Vietnam freight transport report q2 2014

... affect Vietnam' s freight transport sector © Business Monitor International Page 11 Vietnam Freight Transport Report Q2 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam. .. please see BMI's Vietnam Shipping Report © Business Monitor International Page 24 Vietnam Freight Transport Report Q2 2014 Table: Maritime Freight, 2011-2018 2011 2012 2013 2014f 2015f 2016f... Vietnam Freight Transport Report Q2 2014 Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013e) Source: General Statistics Office of Vietnam Vietnam's dense

Q2 2014 www.businessmonitor.com VIETNAM FREIGHT TRANSPORT REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 1750-5364 Published by:Business Monitor International Vietnam Freight Transport Report Q2 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: January 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2014 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 2014 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................... 9 Freight Transport ...................................................................................................................................... 9 Political ................................................................................................................................................. 12 Economic ............................................................................................................................................... 13 Business Environment .............................................................................................................................. 14 Industry Forecast .............................................................................................................. 15 Road Freight ......................................................................................................................................... 16 Table: Road Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Inland Waterways .................................................................................................................................. 18 Table: Inland Waterway Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Rail Freight .......................................................................................................................................... 20 Table: Vietnam Transport Network Length (km) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Table: Rail Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Air Freight ............................................................................................................................................ 21 Table: Air Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Maritime Freight ................................................................................................................................... 23 Table: Maritime Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Trade ................................................................................................................................................... 25 Table: Trade Overview, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table: TOP IMPORT DESTINATIONS, 2005-2012, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table: TOP EXPORT DESTINATIONS, 2005-2012, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Market Overview ............................................................................................................... 27 Industry Trends And Developments ................................................................................ 33 Multimodal ........................................................................................................................................... Maritime .............................................................................................................................................. Air ...................................................................................................................................................... Road .................................................................................................................................................... Rail ..................................................................................................................................................... 33 34 36 36 37 Company Profile ................................................................................................................ 39 Vietnam Airlines Cargo ............................................................................................................................ 39 Vietnam Petroleum Transport Company (VIPCO) .......................................................................................... 42 Vietnam National Shipping Lines (Vinalines) ................................................................................................ 44 Political Outlook ................................................................................................................ 48 Domestic Politics ..................................................................................................................................... 48 Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 © Business Monitor International Page 4 Vietnam Freight Transport Report Q2 2014 Long-Term Political Outlook ..................................................................................................................... 50 Oil Price Outlook ............................................................................................................... 54 Global Oil Products Price Outlook ............................................................................................................. 54 Table: 2013 Oil Product Price Forecast Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Methodology ......................................................................................................................................... 56 Crude Price Forecasts ............................................................................................................................ 57 Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Oil Product Price Forecasts ..................................................................................................................... 57 Table: BMI's Refined Products Forecast, US$/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Narrower US Market Crude-Product Spreads .............................................................................................. Weak Demand Persists ............................................................................................................................ Supply: Global Capacity Supports Demand ................................................................................................. Quarterly Prices .................................................................................................................................... 59 60 61 65 Table: BMI Refined Oil Products Quarterly Forecast, US$/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Naphtha: Long-Term Growth Faces Headwinds From Gas ............................................................................ 66 Gasoline And Gasoil/Diesel: Gasoline Weakness To Continue ........................................................................ 68 Jet Fuel: Downward Movement Capped By Recovery .................................................................................... 74 Table: Total Air Freight And Passenger Volumes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest ............................................................................. 76 Risks To Outlook .................................................................................................................................... 78 Macroeconomic Forecasts ............................................................................................... 79 Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Demographic Forecast ..................................................................................................... 83 Demographic Outlook .............................................................................................................................. 83 Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Methodology ...................................................................................................................... 87 Industry Forecast Methodology ................................................................................................................ 87 Sector-Specific Methodology .................................................................................................................... 88 Sources ................................................................................................................................................ 89 © Business Monitor International Page 5 Vietnam Freight Transport Report Q2 2014 BMI Industry View In line with BMI's view that the Vietnamese economy would accelerate forcefully into the final months of the year (see 'Economy Picking Up Pace', October 4 2013), the latest data released by the General Statistics Office (GSO) showed that the economy expanded by 6.0% year-on-year (y-o-y) in Q4 2013. This translates into full-year growth of 5.4% for 2013, just slightly above our forecast of 5.3%. The latest GDP reading, combined with the strong set of economic data we have seen in recent weeks (accelerating foreign direct investment inflows, remittances, and merchandise trade exports), have reaffirmed our conviction that the Vietnamese economy will begin 2014 on a strong note. In welcome news for Vietnam's freight industry, officials from firms such as Nike, Levi's and Zara attended a public briefing in November 2013 over the status of the trade discussions between Vietnam and the EU. One of the matters discussed was the fashion industry's push to mitigate the global 'rules of origin'. The rules of origin can result into a significant amount of money for the goods coming from Vietnam to the EU. According to the apparel manufacturers, the modern trade policy must not punish firms for manufacturing goods in more than one country. However, Europe's domestic textile industry is against the relaxation of tariffs. 'There are still very high tariffs and significant trade barriers in place which make it hard for importers and exporters to do business, and the free trade agreement could potentially solve this issue,' said Tim McPhie, a European Branded Clothing Alliance spokesperson (CNBC). In 2014, the freight picture by mode is a little mixed but is steady across the board in terms of growth. Leading the way over the next 12 months will be the road freight sector with healthy 6.05% tonnage yearon-year (y-o-y) growth anticipated. The maritime sector is also forecast for strong growth with the Port of Da Nang set for slightly higher annual growth than the larger Port of Ho Chi Minh City (7.00% compared to 6.06%). Slightly lower y-o-y growth is pencilled in for both the rail and air freight sectors (3.12% and 3.00% respectively). Headline Industry Data ■ 2014 rail freight tonnage is set to increase by 3.12% to 6.73mn tonnes. ■ 2014 air freight tonnage is forecast to rise by 3.00% to 189,210 tonnes. ■ Tonnage handled at the Port of Ho Chi Minh City in 2014 is forecast to grow 6.06%, whereas tonnage handled at the Port of Da Nang is forecast to increase 7.00%. ■ 2014 road freight tonnage is forecast to grow by 6.05% to 811.35mn tonnes. © Business Monitor International Page 7 Vietnam Freight Transport Report Q2 2014 ■ 2014 total trade is forecast to rise by 6.55%. Key Industry Trends Evergreen-Hanjin's Intra-Asia Tie-Up Highlights Vietnam Growth Story - The newly established intra-Asia service by Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping, which calls at the port of Ho Chi Minh, will boost both companies' intra-Asia operations. We have long highlighted intra-Asia trade as a region of strong growth and we note the port of Ho Chi Minh to be a specific beneficiary of the new route - with the launch of the service offering upside risk to our forecast for the port. Zenith Expands Vietnam Warehousing Facility - International freight services provider Zenith Global Logistics made steps to keep up with increasing demand for humidity-controlled warehousing space in the Asia region by expanding its warehousing facility in Ho Chi Minh City, Vietnam, according to the Journal of Commerce, reporting in November 2013. The facility, which will house goods and cargoes destined for the US, covers 7,500 square metres. Finnair Cargo Adds New Freighter Service - Finnair Cargo expanded its presence in the Asian region by adding a twice-weekly MD-11 freighter service to the Vietnamese capital, Hanoi, it was announced in November 2013. The decision underlines Finnair's strategy of improving its Brussels cargo hub connectivity. Key Risks To Outlook The transport sector forms the bulk of infrastructure investment pipeline in Vietnam across our 10-year forecast period, expected to account for 60-65% in 2022. In part, this is because the country still suffers from a significant deficit in transportation infrastructure and we believe the Vietnamese government will continue to develop this sector over the medium term. As such, we expect the transport infrastructure industry value to grow by an average of 4.5% year-on-year (y-o-y) between 2014 and 2017. Upside risk could present itself should the Vietnamese government pay heed to calls by the Deputy Minister of Planning and Investment Nguyen Van Trung to create a favourable investment climate to boost investor confidence. He emphasised the need to increase investment promotions to attract more advanced technology and environmentally friendly projects to support the industries in its industrial zones (IZs) and economic zones (EZs). Currently, the country has 289 IZs and 15 coastal EZs, which account for 35%, or more than US$80bn, of the country's annual import-export turnover. In addition, these zones attract around 70% of the total foreign investment flow into the country, and generate more than 2mn local jobs. © Business Monitor International Page 8 Vietnam Freight Transport Report Q2 2014 SWOT Freight Transport SWOT Analysis Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for thousands of kilometres on a north-south axis, creates a need for long-distance freight haulage. ■ A recovery of activity levels at the nation's ports in 2010 is expected to continue over the mid-term to 2018. ■ Vietnam's location on the South China Sea gives the country access to the main interAsian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics. Weaknesses ■ The generally poor state of the road network. Despite new highway construction, only 13.5% of the network is considered to be in good condition. Just 26% of the network has two or more lanes and only 29% is tarred. ■ Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underutilised. ■ Decades of under-investment have left the country with a port infrastructure system that is poor by international standards. Overcapacity is a growing problem. ■ Unresolved business environment issues and lack of significant improvement in access to infrastructure financing means that we remain very conservative on the growth potential of Vietnam's freight sector. ■ A slowdown affecting the US economy has a knock-on effect on Vietnam due to it being the Asian country's largest export partner. ■ Vietnamese shipping company Vinashinlines has announced that 90% of its vessels, including Diamond Way and Sea Eagle, have been sold. The firm added that a number © Business Monitor International Page 9 Vietnam Freight Transport Report Q2 2014 SWOT Analysis - Continued of the carriers had been purchased for prices above their original valuation, Hellenic Shipping News reported in early October 2013. Opportunities ■ The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. ■ Chinese investment could bring about much-needed improvements in the rail sector. ■ Growing international interest in Vietnam as a growth market within the box shipping sector. ■ The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. ■ The president of Russian Railways (RZD) has explained his belief that an investment in the construction of a new rail line in southern Vietnam will come in at more than US $2bn. Speaking to IA Prime, Vladimir Yakunin said that 'it is difficult to talk about it now, because there is no project', but as it stands, an agreement of intent was signed on March 11 2013 between RZD, Vietnamese Railways and the mineral deposit company An Vien, also from Vietnam. ■ It was announced in June 2013 that the Laos government is to build a new railway line between the country and its Asian neighbours, Vietnam and Thailand. The 220km line will run from Laos's Western border with Thailand to the Lao Bao border gate in Vietnam. Construction will commence in August 2013 with an expected completion date of the second half of 2017. ■ The 900,000 twenty-foot equivalent units (TEUs) deepwater Lach Huyen terminal project will entail a total investment of US$1.2bn and is likely to become operational in 2015. The terminal, likely to ease port congestion in Haiphong, will be able to accommodate vessels with a capacity ranging between 8,000TEUs and 9,000TEUs. © Business Monitor International Page 10 Vietnam Freight Transport Report Q2 2014 SWOT Analysis - Continued ■ The Asian Development Bank (ADB) has announced that it will provide a US$410mn loan for the Vietnamese government, reports KHL Group. The loan will enable the government to develop a new arterial road between Ho Chi Minh City, the Mekong Delta and the south of the country. ■ Vietnam-based Rang Dong Group has filed a petition to secure approval for developing Phan Thiet airport, reported the Daily in August 2013, citing the company's chairman Nguyen Van Dong. ■ Two berths at Vietnam's first state-built seaport, the Cai Mep-Thi Vai international port in Ba RiaVung Tau province, are set to be leased for 30 years, according to official sources. Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. ■ Vietnam is vulnerable to any slowdown in Chinese investment and to political risk in the sensitive South China Sea, subject to competing sovereignty claims. ■ A drop in international demand for exports would negatively affect Vietnam's freight transport sector. © Business Monitor International Page 11 Vietnam Freight Transport Report Q2 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the next five years. The oneparty system is generally conducive to short-term political stability. ■ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. ■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent. Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. ■ Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within the one-party system. Threats ■ Macroeconomic instabilities continue to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. ■ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. ■ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage. © Business Monitor International Page 12 Vietnam Freight Transport Report Q2 2014 Economic SWOT Analysis Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2012. ■ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20.7% in 2012. Weaknesses ■ Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy vulnerable to global economic uncertainties. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. ■ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. Opportunities ■ WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam greater access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. ■ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. ■ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s. Threats ■ Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis. ■ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy. © Business Monitor International Page 13 Vietnam Freight Transport Report Q2 2014 Business Environment SWOT Analysis Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country attractive to foreign investors. ■ Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond. Weaknesses ■ Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world. ■ Vietnam remains one of the world's most corrupt countries. According to Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123 out of 176 countries. Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how. ■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points. Threats ■ Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. ■ Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. © Business Monitor International Page 14 Vietnam Freight Transport Report Q2 2014 Industry Forecast Vietnam's latest real GDP reading, which showed that the economy expanded by 6.0% year-on-year (y-o-y) in Q4 2013, confirms our belief that 2014 will prove to be a fruitful year for the Vietnamese economy. Not only are we witnessing more evidence of a sustained pick-up in production activity and employment in the manufacturing sector, but we also expect foreign direct investment (FDI) inflows to accelerate as the economic recovery gathers pace over the coming quarters. We forecast real GDP growth to come in at 6.0% in 2014, versus Bloomberg consensus of 5.5%. Our assessment of the Vietnamese economy at the provincial level suggests that there are attractive opportunities for foreign companies to invest in rapidly-developing provinces that are situated in the South East region (including Ba Ria-Vung Tau, Dong Nai, and Binh Duong). We expect rising labour costs and intense competition in developed cities to push companies to look for better opportunities in these provinces. GDP To Enjoy Healthy Mid Term Vietnam Real GDP growth, % change y-o-y 7.5 7 6.5 6 5.5 2018f 2017f 2016f 2015f 2014f 2013f 2012 2011 2010 5 e/f = BMI estimate/forecast. Source: Asian Development Bank, General Statistics Office © Business Monitor International Page 15 Vietnam Freight Transport Report Q2 2014 To keep pace with growth, Vietnam will need to invest in its logistics sector, but BMI expects a lot of this investment to come from outside logistic and freight transport companies which will be keen to enter and expand into this high growth market. We believe that rapid urbanisation, driven by a healthy pipeline of government-led infrastructure projects over the next five years, will continue to spur rural-urban migration and foreign direct investment (FDI) into developed cities such as Ho Chi Minh and Hanoi. We have also already witnessed this to some extent in Vietnam's port sector, with considerable investment being made by container shipping lines and global port operators in the development of modern box terminals at Vietnam's ports. This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can be achieved with greater links between the country and its main export partner the US. Direct container shipping links between Vietnam and the US have been in operation since 2009, which have cut both time and cost, as previously Vietnamese shipments had to be transhipped via Singapore. Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam's exports set to benefit from the slow but steady recovery in the US economy. Vietnam's export outlook will also continue to be bolstered by China's growth outlook. Although we project China's economic growth to slow over the medium term, the country's real GDP growth outlook remains robust. Vietnam plays a key role in China's coal supply chain. Vietnam is China's fifth-largest coal supplier providing the country with the thermal coal it requires for its power stations. Vietnam's role in this supply chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors' reliance on coal. While we believe that the percentage supplied by coal fired power plants within China's overall energy mix will slip over the medium term, it will nevertheless remain above 70%. BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class, as the country starts to import more from abroad. Road Freight Road Dominates And Offers Best Links Into China Despite its low standing in road infrastructure, with the Global Economic Forum ranking Vietnam's roads at 123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logistics © Business Monitor International Page 16 Vietnam Freight Transport Report Q2 2014 needs are primarily met by road. In 2014 and beyond, we predict that road freight volumes in Vietnam will account for the majority of freight carried in the country. Road Reliant Vietnam Freight Mode Breakdown By Market Share 2013e Source: BMI We forecast that growth in road freight volume will continue to impress, albeit not at the double-digit rate of growth seen in 2012 and the years preceding it. In 2013, we estimate that annual growth was just under 6%, which is set to rise to slightly over 6% in 2014 to reach 811.35mn tonnes. Over the medium term, we forecast road freight volume growth will average 7.59% per annum reaching a projected 1.10bn tonnes by the end of 2018. There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road freight expertise expand in Vietnam. Both FedEx and DHL have expanded their role in Vietnam in recent times. While some companies are breaking into Vietnam by developing their own operations in the country, others are getting a head start by acquiring and joining up with domestic freight operators. This is the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group. © Business Monitor International Page 17 Vietnam Freight Transport Report Q2 2014 Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's export supply chain. Road is the main form of transport linking Vietnam's factories to the country's ports and also plays a key role in linking Vietnam with its second-largest export partner China. Vietnam's northern border links the country's with the south of China. Road links continue to be developed between the two and with them trucking services. Kerry Asia Road Transport (Kart), for example, offers a twice-weekly trucking link connecting Shenzhen and Hanoi. Table: Road Freight, 2011-2018 Road freight, '000 tonnes 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 654,127 722,156 765,070 811,346 878,497 949,784 1,024,494 1,102,945 11.43 10.40 5.94 6.05 8.28 8.11 7.87 7.66 40,130 43,902 46,791 50,090 54,346 58,863 63,597 68,568 10.92 9.40 6.58 7.05 8.50 8.31 8.04 7.82 - % change y-o-y Road freight, mn tonnes/km - % change y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Inland Waterways Mekong Offers Trade Links With Neighbours Vietnam's inland waterways play a considerable role in the country's freight transport sector, making it the second-largest freight transport mode in the country. In 2013, we estimate that 180.81mn tonnes of freight were carried by the nation's waterways, y-o-y growth of 7.31%. In 2014, annual growth will slip slightly to a still healthy 6.67%, to reach 192.88mn tonnes, while over our forecast period, we anticipate average y-o-y growth of 6.35%. © Business Monitor International Page 18 Vietnam Freight Transport Report Q2 2014 Mekong Offers Trade Connections Map of the Mekong River Source: BMI Vietnam's inland waterways stretch for 47,130km and the country's dense network of waterways ranks its seventh in the world in terms of length. The country's inland waterways include the Mekong River, which enables freight connections with Vietnam's neighbours. Although we highlight that the River's full potential has not been reached and so development in the River is an area for potential investment. © Business Monitor International Page 19 Vietnam Freight Transport Report Q2 2014 Table: Inland Waterway Freight, 2011-2018 Inland waterway freight, '000 tonnes - % change y-o-y Inland waterway freight, mn tonnes/km - % change y-o-y 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 160,165 168,493 180,813 192,878 205,108 218,091 231,698 245,986 11.05 5.20 7.31 6.67 6.34 6.33 6.24 6.17 34,372 37,018 39,344 42,363 45,613 49,063 52,679 56,476 8.50 7.70 6.28 7.67 7.67 7.56 7.37 7.21 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Rail Freight Network Lacking And No Impetus To Develop It Despite rail's potential as an overland trade link for Vietnam with its three neighbours, the mode's role in the country's freight transport sector remains small. In 2013, we estimate that Vietnam's rail freight volumes accounted for a negligible percentage of the total with the country's rail network transporting just 6.53mn tonnes of freight. In 2013, we estimate that the rail freight sector in Vietnam performed poorly once more, seeing yet another contraction in y-o-y growth. Growth decreased by 6.82%, following on from 2012's contraction of just under 4% and 2011's larger contraction of 7.33%. However, in welcome news for the sector, we forecast growth to come in the positive in 2014 at 3.12% y-o-y to reach 6.73mn tonnes, albeit well below the heyday of 2007 when tonnage was over 9.00mn tonnes. There are two key factors that we believe have held back Vietnam's rail freight development and will continue to do so. Table: Vietnam Transport Network Length (km) Vietnam Transport Network Road Railway Inland Waterway Length (km) 206,633 2.632 47,130 Source: CIA World Factbook (accessed January 21, 2014) © Business Monitor International Page 20 Vietnam Freight Transport Report Q2 2014 The first is the quality of Vietnam's railway infrastructure. The Global Economic Formula gives Vietnam's rail infrastructure a low ranking, placing it 71st globally out of 123 countries measured. This ranking places it 12th out of its 13 Asian peers. A major problem for Vietnam's rail freight development is the relative shortness of the country's rail network. Vietnam's railway lines extend for just 2,632km; this compares with the country's 206,633km network of roads and 47,130km network of inland waterways. The second drawback for freight rail development in Vietnam is its gauge incompatibility with China. Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total. While the country has some standard gauge track, this system only accounts for 20% of the total. This means that rail freight trade between Vietnam and China is slowed by gauge changes, making road freight a more cost- and time-effective alternative; this stymies potential rail-freight projects between the two nations. BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam and Laos). Table: Rail Freight, 2011-2018 2011 2012 2013 2014f 2015f 2016f 2017f 2018f Rail freight, '000 tonnes 7,285 7,004 6,526 6,730 6,958 7,306 7,715 8,178 - % change y-o-y -7.33 -3.87 -6.82 3.12 3.40 5.00 5.60 6.00 Rail freight, mn tonnes/km 4,162 4,025 3,804 3,903 4,020 4,161 4,344 4,577 5.08 -3.30 -5.48 2.60 3.00 3.50 4.40 5.36 - % change y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Air Freight On Growth Trajectory As Vietnam Gets Better Connected Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector; although this is not expected to change, there is a lot of growth potential in this sector. The government has ambitious plans to modernise and expand the country's airport infrastructure, which consists of 44 airports. © Business Monitor International Page 21 Vietnam Freight Transport Report Q2 2014 Since early 2012, Vietnam has announced that it was in the search for foreign investors to help construct two international airports: the US$1.2bn Van Don International airport in the northern province of Quang Ninh and the US$10bn Long Thanh International airport in the southern province of Dong Nai. For 2014, we predict that the Vietnamese air freight sector will see annual growth of 3.00%, up from 2013's 2.80%, to reach 189,210 tonnes. Over the forecast period to 2018, we expect Vietnam's air freight levels to grow on average per annum by 3.96% to reach 223,040 tonnes. Taking Off Vietnam's Air Freight Tonnage, '000 tonnes, 2010-2018 250 200 150 100 50 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 2010 0 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes. In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi Minh City. Vietnam is also becoming globally better connected by air. In 2012, Emirates added a link with the country and Dubai, and in 2013, Finnair announced that it planned to launch new cargo routes to Hanoi. While still at the development stage, Vietnam is seeking to play a greater role in the electronics supply chain, a key source of demand for air freight transport options. One example has been the impact the local © Business Monitor International Page 22 Vietnam Freight Transport Report Q2 2014 production of iPhones has had on China's air freight sector. Plans are in place for Vietnam-based facilities to produce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand. Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot. Vietnam's trade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term. The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, with the sector offering savings in transport time, along with environment controlled options, which are vital for the transport of some medicines and vaccinations. Table: Air Freight, 2011-2018 Air freight, '000 tonnes 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 200.30 178.70 183.70 189.21 195.64 203.27 212.42 223.04 5.37 -10.78 2.80 3.00 3.40 3.90 4.50 5.00 426.70 480.90 469.80 477.79 489.73 504.42 522.08 542.96 -0.02 12.70 -2.31 1.70 2.50 3.00 3.50 4.00 - % change y-o-y Air freight, mn tonnes/km - % change y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Maritime Freight Vietnam Catching The Eye Of Shippers Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping announced a new intra-Asia service at the end of 2013, which should provide upside risk for the sector going forward. The new intra-Asia service, which calls at the port of Ho Chi Minh, will boost both companies' intra-Asia operations and we have long highlighted intra-Asia trade as a region of strong growth and we note the port of Ho Chi Minh to be a specific beneficiary of the new route - with the launch of the service offering upside risk to our forecast for the port. Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector. As highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulk commodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao. Vietnam is an oil-producing nation, but its consumption needs have come to outweigh its supply and so the country is making use of the liquid bulk shipping sector to import oil. © Business Monitor International Page 23 Vietnam Freight Transport Report Q2 2014 Getting Better Connected UNCTADstat Liner Connectivity Index For Asia 2004 and 2013 Source: UNCTADstat The development of Vietnam's liner connections has been highlighted by data from UNCTAD's liner connectivity index. In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container line connectivity, but by 2013, it had jumped up the rankings to ninth place out of its 14 Asian neighbours. Vietnam's growing role in the global container shipping sector is also in evidence in the port of Ho Chi Minh's box throughput. In 2014, we expect container volumes to have increased by 6.06% and over the medium term by an annual average of 6.88%. For more information on data and analysis of Vietnam's shipping sector, please see BMI's Vietnam Shipping Report. © Business Monitor International Page 24 Vietnam Freight Transport Report Q2 2014 Table: Maritime Freight, 2011-2018 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 33,451 36,029 38,867 41,223 43,986 47,176 50,748 54,212 7.45 7.71 7.87 6.06 6.70 7.25 7.57 6.83 Port of Da Nang throughput, tonnes '000 3,868 4,423 4,812 5,149 5,484 5,784 6,111 6,461 - % change y-o-y 17.10 14.35 8.80 7.00 6.50 5.48 5.66 5.72 Port of Ho Chi Minh City (Saigon New) throughput, tonnes '000 - % change y-o-y e/f = BMI estimate/forecast. Source: Port authorities Trade Table: Trade Overview, 2011-2018 Real 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Imports, real growth, % y-o-y 4.10 9.09 7.90 7.50 7.50 7.30 7.20 7.00 Exports, real growth, % y-o-y 10.78 15.71 6.00 5.60 5.80 6.20 6.60 6.80 7.44 12.40 6.95 6.55 6.65 6.75 6.90 6.90 112.40 118.98 136.68 157.93 180.76 204.81 232.79 263.93 24.17 5.86 14.87 15.55 14.45 13.31 13.66 13.38 106.84 124.43 140.42 159.39 179.54 201.34 227.57 257.53 - % change y-o-y 31.49 16.46 12.85 13.51 12.64 12.14 13.03 13.16 Total trade, US$bn 219.24 243.41 277.10 317.32 360.30 406.15 460.36 521.46 - % change y-o-y 27.63 11.03 13.84 14.51 13.54 12.73 13.35 13.27 Total trade, real growth, % y-o-y Nominal Imports, US$bn - % change y-o-y Exports, US$bn e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Table: TOP IMPORT DESTINATIONS, 2005-2012, US$mn China, Mainland, US$mn China, Mainland, US$mn, % of total Korea, Republic Of, US$mn Korea, Republic Of, US$mn, % of total © Business Monitor International 2005 2006 2007 2008 2009 2010 2011 2012 5,900 7,391 12,710 15,974 16,441 20,019 24,594 37,647 16.0 16.5 20.3 19.8 23.5 24.0 23.5 27.2 3,594 3,908 5,340 7,255 6,976 9,761 13,176 17,541 9.8 8.7 8.5 9.0 10.0 11.7 12.6 12.7 Page 25 Vietnam Freight Transport Report Q2 2014 TOP IMPORT DESTINATIONS, 2005-2012, US$mn - Continued 2005 2006 2007 2008 2009 2010 2011 2012 4,074 4,702 6,189 8,240 7,468 9,016 10,400 11,803 11.1 10.5 9.9 10.2 10.7 10.8 10.0 8.5 4,482 6,274 7,614 9,378 4,248 4,101 6,391 11,421 12.2 14.0 12.1 11.6 6.1 4.9 6.1 8.3 2,374 3,034 3,744 4,906 4,514 5,602 6,384 7,310 6.5 6.8 6.0 6.1 6.5 6.7 6.1 5.3 TOTAL 36,761 44,891 62,765 80,714 69,949 83,365 TOTAL, top 5 countries, US$m 20,424 25,310 35,597 45,753 39,648 48,500 60,944 85,721 55.6 56.4 56.7 56.7 56.7 58.2 58.3 62.0 Japan, US$mn Japan, US$mn, % of total Singapore, US$mn Singapore, US$mn, % of total Thailand, US$mn Thailand, US$mn, % of total % from top 5 trade partners 104,510 138,166 Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report Table: TOP EXPORT DESTINATIONS, 2005-2012, US$mn 2005 2006 2007 2008 2009 2010 2011 2012 5,924 7,845 10,105 11,887 11,356 14,238 16,928 19,427 18.3 19.7 20.8 19.0 19.9 20.4 18.2 17.0 3,228 3,243 3,646 4,850 4,909 7,309 11,125 14,755 9.9 8.1 7.5 7.7 8.6 10.5 12.0 12.9 4,340 5,240 6,090 8,468 6,292 7,728 10,781 13,722 Japan, US$mn, % of total 13.4 13.2 12.5 13.5 11.0 11.1 11.6 12.0 Korea, Republic Of, US$mn 664 843 1,243 1,794 2,065 3,092 4,715 5,199 Korea, Republic Of, US$mn, % of total 2.0 2.1 2.6 2.9 3.6 4.4 5.1 4.6 1,086 1,445 1,855 2,073 1,885 2,373 3,367 5,070 3.3 3.6 3.8 3.3 3.3 3.4 3.6 4.4 TOTAL 32,447 39,826 48,561 62,685 57,196 69,820 92,881 113,944 TOTAL, top 5 countries, US$m 15,242 18,616 22,939 29,072 26,507 34,740 46,916 58,173 47.0 46.7 47.2 46.4 46.3 49.8 50.5 51.1 United States, US$mn United States, US$mn, % of total China, Mainland, US$mn China, Mainland, US$mn, % of total Japan, US$mn Germany, US$mn Germany, US$mn, % of total % from top 5 trade partners Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report © Business Monitor International Page 26 Vietnam Freight Transport Report Q2 2014 Market Overview Vietnam Emerges As An Investment Prospect With the Vietnamese economy beginning to exhibit signs of a robust recovery as we head into 2014, we believe that it could be a worthwhile effort for investors to assess the country's growth opportunities at the provincial level, with the company's freight industry well poised to benefit. Firstly from a demographic perspective, we note that Vietnam reached an estimated population of 90 million in November 2013, according to a statement released by the General Office of Population and Family Planning. Although the country's growing domestic market remains an attractive factor for foreign companies seeking to expand their operations in the region, we note that rapidly shifting demographic trends at the provincial level could become a major challenge for foreign investors. That said, we see a handful of emerging provinces that are likely to witness faster population growth and potentially attract greater FDI inflows over the coming years. We forecast population growth in provinces such as Binh Duong and Dong Nai to average 4.5% and 2.3% annually over the next five years (2014-2018). According to a report published in March 2013 by local consultancy firm Vietnam Report, the country's top 10 fastest growing enterprises are located not only in developed cities such as Hanoi and Ho Chi Minh, but also increasingly in rapidly developing provinces including Can Tho, Hai Duong, Nghe An, Quang Nam, Binh Thuan and Khanh Hoa. We expect this trend to continue to shift in favour of these smaller provinces as the Vietnamese government continues to promote foreign investment in these regions through the establishment of special economic zones and investment in infrastructure projects. Signs of Strong Momentum Abound We witnessed some highly positive data in the third quarter of 2013 that indicate strong momentum for growth over the coming months, and potentially into 2014. We highlight the rebound in manufacturing production activity, with the HSBC Purchasing Managers' Index (PMI) recording a robust 51.5 reading in September, the strongest reading since April 2011 (see 'PMI Surprises To The Upside, VNI Testing Resistance', October 3 2013). More importantly, foreign direct investment (FDI) inflows into the country have accelerated significantly in recent months and are expected to surpass the government's full-year target of US$13bn - usually an indication of improving business sentiment, and a precursor for an acceleration in private sector investment. We believe that the positive ripple effects from the factors above will serve as strong tailwinds for 2014 growth. © Business Monitor International Page 27 Vietnam Freight Transport Report Q2 2014 Chinese and US demand remain integral factors influencing the performance of the Vietnamese freight picture over the mid term. In terms of the former, China's real GDP grew by 7.7% in Q413, slightly above consensus expectations of 7.6%. For the year as a whole the economy also grew by 7.7%, which matches the performance seen in 2012. While a detailed breakdown of GDP by expenditure is unavailable as of yet, we do not expect its release to reveal a great deal of economic rebalancing taking place within the Chinese economy. The traditional drivers of real estate and infrastructure construction continue to dominate the economy. In terms of the US, we believe the appropriations bill recently passed by the US House of Representatives and Senate, and which President Barack Obama is expected to sign, may mark an easing in long-running partisan warfare over fiscal policy. Furthermore, we believe the deal will have positive ramifications for the economy in 2014, while still allowing for fiscal consolidation over the medium term. Finally, the bipartisan spending package sets the stage for a crisis-free resolution to the debt ceiling debate, which will come up in the weeks ahead. The appropriations package provides US$1.1trn for fiscal year 2014 (FY14), which runs through September 30, in line with a budget deal worked out between Democrats and Republicans in late 2013 that we noted as a meaningful first step toward de-escalating tensions over fiscal issues (see 'Deal Avoids Another Shutdown, But Future Progress Uncertain', December 11). That legislation allowed higher spending caps in FY14 than those initially envisioned by the budget sequester that went into effect in early 2013, reducing the drag the fiscal drag on the economy, one reason we see real GDP growth accelerating to 2.8% this year from our estimate of 1.8% in 2013. We believe that greater clarity about the trajectory of fiscal policy this year will allow the US Federal Reserve to continue reducing extraordinary monetary stimulus to the economy, eliminating its quantitative easing programme by end-2014. Domestically, over the longer term, imports will be boosted by Vietnam's young population, as younger populations are generally more supportive of private consumption. The country has a population of 90.7mn, according to estimates for 2013 by BMI, 60% of which is under 35. We forecast that the population will be 94.1mn by 2017, with 57% under 35, and will rise to 97.7mn by 2022. Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo. Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally. © Business Monitor International Page 28 Vietnam Freight Transport Report Q2 2014 Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's World Factbook. BMI believes the sector requires substantial investment as the quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142 countries surveyed in its Global Competitiveness Report 2011-2012. Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC), established in April 2003 as a state corporation operating railway transport and related services. Vietnam's rail network totals 2,632km. The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and 527km of 1.435m gauge. Vietnam's Ministry of Transport has decided to classify the country's airports with an aim to attract investment in the country's aviation sector. The ministry believes that it is a difficult task to attract investment in the sector as it requires huge investment capital and high techniques and a longer time frame to take back the investment capital. The country recorded an increase in capacity of its domestic airports from 6mn passengers in 2000 to 52mn in 2012. Meanwhile, an airport development programme approved in 2009 is moving ahead as per the schedule, according to the Civil Aviation Authorities of Vietnam. Vietnam is currently operating a state-owned airline Vietnam Airlines as well as private airlines, namely Vietjet Air, Air Mekong and a foreign invested airline Jetstar Pacific. Additionally, the government has also granted approval to the development of 25 airports. Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved. This total puts the country in a poor 97th place in comparison with other countries. © Business Monitor International Page 29 Vietnam Freight Transport Report Q2 2014 Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013e) Source: General Statistics Office of Vietnam Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion. BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep International Terminal (CMIT) since it opened in March 2011 as an important driver of growth. In addition to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011. Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks © Business Monitor International Page 30 Vietnam Freight Transport Report Q2 2014 111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Quality of Port Infrastructure. As such, APMT's commitment to improving CMIT's facilities is an important step both for the terminal and the country's shipping sector as a whole. The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger vessels to access the facility. BMI notes that these works are badly needed, as we are seeing a growing trend for shipping lines to order larger container vessels. The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping sector. State-owned shipbuilder Vinashin was bailed out in 2010 when its US$4.5bn debt threatened to bring down the entire Vietnamese economy. Widespread investment in the country's infrastructure is necessary if Vietnam is to compete with regional peers. Investment And Development Outlook The Vietnamese transport sector requires vast levels of investment. The majority of infrastructure investment in Vietnam over the next 10 years will be in the transport sphere, accounting for 65% by the end of 2021. Vietnam still suffers from a significant deficit in transportation infrastructure, and we believe the Vietnamese government will continue to develop this sector over the medium term. This is reflected in our forecast for transport infrastructure industry value, which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016. According to our key infrastructure projects database, there are US$171bn worth of infrastructure projects planned or currently under way in Vietnam's transport sector. One of the most expensive of these is a US $3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs a year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. On November 14 2013, Vietnam's Phuong Nam Technology Science Institute and EDES were scheduled to sign a memorandum of understanding (MoU) for the construction of the US$3.6bn railway project in Vietnam. The project which will be implemented via a built, operate and transfer format, will connect Hoi Chi Minh City to Can Tho City. Upon signing the MoU, a joint venture will be formed by both the parties for executing the project as well as for conducting a feasibility study, which will be presented to the country's government. 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 © Business Monitor International Page 31 Vietnam Freight Transport Report Q2 2014 incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities, it was announced in April 2013. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. The airport, which was approved in 2011 at a cost of US$6.74bn, will be the country's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year after becoming operational in 2020. Meanwhile, Shipowners in Vietnam are expected to offload more vessels form their fleets by the close of 2013, according to the Hellenic Shipping News. Firms planning to pare down their fleets include the Vinashin Joint Stock Company and Northern Shipping. Market analysts have previously warned that the economic potential of the Vietnamese shipping market has been limited by an excessive focus on non-core businesses. In the road freight sphere, bad news was delivered at the end of October 2013, when it was announced that the Vietnamese government has granted approval to Hanoi General Export-Import Joint Stock Company (Geleximco) to withdraw from the build-transfer model-based Hoa Lac-Hoa Binh expressway linking Hanoi with localities in the northwest. The company invested US$17mn in the project, with US$2mn in the construction and US$12.4mn in land acquisition, over three years, according to the transport ministry. 