Vietnam freight transport report q2 2012

... of any information hereto contained Vietnam Freight Transport Report Q2 2012 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q2 2012 CONTENTS Executive Summary ... international demand for exports would affect Vietnam' s freight transport sector © Business Monitor International Ltd Page Vietnam Freight Transport Report Q2 2012 Vietnam Political SWOT Strengths Weaknesses... International Ltd Page 20 Vietnam Freight Transport Report Q2 2012 Industry Forecast Road Freight Road Freight Continues To Dominate Our forecasts for Vietnam' s road freight sector suggest further

Q2 2012 www.businessmonitor.com VietnaM freight transport Report INCLUDES BMI'S FORECASTS ISSN 1750-5364 Published by Business Monitor International Ltd. VIETNAM FREIGHT TRANSPORT REPORT Q2 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: February 2012 Business Monitor International 85 Queen Victoria Street London EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2012 Business Monitor International. All rights reserved. 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All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Vietnam Freight Transport Report Q2 2012 © Business Monitor International Ltd Page 2 Vietnam Freight Transport Report Q2 2012 CONTENTS Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 7 Vietnam Freight Transport SWOT ......................................................................................................................................................................... 7 Vietnam Political SWOT ........................................................................................................................................................................................ 8 Vietnam Economic SWOT ...................................................................................................................................................................................... 9 Vietnam Business Environment SWOT................................................................................................................................................................. 10 Industry Trends And Developments ............................................................................................................ 11 Maritime .............................................................................................................................................................................................................. 11 Rail ...................................................................................................................................................................................................................... 12 Market Overview ............................................................................................................................................. 14 Global Oil Products Price Outlook ............................................................................................................... 16 Industry Forecast ........................................................................................................................................... 21 Road Freight ........................................................................................................................................................................................................ 21 Table: Road Freight, 2009-2016.......................................................................................................................................................................... 21 Rail Freight ......................................................................................................................................................................................................... 21 Table: Rail Freight, 2009-2016 ........................................................................................................................................................................... 21 Air Freight ........................................................................................................................................................................................................... 22 Table : Air Freight, 2009-2016 ............................................................................................................................................................................ 22 Maritime And Inland Waterways ......................................................................................................................................................................... 22 Table: Maritime Freight - Throughput, 2009-2016 ('000 tonnes and % change y-o-y) ....................................................................................... 22 Table: Inland Waterway Freight, 2009-2016 ....................................................................................................................................................... 23 Trade ................................................................................................................................................................................................................... 24 Table: Trade Overview, 2009-2016 ..................................................................................................................................................................... 24 Table: Key Trade Indicators, 2007-2016 (US$mn and % change y-o-y) ............................................................................................................. 25 Table: Vietnam's Main Import Partners, 2002-2009 (US$mn) ............................................................................................................................ 26 Table: Vietnam's Main Export Partners, 2002-2009 (US$mn) ............................................................................................................................ 26 Political Outlook ............................................................................................................................................. 27 Domestic Politics ................................................................................................................................................................................................. 27 Long-Term Politics .............................................................................................................................................................................................. 28 Macroeconomic Outlook ............................................................................................................................... 31 Table: Vietnam – Economic Activity, 2011-2016 ................................................................................................................................................. 32 Company Profiles ........................................................................................................................................... 33 Vietnam Airlines Cargo ....................................................................................................................................................................................... 33 Vinatrans ............................................................................................................................................................................................................. 35 Vietnam Petroleum Transport Company (VIPCO)............................................................................................................................................... 37 Vietnam National Shipping Lines (Vinalines) ...................................................................................................................................................... 38 Country Snapshot: Vietnam Demographic Data ......................................................................................... 40 Section 1: Population........................................................................................................................................................................................... 40 Table: Demographic Indicators, 2005-2030 ........................................................................................................................................................ 40 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 41 © Business Monitor International Ltd Page 3 Vietnam Freight Transport Report Q2 2012 Section 2: Education And Healthcare .................................................................................................................................................................. 41 Table: Education, 2002-2005 .............................................................................................................................................................................. 41 Table: Vital Statistics, 2005-2030 ........................................................................................................................................................................ 41 Section 3: Labour Market And Spending Power .................................................................................................................................................. 42 Table: Employment Indicators, 1999-2004 .......................................................................................................................................................... 42 Table: Consumer Expenditure, 2000-2012 (US$) ................................................................................................................................................ 42 BMI Methodology ........................................................................................................................................... 