to launch a Thailand-Vietnam-Singapore (TVS) service. Vinalines provides a 1,100 twentyfoot equivalent unit (TEU) vessel for the service. BMI believes that Vinalines' presence on the intra-Asia trade route will increase, with major lines looking to expand into the route and the company well placed to enter partnerships with them. Vinalines is also increasing its contacts in the container sector, partnering with a number of the majors on container terminal projects in Vietnam. According to Port Strategy, Vietnam is of increasing interest in East Asia, due to the fact that it is focusing on becoming 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. In September 2013, the wholly-owned limited liability company, Quy Nhon port under Vinalines launched an initial public offering as part of ongoing restructuring of the company, approved back in February 2013. Financial Data 2013 Vinalines is bracing itself for a full-year loss of VND2.1trn (US$101mn) already as the company continues to perform abysmally following 2012's reported loss of VND2.44trn. The company's CEO, Nguyen Canh Viet, said: 'There are few transporting contracts amid these crisis times, while several partners refused to clear their payment on time, despite the cheap fares.' 2012 Vinalines announced a VND1,439bn (US$69.2mn) loss during the first half of 2012, which is around double the losses incurred for the corresponding period a year previous. The loss was attributed to a 'perfect storm of liquidity and jobs woes', according to Vinalines director Nguyen Canh Viet, reported by Vietnam Investment Review. 2011 Vinalines recorded a VND62.15bn (US$3mn) profit for 2011, despite posting a loss of VND660bn (US$32mn) in H111 - the first time this has ever occurred in the company's 15 years of operations. The results came as a surprise to analysts who were expecting the company to suffer from the sinking of the bulker Vinalines Queen. In 2011, Vinalines shipped 36.8mn tonnes of cargo, which was a 1% annual increase on 2010. © Business Monitor International Page 49 Vietnam Freight Transport Report Q1 2014 Latest Activity The Vietnamese shipping industry is reportedly unlikely to meet ambitious targets set by the government, according to the Hellenic Shipping News at the end of July 2013. The government has set a target of 200-292mn tonnes of cargo by 2020, which would represent around 10% of the country's total transport volume. As companies struggle with huge debt obligations, managements have focused increasingly on maximising operation efficiency, as opposed to securing the increase in volumes demanded by the state-set targets. © Business Monitor International Page 50 Vietnam Freight Transport Report Q1 2014 Political Outlook Political Risk Analysis BMI View: The Communist Party of Vietnam (CPV)'s decision to implement an annual no-confidence vote for senior officials is a sign of progress for the country's evolving political system towards a more accountable and democratic government. We believe that the move will also have a significant influence on the CPV's economic agenda by putting pressure on senior government officials to speed up economic reforms. Back in June, the Communist Party of Vietnam (CPV) made an unprecedented move by allowing for a noconfidence vote on the performance of senior government officials, setting the stage for increased accountability for party members going forward. Government officials who received 'Low Confidence' votes from two-thirds of the 500-member National Assembly (NA) will face another vote, which could lead to their dismissal. Meanwhile, those who received more than 50% in 'Low Confidence' votes for two years consecutively will be asked to relinquish their post. More Accountability Ahead Vietnam - Officials With The Highest Share Of "Low Confidence" Votes, % Source: BMI © Business Monitor International Page 51 Vietnam Freight Transport Report Q1 2014 The move symbolises a significant milestone in Vietnam's evolving political system towards a more accountable and gradually more democratic system of government, a trend that we have highlighted for some time now. Not only is the CPV struggling to cope with a more informed population as a result of the rapid adoption of internet technologies such as social media, but policymakers are also facing mounting pressure to allow for democratic reforms due to an increasingly vocal and highly-educated population of young Vietnamese citizens. Overall, we view the latest move by the CPV as a highly positive development for the country's political landscape over the long run. Annual Vote To Play A Major Role In Guiding The CPV's Economic Agenda From an economic perspective, we believe that the introduction of the annual no-confidence vote will also have a significant influence on the government's economic agenda. However, we do acknowledge the risk that the annual vote may distort incentives by encouraging short-sighted policies. In the lead up to the vote, international political observers were largely skeptical of the results amid concerns that members of the NA would be tempted to use the vote as a tool to further their own political interests, rather than representing the public on economic issues. However, the results of the vote indicate that the NA has indeed reflected the public's key concerns over the economy in recent years. On The Right Track Vietnam - Short-Term Political Risk Ratings (out of 100) Source: BMI © Business Monitor International Page 52 Vietnam Freight Transport Report Q1 2014 SBV Under The Spotlight As the accompanying chart shows, government officials who were responsible for areas of the economy that had underperformed the public's expectations were among the group who received the highest 'Low Confidence' votes as a share of the total. The State Bank of Vietnam (SBV)'s chequered track record of managing inflation and the exchange rate in recent years led 42.6% of the NA to cast 'Low Confidence' votes on Governor of the State Bank of Vietnam (SBV) Nguyen Van Binh's performance. Meanwhile, 36.0% of the NA also voted against the Minister of Education and Training Pham Vu Luan for failing to meet the public's expectations on the country's progress for education reforms. Not surprisingly, Prime Minister Nguyen Tan Dung was also handed a poor report card given his responsibility for the overall performance of the economy, with 32.5% of the NA having voted against him. Mounting Pressure On Underperforming Officials Although all 47 senior officials who were subjected to the vote managed to garner the 50% support required to remain office, the results should nonetheless