'As the investment cost rose significantly and the property market at present is nearly frozen, it is impossible for us to reach the project deadline', Geleximco General Director Vu Van Tien said (Intellasia). The government has also approved a proposal by the country's Ministry of Transport and Ministry of Planning and Investment to alter the project's investment model to public-private partnership to make it more feasible and obtain official development assistance. © Business Monitor International Page 32 Vietnam Freight Transport Report Q2 2014 Industry Trends And Developments Multimodal Zenith Expands Vietnam Warehousing Facility International freight services provider Zenith Global Logistics has expanded its warehousing facility in Ho Chi Minh City, Vietnam, according to the Journal of Commerce, reporting in November 2013. The facility was expanded as part of the company's effort to ensure that it is able to keep up with the increasing demand for humidity-controlled warehousing space in the region. The facility, which will house goods and cargoes destined for the US, covers 7,500 square metres. DHL Looking To Increase Vietnamese Investment The gaze of express shipping and logistics firm DHL is firmly on Vietnam at present with the company expressing its desire to invest in the Asian country now that it has taken steps to integrate into the global economy. Chief Executive Officer of DHL Express in Asia Pacific Jerry Hsu outlined his company's commitment to Vietnam while speaking at an event marking DHL's 20th year of operations in the country, According to Vietnam News Brief Service. The total investment of DHL Express in Vietnam over the past six years comes to more than US$14mn following the company's construction of a new depot in Danang at the end of 2012. Currently, a new depot is being built near Tan Son Nhat Airport. Mentfield Logistics Opens Vietnam Office As part of its growing commitment to Vietnam, Mentfield Logistics announced in October 2013 that it had opened new offices in the country, which brings the company's total global offices to 13, according to Lloyd's List. Vietnamese labour costs are cheaper than those in China, meaning that Vietnam is increasingly becoming a popular destination for globally minded firms. Mentfield Vietnam CEO James Nguyen said: 'The opening of the new offices in Vietnam is a step that gives a significant advantage to our clients engaged in international trade in many diverse areas. He added: 'Ranging from food products to equipment & machinery, construction materials, chemicals, high-tech and many more, we are confident that our presence in Vietnam will lead to the strengthening and streamlining of the processes of logistics and freight forwarding from the Far East to the rest of the world.' © Business Monitor International Page 33 Vietnam Freight Transport Report Q2 2014 Underlining the pull of Vietnam at present is the news that Cargo-Partner, the Austrian transport and logistics company, has also chosen Vietnam to act as a base in the Asia region, with a new office opened near Ho Chi Minh City airport. Maritime Evergreen-Hanjin's Intra-Asia Tie-Up Highlights Vietnam Growth Story Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping's newly launched intra-Asia service, which calls at the port of Ho Chi Minh, will boost both companies' intra-Asia operations. BMI has long highlighted intra-Asia trade as a region of strong growth and we note the port of Ho Chi Minh to be a specific beneficiary of the new route - with the launch of the service offering upside risk to our forecast for the port. Evergreen Line has partnered with Hanjin Shipping to launch the New Ho Chi Minh Service (NHCMS) that will see both firms receive a boost to their intra-Asia network. The NHCMS will link South Korea, China, Vietnam, Singapore and Malaysia, and will employ four 2,500 twenty-foot equivalent units (TEUs) ships, one supplied by Evergreen and the remaining three by Hanjin. The first vessel on the once-a-week NHCMS is to set sail from Kwangyang, South Korea, on November 22. BMI notes that Evergreen Line has steadily been expanding its intra-Asia service in 2013, with the addition of a further two express routes: the first being a Colombo, Sri Lanka-Kochi, India, service; and the second being an Indonesia- Malaysia service. Hanjin Shipping has been implementing a similar expansion strategy, with the addition of an Indonesia service in March 2013 and an Australasia service in July 2013. BMI has previously identified the trend of intra-Asia trade as a strong growth area for container lines. Growth in intra-Asia liner trade is developing from a low base and is set to continue expanding as China rebalances its economy toward the consumer sector. The development of a consumer class in China means that the country is increasing the number of containers it imports, rather than being primarily a box operator. Evergreen and Hanjin's decision to include the port of Ho Chi Minh as part of its NHCMS is in line with the intra-Asia growth story seen in the region. The Vietnamese port in particular is showing strong historical growth rates in container throughput - a trend we predict will continue over the medium term. Between 2008 and 2012 the port of Ho Chi Minh's container throughput experienced an annual average increase of 14.4% year-on-year (y-o-y). BMI forecasts this robust growth rate to continue over the medium term (2013-2018), albeit at a slightly slower pace, and forecasts container throughput at Ho Chi Minh expected to © Business Monitor International Page 34 Vietnam Freight Transport Report Q2 2014 expand by 53.1% from 2013 levels - an annual average increase of 8.9% y-o-y, to reach a throughput level of 5.87mn TEUs in 2018. Wan Hai Lines To Start New Direct Service Taiwanese shipping companies Wan Hai Lines and Yang Ming Line intend to begin a new direct service between ports of Japan, South Korea and China to the Vietnamese port of Ho Chi Minh on November 29 2013. The service will be called KCV and it will function with three vessels with an intake of 1,200 twentyfoot equivalent units. KCV is expected to provide better service coverage between Japan, Korea, China and Vietnam. Vietnam Set For Belgian Link Up Vietnam cemented its place as a strategically important growth region in December 2013 with news of a collaboration agreement signed by the ports of Antwerp (the second largest port in Europe) and Zeebrugge, Rent-A-Port and Saigon Newport relating to the construction of a new bulk terminal in the port of Lach Huyen in the north of the country. Eddy Bruyninckx, CEO of Antwerp Port Authority, stated: 'Our subsidiary Port of Antwerp International has been observing this growth market closely with a view to spotting opportunities that offer added value for our port. Our partners can call upon a port that has developed into a leading international player with a wide range of logistics, industrial and maritime activities.' Meanwhile, further evidence of strong Flemish/Vietnamese relations were highlighted by the visit of Flemish Minister for Mobility and Public Works Hilde Crevits to inspect the dredging work at the Soai Rap project in November 2013. Crevits said: 'The dredging by the DEME's dredger 'Uilenspiegel' are spectacular in Soai Rap. They are technically advanced and offer a sustainable solution. This project also demonstrates the good cooperation with Vietnam. Our dredgers are world class. I hope that Vietnam continues to rely on our expertise for major projects.' © Business Monitor International Page 35 Vietnam Freight Transport Report Q2 2014 Air Finnair Cargo Adds New Freighter Service Finnair Cargo announced at the end of November 2013 that it has enhanced its presence in the Asian region by adding a twice-weekly MD-11 freighter service to the Vietnamese capital, Hanoi. This decision underlines Finnair's strategy of improving its Brussels cargo hub connectivity. Speaking about the move, Vice-president of global sales at Finnair Cargo Mikko Turtiainen said: 'Finnair flew seasonal passenger operations to Hanoi until the end of October and adding Hanoi to our freighter network brings year-round continuity to the Finnair Cargo offering to and from the Vietnamese capital. I am very confident in terms of exports and imports linked with the fast-emerging Vietnam.' Road Sceptical Over Dau Giay-Phan Thiet PPP Timeline Vietnam's public-private partnership (PPP) project management board, part of the Ministry of Transport (MOT), has announced that construction work on the country's first PPP expressway project, the 98.7km Dau Giay-Phan Thiet expressway, is expected to start in Q315. However, although we reiterate that the expressway could offer an impressive return on investment, we are not wholly convinced that the project will break ground as scheduled. Following the completion of the fourth and final investor conference for the US$757mn Dau Giay-Phan Thiet expressway project in September 2013, the MOT launched the qualification process for the project, with applications due on November 29 2013. The list of qualified bidders is expected to be announced on December 30 2013. While we continue to view the fundamentals of the project favourably, and we expect the Vietnamese economy to grow impressively over the coming years (see our special report, 'Vietnam: Asia's Star Rising Again?', November 2013), we are not wholly convinced that the project will break ground as scheduled. This is due to the lack of maturity in Vietnam's business environment. The latest edition of the Doing Business report from the World Bank ranked Vietnam 98 out of 189 countries based on its ease of doing business, with the country faring poorly in several key areas that facilitate project development - such as electricity access and investor protection. © Business Monitor International Page 36 Vietnam Freight Transport Report Q2 2014 We also believe that Vietnam's bureaucratic institutions lack the necessary institutional capacity to carry out pre-construction activities (e.g. documentation, spatial planning, feasibility studies, public consultation, permit issuance, land acquisition) in a timely manner or to a level of detail desired by all of the project stakeholders (i.e. local residents, project developers and financers). The lack of human resources to boost institutional capacity could take many years to be resolved and in our opinion, will continue to hamper infrastructure development for the foreseeable future. Such weaknesses in the business environment have already delayed PPP development amongst some of Vietnam's regional peers, particularly Indonesia and the Philippines (see 'PPP Momentum On The Express but Not Without Road Blocks', September 27 2013). Both countries have enlisted the assistance of multilateral financial institutions such as the World Bank and the Asian Development Bank to implement their PPP plans. Furthermore, it remains to be seen if the selected international bidder will be able to work effectively with the Vietnamese partner on the project. In July 2013, the Vietnamese government selected Vietnam-based Binh Minh Import-Export Production and Trade Company (Bitexco) as the primary developer of the fourlane project, with Bitexco providing up to 60% of total equity investment and the remaining 40% coming from international investors. Although we believe that Bitexco's close relationship with the Vietnamese bureaucracy could help navigate the project through Vietnam's business environment, Bitexco lacks experience in managing an expressway concession as it has mainly developed hydropower plants for the public sector. We believe these issues are the main reasons for subdued interest in the project on the part of international investors. Although more than 100 participants attended the final investor conference for the Dau GiayPhan Thiet expressway project, the Saigon Times reported that only seven investors have submitted applications to the MOT. While the names of the investors are unknown, the Philippines Star reported in mid-November 2013 that Hong Kong-based investment firm First Pacific and Philippines-based Metro Pacific Investments are planning to participate in the Dau Giay Phan Thiet project. Rail EDES Signs MoU For US$3.6bn Railway project On November 14 2013, Vietnam's Phuong Nam Technology Science Institute and EDES were scheduled to sign a memorandum of understanding (MoU) for the construction of the US$3.6bn railway project in Vietnam. The project which will be implemented via a built, operate and transfer format, will connect Hoi © Business Monitor International Page 37 Vietnam Freight Transport Report Q2 2014 Chi Minh City to Can Tho City. Upon signing the MoU, a joint venture will be formed by both the parties for executing the project as well as for conducting a feasibility study, which will be presented to the country's government. © Business Monitor International Page 38 Vietnam Freight Transport Report Q2 2014 Company Profile Vietnam Airlines Cargo SWOT Analysis Strengths ■ Vietnam Airlines Cargo is the main air cargo provider in Vietnam. ■ The recent green light given to the purchase of Jetstar Pacific will only strengthen the company's domestic position. Weaknesses ■ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant on using the bellyholds of its parent company's planes. Opportunities ■ The air carrier is well placed to benefit from Vietnam's growing role in the trade sector. The country has flooded money into the development of the country's port sector, but BMI believes aviation also stands to benefit. ■ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could result in cargo being transported in the bellyholds of aircraft in the future. ■ At the end of 2012, Vietnam Airlines announced that it was to introduce a new air route linking the Vietnamese capital with Jakarta, in a bid to 'boost tourism and economic links between Vietnam and Indonesia', according to Bloomberg Business Week. The flights will depart on Tuesdays, Wednesdays, Fridays and Sundays, leaving Ho Chi Minh City at 10am local time, and arriving in Jakarta at 1pm local time. Jakarta is now connected to six ASEAN countries in total. ■ Vietnam Airlines has increased the frequency of its flights to Gatwick Airport, London, it was announced in April 2013, potentially opening the door for further link ups between the two countries. ■ In order to ease congestion at Ho Chi Minh City's Tan Son Nhat International Airport, Vietnam, officials at a meeting in Hanoi in July 2013 called for a new airport to be built in the country. Thanh Nien News reported the chairman of the board, Airports Corporation of Vietnam, Nguyen Nguyen Hung as stating: 'We should have started construction by now, in order to have the first phase completed by 2020.' © Business Monitor International Page 39 Vietnam Freight Transport Report Q2 2014 SWOT Analysis - Continued ■ There is further room for co-operation between Vietnam and the US in the coming years, it was declared at the US-Viet Nam Aviation Co-operation Working Group held in Ho Chi Minh City in September 2013. Threats ■ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Company Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the domestic market. In 1993, it was established as Vietnam's national carrier. The cargo carrier's operations are concentrated in Asia, catering for the domestic market. The airline operates its cargo business by transporting goods in the bellyholds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to other Chinese airports. It has also developed routes to Australia, with freight connections to Melbourne and Sydney. Allied to Vietnam Airlines Cargo's cargo links to three destinations in Europe (Paris, Frankfurt and Moscow), parent company Vietnam Airlines began operating a direct air route to the UK in the last months of 2011. The service flies to Gatwick Airport, with cargo space available in the bellyholds of planes going to and from London. Etihad Airways announced at the start of the October 2013 that it had launched its first commercial passenger service between Abu Dhabi and Ho Chi Minh City. Vietnam Airlines is its codeshare partner and its VN code will be placed on the Abu Dhabi-Ho Chi Minh City sector. Taking advantage of the fast-growing market, Etihad Airways President and CEO James Hogan explained that: 'The United Arab Emirates is Vietnam's seventh largest trading partner and its largest in the Gulf region. In 2012, exports from Vietnam to the UAE exceeded US$2 billion for the first time - up 82 percent on 2011 - and forecast to exceed US$4 billion in 2013. The 13.1-tonne belly-hold capacity of our Airbus A330-200 © Business Monitor International Page 40 Vietnam Freight Transport Report Q2 2014 aircraft, which equates to more than 9,500 tonnes per year, gives us sufficient capacity to boost the volume and value of trade between the UAE and Vietnam and to other markets in the GCC, Europe and North America.' Latest Activity Vietnam Airlines Links Up With Nordisk Vietnam Airlines began to take delivery of some 900 Nordisk light weight air cargo containers, it was announced at the beginning of January 2014, reported Cargo Trends.With the containers weighing less than conventional boxes due to being fashioned from AKE aluminium as opposed to normal aluminium, the costs associated with handling them will reduce due to lower fuel consumption and reduced carbon emissions. BY Sim, Nordisk's Vice President of Sales, Asia and Pacific, explained: 'Nordisk offers the widest range of ULDs in the industry, and we are pleased to provide Vietnam Airlines with products, services and solutions that lower