43 How We Generate Our Industry Forecasts .......................................................................................................................................................... 43 Transport Industry ............................................................................................................................................................................................... 43 Sources ................................................................................................................................................................................................................ 44 © Business Monitor International Ltd Page 4 Vietnam Freight Transport Report Q2 2012 Executive Summary Vietnam's freight transport sector appears to be going from strength to strength, following the recessiondominated 2009, with growth in the medium term expected to be very healthy across the board. Leading the way in terms of average annual growth will be the road sub-sector, which is set to average 7.14% year-on-year (y-o-y) growth over our forecast period, to 2016. In second place will be air freight, with 6.23% growth predicted, with the port sector in third place with 6.03%. Inland waterways and rail freight will both also enjoy healthy average increases between 2012 and 2016, of 5.73% and 5.33% respectively. However, we caution that in order for the country to fully realise its potential, there must be an onus placed on investment over the mid and long term, otherwise Vietnam could suffer from overcapacity. Aside from this, the country's existing infrastructure is sadly lacking and needs a considerable financial injection. With the macroeconomic picture across the globe looking bleak for 2012, Vietnam's main export partners, the US, China and Japan, are all set to suffer slowdowns during 2012, which could go on to pose some serious headaches for Vietnam. Headline Industry Data ƒ 2012 rail freight tonnage is set to increase by 5.29% to 8.62mn tonnes. ƒ 2012 air freight tonnage is forecast to rise by 5.72% to 206,960 tonnes. ƒ Tonnage handled at the Port of Ho Chi Minh City in 2012 is forecast to grow 7.96% in 2012, whereas tonnage handled at the Port of Da Nang is forecast to increase 3.08%. ƒ 2012 road freight tonnage is forecast to grow by 6.97%. ƒ 2012 total trade is forecast to rise by 8.45% Key Industry Trends Van Phong Port To Resume Work In 2012 At Best Vietnam National Shipping Lines (Vinalines) signed a deal with Netherlands-based Rotterdam Port to construct the US$3.6bn Van Phong port, it was reported in October 2011. We believe that the international sea port project is likely to resume construction in 2012 at the earliest, given the need for further negotiations with Rotterdam Port, Vinalines' lack of financing and the unresolved disputes with previous developers of the projects. © Business Monitor International Ltd Page 5 Vietnam Freight Transport Report Q2 2012 Cat Lai Port Denies Any Involvement In Reefer Explosions Saigon Newport, a container terminal operator at the Vietnamese Port of Cat Lai, denied any involvement in the faulty repairs or maintenance of reefer containers which resulted in fatal explosions at four ports in Asia and South America in November 2011. Pham Thi Thuy Van, of Saigon Newport's marketing department, said neither the port nor the terminal operator should be blamed for the explosions, as the maintenance and servicing of the reefers is handled either by third party vendors, or by the shipping lines' own vendors. New Vietnamese Container Rail Service Provides Upside Risk To Forecasts The Vietnamese press reported at the end of 2011 that the Vietnam Railway Corporation (VRC) was seeking to introduce a container train service connecting the Port of Hai Phong with Hanoi and Lao Cai Province, with rail freight volumes set to increase as a result. The new service could also reduce the number of lorries on Vietnam's roads, potentially leading to a drop in road haulage in the South East Asian country. Key Risks To Outlook There should be no doubt that Vietnam's biggest obstacle will be overcapacity, and how the country plans to traverse this will be the difference between fulfilling potential or fading into the wilderness behind regional competitors. With demand for Vietnamese freight high, the offshoot is of course being able to cater for this demand. If provisions are made to combat overcapacity, then this will undoubtedly provide risks to the upside in terms of our mid and long term forecasts. On the downside, Vietnam is certainly not immune to the stubborn global economic headwinds that threaten to blow many an economy of course in 2012. Despite the Vietnamese government's attempts to reduce the country's persistent budget deficit, we expect to see a cooling of the economy over the coming quarters, with real GDP growth slipping slightly from 5.9% last year to 5.8%. With most other economies set to suffer far worse than Vietnam in 2012, including key export partners, the freight sector may well take a hit in 2012 as the belt tightening commences. © Business Monitor International Ltd Page 6 Vietnam Freight Transport Report Q2 2012 SWOT Analysis Vietnam Freight Transport SWOT Strengths Weaknesses Opportunities Threats ƒ Strong domestic growth rate ƒ Stretches for thousands of kilometres on a north-south axis, creating a need for longdistance freight haulage. ƒ Recovery of ports in 2010 is expected to continue over the medium term to 2016. ƒ Location on the South China Sea gives the country access to the main inter-Asian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics. ƒ 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. ƒ Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underused. ƒ Decades of under-investment have left the country with a port infrastructure system that is poor by international standards. Overcapacity is therefore a growing problem. ƒ Beginnings of local commercial vehicle production will help improve the stock of lorries used by road haulage companies. ƒ Chinese investment could bring about much needed improvements in the rail sector. ƒ Growing international interest in Vietnam as a growth market in box shipping sector. ƒ Risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. ƒ Vietnam is vulnerable to any slowdown in Chinese investment. ƒ Drop in international demand for exports would affect Vietnam's freight transport sector. © Business Monitor International Ltd Page 7 Vietnam Freight Transport Report Q2 2012 Vietnam Political SWOT Strengths Weaknesses Opportunities Threats ƒ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the next five years. The one-party system is generally conducive to short-term political stability. ƒ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. ƒ Corruption among government officials poses a major threat to the legitimacy of the Communist Party. ƒ Increasing (albeit limited) public dissatisfaction with leadership's tight control over political dissent. ƒ The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. ƒ 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. ƒ Macroeconomic instabilities in 2012 likely to weigh on public acceptance of the oneparty system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. ƒ Although strong domestic control will ensure little change to political scene in the next few years, over the longer term the one-party-state will probably be unsustainable. ƒ 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 Ltd Page 8 Vietnam Freight Transport Report Q2 2012 Vietnam Economic SWOT Strengths Weaknesses Opportunities Threats ƒ One of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2011. ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 9.5% in 2010. ƒ 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. ƒ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. ƒ WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. ƒ 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. ƒ 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. ƒ Inflation and deficit concerns have caused some investors to re-assess their 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. ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy. © Business Monitor International Ltd Page 9 Vietnam Freight Transport Report Q2 2012 Vietnam Business Environment SWOT Strengths Weaknesses Opportunities Threats ƒ Large, skilled and low-cost workforce, that has made the country attractive to foreign investors. ƒ 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. ƒ Infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world. ƒ Remains one of the world's most corrupt countries. According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries. ƒ Increasingly attracting investment from key Asian economies, such as Japan, South Korea and South Taiwan. This offers the possibility of the transfer of high-tech skills and know-how. ƒ Pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points. ƒ Ongoing trade disputes with the US, and the general threat of US protectionism, which will remain a concern. ƒ Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q2 2012 Industry Trends And Developments Maritime Van Phong Port To Resume Work In 2012 At Earliest The troubled Van Phong port project was finally beginning to see some light at the end of the tunnel at the end of October 2011, with project investor Vietnam National Shipping Lines (Vinalines) signing a deal with Netherlands-based Rotterdam Port to construct the US$3.6bn international sea port. BMI believes that the project will likely resume construction at the earliest in 2012, given the need for further negotiations with Rotterdam Port, Vinalines' lack of financing and the unresolved disputes with previous developers. Construction started at the port, in the southern central province of Khanh Hoa, in October 2009. However, works were suspended by Vinalines in June 2011 due to liquidity problems and design disputes with the project contractor, South Korea-based SK Engineering & Construction (SK E&C), and