put tremendous pressure on the underperforming officials to further boost efforts to address the economy's shortcomings. Indeed, we view the introduction of the noconfidence vote to play a major role in speeding up economic reforms over the coming years. In light of the latest development, we have raised our score for the "Policy-making process" component of our short-term political risk ratings (STPR) for Vietnam from 80.0 to 83.3 (out of a score of 100). Accordingly, this raises Vietnam's STPR from a score of 76.9 to 79.0. Table: Vietnam Political Overview System of Government Single-Party Socialist Republic Head of State President Truong Tan Sang (serving first five-year term) Head of Government Prime Minister Nguyen Tan Dung (serving second five-year term) Last Election Parliamentary - May 2011 Presidential - July 2011 Composition Of Current Government Communist Party of Vietnam Key Figures The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nguyen Phu Trong, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung, and Minister of Public Security Tran Dai Quang. Other Key Posts National Assembly Chariman - Nguyen Sinh Hung, Minister of National Defence Phung Quang Thanh, Minister of Planning and Investment - Bui Quang Vinh, Vice President - Nguyen Thi Doan, Central Bank Governor - Nguyen Van Binh. © Business Monitor International Page 53 Vietnam Freight Transport Report Q1 2014 Vietnam Political Overview - Continued Main Political Parties (number of seats Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has in parliament) been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reform-minded faction originating from Southern Vietnam and an older generation, originating from the North, more aligned to traditionally communist ideology. Next Election Presidential and Parliamentary - May 2016 Ongoing Disputes Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South China Sea Key Relations/ Treaties ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council BMI Short-Term Political Risk Rating 79.0 BMI Structural Political Risk Rating 57.7 Source: BMI Long-Term Political Outlook 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 (CPV)'s 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 © Business Monitor International Page 54 Vietnam Freight Transport Report Q1 2014 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 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. © Business Monitor International Page 55 Vietnam Freight Transport Report Q1 2014 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 57.7/100 is weighed down by a score of 29.0 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: Scenarios For Political Change Core Scenario - CPV Turns Into A Technocratic Regime: Our core scenario is for the 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 pro-democracy 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 where 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 © Business Monitor International Page 56 Vietnam Freight Transport Report Q1 2014 the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe 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 Page 57 Vietnam Freight Transport Report Q1 2014 Oil Price Outlook Global Oil Products Price Outlook Oil product prices continued to rebound in Q313 as a result of upward movement in crude oil prices. However, they have not returned to Q113 levels yet despite all three crude grades - Brent, Dubai and WTI gravitating towards Q113 averages at the time of writing. This supports our view that a tapering in oil product prices is expected for the following reasons: lower crude oil prices, relatively muted demand and a comfortable supply picture in the downstream sector. Moving forward, growing challenges to oil-based fuels with the growth of gas and natural gas liquids production particularly in the US would also suppress rises in prices of oil-based products. Increasingly stringent emission controls in the shipping sector would see bunker fuel prices in Rotterdam particularly hit. Methodology Our refined products forecasts methodology is based on estimating the future spreads between each product - gasoline, gasoil/diesel, naphtha, jet fuel/kerosene, bunker fuel 180 and 380 - and its regional benchmark: WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. Therefore, changes in crude prices (and our crude price forecasts) will automatically trigger movements in our forecasts for oil product prices. Our estimates of the spread between crude prices and individual oil products are determined by the following: ■ Supply: This will be affected by changes in regional and global refining capacity. ■ Demand: This is partly a function of our expectations of the trajectory of the global economy. With regard to customers, we have identified four main sectors/users for the respective products: kerosene/jet fuel in the aviation sector, gasoline and diesel for retail users and land freight operators, naphtha in the petrochemicals industry (a gauge for industrial activity) and bunker fuel for the shipping sector. In our outlook for demand we therefore incorporate forecasts and the views of BMI's Shipping, Freight Transport, Autos and Petrochemicals industry analysis, as well as the assumptions and forecasts from BMI's Country Risk analysts, in an effort to incorporate a wide range of industry data. Crude Price Forecasts In October we revised our forecast for Brent and WTI for 2013. We now expect Brent to average US $107.60 per barrel (bbl) and WTI at US$98.40/bbl. Our forecast for Dubai, which takes into account the estimated spread between Dubai and Brent, is US$104.20/bbl (see BMI's Oil Price Outlook, 'Resistance To Remain Strong As Risk Premium Subsides', October 3). © Business Monitor International Page 58 Vietnam Freight Transport Report Q1 2014 Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) Brent WTI Dubai 2011 2012 2013f 2014f 2015f 2016f 2017f 111.05 111.70 107.60 102.80 102.00 101.00 99.00 95.05 93.30 98.40 101.50 101.00 96.00 94.00 106.15 108.88 104.20 101.50 100.50 98.50 96.50 f = forecast. Source: BMI © Business Monitor International Page 59 Vietnam Freight Transport Report Q1 2014 Variance Across Product Markets Crude oil prices rebounded particularly towards the end of Q313 as security risks in the Middle East led to supply fears. This is reflected in the increase seen across all products between Q213 and Q313. Brent, WTI Moves Back Up Front Month Price Of Brent & WTI, January - Present (US$/bbl) Source: Bloomberg However, the extent of this increase varied across the different products: Gasoline: High crude oil prices