their total cost of ULD ownership while ensuring safe and reliable cargo handling for their customers.' Sim added: 'Vietnam Airlines already has approximately 2,000 Nordisk containers operating in its fleet, and our dedicated after-sales support team in Asia is committed to support Vietnam Airlines and ensure that their new Nordisk units enter operation according to schedule.' © Business Monitor International Page 41 Vietnam Freight Transport Report Q2 2014 Vietnam Petroleum Transport Company (VIPCO) SWOT Analysis Strengths ■ Around 60% of VIPCO's fleet is employed by Petrolimex. ■ The company boasts a relatively young fleet. ■ It has diversified away from operating in a single sector, with a real estate arm. Weaknesses ■ VIPCO only operates in one shipping sector. Opportunities ■ The company plans to expand its fleet, although no further information is currently forthcoming. ■ Petrolimex made a company announcement at the end of July 2013 to state that it had signed a memorandum of understanding (moU) with Japan International Cooperation Agency (JICA) and Tamada Industries, Inc. (Tamada) relating to 'cooperation in the trial project of double-shell tank against harmful matters'. Threats ■ Vietnam's reliance on imported refined products is decreasing as the country brings online more refining capacity, which could negatively affect VIPCO. In the longer term, Vietnam's refining capacity could allow the state to export. Company Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime transport for petroleum products. The company has a diversified portfolio, including units that support its product tanker fleet - such as its port operations and freight forwarding services. It is also engaged in real estate. Strategy VIPCO has developed a fleet of six product tankers with a total capacity of 176,111 deadweight tonnes (DWT). The fleet is relatively young with an average age of 16 years. VIPCO has a fleet expansion strategy in place and is prepared to invest either in newbuilds or purchasing tankers under the age of 10 years. The company plans to boost its fleet to 200,000DWT. The majority of VIPCO's tanker fleet (60%) is employed to meet the transport needs of the Vietnam National Petroleum Corporation (Petrolimex). The remaining 40% is charted to other consignees. © Business Monitor International Page 42 Vietnam Freight Transport Report Q2 2014 Via its connection with Petrolimex, the company is able to cater for Vietnam's oil sector. While Vietnam has estimated oil reserves of 4.6bn barrels, it imports refined products. The company's shipping unit is complemented by its petrochemical terminal's sector. The board of directors of Petrolimex announced the establishment of a new whollyowned subsidiary, PG Tanker, in 2013, with Nguyen Anh Dung made chief executive officer. Headquartered in Hanoi, the subsidiary will be charged with transporting oil products, marine services and the repair and building of tankers. Financial Data 2013 Deputy General Director Tran Ngoc Nam explained at the end of December 2013 that profits were low at Petrolimex, owing to the Vietnamese government's efforts to curb inflation and stabilise the economy through retail price adjustment. In the first half of 2013 the company announced profits of VND898bn (US$42.69mn), however, according to Viet Nam News, earnings fell short 'of the full-year target of the country's largest fuel wholesaler at VND1.98trn (US$94.2mn) in 2013. With only 45 per cent of the plan covered, Petrolimex said it will exert efforts to make it in the second half of this year.' 2011 For the final quarter of 2011, VIPCO registered a drop in net income to VDN8bn, down from VDN51.7bn a year previously. Meanwhile, in mid-February 2012, the company saw its share price fall 2.2% to VND4,500. For the first half ended June 2011, the company reported a net profit of VND38.66bn (US$1.88mn), which represents a 121% year-on-year (y-o-y) increase. Revenues rose 36% y-o-y to VND943.12bn during this period, while six-month earnings per share were VND647, compared with less than half of that for the corresponding period of 2010. Latest Activity Petrolimex Seeks Diesel Delivery Petrolimex is seeking some 70,000 tonnes of diesel to be delivered in February 2014, according to Business Recorder. Trade sources explained that Vietnam's top fuel importer and distributor was looking to obtain two cargoes of 35,000 tonnes apiece, which are to be loaded from Singapore, Thailand, South Korea, South China or Taiwan. The tender will close on January 9 and is valid until January 14, and is necessary due to Petrolimex skipping its first quarter term diesel and gasoline imports. © Business Monitor International Page 43 Vietnam Freight Transport Report Q2 2014 Vietnam National Shipping Lines (Vinalines) SWOT Analysis Strengths ■ Diversified fleet operating in dry bulk, container and oil transport. ■ Largest commercial shipping line in Vietnam. ■ On December 16 2012, Vinalines launched the second biggest bulk carrier in Vietnam in Hai Phong city. Named Vosco Sunrise, the bulk carrier has been designed to cater for a deadweight of 56,200DWT. Weaknesses ■ Vietnam does not play a role on the major Asia-Europe routes, despite developing as a direct port of call on these routes. ■ The US$3.6bn Van Phong International Port project, primarily constructed by stateowned Vinalines, was suspended in June 2011 following a reassessment of the geological conditions at the project site. ■ Vietnamese shipping company Vinalines is currently US$2.1bn in debt, reported Reuters in June 2012. ■ Vinalines' heavy exposure to Vietnam's domestic transport sector, which has been performing well recently, indicates that the firm's struggles go beyond the troubles facing the global industry. ■ According to chairman of Vietnam Shipowners' Association Vu Xuan Quynh, a large sell off of old tonnage is needed, with Vinalines seeking to offload around 1.4m dwt of ships, Sea Ship News reported in July 2013. ■ Vinalines was asked by the government to withdraw its plans to participate in the development of the northern Lach Huyen Port, reported Sea Ship News in March 2013. The company will continue to concentrate on its ongoing port projects; however, Hanoi said that it needs to make arrangement of funds before it can mull over additional expansion. Vinalines teamed up with Japan's Itochu, MOL and NYK for the development of the port. ■ The death sentence handed out to Vinalines' former chairman at the end of 2013 for embezzlement has done little for the company's reputation. © Business Monitor International Page 44 Vietnam Freight Transport Report Q2 2014 SWOT Analysis - Continued Opportunities ■ Vietnam is expanding its role in the global box market and it is fast becoming a mainstay port of call on Asia-Europe services. ■ Potential to increase its intra-Asia role, shown by the expansion work at Cai Mep, and well placed to be chosen as a partner on these services by major lines. Threats ■ While Vietnam has invested heavily in its port network, the logistics supply chain could be let down by the landside freight network, which will have a negative impact on operators. ■ In 2011, Vinalines posted its first ever loss in 15 years of operations, with further losses expected. ■ Overcapacity is a threat over the medium term, unless money is pumped into port facilities and infrastructure. ■ Vietnamese police issued an arrest warrant for the former chairman due to the scandal rocking the debt-mired company. Duong Chi Dung has been accused of deliberately mismanaging Vinalines during his tenure. ■ Vinalines has been stung by the poor performance of the three container terminals it has joint venture interests in. Company Overview Vinalines is Vietnam's largest commercial shipping line. Established in 1996, it caters for domestic trade in Vietnam and offers intra-Asia services. The company also has a port operating division that is the largest in Vietnam, controlling and managing ports in Quang Ninh, Hai Phong, Da Nang, Ho Chi Minh and Can Tho. Strategy Vinalines' 14 shipping companies operate a diverse fleet, dominated by dry bulk vessels but also boasting container ships, oil and product oil vessels. According to the company's website, Vinalines' fleet consisted of 128 vessels. The line is looking to expand, with a plan centred on increasing the proportion of specialised vessels such as box ships or oil tankers. In order to achieve this, the line was seeking to spend US$2bn on ordering new ships from Vietnamese yards seeking state funding for the plan. Vinalines has in fact ended up expanding its fleet quicker than intended, with the shipping line taking on 36 vessels © Business Monitor International Page 45 Vietnam Freight Transport Report Q2 2014 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 financial aid from the government for the project. Vinalines services the trade needs of Vietnam's domestic shipping market, but also has exposure to the intra-Asia trade lane after joining forces with NYK in December 2010 to launch a Thailand-Vietnam-Singapore (TVS) service. Vinalines provides a 1,100 twentyfoot equivalent unit (TEU) vessel for the service. BMI believes that Vinalines' presence on the intra-Asia trade route will increase, with major lines looking to expand into the route and the company well placed to enter partnerships with them. Vinalines is also increasing its contacts in the container sector, partnering with a number of the majors on container terminal projects in Vietnam. According to Port Strategy, Vietnam is of increasing interest in East Asia, due to the fact that it is focusing on becoming better connected with both short and long haul destinations. Providing the bedrock to this strategy are the new terminals constructed in the Cai Mep area. In September 2013, the wholly-owned limited liability company, Quy Nhon port under Vinalines launched an initial public offering as part of ongoing restructuring of the company, approved back in February 2013. In a high-profile court case in Hanoi in January 2014, the former chairman of Vinalines, Duong Chi Dung admitted to handing out bribes to members of the country's ruling communist party in a bid to avoid his imminent arrest for embezzlement. Dung was sentenced to death in December for siphoning off millions of dong from the company. Financial Data 2013 Vinalines is bracing itself for a full-year loss of VND2.1trn (US$101mn) already as the company continues to perform abysmally following 2012's reported loss of VND2.44trn. The company's CEO, Nguyen Canh Viet, said: 'There are few transporting contracts amid these crisis times, while several partners refused to clear their payment on time, despite the cheap fares.' 2012 Vinalines announced a VND1,439bn (US$69.2mn) loss during the first half of 2012, which is around double the losses incurred for the corresponding period a year previous. The loss was attributed to a 'perfect storm of liquidity and jobs woes', according to Vinalines Director Nguyen Canh Viet, reported by Vietnam Investment Review. © Business Monitor International Page 46 Vietnam Freight Transport Report Q2 2014 Financial Data 2011 Vinalines recorded a VND62.15bn (US$3mn) profit for 2011, despite posting a loss of VND660bn (US$32mn) in H111 - the first time this has ever occurred in the company's 15 years of operations. The results came as a surprise to analysts who were expecting the company to suffer from the sinking of the bulker Vinalines Queen. In 2011, Vinalines shipped 36.8mn tonnes of cargo, which was a 1% annual increase on 2010. Latest Activity Former Vinalines Bosses Sentenced To Death In a bid to curb corporate graft, the government of Vietnam announced in December 2013 that two former Vinalines bosses - Tran Ba Hung, former head of HyundaiVinashin Shipyard's Manufacturing Department; and Pham Ba Giap, director of Nguyen An Limited Company - are to be sentenced to death for 'asset misappropriation'. The sentences relate to the signing of a contract for floating dock 83M back in 2008 destined for Van Phong Port. While Tran Hai Son is alleged to have colluded with Tran Van Quang, Tran Ba Hung and Pham Ba Giap over the penning of repair contracts worth around VND8.7bn (US $411,000) with Nguyen An Limited Company, Tran Hai Son is alleged to have misappropriated a larger sum and also admitted to spending VND300mn on gifts for former Vinalines Chairman Duong Chi Dung. © Business Monitor International Page 47 Vietnam Freight Transport Report Q2 2014 Political Outlook Domestic Politics BMI View: Despite the encouraging progress we have seen with regards to the Communist Party of Vietnam (CPV)'s stance on allowing for broad democratic reforms, we continue to see evidence of the party's hardline stance on having absolute control over the media. However, we believe that the growing adoption of the internet and social media amongst the younger population will eventually pressure the CPV to relax its media laws. The Communist Party of Vietnam (CPV) has made significant progress in allowing for democratic reforms in 2013 and we expect this trend to accelerate over the coming years. Indeed, we view the CPV's move in June to implement an annual no-confidence vote for senior party officials as a major milestone that is likely to pave the way for a more transparent and accountable government going forward (see ' No-Confidence Vote A Major Milestone For Democratic Reforms', August 6 2013). Despite the encouraging progress we have seen in 2013 with regards to government efforts to clamp down on corruption and impose stricter audits of state-owned enterprises (SOEs), reforms have, however, been relatively slow in other aspects of Vietnam's political environment. Tight Control Over The Media Underneath the growing perception by most foreign political observers that the CPV is gradually shifting towards a more democratic political agenda, we continue to observe evidence of the party's hardline stance on having absolute control over the media and of the relentless prosecution of democracy activists. In a latest report published by human rights group Voice of America (VoA), a Vietnamese man has recently been convicted in October of 'abusing democratic freedoms' under Article 258 of the penal code. The individual received a 15-month suspended sentence for using social media to campaign for the release of another activist who had been sentenced to four years in prison for distributing anti-government material. The latest case also highlights a growing generation of internet activists amongst the younger and more highly-educated population in Vietnam. Although the number of similar cases has increased steadily over the years, they have often been excluded from traditional forms of media, which is tightly controlled by the government. We believe that the growing adoption of the internet and social media amongst the younger population, however, will put greater pressure on the CPV to relax its media laws. According to our telecoms team's © Business Monitor International Page 48 Vietnam Freight Transport Report Q2 2014 forecasts, around 35.4% of the Vietnamese population currently has access to the internet, with the adoption rate expected to rise steadily over the coming years. This is likely to further complicate the CPV's agenda on political reforms going forward. A Difficult Balancing Act From our perspective, the CPV's current stance on gradually allowing for more transparency and accountability with regards to the government's economic performance, while suppressing small-scale protests and online activism in a bid to defend its ideology of a single-party political system, is unsustainable over the long run. We believe that the rapid adoption of the internet will eventually force the CPV's hand to either escalate its crackdown on internet activism (which we believe will risk triggering widespread public unrest), or adopt a more accommodative stance towards modern media and allow for genuine democratic reforms. The latter scenario is more likely in our view, and we see scope for progress on this front as we head into 2014. In terms of our short-term political risk ratings (STPR), we maintain an overall score of 79.0 (out of a score of 100) for Vietnam. The 'Social Stability' component of the STPR stands at a weak 62.5 to reflect the growing risk of widespread public unrest as a result of the government's hardline approach towards its single-party ideology. However, should we continue to see evidence that the CPV is moving towards a more democratic system of government, we would consider upgrading the country's long-term political risk rating (LTPR). Table: Vietnam Political Overview System of Government Single-Party Socialist Republic Head of State President Truong Tan Sang (serving first five-year term) Head of Government Prime Minister Nguyen Tan Dung (serving second five-year term) Last Election Parliamentary - May 2011 Presidential - July 2011 Composition Of Current Government Communist Party of Vietnam Key Figures The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nguyen Phu Trong, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung, and Minister of Public Security Tran Dai Quang. Other Key Posts National Assembly Chariman - Nguyen Sinh Hung, Minister of National Defence Phung Quang Thanh, Minister of Planning and Investment - Bui Quang Vinh, Vice President - Nguyen Thi Doan, Central Bank Governor - Nguyen Van Binh. © Business Monitor International Page 49 Vietnam Freight Transport Report Q2 2014 Vietnam Political Overview - Continued Main Political Parties (number of seats Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has in parliament) been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reform-minded faction originating from Southern Vietnam and an older generation, originating from the North, more aligned to traditionally communist ideology. Next Election Presidential and Parliamentary - May 2016 Ongoing Disputes Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South China Sea Key Relations/ Treaties ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council BMI Short-Term Political Risk Rating 79.0 BMI Structural Political Risk Rating 57.7 Source: BMI Long-Term Political Outlook BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US. Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam (CPV)'s monopoly on political power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a more pluralistic society over the coming decade and beyond. Indeed, the CPV's strict control of the media and political opinion is already cracking, with a growing number of internet bloggers becoming increasingly critical of government policy. Challenges And Threats To Stability Inflation And Devaluation As Drivers Of Discontent: As in neighbouring China, economic growth has brought sizeable material gains for the majority of the population. However, the Vietnamese government's loose fiscal and monetary policies have led to high levels of inflation and repeated devaluations of the dong © Business Monitor International Page 50 Vietnam Freight Transport Report Q2 2014 in recent years, which have eroded the real value of wages and savings. A failure to contain inflation at a reasonable level and uphold the real value of the dong could undermine confidence in the regime. Divisions Within The Communist Party: High inflation and devaluation have opened schisms within the CPV leadership between proponents of continued economic reform and a more conservative wing which believes that a deceleration or even reversal of reform policies would benefit macroeconomic stability. Ethnic And Regional Tensions: Vietnam is relatively homogeneous, with ethnic Viet comprising almost 90% of the population. Ethnic minorities in the Central Highlands have previously objected to government policies promoting migration of ethnic Viet into the highland region. While protests have died down, they could emerge in future. A potential spark could be the Chinese-financed bauxite mining project in Lam Dong and Dak Nong provinces, which is currently causing widespread environmental damage and raising ire among the local population. There are also continued cultural differences between the population of the Red River Delta around the capital Hanoi in the north and the population of the Mekong Delta in the south, where Ho Chi Minh City (formerly Saigon, the ex-capital of South Vietnam) remains the commercial capital. While the general perception is that northerners are more supportive of socialist rule and the southerners more inclined to support continued economic reform, a strong concept of national unity nevertheless exists in both parts of the country. Demands For Increased Religious Rights: One of the most concerted challenges against the CPV in recent years has come from Catholics wishing for a stronger recognition of their right to worship in what is still a nominally atheist country. Hanoi has ceded to pressure from the US to allow a higher degree of religious freedom, but is wary of the Catholic Church becoming a rallying point of political opposition, as was the case in Communist Poland and the Philippines during the Marcos dictatorship. The Vietnamese government has thus slapped heavy sentences on Catholic activists who have extended their fight to encompass increased political freedom. Relations With China: Relations with China have become increasingly strained in recent years as Beijing has expanded its economic, political and military influence southwards. The main point of contention is the conflicting territorial claims for the Paracel and Spratly Islands in the South China Sea. Vietnam's relations with China have also been strained by the large bilateral trade deficit it runs with its northern neighbour, which amounts to more than 10% of GDP, and criticism of a Chinese-financed bauxite mining project in the central highlands. © Business Monitor International Page 51 Vietnam Freight Transport Report Q2 2014 That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respective politburos have decreased tension between them. Nonetheless, we believe Vietnam will seek increasingly close relations with the US - and potentially India and Japan - in the defence sphere, as a hedge against China's rising power in the region. Vietnam's long-term political risk rating of 57.7/100 is weighed down by a score of 29.0 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up three scenarios for Vietnam's political future: Scenarios For Political Change Core Scenario - CPV Turns Into A Technocratic Regime: Our core scenario is for the CPV to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older more traditionally minded party members. However, intermittent periods of harsh repression against pro-democracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best-Case Scenario - Gradual Political Liberalisation: Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held, but where only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan and Japan have shown that even dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario - Mass Unrest And Violent Suppression: Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by © Business Monitor International Page 52 Vietnam Freight Transport Report Q2 2014 the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Page 53 Vietnam Freight Transport Report Q2 2014 Oil Price Outlook Global Oil Products Price Outlook 2013 closed with most product prices remaining flat quarter-on-quarter (q-o-q) in Q413 with the exception of gasoline. Transport fuel saw a steep price fall during the quarter, particularly in the New York market. This dragged the yearly average price of gasoline down to US$115.19-US$118.70 per barrel (bbl) in New York, Rotterdam and Singapore. Otherwise, yearly average prices for most other products came within +/US$1/bbl of our forecasts in 2013. Table: 2013 Oil Product Price Forecast Record Actual BMI Forecast Gasoline - Global Difference -2.84 Rotterdam 115.19 118.13 -2.94 New York 118.7 121.38 -2.68 Singapore 115.89 118.8 -2.91 Gasoil/Diesel - Global -0.35 Rotterdam 124.81 125.33 -0.52 New York 126.56 125.77 0.79 Singapore 123.15 124.47 -1.32 Jet Fuel - Global 0.28 Rotterdam 126.33 126.72 -0.39 New York 125.1 123.4 1.70 Singapore 122.65 123.13 -0.48 Naphtha - Global Singapore -0.93 100.27 101.2 Bunker Fuel 180 - Global -0.93 -0.74 Rotterdam 95.07 96.4 -1.33 New York 97.52 97.15 0.37 Singapore 93.96 95.22 -1.26 Bunker Fuel 380 - Global -0.87 Rotterdam 91.24 93.8 -2.56 New York 93.13 94.89 -1.76 Singapore 95.84 94.12 1.72 Source: BMI, Bloomberg © Business Monitor International Page 54 Vietnam Freight Transport Report Q2 2014 It also validates our view that oil product prices peaked in 2012 and will trend downwards in the future. This is partly an outcome of our projections for crude oil prices to trend downwards. Past Its Peak? Oil Product Prices, 2011-2013 (US$/bbl) Source: Bloomberg, BMI However, we do note that oil product prices have fallen more than the decrease in Brent. Notably, prices at New York continue to fall, notwithstanding an increase in the price of WTI in 2013. This is a result of relatively muted demand for the product and a comfortable supply picture in the downstream sector. Moving forward, we expect this downward trend to continue as growing substitutes to oil-based fuels - the result of gas and natural gas liquids production growth, particularly in the US - suppress rises in prices of oil-based products. © Business Monitor International Page 55 Vietnam Freight Transport Report Q2 2014 Refined Products Take Steeper Price Fall % y-o-y Change In Prices Across Products Source: Bloomberg, BMI Methodology Our refined products forecasts methodology is based on estimating the future spreads between each product - gasoline, gasoil/diesel, naphtha, jet fuel/kerosene, bunker fuel 180 and 380 - and its regional benchmark: WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. Therefore, changes in crude prices (and our crude price forecasts) will automatically trigger movements in our forecasts for oil product prices. Our estimates of the spread between crude prices and individual oil products are determined by the following: ■ Supply: This will be affected by changes in regional and global refining capacity. ■ Demand: This is partly a function of our expectations for the trajectory of the global economy. With regard to customers, we have identified four main sectors/users for the respective products: kerosene/jet fuel in the aviation sector, gasoline and diesel for retail users and land freight operators, naphtha in the petrochemicals industry (a gauge for industrial activity) and bunker fuel for the shipping sector. In our outlook for demand we therefore incorporate forecasts and the views of BMI's Shipping, Freight Transport, Autos and Petrochemicals industry analysis, as well as the assumptions and forecasts from BMI's Country Risk analysts, in an effort to incorporate a wide range of industry data. © Business Monitor International Page 56 Vietnam Freight Transport Report Q2 2014 Crude Price Forecasts For 2014, we expect Brent to average US$104.80 per barrel (bbl) and WTI at US$101.50/bbl. Our forecast for Dubai, which takes into account the estimated spread between Dubai and Brent, is US$101.90/bbl (see 'Bullish On Brent And WTI As Uncertainties Persist', January 8). Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) Brent WTI Dubai 2012 2013 2014f 2015f 2016f 2017f 2018f 111.70 108.79 104.80 102.00 101.00 99.00 98.00 93.30 98.01 101.50 101.00 96.00 94.00 95.00 108.88 105.36 101.90 100.50 98.50 96.50 95.50 f = forecast. Source: BMI Oil Product Price Forecasts We expect oil products across all categories to see downward price movement across our forecast period, in line with our crude oil price forecasts. Gasoline and bunker fuel in particular will see sharper downward price movement than other products, due to a likely abundance of supplies, especially in the Atlantic Basin. Growth in US downstream production, sustained by its crude oil boom, will see European gasoline exports continue to struggle in the Atlantic Basin unless Europe cuts production of the product. Meanwhile, increasingly stringent environmental standards for shipping fuel will see sulphur-heavy bunker fuel products suffer in the North American and European markets. While diesel/gasoil prices will be partially supported by the growing adoption of diesel in transport, prices at Singapore are likely to underperform other markets. China has a particularly large impact on the diesel market, as a slowdown in domestic diesel consumption and continued expansion in diesel output see the country's diesel imports fall. Naphtha has rebounded strongly in the Asian market as economic momentum in the region picks up. While economic optimism could support prices in the short term, we warn that this also creates a downside risk to prices in the longer run as it would encourage petrochemical firms in Asia to invest in gas-based production facilities, therefore prompting a decrease in demand. © Business Monitor International Page 57 Vietnam Freight Transport Report Q2 2014 Table: BMI's Refined Products Forecast, US$/bbl Jet Fuel Rotterdam 131.41 127.30 125.05 121.85 120.45 118.45 117.45 New York 130.74 125.10 125.50 122.60 121.92 120.70 119.03 Singapore 126.90 122.65 120.15 118.20 115.85 113.33 111.82 Global 129.68 125.01 123.57 120.88 119.41 117.49 116.10 Gasoil/Diesel Rotterdam 130.36 124.81 120.30 116.73 114.99 112.29 110.62 New York 130.79 126.56 124.00 121.25 120.30 118.30 119.30 Singapore 128.18 123.15 118.40 116.67 114.35 112.03 110.72 Global 129.78 124.84 120.90 118.22 116.55 114.21 113.55 Gasoline Rotterdam 121.28 115.19 113.30 109.65 107.89 105.54 103.23 New York 124.79 118.70 114.50 112.70 107.70 105.12 105.00 Singapore 123.47 115.89 113.65 111.66 108.55 105.54 103.64 Global 123.18 116.60 113.82 111.34 108.04 105.40 103.96 Naphtha Singapore 102.87 100.27 100.12 98.72 96.72 94.72 93.72 Global 102.87 100.27 100.12 98.72 96.72 94.72 93.72 Bunker Fuel 180 Rotterdam 101.52 95.07 91.05 88.11 86.97 84.83 83.69 New York 104.67 97.52 96.00 93.85 91.00 89.25 88.34 Singapore 102.46 93.96 89.65 88.13 86.00 83.88 82.75 Global 102.88 95.52 92.23 90.03 87.99 85.99 84.93 Bunker Fuel 380 Rotterdam 97.47 91.24 87.80 84.83 83.14 80.96 79.78 New York 100.32 93.13 91.00 87.35 86.45 84.92 83.20 Singapore 101.08 95.84 91.15 87.23 85.10 82.98 81.85 99.62 93.40 89.98 86.47 84.90 82.96 81.61 Global Bunker Fuel Average Rotterdam 99.50 93.16 89.43 86.47 85.06 82.90 81.74 New York 102.50 95.33 93.50 90.60 88.72 87.08 85.77 Singapore 101.77 94.90 90.40 87.68 85.55 83.43 82.30 © Business Monitor International Page 58 Vietnam Freight Transport Report Q2 2014 BMI's Refined Products Forecast, US$/bbl - Continued Jet Fuel Global 101.25 94.46 91.11 88.25 86.44 84.47 83.27 f = forecast. Source: Bloomberg, BMI Narrower US Market Crude-Product Spreads We maintain our view that US crude-product spreads will continue to narrow in the short term as the easing of the Cushing glut reduces the bumper refining margins refiners had enjoyed from the massively discounted WTI in 2012. As US refiners have to compete with other producers in a well-supplied global market, we continue to expect the gains in product prices to be capped relative to gains in WTI. However, this could reverse from 2015 as crude oil production outstrips the country's infrastructure capacity, thereby suppressing WTI again. This would allow them to continue benefiting from larger crudeproduct spreads than their European and Asian counterparts in 2016 and 2017, though the easing of infrastructure constraints could see spreads in New York fall again in 2018. © Business Monitor International Page 59 Vietnam Freight Transport Report Q2 2014 Falling Over Time Expected Crude-Product Spread* In New York, Rotterdam & Singapore (US$/bbl) *Average of forecast spread between crude benchmark and the following products: Gasoline, gasoil/diesel, naphtha, jet fuel and bunker fuels. f=forecast. Source: Bloomberg, BMI Success in lifting a ban on crude oil exports from the US poses downside risks to the spreads refiners could enjoy vis-à-vis Asia and Europe. The enlargement of the market for WTI would see the US benchmark price converge with Brent and other crude grades. The upward movement of WTI and downward movement of other crudes would even lower feedstock costs for refiners worldwide. Weak Demand Persists Demand is expected to be muted over our forecast period to 2018: ■ China Worries: We have consistently highlighted in our Commodities team's monthly write-up on Chinese industrial imports that China's refined product imports could follow a downward trend - both a result of slower growth and an increase in domestic refining capacity as China slowly becomes a net oil products exporter. As the world's second-largest oil consumer, slower Chinese demand would loosen up the global oil products market. ■ Upward Fuel Price Revisions: Fiscal and monetary problems faced by developing countries - where subsidies have fuelled a boom in oil consumption - could eventually make subsidies unsustainable. Some of the fastest growing oil markets have already adjusted fuel prices at the pump in order to correct economic imbalances: China, Indonesia, Vietnam, India and Brazil. The removal of subsidies is a trend © Business Monitor International Page 60 Vietnam Freight Transport Report Q2 2014 that is likely to continue. Higher prices are likely to see consumption growth slow, and consequently oil import growth from these countries even as the global supply market loosens. ■ Limited Upside From Developed Countries: Despite rising optimism about both the US, European and Japanese economies, we expect energy efficiency measures to limit oil demand growth that should accompany economic recovery. Moreover, Japanese oil consumption had been propped up in 2011 and 2012 by a switch to fossil fuels for power generation in the wake of the Fukushima