the project designer, Vietnam-based Portcoast. Although the Rotterdam Port's participation could see the Van Phong project get back on track by providing expertise and financing, we believe that there is still much scope for further delays to the project. Firstly, Rotterdam Port still needs to send representatives to Vietnam to conduct further negotiations with Vinalines regarding the scope of its participation in the project. Secondly, Vinalines' liquidity disputes with the existing developers remain unresolved. Vinalines plans to revise the design of the Van Phong port through one of its subsidiaries, a move that will inevitably lead to a delay in the resumption of construction works, but is still contractually obligated to pay Portcoast VND20bn for work done on the previous design. Lastly, current monetary conditions in Vietnam are not conducive for Vinalines to borrow domestically. The policy rate in Vietnam rose to 15% in early October, its highest level over the past five years. This could delay payments to previous developers and the purchase of new materials for the revised project. The change in design for the Van Phong port is expected to void up to VND675bn of investments previously made in the port project, inflating its overall cost. Not only is the advance paid to SK E&C contractually forfeited, certain materials and parts purchased or manufactured for the project must be replaced. However, we believe Vietnam's adverse monetary conditions could lessen going into 2012, as the softening global conditions and aggressive monetary tightening policy initiated by the Vietnamese © Business Monitor International Ltd Page 11 Vietnam Freight Transport Report Q2 2012 government could spur a faster decline in inflation, increasing the likelihood of domestic interest rates being cut in early 2012. Vinalines could therefore raise the required funds in 2012 to pay all outstanding bills for the Van Phong port project. The Van Phong port may not be in demand over the short term, due to the current conditions in Vietnam's port sector. South Vietnam's chief sea port, the Port of Ho Chi Minh, is facing the prospect of overcapacity; its five newest terminals are all working well below capacity, according to Alphaliner. Therefore, it is possible that even if the Van Phong port was completed on schedule (2015), near-term trading volumes may not justify the cost of its construction as it may not have reached its handling target of 0.71mn TEUs per annum. Cat Lai Port Denies Any Involvement In Reefer Explosions Saigon Newport, a container terminal operator at the Vietnamese Port of Cat Lai, denied any involvement in the faulty repairs or maintenance of reefer containers which resulted in fatal explosions at four ports in Asia and South America in November 2011. Pham Thi Thuy Van, of Saigon Newport's marketing department, said neither the port nor the terminal operator should be blamed for the explosions, as the maintenance and servicing of the reefers is handled either by third party vendors, or by the shipping lines' own vendors. Between April and October 2011, four refrigerated containers - which are predominantly used to transport fresh food such as seafood - exploded in Brazil, China and Vietnam, with the result being that three port workers lost their lives. More than 1,000 reefers were consequently taken out of service and stevedores at the US ports of Oakland and Seattle refused to unload containers from Vietnam. According to a preliminary investigation carried out by Denmark's Maersk Line, contaminated gas in the cooling units of the containers was the likely cause of the explosions. Vietnamese officials were scheduled to begin their own investigation on November 11 2011. Meanwhile, the port has implemented stricter handling procedures, updating the certification of its technicians and approving its processes and procedures with the shipping lines calling at the terminal. Rail New Vietnamese Container Rail Service Provides Upside Risk To Forecasts BMI believes that rail freight volumes in Vietnam will rise following the launch of a new container train in the country in November 2011. The new service could also reduce the number of lorries on Vietnam's roads, potentially leading to a drop in road haulage in the southeast Asian country. According to reports in the Vietnamese press, the Vietnam Railway Corporation (VRC) is looking to introduce a container train service connecting the port of Hai Phong with Hanoi and Lao Cai Province. © Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q2 2012 The maritime facility is one of the largest in Vietnam. Located in the north of the country, it has grown rapidly over the past decade. In 2000, Hai Phong handled 7.65mn tonnes of cargo and 218,856 twentyfoot equivalent units (TEUs). By 2010, this had risen to 15.68mn tonnes and 953,646 TEUs, growth of 104.9% and 335.7% respectively. This growth is expected to continue, with the port estimating it will have handled 1.2mn TEUs by the end of 2011, a further growth of 25.8%. Hai Phong is the only port in Vietnam currently connected to the national rail network. Once up and running, the container service will provide links from the port to Lao Cai, Yen Vien, Gia Lam and Hanoi said VRC, having completed a survey of loading capabilities. Each train to and from the port will carry 32 TEUs: 10 carriages will carry TEUs, and six will be loaded with forty-foot equivalent units (FEUs). If just 10% of the container throughput at the port was carried by rail, the traffic on National Highway 5 would be reduced by around 200 vehicle trips. BMI notes that VRC's proposal provides upside risk to our rail freight forecasts. Volumes carried on Vietnam's rail network saw four consecutive years of decline from 2007 to 2010, falling from 9.05mn tonnes to 7.81mn tonnes. In 2011, we forecast that volumes will return to growth, rising 4.8% to 8.19mn tonnes. From 2012 to 2016 we project annual growth to average 5.3% per annum, rising to 10.62mn tonnes at the end of our forecast period, exceeding levels achieved prior to the slump. The new container service could see these growth rates exceeded. Equally, the upside risk to our rail freight forecasts is matched by downside risk to our road freight volumes in Vietnam. Over the same 2012-2016 forecast period, BMI anticipates growth in road haulage to average 5.6% per annum. If the container service takes off, however, and more volumes are moved off the roads and onto rail (which is both greener and reduces congestion on roads), our outlook could be affected. © Business Monitor International Ltd Page 13 Vietnam Freight Transport Report Q2 2012 Market Overview Vietnam's real GDP growth figure came in at 6.1% year-on-year (y-o-y) in Q311, in line with our view that monetary tightening by the State Bank of Vietnam (SBV) and a reduction in public spending would continue to be a drag on growth over the coming quarters. Meanwhile, downside risks to our outlook on external demand - a sputtering economic recovery in the US, sovereign debt concerns in the eurozone and a potential hard landing in China - have escalated significantly in recent months. Consequently, we have downgraded our real GDP growth forecast from 6.3% to 6.0% for 2011 to reflect a deteriorating economic environment that we expect to persist over the coming months. Looking into 2012, we believe Vietnam's real GDP growth will remain subdued by historical standards at 6.5% as weak economic momentum spills over into H112. Domestically, we expect to see welfare subsidies rise as cooling external demand translates into higher unemployment for the manufacturing sector. Furthermore, we expect tax revenue growth to slow significantly as a result of cooling private sector income growth. Retail sales have moderated considerably since November 2010, when the SBV initiated its monetary tightening cycle. Retail sales growth slowed from 32.5% in November 2010 to 22.6% in June 2011, indicating that the measures have dampened private consumption growth. Nonetheless, retail sales remain at double-digit growth rates, indicating that private consumption growth remains resilient. This supports our view that private consumption would remain resilient on the back of robust labour market conditions and rising wages in Vietnam, boding well for containerised imports. However, public spending cuts and a subdued outlook on gross fixed capital formation (GFCF) growth due to high lending rates would lead to continued moderation in domestic demand. Road Freight Remains The Dominant Force 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. Vietnam has a national road network of 171,392km. BMI believes the sector requires substantial investment. The quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142 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. © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q2 2012 Vietnam's rail network totals 2,347km. The network is of mixed-gauge, comprising 2,169km of 1.000m gauge and 178km of 1.435m gauge. Railway infrastructure in Vietnam was ranked 101 out of 123 by the WEF. Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, like Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion. Vietnam's port infrastructure is poor by international standards. The WEF's 2011 Global Competitiveness Report ranks it 111th out of 142 countries, placing it 12th in the region, just one place ahead of the Philippines, the regional underperformer. Investment And Development Outlook According to our key infrastructure projects database, there are US$171bn worth of infrastructure projects planned, or 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 per year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. 