and the driving season pushed prices up, but the extent of this increase is less than that seen in crude prices. Going into 2014, gasoline prices fell despite a slight increase in Brent and Dubai in the European and Singaporean market. In New York, gasoline prices fell more than proportionately to the drop in WTI. From a high of about US$122.71 per barrel (bbl) on average across all three markets, the price of gasoline has fallen to about US$112.62/bbl at the time of writing. This suggests that there could be excess supply to demand in the gasoline market. © Business Monitor International Page 60 Vietnam Freight Transport Report Q1 2014 Slow Gasoline Move % Quarter-On-Quarter (Q-o-Q) Change In Gasoline And Crude Prices Source: Bloomberg, BMI Diesel/Gasoil and Jet Fuel: Prices across all three markets have kept steady at the average price in Q313 of about US$126.13/bbl. Jet fuel prices have also remained at Q313 levels at about US$125.40/bbl. The percentage change in prices across all three quarters has trended closely to the percentage change in crude prices. Naphtha: Prices at Singapore have rebounded 9.1% at the time of writing from US$93.09/bbl in Q213: this compares with a 7.01% and 7.84% increase in Dubai and Brent over the same period. Data on naphtha prices in Europe beyond July 9 has yet to be updated but have likely softened in Q313 as Platts report that many petrochemical firms in the region had turned to the cheaper propane over the season. Bunker fuel: Bunker fuel prices continue to be least resistant to changes to crude oil prices. While bunker fuel prices increased from Q213 to present, the extent of this rise was less than that seen in other fuels, supporting our view that a weak shipping sector would cap gains in bunker fuel prices. Growing emphasis on shifting to cleaner fuels has also hit bunker fuel prices, especially in the Rotterdam market owing to more stringent fuel standards in North West Europe. Of the three markets, bunker fuel prices in Rotterdam © Business Monitor International Page 61 Vietnam Freight Transport Report Q1 2014 have been the weakest, exhibiting a downtrend trend at the start of Q413 despite a quarter-on-quarter (q-oy) increase in crude oil prices. Weak Bunker Price Movement Endures Price Of Bunker Fuel 180 (LHC) & Bunker Fuel 380 (RHC), January 2013 - Present (US$/metric tonne) Source: Bloomberg The relatively mild changes seen in most product prices despite crude oil price fluctuations reinforces our view that oil product prices are likely to even out over 2013 following wild fluctuations. However, there are nuances to the price pattern among all three markets seen at the start of the quarter: ■ Rotterdam: Fall in gasoline, jet fuel and bunker fuel prices; ■ New York: Weakness in all product markets. This is most likely a result of a consumer concerns in face of a political impasse that has brought the operations of the US government down. ■ Singapore: Some strength seen across nearly all product categories. Narrower US Market Crude-Product Spreads Weak short-term sentiments surrounding the US' economic outlook, complicated by higher domestic crude prices owing to an easing of the Cushing glut, would significantly reduce the bumper refining margins US refiners enjoyed due to their access to discounted crude feedstock in 2012. Going forward, as US refiners have to compete with other producers in a well-supplied global market, we continue to expect the gains in product prices to be capped relative to gains in WTI. © Business Monitor International Page 62 Vietnam Freight Transport Report Q1 2014 However, we note that they would still benefit from larger crude-product spreads than their European and Asian counterparts, which a partial rebound expected in 2016 as a result of an expected short-term glut in crude oil in the US as production temporarily outstrips infrastructure capacity (see 'WTI Pushed Higher As Upside View Plays Out', July 26). Falling Over Time Expected Crude-Product Spread* In New York, Rotterdam & Singapore (US$/bbl) *Average of forecast spread between crude benchmark and the following products: Gasoline, gasoil/diesel, naphtha, jet fuel and bunker fuels. Source: Bloomberg, BMI © Business Monitor International Page 63 Vietnam Freight Transport Report Q1 2014 Weak Demand Persists Despite the recovery in crude prices, we maintain our outlook for lower prices for oil products as demand is expected to be muted over our forecast period from 2013 to 2017: ■ China worries: We have consistently highlighted in our Commodities team's monthly write-up on Chinese industrial imports that China's refined product imports could follow a downward trend - both a result of slower growth and an increase in domestic refining capacity as China slowly becomes a net oil products exporter, adding supplies to the global market. As the world's second-largest oil consumer, slower Chinese demand would further loosen up the global oil products market. Our Country Risk team reiterates that the loss of momentum in the Chinese machine will also have knock-on effects for other economies. ■ Upward fuel price revisions: Some of the fastest growing oil markets have adjusted fuel prices at the pump in the past quarter in order to correct economic imbalances: China (March), Indonesia (June) and Vietnam (July). Higher prices are likely to see a cutback in oil consumption, and consequently oil product imports in these countries. ■ Other emerging market problems: Fiscal and monetary problems faced by Brazil and Argentina where subsidies fuelled a boom in oil consumption - could eventually make subsidies unsustainable. This could hit oil product demand from Latin America. ■ Limited upside from US and Japan: Despite rising optimism in both the US and Japanese economies, we expect energy efficiency measures to limit oil demand growth that should accompany economic recovery. Moreover, Japanese oil consumption had been propped up in 2011 and 2012 by a switch to fossil fuels for power generation in the wake of the Fukushima nuclear meltdown. Tokyo is still considering the return of nuclear power, which could in turn reduce the power sector's demand for heavy fuels. ■ Weak consumption growth from Europe: Weakness in the eurozone, together with energy efficiency measures, will limit demand from this large market. ■ Increase in global refining capacity: The impact of this would be especially strong in the Asian market, thereby keeping margins depressed. ■ Beginning of a switch to alternative fuels: Liquefied natural gas (LNG) and biofuels can be expected to play a larger role, particularly in the transport sector as governments move to cap carbon emissions and as supplies of LNG and biofuels begin to grow. We expect these trends to continue into 2014. Our short-term forecasts for 2013 and 2014 show a year-onyear (y-o-y) decrease in prices across all products. This forms part of our view that an upward price trend that began in 2009 has reversed into a downtrend from 2012. This change is particularly pronounced in the bunker fuels market, for both 180 and 380 fuel grades. Nonetheless, , in the longer term, we expect prices to remain above levels seen in 2010 through to the end of our forecast period in 2017 as a result of high crude prices. © Business Monitor International Page 64 Vietnam Freight Transport Report Q1 2014 Risks To Outlook The risks we highlight to our forecasts are: ■ Crude oil prices: Although we have already priced in OPEC support for prices in our crude oil price forecasts, we assume that the OPEC price floor will be set at US$100/bbl. Any larger-than-expected cuts in OPEC output, together with security risks in the Middle East, could support oil product prices. ■ Regional discrepancies in the fall in prices: As such, broad generalisations should be taken with caution. ■ Slower-than-expected downward trend in prices: Falling prices may delay the rise of alternative fuels, including some early movement towards LNG and biofuels in the transport sector and the power sector, which we have already seen in the shipping and air freight industries. This could in turn taper the downward trend in fuel prices. Table: BMI's Refined Products Forecasts, US$/bbl 2011 2012 2013f 2014f 2015f 2016f 2017f Rotterdam 129.18 131.41 126.72 121.92 120.74 119.36 117.36 New York 128.23 130.74 123.40 121.50 119.00 117.60 115.60 Singapore 125.67 126.90 123.13 119.10 116.87 114.54 112.06 Global 127.70 129.68 124.42 120.84 118.87 117.17 115.01 Rotterdam 127.49 130.36 125.33 119.65 118.00 116.20 113.44 New York 126.64 130.79 125.77 123.39 120.70 119.64 117.64 Singapore 126.26 128.18 124.47 120.50 118.50 115.50 113.50 Global 126.80 129.78 125.19 121.18 119.07 117.12 114.86 Rotterdam 114.94 121.28 118.13 114.39 113.59 112.59 109.43 New York 119.30 124.79 121.38 119.89 117.55 114.20 112.20 Singapore 119.91 123.47 118.80 115.51 114.51 112.51 109.81 Global 118.05 123.18 119.44 116.60 115.22 113.10 110.48 Rotterdam 106.07 106.75 101.17 98.30 98.85 98.79 97.02 Singapore 102.46 102.87 101.20 100.50 99.50 97.50 95.50 Global 104.26 104.81 101.19 99.40 99.17 98.15 96.26 Rotterdam 97.27 101.52 96.40 91.49 89.56 87.31 85.18 New York 101.09 104.67 97.15 95.50 94.40 89.40 86.74 Jet Fuel Gasoil/Diesel Gasoline Naphtha Bunker Fuel 180 © Business Monitor International Page 65 Vietnam Freight Transport Report Q1 2014 BMI's Refined Products Forecasts, US$/bbl - Continued 2011 2012 2013f 2014f 2015f 2016f 2017f 100.14 102.46 95.22 92.07 92.01 90.86 89.63 99.50 102.88 96.26 93.02 91.99 89.19 87.18 Rotterdam 94.03 97.47 93.80 88.79 85.26 81.31 77.68 New York 97.13 100.32 94.89 92.99 90.49 83.49 79.49 Singapore 98.94 101.08 94.12 90.97 91.11 89.96 88.73 Global 96.70 99.62 94.27 90.92 88.96 84.92 81.97 Rotterdam 95.65 99.50 95.10 90.14 87.41 84.31 81.43 New York 99.11 102.50 96.02 94.25 92.45 86.45 83.12 Singapore 99.54 101.77 94.67 91.52 91.56 90.41 89.18 Global 98.10 101.25 95.26 91.97 90.47 87.06 84.57 Singapore Global Bunker Fuel 380 Bunker Fuel Average f = forecast. Source: BMI, Bloomberg Supply: Supported By Global Refining Capacity A slight increase in global refining capacity vis-à-vis demand between 2012 and 2017 will help contain dramatic increases in oil prices. According to our forecasts, based on refinery changes in our downstream database, refining capacity is expected to rise by approximately 10% between 2012 and 2017 - which is two percentage points higher than the growth we project for global oil consumption over the same period. Nonetheless, this expansion alone is insufficient to account for the fall in fuel prices that we expect to see. © Business Monitor International Page 66 Vietnam Freight Transport Report Q1 2014 A Comfortable Supply-Demand Picture Global Refining Capacity And Oil Consumption, 2010-2017 ('000b/d) f = forecast. Source: EIA, BMI The geography of expansion is highly uneven. Emerging markets in Asia, the Middle East and Africa are building up their capacity. However, developed economies such as Japan and Europe will see more refinery closures, which will in turn negate some of the loosening of the global fuels market that the former should have brought about. Emerging Markets Africa will see the fastest rate of regional refining capacity growth at 30%. However, the most significant growth in absolute volume will come from the Middle East - where Saudi Aramco has at least three large 300,000 barrels per day (b/d) refineries set to come online - and in Asia - where expansions continue apace in China and India, while Indonesia considers at least four large newbuild refinery projects. Meanwhile, Russia's refinery modernisation programme will see its plants continue to serve the market to make up for expected closures in Central Europe. Turkey - the fastest-growing market for oil in Europe - will also see significant refinery expansions. © Business Monitor International Page 67 Vietnam Freight Transport Report Q1 2014 Market Growth Spurs Refining Expansion Refining Capacity Of Emerging Markets, 2010-2017 ('000b/d) Selected CEE = Russia, Azerbaijan, Turkey, Turkmenistan; Emerging Asia = China, India, Indonesia, Pakistan, Thailand, Vietnam; f = forecast. Source: EIA, BMI Therefore, most of these markets will be adequately prepared to meet an expected increase in local fuel demand and will have spare capacity for export, especially the Middle East and Russia. Even China, has overtaken the US as the world's largest oil consumer, is on its way to becoming a net fuel exporter owing to a continued increase in its domestic refining capacity. This will loosen some pressure on global supplies and in turn prices. Developed Markets Among developed markets, the outlook is brightest for US refiners which are amply supplied by cheaper crude feedstock available in the North American markets, thanks to a production boom in the US and Canada. However, due to fragmentation of the US refined fuels market, where supplies are concentrated in the refining heartlands of the Midwest and Gulf Coast, prices in import-dependent New York (East Coast) are expected to remain elevated and follow international trends. This will create an uneven market with prices that can vary vastly from region to region, reflecting differences in the crude baskets that refiners have