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$6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q2 2012 Global Oil Products Price Outlook Lower Fuels Prices To Help Weather Global Headwinds BMI View: BMI’s latest refined fuels forecast indicates there will be a fall in prices between 2012 and 2016, with the sharpest falls taking place over 2012 and 2014. On one hand, cheaper fuels will certainly help many struggling industries (such as aviation, land freight and petrochemicals) in the coming years, with North American consumers set to profit less from this expected decline relative to other regions. On the other, lower demand and falling prices imply that many refiners will continue to struggle, particularly in Europe and the US north east. However, we still see room for growth for refiners in some emerging countries and in some parts of the US. Fall In Prices Across The Board Oil Products Price Forecasts, 2012-2016 (US$/bbl) f = forecast; bbl = barrel. Source: BMI When we last published our global oil products outlook, in October 2011, oil prices were on a downward trend because of a recovery in output. Libyan oil was fast coming back onstream, reaching nearly 1mn barrels a day (b/d), according to our latest estimates, and other disruptions around the world were receding, though some of them were expected to spill over into 2012. © Business Monitor International Ltd Page 16 Vietnam Freight Transport Report Q2 2012 Although we expected a supply deficit in 2012, particularly in the first half of the year, rising production, particularly from unconventional projects in the Americas, was expected to ease the tension between supply and demand. The ongoing European debt crisis and slower than expected growth in the US had dampened our consumption outlook. However, recent developments in the market have highlighted some significant upside risks. Volatility is likely to remain high, as suggested by continued Iranian and US sabre rattling in the Strait of Hormuz, which could have resulted in a US$5-US$15 per barrel (bbl) premium at current prices. Furthermore, unless demand contracts in an unprecedented fashion, a clear price floor has been established due to the cost of developing the capital-intensive projects from which much of 2012’s stabilising volumes are expected to be drawn. First Steps To Recovery For Refiners With regard to downstream operators, BMI sees three main geographic blocks emerging: North America, emerging markets and Europe. In the US, although higher feedstock prices have caused many refineries to close in the north east, cheap domestic crudes in the Midwest, the Rockies and on the Gulf Coast have generated very high margins. Furthermore, rising gasoline margins, compounded by growing diesel export volumes to booming Latin American markets, offer substantial opportunities for growth, particularly in the Gulf Coast region. In emerging markets, high crude prices have forced many governments to revise their fuel subsidies. Although we still expect many refiners to incur losses in 2012, as they will still be expected to perform their ‘national duty’ by providing cheap energy to fuel growth, their prospects are clearly improving. India, Iran, Nigeria, Indonesia and China, among others, have all liberalised prices or are expected to. This offers growth opportunities not only for domestic operators but also, in some cases, for foreign operators. In Europe the outlook is bleaker, with many plants shutting. Neighbouring emerging markets, rather than offering prospects for export, are a source of competition, as Russia, the Middle East and North Africa enjoy cheap feedstock and are constantly increasing capacity and standards. Consequently, operators willing to approach the European market would be better advised to invest in neighbouring oil-rich countries, particularly in the Middle East, as these countries also have access to booming Asian markets. Diesel Prices To Offer Relief To Land Freight Diesel prices are largely expected to follow a downward trend over 2012-2016, with most of this correction taking place in 2012-2014. We see global prices, an average of the Singapore and Rotterdam benchmarks, falling by nearly 6.20% in this period, as opposed to 0.91% in 2014-2016. For many land freight companies this will be a source of relief as current global headwinds are likely to hurt most © Business Monitor International Ltd Page 17 Vietnam Freight Transport Report Q2 2012 operators, particularly those in developed markets. This also implies that beyond 2014 growth will have to come from rising revenue rather than fuel savings. If freight volumes fail to pick up, cost savings will have to be made in other departments. In terms of geography, prices are expected to fall by approximately 1.80% for both the Singapore and Rotterdam benchmarks over the forecast period. This is likely to give a disproportionate advantage to emerging Asian and African road freight operators, where the economic headwinds are unlikely to destroy demand as significantly as they will in Europe. Diesel Prices Die Down Gasoil/Diesel Prices, 2006-2016 (US$/bbl) f = BMI forecast. Source: BMI, Bloomberg A Gentler Fall In Gasoline Prices Gasoline prices will follow the same downward trend as diesel and most of the correction in prices (-4.68%) will take place in 2012-2014, with only a minor 0.74% fall in 2014-2016. However, as the overall fall in prices will be smaller than the fall in diesel prices, gasoline markets, such as the US, will enjoy smaller returns from any correction, a trend that will be exacerbated by geographical discrepancies between gasoline benchmarks. BMI sees the US gasoline benchmark falling by just 0.51% in 2012-2016, compared to 1.75% and 1.78% in Europe and Asia respectively. Cheaper Kerosene To Benefit Latin America And Middle East Kerosene will offer some relief to the troubled air freight market. With weak consumer sentiment dampening demand for air freight because of the economic woes in Europe and North America, Asian exports are also set to take a hit. However, falling kerosene prices should offer some relief to margins, © Business Monitor International Ltd Page 18 Vietnam Freight Transport Report Q2 2012 particularly in Europe and Asia. Outperforming air freight markets, such as the Middle East and Latin America, will both experience higher demand and lower costs, thereby boosting margins. US Unleaded Gasoline Leads The Way Gasoline Prices, 2006-2016 (US$/bbl) f = BMI forecast. Source: BMI, Bloomberg Jet Fuel Price Landing Jet/Kerosene Prices, 2006-2016 (US$/bbl) f = BMI forecast. Source: BMI, Bloomberg © Business Monitor International Ltd Page 19 Vietnam Freight Transport Report Q2 2012 Naphtha To Boost Middle East Petrochemicals Falling naphtha prices will do little to save the ailing Western petrochemicals markets. The European and North American petrochemicals industries have mostly followed the lead of the refining industry. Much like the downstream segment, an ailing European petrochemicals industry implies that Middle Eastern operators could strengthen their presence on the continent. Middle Eastern operators will not only benefit from better market conditions, they will also enjoy lower feedstock costs as the fall in naphtha prices will be sharpest in Asia (where refined fuels prices are indexed to the Dubai Fateh). Mix ‘n’ Match Naphtha Prices, 2006-2016 (US$/bbl) f = BMI forecast. Source: BMI, Bloomberg While there will be a sharp fall in refined fuels prices in 2012, cheaper costs are only likely to help most companies weather the crisis rather than avoid it. As for refiners, lower demand and lower prices will continue to hurt margins, though we see room for growth in some emerging countries and in some parts of the US. © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q2 2012 Industry Forecast Road Freight Road Freight Continues To Dominate Our forecasts for Vietnam's road freight sector suggest further strong growth over the medium term. For 2012 we expect y-o-y growth of 6.97%, up from an estimated 6.47% in 2011. In terms of medium-term annual growth, BMI sees an average of 7.14% to reach 846.83mn tonnes. Table: Road Freight, 2009-2016 2009 '000 tonnes 2010 2011e 2012f 2013f 2014f 2015f 2016f 494,649.80 563,406.12 599,863.21 641,689.03 688,531.87 738,564.31 789,140.46 846,827.50 - % change y-o-y mn tonnes/km 8.50 13.90 6.47 6.97 7.30 7.27 6.85 7.31 30,261.40 34,467.73 36,840.47 39,562.62 42,611.29 45,867.56 49,182.10 52,897.32 8.20 13.90 6.88 7.39 7.71 7.64 7.23 7.55 - % change y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Rail Freight Table: Rail Freight, 2009-2016 '000 tonnes - % change y-o-y mn tonnes/km - % change y-o-y 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 8,068.10 7,809.92 8,187.28 8,620.20 9,105.06 -4.87 -3.20 4.83 5.29 5.62 5.69 5.99 4.05 3,805.10 3,717.58 3,893.05 4,094.36 4,319.82 4,560.63 4,799.43 5,120.22 -8.77 -2.30 4.72 5.17 5.51 5.57 5.24 6.68 9,622.93 10,199.06 10,612.12 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q2 2012 Rail Recovers The rail freight sector will safely put the twin contractions of 2009 and 2010 out of sight with 2012 and beyond set to reflect 2011's steady growth pattern. For 2012 we expect growth of 5.29%, with the average annual growth over the forecast period just beating this figure, at 5.33%, to reach 10.61mn tonnes in 2016, up from 2012's forecast 8.62mn tonnes. Air Freight Growth Steady, But Work To Be Done In common with the sectors mentioned above, Vietnam's air freight sector will enjoy steady growth rates over the medium term. We see an annual average of 6.23% over our forecast period, with tonnage throughput increasing from 206,960 tonnes in 2012 to 264,780 tonnes by the end of 2016. In 2012 BMI forecasts y-o-y growth of 5.72%, up slightly on 2011's 5.25%. However, the Vietnamese air freight sector is by far the country's smallest in terms of annual tonnage throughput. Table : Air Freight, 2009-2016 '000 tonnes - % change y-o-y mn tonnes/km - % change y-o-y 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 139.60 186.00 195.76 206.96 219.51 232.90 248.23 264.78 6.24 33.24 5.25 5.72 6.06 6.10 6.58 6.67 316.60 492.20 516.23 543.79 574.66 607.63 643.02 686.43 7.10 55.46 4.88 5.34 5.68 5.74 5.82 6.75 2013f 2014f 2015f 