access to. © Business Monitor International Page 68 Vietnam Freight Transport Report Q1 2014 Lower runs and refinery closures in developed markets outside of the US will be the main factor propping up prices despite capacity expansion in emerging markets. At a time of high crude feedstock prices, crude import-dependent refiners in developed Europe and Japan will see their refining margins pressed. Weaker domestic demand also makes them dependent on external markets for support. However, their export competitiveness will be challenged by the smaller scale of their plants relative to newbuild and sophisticated facilities in emerging markets, and cheaper fuel exports coming out from the US. For example, European refiners are increasingly challenged by US competition in their traditional stronghold in West Africa, while cheaper Russian products are displacing local output in the Central European and Mediterranean markets. Struggling Against The New Challengers Refining Capacity In Western Europe & Japan, 2010-2017 ('000b/d) f = forecast. Source: EIA, BMI Losses in capacity in these traditional refining markets will limit the scale of global refining expansion, such that the global fuel market will not be oversupplied and prices will not be forced down significantly. Slower demand growth - owing to an expected rise in fuel efficiency, tougher environmental rules, rollback of fuel subsidies and alternatives to oil products - explains the extent to which individual oil product prices will fall. © Business Monitor International Page 69 Vietnam Freight Transport Report Q1 2014 Naphtha: US Gas Hits Demand As a key feedstock for the petrochemicals industry - for which final demand is heavily reliant on industrial needs - naphtha is greatly exposed to wider macroeconomic trends. With the exception of the US, we expect tepid growth in key industrialised countries - growth in the eurozone and Japan is projected to average 1.0% and 1.2% respectively between 2013 and 2017. China's growth is also expected to slow from an average of 9.2% between 2008 and 2012 to 6.4% between 2013 and 2017. Although the US is expected to register 2.4% average growth over the same period, naphtha is not likely to benefit from it. This is largely because much of the petrochemical sector in the US is increasingly switching to gas-based ethane as feedstock for ethylene production instead of naphtha to capitalise on lower gas prices. With fiercer competition from the US, Asian petrochemical giants may be forced to roll back production to maintain their bottom lines, which will further dampen demand for naphtha. Naphtha Losing Competitiveness Versus Ethane Spot Price Of Naphtha (Singapore) & Ethane (Mont-Belvieu), US$/bbl Source: Bloomberg © Business Monitor International Page 70 Vietnam Freight Transport Report Q1 2014 Naphtha Out Of Favour In The US US Ethylene Steam Cracker Cash Margins By Feedstock Type (US$/metric tonne) Source: Bloomberg The biggest challenge to naphtha prices in Europe and Asia will be the rise in natural gas liquids production (NGL) especially from the US. Although prices from July 9 are not available at the time of writing, Platts reported that naphtha demand in Europe had suffered in Q313 as refiners looked to crack the cheaper propane over naphtha. The price competitiveness of propane over naphtha in the past two years is a result of growing US supplies into the global market. As shown by the chart below, US exports of propane have grown almost eightfold between January 2009 and July 2013, particularly from 2012. © Business Monitor International Page 71 Vietnam Freight Transport Report Q1 2014 US NGL Production Pushes NGL Prices Down US Monthly Propane Exports, 2008 - July 2013 ('000 bbl) Source: DOE, Bloomberg The use of propane for winter heating should reduce competition for naphtha till the end of 2013, but we highlight that NGLs and an upward trend in US propane exports would continue to put downward pressure on global naphtha demand through our forecast period to 2017. We forecast an average price of US$101.19/bbl for naphtha in 2013 and US$99.40/bbl in 2014 - a 7.2% fall from 2012. The fall in crude prices, alongside slow growth in key countries, will see naphtha prices fall by 2% between 2013 and 2017. An exacerbation of the eurozone crisis or economic shocks elsewhere pose downside risk to this forecast, though we note that the negative spread between crude benchmark prices and naphtha prices limits the extent to which prices can fall further. Gasoline And Gasoil/Diesel: Subsidies & Fuel Efficiency Cap Upward Movement Gasoline and gasoil/diesel - key for the land transport sector - will also be affected by a weaker global economic outlook. Complicating demand for gasoline and gasoil/diesel are green measures; fuel-efficient vehicles and green legislation limiting emissions will further limit growth in consumption of these fuels in developed countries. Oil-based fuels could also see a growing challenge from alternative power sources © Business Monitor International Page 72 Vietnam Freight Transport Report Q1 2014 such as batteries or natural gas - LNG and compressed natural gas (CNG) - as the preferred choice in the transport sector towards the tail-end of our forecast period, both in emerging and developed markets. For example, Indonesia, the Philippines and Pakistan are pushing their countries towards CNG for transportation, while China has already started a pilot programme to run public buses and taxis on LNG in selected cities. A rollback of fuel subsidies or price controls on fuel - which China, Brazil, Indonesia, Vietnam and Malaysia have enacted under budgetary and monetary pressures - would also slow demand growth significantly in these key growth markets. Together with an anticipated increase in regional refining capacity (and associated output), we expect a move towards convergence in prices at Rotterdam and Singapore as the Asian market loosens. Meanwhile, in the US, major freight player UPS is deploying more gas-powered trucks in its fleet. This would be backed by a US$50mn investment into LNG-fuelling stations. Other major transport companies could follow suit, given the low price of domestic gas in the US and under a small but growing shift towards green policies. Meanwhile, Volkswagen's Scirocco R-Cup - a car race that will pit cars powered by CNG against each other - could also indicate a growing embrace of gas-powered cars at the household level. The challenge posed by gas to oil-based fuels will likely grow, especially if supported by a further fall in gas prices globally and a corresponding development of