2016f e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Maritime And Inland Waterways Table: Maritime Freight - Throughput, 2009-2016 ('000 tonnes and % change y-o-y) 2009 Port of Ho Chi Minh City - % change Port of Da Nang - % change 2010 2011e 2012f 19,140.00 31,132.00 33,450.71 36,111.78 39,148.54 42,406.25 45,902.18 49,652.56 -5.15 62.65 7.45 7.96 8.41 8.32 8.24 8.17 3,132.00 3,303.04 3,394.27 3,498.97 3,618.45 3,746.62 3,915.76 4,097.21 14.21 5.46 2.76 3.08 3.41 3.54 4.51 4.63 e/f = BMI estimate/forecast. Source: Port authorities © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q2 2012 Ho Chi Minh Port's growth forecast for 2012 is set to reflect the slower GDP growth in Vietnam. We are sticking with last quarter's prediction that the port's container throughput will increase by 4.8% in 2012 to 3.1mn twenty-foot equivalent units (TEUs), a slowdown from the double-digit growth in the years prior to 2011. We also stick to Q112's tonnage throughput growth forecast of 8%, to reach 36.11mn tonnes. However, growth at the Port of Da Nang will not mirror that of Ho Chi Minh City, with 2012's forecast set to be 3.08%, albeit an increase on 2011's estimate. Over the medium term, the port is set to see average annual tonnage throughput of 3.83%, compared to the Port of Ho Chi Minh's 8.22%. Inland waterways will also enjoy the healthy growth we expect to see in other sectors over the medium term. In 2012 we forecast growth of 5.11%, a figure that will be surpassed by the predicted y-o-y average over the forecast period of 5.73%. Table: Inland Waterway Freight, 2009-2016 2009 '000 tonnes - % change y-o-y mn tonnes/km - % change y-o-y 2010 2011e 2012f 2013f 2014f 2015f 2016f 135,688.40 142,201.44 148,378.09 155,960.44 164,659.38 174,401.76 184,807.51 196,014.15 2.00 4.80 4.34 5.11 5.58 5.92 5.97 6.06 25,365.20 25,593.49 26,752.09 28,084.60 29,568.40 31,159.70 32,622.02 34,541.55 2.00 0.90 4.53 4.98 5.28 5.38 4.69 5.88 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 23 Vietnam Freight Transport Report Q2 2012 Trade Table: Trade Overview, 2009-2016 Real growth, % y-o-y 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f Imports -13.81 22.40 15.32 8.00 6.80 6.50 6.50 6.50 Exports -15.00 24.81 15.00 8.90 8.00 8.00 8.00 8.00 Total trade -14.40 23.61 15.16 8.45 7.40 7.25 7.25 7.25 73.27 90.90 145.79 166.69 194.10 229.61 260.83 293.22 - % change y-o-y -12.87 24.06 60.37 14.34 16.44 18.30 13.60 12.42 Exports, US$bn 63.63 80.27 120.57 139.01 163.68 196.36 226.20 257.87 - % change y-o-y -9.57 26.14 50.22 15.29 17.75 19.96 15.20 14.00 Total trade, US$bn 136.91 171.17 266.36 305.70 357.78 425.97 487.02 551.08 - % change y-o-y -11.37 25.03 55.61 14.77 17.04 19.06 14.33 13.15 Nominal Imports, US$bn e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 24 Vietnam Freight Transport Report Q2 2012 Table: Key Trade Indicators, 2007-2016 (US$mn and % change y-o-y) 2009 2010e 2011e 2012f 2013f 2014f 2015f 2016f 2,217.52 2,789.32 4,174.77 4,808.47 5,656.61 6,779.76 7,805.36 8,892.06 -8.21 25.79 49.67 15.18 17.64 19.86 15.13 13.92 2,112.00 2,678.93 4,443.83 5,116.01 5,997.35 7,139.36 8,143.20 9,192.87 -12.61 26.84 65.88 15.13 17.23 19.04 14.06 12.89 Exports 437.87 561.25 860.19 996.93 1,179.94 1,422.29 1,643.59 1,869.89 - % change -20.87 28.18 53.26 15.90 18.36 20.54 15.56 13.77 2,651.69 3,371.43 5,612.07 6,465.43 7,584.35 9,034.18 10,308.61 11,608.00 -6.13 27.14 66.46 15.21 17.31 19.12 14.11 12.60 442.82 573.52 890.19 1,035.03 1,228.89 1,485.61 1,720.04 1,951.28 7.74 29.51 55.22 16.27 18.73 20.89 15.78 13.44 5,305.13 6,644.99 10,816.12 12,404.73 14,487.69 17,186.69 19,559.14 21,965.58 7.26 25.26 62.77 14.69 16.79 18.63 13.80 12.30 28,781.83 36,240.12 54,311.10 62,576.87 73,639.57 -11.54 25.91 49.86 15.22 17.68 47,971.77 59,491.63 -12.02 24.01 60.28 14.32 16.43 18.28 13.59 12.38 12,805.22 16,095.06 24,066.14 27,712.16 32,591.90 39,053.91 44,954.64 51,318.60 -13.67 25.69 49.53 15.15 17.61 19.83 15.11 14.16 11,062.37 14,052.49 23,361.07 26,906.32 31,554.80 37,578.05 42,872.57 48,453.30 -19.90 27.03 66.24 15.18 17.28 19.09 14.09 13.02 Agricultural raw materials Imports - % change Exports - % change Ores and metals Imports - % change Iron and steel Exports - % change Imports - % change Manufactured goods Exports - % change Imports - % change 88,289.40 101,666.75 115,462.80 19.89 15.15 13.57 95,354.26 109,012.83 126,921.75 150,127.20 170,525.09 191,629.52 Fuel Exports - % change Imports - % change e/f = BMI estimate/forecast. Source: UNCTAD, BMI © Business Monitor International Ltd Page 25 Vietnam Freight Transport Report Q2 2012 Table: Vietnam's Main Import Partners, 2002-2009 (US$mn) 2002 2003 2004 2005 2006 2007 2008 2009 Mainland China 2,158.84 3,138.55 4,595.10 5,899.70 7,391.30 12,710.00 15,652.10 16,441.00 Japan 2,504.65 2,982.06 3,552.60 4,074.10 4,702.10 6,188.90 0.00 7,468.09 South Korea 2,279.60 2,625.44 3,359.40 3,594.10 3,908.40 5,340.40 7,066.30 6,976.36 955.24 1,282.19 1,858.60 2,374.10 3,034.40 3,744.20 4,905.60 4,514.07 2,533.49 2,875.82 3,618.40 4,482.30 6,273.90 7,613.70 9,392.50 4,248.36 Thailand Singapore Source: IMF's Direction of Trade Statistics Table: Vietnam's Main Export Partners, 2002-2009 (US$mn) 2002 2003 2004 2005 2006 2007 2008 2009 US 2,453.15 3,939.56 5,024.80 5,924.00 7,845.10 10,104.50 11,868.50 11,355.80 Japan 2,436.96 2,908.60 3,542.10 4,340.30 5,240.10 6,090.00 8,537.90 6,291.81 Mainland China 1,518.33 1,883.12 2,899.10 3,228.10 3,242.80 3,646.10 4,535.70 4,909.03 66.67 74.67 120.20 103.90 155.70 236.90 516.90 2,486.49 1,328.33 1,420.86 1,884.70 2,722.80 3,744.70 3,802.20 4,225.20 2,276.72 Switzerland Australia Source: IMF's Direction of Trade Statistics © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q2 2012 Political Outlook Domestic Politics Stronger Measures To Fight Corruption BMI View: Despite slow progress, the government remains fully committed to its agenda of eradicating corruption. We are optimistic that plans to implement a draft-law to combat money-laundering activities, publishing information on personal property of public servants and formalising the legal responsibilities of government entities should help support existing efforts to deter graft. Success in tackling corruption should reinforce confidence in the Communist Party of Vietnam (CPV)’s leadership and boost its credibility in pushing forward with further political reforms. Efforts by the government to address corruption have achieve limited success in recent years. Rampant cases of corruption continue to exist among lower level government officials and political bureaucracy has been blamed as a key factor that has impeded progress on this front. Global political uprisings in recent months, many of which have been fuelled by public unrest in authoritative and corrupt governments, highlight the urgency in addressing corruption in Vietnam. Staying Committed Despite Slow Progress According to Transparency International 's 2010 Corruption Perceptions Index, Vietnam ranks 116 out of 178 countries, placing it at the bottom half of the group. This, in comparison to the country's ranking of 120 out of 180 countries in 2009, highlights the sluggish pace at which the country is progressing in terms of eradicating corruption. Despite the modest improvement, we are seeing positive signs that the government remains fully committed to fighting corruption. In October 2011 high-level government officials attended the Conference of the State Parties to the UN Convention Against Corruption (UNCAC) to discuss measures that the government is looking to implement over the coming months. These include a draft-law to combat money-laundering activities, plans to publish information on personal property of public servants, and formalising the legal responsibilities of government entities. We are optimistic that the implementation of these measures will help support existing efforts to deter graft. Tackling Corruption To Spur FDI Inflows Addressing corruption should remain a priority on the government's agenda. An aggressive stance towards fighting corruption is consistent with government goals on the economic front. We see widespread corruption as a major deterrent to foreign investment in the country. Reducing corruption will benefit the overall economy in terms of promoting fair competition and promoting foreign direct investment (FDI) inflows. Being fully aware that eradicating corruption will be crucial to the economic and political outlook for the country, the government is stepping up efforts to deal with the problem. © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q2 2012 Public Unrest A Key Threat To The CPV's Leadership Over the longer term, we note that Vietnam has similar characteristics to countries that have experienced major political uprisings in recent years. Vietnam hasa single-party political system in which the direction of policy decisions is mainly determined by the politburo within the CPV. We see this as an inherently unstable political system over the long run. The CPV's absolute commitment towards maintaining its ideology of a single-party state has often resulted in the oppression of political dissidents over the years. This, in turn, has served as a catalyst for growing political dissent. Furthermore, high double-digit consumer price inflation (CPI), especially in the form of food prices, has put severe strain on families among the lower-income population. Mismanagement of economic policies by the government (resulting in an overheating economy and stubborn inflationary pressures) are hurting the lower income segment of the population, a recipe for political unrest, in our view. However, success in tackling corruption would be a major step in reinforcing confidence in the CPV's leadership. This would boost the CPV's credibility in pushing forward with further political reforms. Long-Term Politics Key Political Challenges Over The Coming Decade BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the 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 countries with close relations with the US. Although Vietnam is a politically stable country, we see the ruling 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. 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 government's loose fiscal and monetary policies have led to high levels of inflation and repeated devaluations of the dong in recent years, which have eroded the real value of wages and savings. A failure to contain inflation at a reasonable level and uphold the real value of the dong could undermine confidence in the regime. © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q2 2012 Divisions Within The Communist Party High inflation and devaluation have opened schisms in the CPV leadership between proponents of continued economic reform and a more conservative wing that 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 re-emerge. A potential spark could be the Chinese-financed bauxite mining project in Lam Dong and Dak Nong provinces, which is causing widespread environmental damage and raising ire among the local population. There are 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 exists in both parts of the country. Demands For Increased Religious Rights One of the most concerted challenges against the CPV 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 as Beijing has expanded its economic, political and military influence southwards. The main point of contention is the conflicting territorial claims for the Paracel and Spratly Islands in the South China Sea. Vietnam's relations with China have also been strained by the large bilateral trade deficit it runs with its northern neighbour, which amounts to more than 10% of GDP, and criticism of a Chinese-financed bauxite mining project in the central highlands. That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respective politburos have decreased tension between them. Nonetheless, we believe Vietnam will seek increasingly close relations with the US, and potentially India and Japan, in the defence sphere, as a hedge against China's rising power in the region. © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q2 2012 Vietnam's long-term political risk rating of 53.8 out of 100 is weighed down by a score of 27.6 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limits on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian countries 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 would see Vietnam moving from a one-party system towards a dominant-party system of the kind in neighbouring Cambodia, Malaysia and Singapore, where elections are held but only the ruling party has a realistic chance of winning them. Looking beyond the horizon, the experiences of South Korea, Taiwan, and Japan have shown that even dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario: Mass Unrest And Violent Suppression Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe that at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Ltd Page 30 Vietnam Freight Transport Report Q2 2012 Macroeconomic Outlook External Headwinds Prompt Downward Growth Revision BMI View: We expect Vietnam's real GDP growth for 2011 and 2012 to be much weaker than we previously anticipated due to escalating economic headwinds in the US, eurozone and China. We are increasingly concerned that the slowdown in manufacturing sector growth, which indicates weak demand for Vietnamese exports, will be sustained over the coming quarters, presenting significant downside risks to growth. We have downgraded our real GDP growth forecast from 6.3% to 6.0% for 2011, and we expect growth to remain subdued at 6.5% in 2012. Real GDP growth was 6.1% year-on-year (y-o-y) in Q311, in line with our view that monetary tightening by the State Bank of Vietnam (SBV) and a reduction in public spending would continue to drag on growth. Downside risks to our outlook on external demand (a sputtering economic recovery in the US, sovereign debt concerns in the eurozone and a potential hard landing in China) have escalated. We have downgraded our real GDP growth forecast for 2011 to reflect a deteriorating economic environment that we expect to persist over the coming months. Looking into 2012, we believe Vietnam's real GDP growth will remain subdued by historical standards as weak economic momentum spills over into H112. Manufacturing Sector Activity Points To Cooling External Demand Looking at growth rates across the three broad classifications of economic activity in Vietnam, there is a notable slowdown in industry and construction growth from 7.3% y-o-y in Q211 to 6.8% in Q311. This is largely due to a slowdown in the manufacturing sector. According to figures published by the General Statistics Office (GSO), the manufacturing sector grew at a much slower pace of 7.1% y-o-y in Q311, compared with 9.1% in the previous quarter. To put into perspective the critical role that the manufacturing sector plays, the sector alone accounts for around 22% of GDP, and manufactured goods make up slightly more than 50% of total exports. Given that a large proportion of the sector's output is exported, a slowdown in manufacturing activity suggests that producers are expecting weaker demand for Vietnamese exports over the coming months. We concerned that a sustained slowdown in the manufacturing sector over coming quarters would present significant downside risks to our outlook on external demand and, in turn, undermine the government's efforts to tackle a stubborn trade deficit. Tight Labour Market To Support Private Consumption Growth Despite growing risks of a sustained slowdown in the manufacturing sector, our view that private consumption growth will remain resilient continues to holds. The manufacturing sector absorbs around 14% of the labour force. In contrast, the agricultural sector remains the major source of employment, absorbing an estimated 40% of the labour force. Given that the agricultural sector is relatively more resilient during periods of an economic slowdown, particularly one that is mainly driven by external demand, we believe the unemployment rate will remain stable at historical lows of 2.5-3.0% over the © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q2 2012 coming quarters. This supports our view that resilient private consumption growth will help to cushion a slowdown in net exports (we forecast private consumption growth of 6.5% and 5.8% in 2011 and 2012). Investments Likely To Remain Depressed Lending rates, which surged to around 25.0-27.0% in Q211 as a result of the SBV's monetary tightening since the beginning of the year, have fallen to around 17.0-19.0% in October 2011. We believe this is due to a combination of a decline in demand for credit as well as easing inflationary pressures, which is leading to a contraction in the spread between lending rates and the SBV's current policy rate of 15.00%. Although lending rates have fallen significantly, we are sceptical that this will provide a boost to gross fixed capital formation (GFCF) growth. Current lending rates are at a historical highs, and credit growth in the first nine months of the year remained low at 9.5%, below the government's target of 17%. We believe that deteriorating global economic headwinds should have a negative impact on investor sentiment, which should depress foreign direct investment inflows over the coming quarters. These negative factors should offset any positive effects that lower lending rates would have on GFCF growth. We expect GFCF growth to slow from 7.0% in 2010 to 5.0% and 5.3% in 2011 and 2012 respectively. Monetary Normalisation Could Come Sooner More positively, there is growing evidence that inflation has peaked (consumer price inflation slowed to 22.4% in September from 23.0% in August). Should inflation continue to ease, we believe that the SBV could embark on monetary normalisation much sooner than we have previously anticipated. Falling commodity prices suggest that downside risks to economic growth could become a greater concern for policymakers. We see upside risks to our outlook on real GDP growth in 2012 (although this is not our core view) that the SBV would ease monetary policy in early 2012, providing a boost to growth. Table: Vietnam – Economic Activity, 2011-2016 Nominal GDP, VNDbn 1 Nominal GDP, US$bn 1 Real GDP growth, % y-o-y GDP per capita, US$ Population, mn 2011 2012f 2013f 2014f 2015f 2016f 2,512,057.4 3,038,152.9 3,459,309.7 3,892,844.8 4,360,657.2 4,885,479.5 121.9 149.1 174.7 202.2 232.6 267.7 6.0 6.5 6.9 7.3 7.3 7.4 1,373 1,662 1,927 2,209 2,516 2,869 88.8 89.7 90.7 91.6 92.4 93.3 14.0 15.0 16.0 16.0 16.0 15.0 5.0 5.0 5.0 5.0 5.0 5.0 1 1 2 Industrial production index, % 3 y-o-y, average Unemployment, % of labour 3 force, end of period 1 2 3 f = BMI forecast. Source: Asian Development Bank, General Statistics Office; World Bank, UN, BMI; General Statistics Office © Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q2 2012 Company Profiles Vietnam Airlines Cargo Strengths ƒ Vietnam Airlines Cargo is the main air cargo provider in Vietnam. ƒ The recent green light given to the purchase of Jetstar Pacific will only strengthen the company's domestic position. Weaknesses ƒ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant on using the belly hold of its parent company's planes. Opportunities ƒ The air carrier is well placed to benefit from Vietnam's growing role in the trade sector. The country has flooded money into the development of the country's port sector, but BMI believes aviation also stands to benefit. ƒ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could result in cargo being transported in the belly holds of aircraft in the future. Threats ƒ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. 