gas-fuelling infrastructure to support greater commercial and private use. Our average global gasoline price for 2013 and 2014 is US$119.44/bbl and US$116.60/bbl respectively, compared to an average of US$123.18/bbl in 2012. The average global gasoil/diesel price for 2013 is forecast at US$125.19/bbl - a 4% y-o-y fall. Over the longer term, we expect gasoline and gasoil/diesel prices to fall about 7-8% between 2013 and 2017. © Business Monitor International Page 73 Vietnam Freight Transport Report Q1 2014 Demand Pressures And Crude Price Changes Support Downward Trend Average Price Of Gasoline, 2011-2017 (US$/bbl) f = forecast. Source: Bloomberg, BMI Jet Fuel: Limited Upward Movement We forecast that jet fuel prices will fall steadily through to 2017, in line with our crude price and other fuel products forecasts. Between 2013 and 2017, prices are forecast to fall by 9% in Singapore, 7% in Rotterdam and 6% in New York. © Business Monitor International Page 74 Vietnam Freight Transport Report Q1 2014 No Take-Off Expected Average Price Of Jet Fuel, 2011-2017 (US$/bbl) f = forecast. Source: Bloomberg, BMI We expect that European, North American and Asian air freight carriers will continue to be squeezed in 2013 and going into 2014, by a challenging global economic picture and the continued growth of Middle Eastern carriers and their new hubs in the Gulf. This will have knock-on effects on jet fuel demand. Indeed, the industry's troubled run continues into 2013 with year-to-date (ytd) figures from IATA to the end of August 2013 showing a global rise in freight tonne-km (FTK) of just 0.7%. IATA did, however, continue to record an increase in passenger demand going into 2013. At the time of writing, passenger traffic for August 2013 (the most recent data available) saw 6.8% y-o-y growth, marking year-to-date growth of 5.1%. Nonetheless, it warned that a decrease in consumer confidence owing to macroeconomic developments will affect this upward trend. Given that these are not major increases, we believe that the downward pressure on crude oil prices will continue to have spillover effects on jet fuel prices. Thus, we see little upside risk to our short-term jet fuel price forecasts. © Business Monitor International Page 75 Vietnam Freight Transport Report Q1 2014 Table: Total Air Freight And Passenger Volumes Aug 2013 vs. Aug 2012 YTD 2013 vs. YTD 2012 RPK (% change y-o-y) FTK (% change y-o-y) RPK (% chg y-o-y) FTK (% chg y-o-y) International 7.5 3.7 5.2 0.4 Domestic 5.6 3.0 4.8 2.3 Total Market 6.8 3.6 5.1 0.7 RPK: Revenue-Passenger-Kilometres; FTK: Freight-Tonne-Kilometres. Source: IATA Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest Our global average forecast for bunker fuel (the average of the 180 and 380 grades' global prices) has been revised upwards to US$95.26/bbl for 2013 and US$91.97/bbl (following a upward revision in our crude oil price forecast). This marks a 5.9% and 9.2% decrease from the 2012 average of US$101.25/bbl - the highest average price recorded over the last three years. Of all the oil products, the downtrend in bunker fuel prices looks the most pronounced. 2012 saw a strong downward trend in bunker fuel prices, reversing a strong price rally that had taken off in 2009. Also, among all oil product bunker fuel had been least resistant to changes in crude oil prices, as demand and supply dynamics in the shipping sector played a bigger role influencing prices. © Business Monitor International Page 76 Vietnam Freight Transport Report Q1 2014 End Of The Uptrend Bloomberg Average Weighted Price Of Bunker Fuel 180 & Bunker Fuel 380, 2010-Present (US$/bbl) Source: Bloomberg, BMI Downward pressure on bunker fuel prices is chiefly a result of weakness in the global shipping industry. We have also been highlighting three key risks to shipping, each of which will have a knock-on effect on bunker fuels demand: ■ High risk of global overcapacity: This threat is complicated by an expected increase in new and more fuel-efficient ships - especially container ships. 2013 has seen ships with new mega-vessel capacity, including Maersk Line's Triple E-Type 18,000 twenty-foot equivalent unit (TEU) vessel, the largest ship to date, come online. Importantly, these ships are not just larger, but are also more fuel-efficient than those currently employed around the globe, thereby reducing bunker fuels demand. ■ Overall cleaner shipping industry: These efficiency trends are also part of a broader push for a greener industry by both governments with forward-leaning environmental policies and major ports themselves. Hong Kong and Los Angeles - two of the largest ports in the world - are demanding that container ships utilise cleaner bunker fuels than today's standards. ■ Separate push to increase the utilisation of LNG as a shipping fuel: Several European ports have invested in LNG shipping infrastructure to support this new industry. Singapore has also engaged Lloyd's Register to help develop its port's LNG bunkering capabilities. Det Norske Veritas (DNV), a ship classification bureau, estimates that 19-45% of ships will be powered using LNG by 2030. Meanwhile, Maersk Line wants to test biofuels and NYK Line is trialling a solar power-assisted car carrier. While this remains a long-term prospect that will only kick in towards the end of our forecast period, it will dampen oil-based bunker fuel demand in the long term. © Business Monitor International Page 77 Vietnam Freight Transport Report Q1 2014 Pressure On Europe This quarter we have incorporated the effect of environmental policies and regulations in the shipping sector into our forecasts. In North America and northern Europe (comprising the Baltic Sea, North Sea and English Channel), strict sulphur standards on bunker fuel will come into effect in 2015. By 2020, the European Union (EU) will impose a strict 0.1% limit on sulphur content of all vessels entering the EU Emissions Control Area (ECA). Assuming no relaxation of these policies, the shipping industry will have to meet these requirements either by retrofitting their vessels with scrubbers to reduce emissions, switching to the more expensive marine gasoil or turning to LNG as an alternative fuel. This could squeeze demand for sulphur-heavy bunker fuel further and hit prices particularly in Rotterdam as European shippers are expected to be most hit by new regulations. This underpins further downward revision in our bunker fuel price forecast for Rotterdam. From a forecast of US$87.46/bbl for 180 and US$79.96/bbl for 380 by 2017, we now expect prices at Rotterdam to come in at US$85.18/bbl for the 180 grade and