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 belly holds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing: China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to other Chinese airports. It has also developed routes to Australia, with freight connections to Melbourne and Sydney. Allied to Vietnam Airlines Cargo's cargo links to three destinations in Europe (Paris, Frankfurt and Moscow), parent company Vietnam Airlines began operating a direct air route to the UK in the last months of 2011. The service flies Gatwick Airport, with cargo space available in the belly holds of planes going to and from London. Financial Results 2011 Not available at the time of writing. © Business Monitor International Ltd Page 33 Vietnam Freight Transport Report Q2 2012 Latest Activity Vietnam Airlines Given Green Light For Jetstar Acquisition The Vietnamese prime minister has given Vietnam Airlines the green light to pursue its takeover of budget airline Jetstar Pacific. Jetstar has been suffering losses for years, and with no other solutions cropping up, the Vietnamese Ministry of Finance submitted a proposal to the prime minister regarding the transfer of Jetstar's capital to Vietnam Airlines, according to Vietnam Net Bridge. The purchase, which is expected to officially take place on February 15 2012, puts Vietnam Airlines in an enviably strong position domestically. Before the takeover was given the go ahead, Vietnam Airlines accounted for around 80% of the local aviation market, while Jetstar held around 17%. © Business Monitor International Ltd Page 34 Vietnam Freight Transport Report Q2 2012 Vinatrans Strengths ƒ Vinatrans is a diversified logistics company, offering a wide variety of services. Weaknesses ƒ The company is exposed to the weaknesses inherent in state-owned companies, such as inefficiency and underfunding. Opportunities ƒ BMI has identified intra-Asia trade as a market to watch, as consumer demand in the traditional markets of the US and Europe remains sluggish. ƒ Vietnam is part of the ASEAN 5. As such, it should see an uptick in trade as a result of the group's free trade agreement (FTA) with China. Threats ƒ ƒ Rising fuel prices pose a threat to logistics companies' profit margins. The rate of economic growth in Vietnam has far outpaced the country's infrastructure. Road, railways and ports are all badly in need of upgrades. Company Overview Vinatrans is a state-owned Vietnamese freight forwarding company, providing door-to-door logistics worldwide and a number of related services. These include air freight and sea freight forwarding (including customs clearance, cargo surveying, insurance, air consolidation for inbound and export cargoes, and exhibition or project handling), shipping (including chartering, husbandry, crewing, and brokerage services) as well as warehousing and cold storage provision. The company is 100% owned by the Vietnamese Ministry of Trade and acts as an agent for several foreign organisations including BAX Global, Hapag-Lloyd Container, Zim Israel Navigation Company and Panalpina. The firm's warehousing and storage facilities in Vietnam 2 include: a 2,500 square metre (m ) Container Freight Station (CFS) for sea and air cargo; a joint 2 venture (JV) cold storage facility of 2,800m , run by Vinatrans and Konoike Transport Company 2 2 of Japan; 40,000m of covered warehousing; and 50,000m of open storage. Strategy BMI has been following the trend of increasing investment in the Vietnamese port sector as the country establishes itself as a centre of production, particularly for the textile industry. We caution, however, that as many factories are situated inland, investment in the supply chain as a whole, including road, air, rail and storage, are needed to deal with increasing demand. Having declined by 10% year-on-year (y-o-y) in 2009, Vietnamese exports returned to growth in 2010. The volume of imports and exports is forecast to grow by 20% in 2011. According to the Civil Aviation Authority of Vietnam, air freight to and from the country increased by 37% y-o-y to reach 340,000 tonnes in 2010. As such, we see growth opportunities for Vinatrans in the sector. We note that several air cargo carriers have already spotted the potential in the market. Chinese carrier Jade Cargo has recently opened the first air freight link between Vietnam and Amsterdam. In 2009 Lufthansa Cargo, the air freight subsidiary of Deutsche Lufthansa, launched a weekly direct service between Frankfurt and Hanoi, which it is considering doubling in the future to keep up with demand. From late-June 2011, Vietnam Airlines is planning to increase its flights between Hanoi and Paris, Hanoi and Moscow, and Hanoi and Frankfurt, which could potentially mean an increase in the amount of freight carried on the routes. © Business Monitor International Ltd Page 35 Vietnam Freight Transport Report Q2 2012 Financial Results Vinatrans has reported consolidated earnings for the second quarter and first half of 2010. In Q210, the company made a net profit of VND5.06bn on revenues of VND 109.42bn, versus VND 3.42bn and VND62.99bn respectively in the same period of 2009. The company made a net profit of VND9.94bn in H110, down 14.16% on a year earlier. Net revenues, however, rose 44.05% y-oy to VND189.08bn during the period. Six-month earnings per share (EPS) were VND1,816, compared to VND2,117 in the same period in 2009. The company was targeting pre-tax profit of VND23bn on revenues of VND300bn for 2010, and a dividend payout equivalent to VND1,500 per share for the year. Latest Activity Vietnam Freight Forwarders Association Fears Logistics Companies Too Small According to the Vietnam Freight Forwarders Association (Viffas) Vietnam now has more than 1,000 enterprises which provide logistics services, most of which - about 600-700 enterprises are located in Ho Chi Minh City. Commenting on the capabilities of the enterprises, Mai Xuan Thieu, head of the Vietnam Logistics Institute, said the majority have a modest capital of VND11.5bn. As a result, most Vietnamese logistics firms act as agents for multinational groups. Thieu believes that many are not capable of providing enough transport services in Vietnamese territory with competitive costs. Currently, Vietnamese companies can only meet 25% of total domestic demand. BMI believes this is a cause for concern, given that we expect the country's trade volumes to continue growing. © Business Monitor International Ltd Page 36 Vietnam Freight Transport Report Q2 2012 Vietnam Petroleum Transport Company (VIPCO) Strengths ƒ 60% of the company's fleet is employed by Petrolimex. ƒ The company boasts a relatively young fleet. ƒ The company has diversified away from operating in a single sector, with a real estate arm. Weaknesses ƒ The company only operates in one shipping sector. Opportunities ƒ The company plans to expand its fleet. Threats ƒ Vietnam's reliance on imported refined products is decreasing as the country brings online more refining capacity, which could negatively affect VIPCO. In the longer term Vietnam's refining capacity could allow the state to export. Company Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime transport for petroleum products. The company has a diversified portfolio and units that support its product tanker fleet such as its port operations and freight forwarding services. It is also engaged in real estate. Strategy VIPCO 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. Financial Results 2011 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-oy 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. Fiscal year 2011 results are expected to be released on March 9 2012. Latest Activity VIPCO stands to benefit from a deal signed between Petrolimex and SK Energy in February 2011. The South Korean firm supplied Petrolimex with an estimated 900,000bcm of RON 92 gasoline and diesel oil in 2011. © Business Monitor International Ltd Page 37 Vietnam Freight Transport Report Q2 2012 Vietnam National Shipping Lines (Vinalines) Strengths Weaknesses ƒ Diversified fleet operating in dry bulk, container and oil transport. ƒ Largest commercial shipping line in Vietnam. ƒ Vietnam does not play a role on the major Asia-Europe routes, despite Vietnam developing as a direct port of call on these routes. ƒ 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. Opportunities ƒ Vietnam is expanding its role in the global box market and it is fast becoming a mainstay port of call on Asia-Europe services. ƒ Potential to increase its intra-Asia role, shown by the expansion work at Cai Mep, and well placed to be chosen as a partner on these services by major lines. Threats ƒ While Vietnam has invested heavily in the port network, the logistics supply chain could be let down by the landside freight network, which will have a negative impact on operators. ƒ In 2011 Vinalines posted its first ever loss in 15 years of operations, with further losses expected. ƒ Overcapacity is a threat over the medium term, unless money is pumped into port facilities and infrastructure. Company Overview Vinalines is Vietnam's largest commercial shipping line. Established in 1996, it caters for domestic trade in Vietnam and also offers intra-Asia services. The company also has a port operating division that is the largest in Vietnam, controlling and managing ports in Quang Ninh, Hai Phong, Da Nang, Ho Chi Minh and Can Tho. Strategy Vinalines' 14 shipping companies operate a diverse fleet, dominated by dry bulk vessels but also boasting container ships, oil and product oil vessels. As of the end of Q210 (latest published data), Vinalines' fleet consisted of 150 vessels with a capacity of 3.1mn deadweight tonnes (DWT). The line is looking to expand, with a mid-term plan to increase its capacity to 6-7mn DWT by 2010. The plan centres on increasing the proportion of specialised vessels such as box ships or oil tankers. In order to achieve this, the line was seeking to spend US$2bn on ordering new ships from Vietnamese yards seeking state funding for the plan. Vinalines has in fact ended up expanding its fleet quicker than 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 would need to spend US$26mn to repair the vessels and purchase insurance cover. Dung added that the company expected some © Business Monitor International Ltd Page 38 Vietnam Freight Transport Report Q2 2012 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 ThailandVietnam-Singapore (TVS) service. Vinalines provides a 1,100TEU 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. Financial Results Vinalines recorded a loss of VND660bn (US$32mn) in H111; the first time this has ever occurred in the company's 15 years of operations. Although the company's three core services - marine transport, ports and logistics - had seen revenues grow by 5% year-on-year to US$492mn in the first quarter, lower freight rates and higher fuel costs hit the operator badly in the second quarter. Latest Activity Cai Mep Welcomes Its Largest Container Vessel The Cai Mep International Terminal (CMIT) announced at the end of December 2011 that it had docked its largest ever containership, according to transportweekly.com. The 13,830 twenty-foot equivalent unit (TEU) CMA CGM Laperouse is the largest vessel to dock in the Vietnamese port so far. Its accommodation was made possible by the post-Panamax cranes that operate at the site - numbering five by the end of January 2012. 