US$77.68/bbl for the more pollutive 380. In contrast, the slow rate of development in emissions regulations in Asia will support bunker fuel demand and prices in the Singapore market. As such, by 2017, Rotterdam is likely to see the lowest price for bunker fuel while Singapore is expected to see the highest price. © Business Monitor International Page 78 Vietnam Freight Transport Report Q1 2014 Emissions Control Hit Rotterdam Average Price Of Bunker Fuel, 2011-2017 (US$/bbl) f=forecast. Source: Bloomberg, BMI Although prices will remain elevated by historical standards, our forecast for a decline in bunker fuel costs should offer shipping companies some short-term relief and take the pressure off their bottom lines in the coming years. As such, we believe that companies will continue to slow steam in an effort to conserve fuel and cut expenditures, as well as embrace the push towards cleaner-burning fuels. All of this is to say that the overall trend for bunker fuels will be that of reduced demand over the medium term. © Business Monitor International Page 79 Vietnam Freight Transport Report Q1 2014 Macroeconomic Forecasts Vietnam's economic recovery is beginning to lose its momentum, with the country recording a relatively weak real GDP growth figure of 5.0% year-on-year (y-o-y) in Q213, up only slightly from 4.9% in Q113. The latest GDP print also suggests to us that further efforts by the Vietnamese government to speed up the restructuring of debt-laden banks and restart lending to small and medium-sized enterprises (SMEs) may be necessary to support economic growth over the coming quarters. Moreover, given that we have recently begun to see signs of a slowdown in economic activity across the region, 2013 looks increasingly precarious for the Vietnamese economy. Not A Good Year Vietnam - Real GDP, VNDbn (LHS) & % chg y-o-y (RHS) Source: BMI, General Statistics Office Hint Of A Weak PMI Release The latest GDP print also suggests that the HSBC Vietnam manufacturing purchasing mangers' index (PMI) for June, which is scheduled for release later this week, is likely to come in relatively weak. As the accompanying chart shows, Vietnam's PMI initially exhibited signs of a sustained expansion in © Business Monitor International Page 80 Vietnam Freight Transport Report Q1 2014 manufacturing sector growth in March, before recent data indicated that the sector has fallen back into contraction territory (PMI came in at 48.8 in May, compared to 50.8 and 51.0 in March and April, respectively). On the whole, we maintain a cautious outlook on the manufacturing sector in H213, as the sector remains heavily dependent on external demand to drive growth. As we have highlighted in recent articles, the long-awaited establishment of the Vietnam Asset Management Company (VAMC) to clean up the build-up of bad debt across the banking sector should help to ease credit conditions for businesses over the coming months (see 'All Eyes On New Debt Management Company', June 28 2013). However, we argue that the pace of the recovery will be highly dependent on the smooth and timely implementation of banking sector reforms by the government. Indeed, further delays in implementing banking reforms and the lack of clarity over how the government will address the country's deteriorating fiscal position as a result of rescuing the banking sector over the longer term, could risk undermining investors' confidence in the economy. Stalled Lending A Major Drag On Economy Vietnam - Purchasing Managers' Index Source: BMI, Markit/HSBC © Business Monitor International Page 81 Vietnam Freight Transport Report Q1 2014 Surge In FDI Inflows A Sign Of Confidence On a more positive note, we continue to see evidence that foreign direct investment (FDI) inflows into the country have remained resilient despite the lack of progress on banking reforms and the weak economic data. According to figures published by the Ministry of Planning and Investment (MPI), FDI inflows into Vietnam grew by 16.0% y-o-y to US$10.5bn in H113. FDI in new projects were worth US$5.8bn, an increase of 3.7% over the same period. This is in line with our view that Vietnam's long-term prospect remain bright and that the influx of FDI inflows will provide a significant boost to real gross fixed capital formation (GFCF) growth over the coming quarters. We forecast GFCF growth to come in at 4.4% this year, before accelerating towards 4.8% in 2014. Accordingly, we expect real GDP growth to come in at 5.3% in 2013 before accelerating towards 6.0% in 2014. Expenditure Breakdown Private Consumption: We expect private consumption to grow at a relatively resilient pace of 4.6% in 2013. However, we note that the risk of further bankruptcies among SMEs could potentially lead to widespread job losses, especially in export-driven sectors. Uncertainties over the outlook for employment could, in turn, prompt households to cut back on spending. Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2013, partly led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the coming months as the effect of recent rate cuts by the SBV begins to kick in. We are also seeing evidence that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to accelerate slightly from 4.3% in 2012 to 4.4% in 2013. Public Spending: We expect total public spending to remain relatively resilient in 2013, expanding at a respectable pace of 6.5%. However, there is limited room for the government to increase spending further owing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks. Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy, although we expect external demand to pick up through H213. Vietnam's trade account has fallen back into deficits in recent months, but we see the case for a substantial pickup in external demand on the back of a rebound in regional growth over the coming quarters. Accordingly, we still expect exports to expand at a moderate pace of 5.5% in 2013. © Business Monitor International Page 82 Vietnam Freight Transport Report Q1 2014 Table: Vietnam - Economic Activity 2009 Nominal GDP,VNDbn 3 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 1,658,389 1,980,914 2,536,631 2,950,684 3,309,880 3,711,413 4,175,199 4,689,021 5,267,161 Nominal GDP,US $bn 3 93.2 103.5 122.8 141.4 158.4 180.5 205.4 233.3 263.4 Real GDP growth, % change y-o-y 3 5.3 6.8 6.0 5.0 5.3 6.0 6.9 7.0 7.0 1,056 1,163 1,366 1,558 1,727 1,950 2,199 2,477 2,773 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 Industrialproductio n index, % y-o-y, ave 1,5 6.7 14.1 10.9 7.0 12.0 14.0 13.0 12.0 11.0 Unempl-oyment, % of labour force, eop 2,6 4.6 4.3 3.6 4.0 4.8 4.7 4.6 4.5 4.4 GDP per capita,US$ 3 Popul-ation,mn 4 Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI. © Business Monitor International Page 83 Vietnam Freight Transport Report Q1 2014 Demographic Forecast Demographic Outlook Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split. Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 84 Vietnam Freight Transport Report Q1 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050 Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695 Total © Business Monitor International Page 85 Vietnam Freight Transport Report Q1 2014 Vietnam's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 2 4 7 12 17 21 24 30 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12 © Business Monitor International Page 86 Vietnam Freight Transport Report Q1 2014 Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued 100+ years 1990 1995 2000 2005 2010 2013e 2015f 2020f 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Key Population Ratios, 1990-2020 Dependent ratio, % of total working age Dependent population, total, '000 1990 1995 2000 2005 2010 2013e 75.8 71.0 61.3 50.8 42.9 41.4 2015f 2020f 41.3 41.9 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 Active population, total, '000 58.5 62.0 66.3 70.0 70.7 70.8 70.5 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 Youth population, total, '000 60.9 50.9 40.9 33.6 32.1 31.7 30.2 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age Pensionable population, total, '000 10.0 10.1 10.3 9.9 9.3 9.3 9.6 11.6 3,934 4,491 5,190 5,579 5,823 6,037 6,343 7,965 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI © Business Monitor International Page 87 Vietnam Freight Transport Report Q1 2014 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of 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. 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. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account ■ Testing the directional movement and magnitude of coefficients ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ■ All results are assessed to alleviate issues related to autocorrelation and multicollinearity © Business Monitor International Page 88 Vietnam Freight Transport Report Q1 2014 BMI uses the selected best model to perform forecasting. It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology 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 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: ■ Trends manifested through historical data; ■ 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: ■ Trends in historical modal split data; ■ Evidence of government policy favouring one or more modes over others; ■ Government and or private sector investment plans in specific modes. © Business Monitor International Page 89 Vietnam Freight Transport Report Q1 2014 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 Page 90 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... below that which we forecast for the nation's other main freight modes, road and inland waterways There are two key factors that we believe have held back Vietnam' s rail freight development and will continue to do so © Business Monitor International Page 22 Vietnam Freight Transport Report Q1 2014 Table: Vietnam Transport Network Length (km) Vietnam Transport Network Road Length (km) 180,549 km Railway... international air freight operators in Vietnam Throughout 2012, Vietnam' s Ho Chi Minh City airport became better connected with more air freight routes and BMI expects this trend to have continued in 2013 and beyond © Business Monitor International Page 24 Vietnam Freight Transport Report Q1 2014 Taking Off Vietnam Air Freight, '000 tonnes e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam. .. terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally © Business Monitor International Page 33 Vietnam Freight Transport Report Q1 2014 Investment Needed Across The Board Vietnam Transport. .. 7.2% and over the medium term by an annual average of 8% For more information on data and analysis of Vietnam' s shipping sector, please see BMI's Vietnam Shipping Report © Business Monitor International Page 27 Vietnam Freight Transport Report Q1 2014 Table: Maritime Freight, 2011-2018 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 33,451 36,029 38,867 41,223 43,986 47,176 50,748 54,212 7.45 7.71 7.87... potential rail -freight projects between the two nations BMI highlights that developments in Vietnam' s rail network are taking place, but these have been focused on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam and Laos) © Business Monitor International Page 23 Vietnam Freight Transport Report Q1 2014 Table: Rail Freight, 2011-2018 2011 2012 2013e 2014f 2015f... tonnes in 2018 © Business Monitor International Page 19 Vietnam Freight Transport Report Q1 2014 There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road freight expertise expand in Vietnam Recently, both FedEx and DHL have been expanding their role in Vietnam While some companies are breaking into Vietnam by developing their own operations in the country,... freight connections with Vietnam' s neighbours Although we highlight that the River's full potential has not been reached and so development in the River is an area for potential investment © Business Monitor International Page 21 Vietnam Freight Transport Report Q1 2014 Table: Inland Waterway Freight, 2011-2018 Inland waterway freight, '000 tonnes - % change y-o-y Inland waterway freight, mn tonnes/km*... options, which are vital for the transport of some medicines and vaccinations © Business Monitor International Page 25 Vietnam Freight Transport Report Q1 2014 Table: Air Freight, 2011-2018 Air freight, '000 tonnes - % change y-o-y Air freight, mn tonnes/ km - % change y-o-y 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 200.30 178.70 189.03 198.70 210.27 223.61 238.57 252.35 5.37 -10.78 5.78 5.11 5.82 6.35... for Vietnam with its three neighbours, the mode's role in the country's freight transport sector remains small In 2013, we estimate Vietnam' s rail freight volumes accounted for just 1.8% of the total with the country's rail network transporting just 7.29mn tonnes of freight Although like the other freight modes, we expect volumes to increase in line with Vietnam' s economic growth outlook, rail freight. .. Sea, subject to competing sovereignty claims ■ A drop in international demand for exports would negatively affect Vietnam' s freight transport sector © Business Monitor International Page 12 Vietnam Freight Transport Report Q1 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the