'We are delighted to be able to finally put to good use our super post-Panamax cranes which are designed and built specifically to handle vessels of this size,' explained Nguyen Xuan Ky, deputy general director of CMIT. He added: 'With the imminent delivery of our fifth super post-Panamax quay crane in January 2012, CMIT will be ideally placed to handle these huge vessels whilst delivering world class berth productivity.' © Business Monitor International Ltd Page 39 Vietnam Freight Transport Report Q2 2012 Country Snapshot: Vietnam Demographic Data Section 1: Population Population By Age, 2005 (mn) Population By Age, 2005 And 2030 (mn, total) 70-74 70-74 60-64 60-64 50-54 50-54 40-44 40-44 30-34 30-34 20-24 20-24 10-14 10-14 0-4 0-4 -6.0 -4.0 -2.0 0.0 Male 2.0 4.0 6.0 -10.0 -5.0 0.0 2030 Female 5.0 10.0 2005 Source: UN Population Division Table: Demographic Indicators, 2005-2030 2005 2010f 2020f 2030f Dependent population, % of total 34.1 29.9 30.4 31.2 Dependent population, total, ‘000 28,318 26,225 30,950 34,499 Active population, % of total 65.8 70.0 69.5 68.7 Active population, total, ‘000 54,650 61,263 70,706 75,927 Youth population*, % of total 28.8 25.0 23.4 20.3 Youth population*, total, ‘000 23,972 21,887 23,807 22,508 Pensionable population, % of total 5.2 4.9 7.0 10.8 Pensionable population, total, ‘000 4,346 4,338 7,143 11,991 f = forecast. * Youth = under 15. Source: UN Population Division © Business Monitor International Ltd Page 40 Vietnam Freight Transport Report Q2 2012 Table: Rural/Urban Breakdown, 2005-2030 2005 2010f 2020f 2030f Urban population, % of total 26.7 29.4 34.7 41.8 Rural population, % of total 73.3 70.6 65.3 58.2 Urban population, total, ‘000 22,509 26,395 35230 46,123 Rural population, total, ‘000 61,729 63,323 66426 64,306 Total population, '000 84,238 89,718 101,656 110,429 f = forecast. Source: UN Population Division Section 2: Education And Healthcare Table: Education, 2002-2005 2002/03 2004/05 Gross enrolment, primary 98 93 Gross enrolment, secondary 73 75 Gross enrolment, tertiary 10 16 Adult literacy, male, % na 93.9 Adult literacy, female, % na 86.9 Gross enrolment is the number of pupils enrolled in a given level of education regardless of age expressed as a percentage of the population in the theoretical age group for that level of education. na = not available. Source: UNESCO Table: Vital Statistics, 2005-2030 2005 2010f 2020f 2030f Life expectancy at birth, males (years) 68.4 69.9 74.2 75.8 Life expectancy at birth, females (years) 72.4 73.9 78.4 80.0 Life expectancy estimated at 2005. f = forecast. Source: UNESCO © Business Monitor International Ltd Page 41 Vietnam Freight Transport Report Q2 2012 Section 3: Labour Market And Spending Power Table: Employment Indicators, 1999-2004 1999 2000 2001 2002 2003 2004 Employment, '000 38,120 38,368 39,000 40,162 41,176 42,316 – % change y-o-y 3.1 0.6 1.6 2.9 2.5 2.7 – male 19,029 19,292 19,744 20,356 20,959 21,649 – female 19,091 19,076 19,257 19,807 20,217 20,666 — female, % of total 50.0 49.7 49.3 49.3 49.1 48.8 Unemployment, '000 909 886 1,107 871 949 926 – male 439 468 458 398 402 410 – female 470 418 650 473 547 517 – unemployment rate, % 2.3 2.2 2.7 2.1 2.2 2.1 Source: ILO Table: Consumer Expenditure, 2000-2012 (US$) 2000 2007e 2008f 2009f 2010f 2012f 110 265 301 368 386 427 Poorest 20%, expenditure per capita 49 119 136 166 174 192 Richest 20%, expenditure per capita 243 587 668 815 855 946 Richest 10%, expenditure per capita 316 763 868 1,060 1,112 1,230 Middle 60%, expenditure per capita 85 206 235 286 301 332 Consumer expenditure per capita 556 1,196 1,297 na na na Poorest 20%, expenditure per capita 250 538 583 na na na Richest 20%, expenditure per capita 1,231 2,649 2,872 na na na Richest 10%, expenditure per capita 1,600 3,444 3,734 na na na 433 931 1,009 na na na Consumer expenditure per capita Purchasing power parity Middle 60%, expenditure per capita e/f = BMI estimate/forecast. na = not available. Source: World Bank, Country data; BMI calculation © Business Monitor International Ltd Page 42 Vietnam Freight Transport Report Q2 2012 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part of all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Transport Industry There are a number of principal criteria that drive our forecasts for each transport variable: GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI’s own macroeconomic and demographic forecasts. © Business Monitor International Ltd Page 43 Vietnam Freight Transport Report Q2 2012 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: ƒ Trends manifested through historical data; ƒ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). Port Traffic Port traffic levels act as a ‘second opinion’ on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ƒ Trends in historical modal split data; ƒ Evidence of government policy favouring one or more modes over others; ƒ Government and or private sector investment plans in specific modes. Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Ltd Page 44 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... Monitor International Ltd Page 32 Vietnam Freight Transport Report Q2 2012 Company Profiles Vietnam Airlines Cargo Strengths ƒ Vietnam Airlines Cargo is the main air cargo provider in Vietnam ƒ The recent green light given to the purchase of Jetstar Pacific will only strengthen the company's domestic position Weaknesses ƒ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant... operator, the Vietnam Railway Corporation (VRC), established in April 2003 as a state corporation operating railway transport and related services © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q2 2012 Vietnam' s rail network totals 2,347km The network is of mixed-gauge, comprising 2,169km of 1.000m gauge and 178km of 1.435m gauge Railway infrastructure in Vietnam was ranked... 10,612.12 e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q2 2012 Rail Recovers The rail freight sector will safely put the twin contractions of 2009 and 2010 out of sight with 2012 and beyond set to reflect 2011's steady growth pattern For 2012 we expect growth of 5.29%, with the average annual growth over... believe Vietnam' s adverse monetary conditions could lessen going into 2012, as the softening global conditions and aggressive monetary tightening policy initiated by the Vietnamese © Business Monitor International Ltd Page 11 Vietnam Freight Transport Report Q2 2012 government could spur a faster decline in inflation, increasing the likelihood of domestic interest rates being cut in early 2012 Vinalines... Monitor International Ltd Page 33 Vietnam Freight Transport Report Q2 2012 Latest Activity Vietnam Airlines Given Green Light For Jetstar Acquisition The Vietnamese prime minister has given Vietnam Airlines the green light to pursue its takeover of budget airline Jetstar Pacific Jetstar has been suffering losses for years, and with no other solutions cropping up, the Vietnamese Ministry of Finance submitted... estimate/forecast Source: Port authorities © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q2 2012 Ho Chi Minh Port's growth forecast for 2012 is set to reflect the slower GDP growth in Vietnam We are sticking with last quarter's prediction that the port's container throughput will increase by 4.8% in 2012 to 3.1mn twenty-foot equivalent units (TEUs), a slowdown from the double-digit... international community If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble © Business Monitor International Ltd Page 30 Vietnam Freight Transport Report Q2 2012 Macroeconomic Outlook External Headwinds Prompt Downward Growth Revision BMI View: We expect Vietnam' s real GDP growth for 2011 and 2012 to be much weaker than... prices in 2012, cheaper costs are only likely to help most companies weather the crisis rather than avoid it As for refiners, lower demand and lower prices will continue to hurt margins, though we see room for growth in some emerging countries and in some parts of the US © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q2 2012 Industry Forecast Road Freight Road Freight Continues... could leave Vietnam a second-rate economy for an indefinite period © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q2 2012 Industry Trends And Developments Maritime Van Phong Port To Resume Work In 2012 At Earliest The troubled Van Phong port project was finally beginning to see some light at the end of the tunnel at the end of October 2011, with project investor Vietnam National... 34,541.55 2.00 0.90 4.53 4.98 5.28 5.38 4.69 5.88 e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 23 Vietnam Freight Transport Report Q2 2012 Trade Table: Trade Overview, 2009-2016 Real growth, % y-o-y 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f Imports -13.81 22.40 15.32 8.00 6.80 6.50 6.50 6.50 Exports -15.00 24.81 15.00 8.90 8.00