nuclear meltdown. Tokyo is still considering the return of nuclear power, which could reduce the power sector's demand for heavy fuels. ■ Increase In Global Refining Capacity: The impact of this would be especially strong in the Asian market, thereby keeping margins depressed. ■ Beginning Of A Switch To Alternative Fuels: Liquefied natural gas (LNG) and biofuels can be expected to play a larger role, particularly in the transport sector as governments move to cap carbon emissions and as supplies of LNG and biofuels begin to grow. Supply: Global Capacity Supports Demand According to our forecasts, global refining capacity should be sufficient to meet the world's oil demand needs through our forecast period to 2018. Although developed European countries and Japan will see refining capacities shrink due to high crude costs and less-sophisticated plants hitting their refining margins, this would be compensated by a rise in refining capacity in other emerging markets such as China, India and Saudi Arabia. Barring an unexpected increase in crude feedstock prices, this comfortable demand-supply picture should keep prices in check. © Business Monitor International Page 61 Vietnam Freight Transport Report Q2 2014 A Comfortable Supply-Demand Picture Global Refining Capacity & Oil Consumption, 2012-2018 ('000b/d) e/f = estimate/forecast. Source: EIA, BMI Emerging Markets Africa will see the fastest rate of regional refining capacity growth between 2013 and 2018 at 43.9%. However, the most significant growth in absolute volume will come from the Middle East - where Saudi Aramco is awaiting the start-up of two other large 300,000 barrels per day (b/d) refineries - and in Asia where expansions continue apace in China and India. Meanwhile, Russia's refinery modernisation programme will see its plants continue to serve the market to make up for expected closures in Central Europe. Turkey - the fastest-growing market for oil in Europe - will also see significant refinery expansions. © Business Monitor International Page 62 Vietnam Freight Transport Report Q2 2014 Market Growth Spurs Refining Expansion Refining Capacity Of Emerging Markets, 2012-2018 ('000b/d) Selected CEE = Russia, Azerbaijan, Turkey, Turkmenistan; Emerging Asia = China, India, Indonesia, Pakistan, Thailand, Vietnam; e/f = estimate/forecast. Source: EIA, BMI Therefore, most of these markets will be adequately prepared to meet an expected increase in local fuel demand and will have spare capacity for export, especially the Middle East and Russia. Even China, which has overtaken the US as the world's largest oil consumer, is on its way to becoming a net fuel exporter owing to a continued increase in its domestic refining capacity. This will loosen some pressure on global supplies and, in turn, prices. Developed Markets Among developed markets, the outlook is brightest for US refiners that are amply supplied by cheaper crude feedstock available in the North American markets, thanks to a production boom in the US and Canada. However, due to fragmentation of the US refined fuels market, where supplies are concentrated in the refining heartlands of the Midwest and Gulf Coast, prices in import-dependent New York (East Coast) are expected to remain elevated and follow international trends. This will create an uneven market with prices that can vary vastly from region to region, reflecting differences in the crude baskets that refiners have access to. © Business Monitor International Page 63 Vietnam Freight Transport Report Q2 2014 Lower runs and refinery closures in developed markets outside of the US will be the main factor propping up prices despite capacity expansion in emerging markets. Although crude feedstock prices are expected to fall, refining margins for crude import-dependent refiners in developed Europe and Japan will continue to be pressed as many of these older plants lack the scale and the sophistication to compete on costs with newer and more-modern plants in emerging countries without upgrades. Moreover, weak growth in domestic demand also makes them dependent on external markets for support. European refiners are being squeezed particularly by US competition in the Atlantic, as downstream supplies from the US Gulf Coast are challenging developed Europe's position in the New York markets and also increasingly in their West African stronghold. Meanwhile, cheaper Russian and growing supplies from the Middle East are displacing local output in the Central European and Mediterranean markets. Struggling Against The New Challengers Refining Capacity In Western Europe & Japan, 2012-2018 ('000b/d) e/f = estimate/forecast. Source: EIA, BMI Losses in capacity in these traditional refining markets will limit the scale of global refining expansion, such that the global fuel market will not be oversupplied and prices will not be forced down significantly. Slower demand growth - owing to an expected rise in fuel efficiency, tougher environmental rules, rollback of fuel © Business Monitor International Page 64 Vietnam Freight Transport Report Q2 2014 subsidies and alternatives to oil products - explains the extent to which individual oil product prices will fall. Quarterly Prices Table: BMI Refined Oil Products Quarterly Forecast, US$/bbl Q413 Q114f Q214f Q314f Q414f 2014f Reference Crude Brent 110.80 107.00 104.00 105.00 103.00 104.80 98.42 102.00 101.00 103.00 100.00 101.50 107.89 104.70 102.00 101.00 100.00 101.90 WTI Dubai Jet Fuel Rotterdam 132.47 125.00 124.00 130.00 124.50 125.93 New York 132.24 127.00 123.00 122.00 130.00 125.50 Singapore 126.28 122.70 119.00 120.00 119.00 120.18 Global 130.33 124.90 122.00 124.00 124.50 123.87 Gasoil/Diesel Rotterdam 124.54 124.00 119.00 121.00 117.00 120.30 New York 129.77 128.00 120.00 123.00 125.00 124.00 Singapore 125.90 120.20 120.00 116.00 117.50 118.43 Global 126.74 124.07 119.67 120.00 119.83 120.91 Gasoline Rotterdam 115.26 118.00 114.00 110.00 111.00 113.25 New York 117.16 120.00 116.00 110.00 112.00 114.50 Singapore 116.11 118.70 116.00 111.00 109.00 113.68 Global 116.18 118.90 115.33 110.33 110.67 113.81 99.00 98.00 100.15 Naphtha Singapore 107.36 104.60 99.00 Bunker Fuel 180 Rotterdam 92.63 94.00 89.00 92.00 89.00 91.05 New York 98.25 98.00 93.00 96.00 97.00 96.00 Singapore 92.40 93.70 91.00 89.00 85.00 89.68 Global 94.43 95.23 91.00 92.33 90.33 92.24 88.00 87.00 87.80 Bunker Fuel 380 Rotterdam © Business Monitor International 88.88 91.00 85.00 Page 65 Vietnam Freight Transport Report Q2 2014 BMI Refined Oil Products Quarterly Forecast, US$/bbl - Continued Q413 Q114f Q214f Q314f Q414f 2014f New York 92.40 93.00 88.00 91.00 92.00 91.00 Singapore 94.20 94.70 92.00 91.00 87.00 91.18 Global 91.83 92.90 88.33 90.00 88.67 89.99 Bunker Fuel Average Rotterdam 90.76 92.50 87.00 90.00 88.00 89.43 New York 95.33 95.50 90.50 93.50 94.50 93.50 Singapore 93.30 94.20 91.50 90.00 86.00 90.43 Global 93.13 94.07 89.67 91.17 89.50 91.12 Source: Bloomberg, BMI Naphtha: Long-Term Growth Faces Headwinds From Gas In the short term, despite a strong start to the year we expect naphtha prices in Singapore to trend downwards throughout 2014. Prices had rebounded on renewed optimism surrounding Asian economic growth. In addition, the use of propane for winter heating had supported propane prices in Q413, thereby decreasing its competitiveness vis-à-vis naphtha in the European market where petrochemical producers have more flexibility to switch between the two for feedstock. Demand pressure on naphtha is likely to ease going into 2014, particularly from Europe. As we expect the US to continue its production and exports of liquefied petroleum gases (LPG), softer LPG prices as winter unwinds could once again increase its appeal over coal in Europe. This would increase available supplies to the Asian market, thereby capping prices. The effect of this could be more pronounced from the start of H214, as the unwinding of refinery maintenance puts more naphtha into the world market. © Business Monitor International Page 66 Vietnam Freight Transport Report Q2 2014 Room For More US LPG Exports US LPG Production ('000b/d) 2,000 2018f 2017f 2016f 2015f 2014f 2013e 0 2012e 1,000 LPG production, 000b/d LPG consumption, 000b/d e/f = estimate/forecast. Source: EIA, BMI In the longer term, naphtha prices in Singapore will continue moving downwards due to the following factors: ■ Shutdown of European petrochemical plants. Poor profit margins will continue to see the rationalisation of the petrochemical industry in Europe. For example, Ineos and Total have announced plans to end operations at some of their plants by 2016. ■ Choice of gas-based feedstock for US and Middle Eastern plants. Further petrochemical expansions are expected in these two markets, though feedstock for these plants will mainly be gas-based, due to the cost advantages Middle East and US producers have in cheap domestic gas. © Business Monitor International Page 67 Vietnam Freight Transport Report Q2 2014 Naphtha Out Of Favour In The US US Ethylene Steam Cracker Cash Margins By Feedstock Type (US$/metric tonne) Source: Bloomberg This will thus loosen the market for oil-based naphtha. We forecast naphtha in Singapore to average at US $100.12/bbl in 2014, falling to US$93.72/bbl by 2018. Economic shocks elsewhere pose downside risk to this forecast, though we note that the negative spread between crude benchmark prices and naphtha prices limits the extent to which prices can fall further. A further downside risk to long-term naphtha prices comes from the adoption of crude-cracking technology in petrochemical production. ExxonMobil has spearheaded this technology, having launched the world's first chemical unit in Singapore that bypasses naphtha to produce petrochemical building blocks such as ethylene and propylene. Should this technology be more widely adopted in the future, this could reduce the relevance of naphtha in the global market. Gasoline And Gasoil/Diesel: Gasoline Weakness To Continue Gasoline and gasoil/diesel - key for the land transport sector - will also be affected by a slowdown in economic growth. Complicating demand for gasoline and gasoil/diesel are green measures; fuel-efficient vehicles and green legislation limiting emissions will further limit growth in consumption of these fuels in © Business Monitor International Page 68 Vietnam Freight Transport Report Q2 2014 developed countries. Oil-based fuels could also see a growing challenge from alternative power sources such as batteries or natural gas - LNG and compressed natural gas (CNG) - as the preferred choice in the transport sector towards the tail-end of our forecast period, both in emerging and developed markets. However, we note that the price of gasoline will fall more than diesel through our forecast period. In the short term, gasoline prices are expected to rise in Q114 relative to Q413 due to the cold snap in the US, which has hit US production and raised demand. This is expected to move back down due to limited global demand growth relative to supply. In particular, the US has seen a sharp decline in gasoline demand, which can be approximated by gasoline retail sales in the US. Average gasoline retail sales in the US have fallen by about 1.83mn b/d at its peak in 2003 to 849,981b/d in 2012. The fall was particularly steep between 2011 and 2012, which witnessed a 23.8% y-o-y decline in gasoline sales. Data for January-October 2013 indicate that gasoline sales continued to decrease to 727,784b/d. Gasoline Demand Takes Steep Plunge Average US Total Gasoline Retail Sales By Refiners ('000b/d) Source: EIA, BMI The fall in gasoline sales is in part an outcome of the growing use of diesel in the US, and also an outcome of greater fuel efficiency in vehicles. Yet gasoline production in the US continues on an uptrend, thereby increasing the net volume of gasoline available for exports in the country. © Business Monitor International Page 69 Vietnam Freight Transport Report Q2 2014 Gasoline Production Continues Unabated US - Refinery and Blender Net Production Of Finished Gasoline ('000b/d) Source: EIA The greater flow of US gasoline products from the refining heartland in the US Gulf Coast to the Atlantic Basin has in turn increased competition for European gasoline that has traditionally flowed to this area, pushing prices down in both New York and Rotterdam. US refiners are moving to adjust their product slate to increase the production of diesel over gasoline, and the continued cutback in production from beleaguered refineries in Europe could help alleviate the situation in the longer run. However, as these adjustments take time, abundant production will keep gasoline prices on a firm downward trajectory within our forecast period. © Business Monitor International Page 70 Vietnam Freight Transport Report Q2 2014 Singapore Sees Smaller Gasoline Crash In Q413 Quarterly Movement In Gasoline Prices In 2013, US$/bbl Source: Bloomberg, BMI Likewise in Singapore, gasoline prices have trended downwards but, interestingly, have shown greater resistance against the quarter-on-quarter (q-o-q) plunge in prices seen in New York and Rotterdam in Q413. Although this is partly an outcome of a larger fall in prices in Q213 relative to other markets due to supply abundance, it also illustrates that the trajectory of the Singapore market may differ slightly from Rotterdam and New York. Growth in key markets in Asia will provide more support for gasoline prices in Singapore than in the other two markets. This is particularly as the expansion of the middle class in China and India continues to see gasoline demand increase. © Business Monitor International Page 71 Vietnam Freight Transport Report Q2 2014 Growing Middle Class Supports Gasoline Demand In Asia China's Estimated Gasoline Consumption (LHC) & India's Domestic Sale Of Gasoline (RHC), '000b/d Source: China General Customs Administration, China National Bureau Of Statistics, Indian Ministry Of Petroleum & Natural Resources, BMI This underpins our view for a much closer convergence in global gasoline prices across all three markets than in other oil products. © Business Monitor International Page 72 Vietnam Freight Transport Report Q2 2014 Healthy Asian Demand, Weak US Demand See Price Convergence Across Markets BMI Gasoline Price Forecast (US$/bbl) f = forecast. Source: Bloomberg, BMI Our view on the diesel market is less bearish than for gasoline, underpinned by a healthy expansion of the commercial automobile market in the US - which is more diesel-heavy - as highlighted by our Autos team. This will help support diesel prices, particularly in the New York market, which would see changes in diesel prices trend slightly more closely to crude oil than gasoline prices. © Business Monitor International Page 73 Vietnam Freight Transport Report Q2 2014 Commercial Vehicles To Grow Over Passenger Fleet Make-Up Of Vehicle Fleet In The US, 2012-2018 300M 200M 2018f 2017f 2016f 2015f 2014f 2013e 0M 2012e 100M Commercial vehicle fleet, units Passenger car fleet, units e/f = estimate/forecast. Source: FHA, BMI Our average global gasoline price for 2014 and 2015 is US$113.82/bbl and US$111.34/bbl respectively, compared with an average of US$116.60/bbl in 2012. Over the longer term, we expect gasoline prices to fall about 10% between 2013 and 2017. We forecast the global gasoil/diesel price to average at US$120.90/ bbl in 2014, US$118.22/bbl in 2015, and to US$113.55/bbl by 2018. Jet Fuel: Downward Movement Capped By Recovery We forecast that jet fuel prices will fall steadily through to 2017, in line with our crude price and other fuel products forecasts. Between 2014 and 2018, prices are forecast to fall by 9% in Singapore, 8% in Rotterdam and 3% in New York. © Business Monitor International Page 74 Vietnam Freight Transport Report Q2 2014 No Take-Off Expected Average Price Of Jet Fuel, 2012-2018 (US$/bbl) f = forecast. Source: Bloomberg, BMI However, a pick-up in air traffic activity - seen in recent months - could see a smaller decline in jet fuel prices vis-à-vis other products in 2014. IATA noted that global air cargo made a 'solid improvement' in November 2013. Once again, activity in the Middle East saw the greatest growth, thanks to new hubs in the Gulf that have increased its capacity. Meanwhile, IATA also reported better demand in developed countries, especially Europe, which has supported Middle Eastern growth. Europe itself has seen an 8% y-o-y increase in air cargo in November 2013. Asia also made headway with a 4.9% y-o-y growth in air cargo, and the IATA notes that growth in the region - which makes up 39.2% of total global demand - bodes well for air carriers. North America joined these key regions in registering a 2.5% y-o-y increase in air cargo demand. IATA also continues to record an increase in passenger demand in the last quarter of 2013. At the time of writing, passenger traffic for October 2013 (the most recent data available) saw 6.6% y-o-y growth, marking year-to-date growth of 5.2%. © Business Monitor International Page 75 Vietnam Freight Transport Report Q2 2014 Table: Total Air Freight And Passenger Volumes RPK (Oct) (% chg y-o-y) FTK (Nov) (% chg y-o-y) YTD RPK (% chg y-o-y) YTD FTK (% chg y-o-y) International 6.9 6.7 5.3 1.2 Domestic 6.0 2.6 4.8 2.5 Total Market 6.6 6.1 5.2 1.4 RPK: Revenue-Passenger-Kilometres, latest available data is for October 2013; FTK: Freight-Tonne-Kilometres. Source: IATA With our expectations that the global economy is set on a road of firmer recovery in 2014, this will continue to support the air freight and passenger industry, thereby supporting jet fuel demand (see 'Developed States To Lead Global Recovery In 2014', December 2013). The EU's decision to scrap jet fuel import duties from January 1 2014 could see softer prices in the Rotterdam market, and the downward trend in crude prices will see lower jet fuel prices. However, the extent of this decrease will be capped by continued recovery in the air freight and passenger sector. Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest Of all the oil products, the downtrend in bunker fuel prices looks the most pronounced. 2013 continued the slide in prices seen in 2012. Also, among all oil products bunker fuel has been least resistant to changes in crude oil prices, as demand and supply dynamics in the shipping sector played a bigger role influencing prices. © Business Monitor International Page 76 Vietnam Freight Transport Report Q2 2014 Testing Support Bloomberg Average Weighted Price Of Bunker Fuel 180 & Bunker Fuel 380, January 2011-Present (US $/metric tonne) Source: Bloomberg, BMI Downward pressure on bunker fuel prices is chiefly a result of weakness in the global shipping industry. We have also been highlighting three key risks to shipping, each of which will have a knock-on effect on bunker fuels demand: ■ High Risk Of Global Overcapacity: This threat is complicated by an expected increase in new and more fuel-efficient ships - especially container ships. 2013 has seen ships with new mega-vessel capacity, including Maersk Line's Triple E-Type 18,000 twenty-foot equivalent unit vessel, the largest ship to date, come online. Importantly, these ships are not just larger, but are also more fuel-efficient than those currently employed around the globe, thereby reducing bunker fuels demand. ■ Overall Cleaner Shipping Industry: These efficiency trends are also part of a broader push for a greener industry by both governments with forward-leaning environmental policies and major ports themselves. Hong Kong and Los Angeles - two of the largest ports in the world - are demanding that container ships use cleaner bunker fuels than today's standards. ■ Separate Push To Increase The Use Of LNG As A Shipping Fuel: Several European ports have invested in LNG shipping infrastructure to support this new industry. Singapore has also engaged Lloyd's Register to help develop its port's LNG bunkering capabilities. Det Norske Veritas, a ship classification bureau, estimates that 19-45% of ships will be powered using LNG by 2030. Meanwhile, Maersk Line wants to test biofuels and NYK Line is trialling a solar power-assisted car carrier. While this remains a long-term prospect that will only kick in towards the end of our forecast period, it will dampen oil-based bunker fuel demand in the long term. © Business Monitor International Page 77 Vietnam Freight Transport Report Q2 2014 Pressure On Europe The effect of environmental policies and regulations in North America and northern Europe (comprising the Baltic Sea, North Sea and English Channel) will hit demand for dirtier grades of bunker fuel. Strict sulphur standards will come into effect in 2015. By 2020, the EU will impose a strict 0.1% limit on sulphur content of all vessels entering the EU Emissions Control Area (ECA). Assuming no relaxation of these policies, the shipping industry will have to meet these requirements either by retrofitting their vessels with scrubbers to reduce emissions, switching to the more expensive marine gasoil or turning to LNG as an alternative fuel. This could squeeze demand for sulphur-heavy bunker fuel further and hit prices particularly in Rotterdam as European shippers are expected to be most hit by new regulations. This underpins further downward revision in our bunker fuel price forecast for Rotterdam. We expect prices at Rotterdam to come in at US$83.69/bbl for the 180 grade and US$79.78/bbl for the more pollutive 380 by 2018. In contrast, the slow rate of development in emissions regulations in Asia will support bunker fuel demand and prices in the Singapore market. As such, by 2018, Rotterdam is likely to see the lowest price for bunker fuel of the three markets. Risks To Outlook The risks we highlight to our forecasts are: ■ Crude Oil Prices: Although we have already priced in OPEC support for prices in our crude oil price forecasts, we assume that the OPEC price floor will be set at US$100/bbl. Any larger-than-expected cuts in OPEC output, together with security risks in the Middle East, could support oil product prices. ■ Regional Discrepancies In The Fall In Prices: As such, broad generalisations should be taken with caution. ■ Slower-Than-Expected Downward Trend In Prices: Falling prices may delay the rise of alternative fuels, including some early movement towards LNG and biofuels in the transport sector and the power sector, which we have already seen in the shipping and air freight industries. This could in turn taper the downward trend in fuel prices. © Business Monitor International Page 78 Vietnam Freight Transport Report Q2 2014 Macroeconomic Forecasts BMI View: Although we expect the Vietnamese economy to record yet another quarter of sub-par growth in Q413, we are beginning to see potential for upside surprises to domestic demand over the coming quarters. Recent data on foreign direct investment inflows, remittances, passenger car sales, and property market launches, suggests to us that domestic demand is on a nascent recovery, setting the stage for stronger 2014 growth. The general consensus is expecting the Vietnamese economy to suffer yet another quarter of sub-par growth mainly due to subdued external demand and the lack of progress on banking sector reforms. This is closely in line with our view that real GDP growth will come in at just 5.3% in 2013, a slight improvement from 5.2% in 2012. Looking ahead to 2014, however, evidence of improving macroeconomic fundamentals in Vietnam (especially with regards to the outlook for domestic demand) suggests to us the balance of risks to our growth forecast of 6.0% is gradually tilting towards the upside. Robust Remittances Could Boost Domestic Demand Vietnam - Unrequited Transfers, US$mn Source: BMI, Asian Development Bank © Business Monitor International Page 79 Vietnam Freight Transport Report Q2 2014 Remittances: According to estimates published by the World Bank, the Vietnamese economy is on track to record a bumper year for remittance inflows. The country is expected to receive US$10.6bn in remittances from Vietnamese citizens working abroad, a robust 6.5% increase from 2012. Crucially, we believe that remittance inflows will remain strong over the coming quarters as macroeconomic conditions in Vietnam continue to improve. Growing confidence in the stability of the Vietnamese dong should also help to encourage Vietnamese workers abroad, to a certain extent, to remit a larger share of their earnings back home. We believe that this will help to boost domestic demand while providing support for the currency. Foreign Direct Investment: Total foreign direct investment (FDI) inflows are also set to surpass the government's full-year target of US$13bn, after data released by the Ministry of Planning and Investment showed that inflows surged by 19.5% year-on-year (y-o-y) growth over the first eight months of the year. The strong reading chimes with our view that the country's solid long-term growth story should continue to attract foreign investors over the coming years. Automobile Sales: We are witnessing signs of a robust recovery in automobile sales, a sign that pent-up domestic demand is beginning to rebound. According to the Vietnam Automobile Manufacturers Association (VAMA), September vehicle sales of its members surged by 20.6% year-on-year (y-o-y), exceeding our already bullish forecast of 12.5% for the year (see 'Bullish On CV Sales In The Medium To Long Term', October 14 2013). © Business Monitor International Page 80 Vietnam Freight Transport Report Q2 2014 Developers Eyeing Property Market Rebound Vietnam - Real Estate Index Source: BMI, Blooomberg Property Market: Meanwhile, we see increasing evidence that the Vietnamese property market may have bottomed out (see 'Early Signs Of A Recovery, But No Property Market Boom In Sight', August 14 2013). According to a quarterly report published by real estate agency CBRE Vietnam, the number of new launches surged by 12% y-o-y in Q313. Anecdotal evidence from the local media suggests to us that demand for real estate following the sharp decline in prices since 2011 may be recovering. To be sure, we maintain our view that we are unlikely to see a property market boom given the healthy pipeline of new units that will come online in 2014. Nonetheless, we acknowledge that consumer confidence is recovering and we could potentially see some upside surprises to domestic demand in 2014. Expenditure Breakdown Private Consumption: We expect private consumption to grow at a relatively resilient pace of 5.0% in 2014. However, we note that the risk of further bankruptcies among SMEs could potentially lead to widespread job losses, especially in export-driven sectors. Uncertainties over the outlook for employment could, in turn, prompt households to cut back on spending. © Business Monitor International Page 81 Vietnam Freight Transport Report Q2 2014 Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2014, partly led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the coming months as the effect of recent rate cuts by the SBV begins to kick in. We are also seeing evidence that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to accelerate slightly from 4.1% in 2013 to 4.8% in 2014. Public Spending: We expect total public spending to remain relatively resilient in 2014, expanding at a respectable pace of 6.1%. However, there is limited room for the government to increase spending further owing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks. Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy, although we expect external demand to pick up in 2014. Vietnam's trade account has fallen back into deficits in recent months, but we see the case for a substantial pickup in external demand on the back of a rebound in regional growth over the coming quarters. Accordingly, we still expect exports to expand at a moderate pace of 5.9% in 2014. Table: Vietnam - Economic Activity 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2,157,829 2,779,880 3,245,419 3,657,621 4,117,487 4,631,499 5,203,774 5,841,949 112.9 134.6 155.5 175.0 200.2 227.8 257.4 291.4 6.4 6.2 5.2 5.3 6.0 6.9 7.0 7.0 1,267 1,497 1,712 1,909 2,163 2,439 2,733 3,068 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 Industrial production index, % y-o-y, ave 1,5 14.1 10.9 7.0 7.6 8.7 9.6 9.9 9.8 Unemployment, % of labour force, eop 2,6 4.3 3.6 3.2 3.7 3.5 3.5 3.6 3.5 Nominal GDP, VNDbn 3 Nominal GDP,US $bn 3 Real GDP growth, % change y-o-y 3 GDP per capita, US$ 3 Population, mn 4 Notes: f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI. © Business Monitor International Page 82 Vietnam Freight Transport Report Q2 2014 Demographic Forecast Demographic Outlook Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split. Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 83 Vietnam Freight Transport Report Q2 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050 Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695 Total © Business Monitor International Page 84 Vietnam Freight Transport Report Q2 2014 Vietnam's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 2 4 7 12 17 21 24 30 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12 © Business Monitor International Page 85 Vietnam Freight Transport Report Q2 2014 Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued 100+ years 1990 1995 2000 2005 2010 2013e 2015f 2020f 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Key Population Ratios, 1990-2020 Dependent ratio, % of total working age Dependent population, total, '000 1990 1995 2000 2005 2010 2013e 75.8 71.0 61.3 50.8 42.9 41.4 2015f 2020f 41.3 41.9 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 Active population, total, '000 58.5 62.0 66.3 70.0 70.7 70.8 70.5 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 Youth population, total, '000 60.9 50.9 40.9 33.6 32.1 31.7 30.2 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age Pensionable population, total, '000 10.0 10.1 10.3 9.9 9.3 9.3 9.6 11.6 3,934 4,491 5,190 5,579 5,823 6,037 6,343 7,965 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI © Business Monitor International Page 86 Vietnam Freight Transport Report Q2 2014 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account ■ Testing the directional movement and magnitude of coefficients ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ■ All results are assessed to alleviate issues related to autocorrelation and multicollinearity © Business Monitor International Page 87 Vietnam Freight Transport Report Q2 2014 BMI uses the selected best model to perform forecasting. It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology There are a number of principal criteria that drive our forecasts for each transport variable: ■ GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI's own macroeconomic and demographic forecasts. ■ Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ■ Trends manifested through historical data; ■ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). • Port Traffic Port traffic levels act as a 'second opinion' on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. ■ Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ■ Trends in historical modal split data; ■ Evidence of government policy favouring one or more modes over others; ■ Government and or private sector investment plans in specific modes. © Business Monitor International Page 88 Vietnam Freight Transport Report Q2 2014 Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Page 89 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... logistics © Business Monitor International Page 16 Vietnam Freight Transport Report Q2 2014 needs are primarily met by road In 2014 and beyond, we predict that road freight volumes in Vietnam will account for the majority of freight carried in the country Road Reliant Vietnam Freight Mode Breakdown By Market Share 2013e Source: BMI We forecast that growth in road freight volume will continue to impress, albeit... International Page 29 Vietnam Freight Transport Report Q2 2014 Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013e) Source: General Statistics Office of Vietnam Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km This is the second largest sub-sector involved in domestic cargo transport, accounting... Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally © Business Monitor International Page 28 Vietnam Freight Transport Report Q2 2014 Vietnam. .. of demand for air freight transport options One example has been the impact the local © Business Monitor International Page 22 Vietnam Freight Transport Report Q2 2014 production of iPhones has had on China's air freight sector Plans are in place for Vietnam- based facilities to produce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand Vietnam' s pharmaceutical... this report © Business Monitor International Page 26 Vietnam Freight Transport Report Q2 2014 Market Overview Vietnam Emerges As An Investment Prospect With the Vietnamese economy beginning to exhibit signs of a robust recovery as we head into 2014, we believe that it could be a worthwhile effort for investors to assess the country's growth opportunities at the provincial level, with the company's freight. .. (accessed January 21, 2014) © Business Monitor International Page 20 Vietnam Freight Transport Report Q2 2014 The first is the quality of Vietnam' s railway infrastructure The Global Economic Formula gives Vietnam' s rail infrastructure a low ranking, placing it 71st globally out of 123 countries measured This ranking places it 12th out of its 13 Asian peers A major problem for Vietnam' s rail freight development... which enables freight connections with Vietnam' s neighbours Although we highlight that the River's full potential has not been reached and so development in the River is an area for potential investment © Business Monitor International Page 19 Vietnam Freight Transport Report Q2 2014 Table: Inland Waterway Freight, 2011-2018 Inland waterway freight, '000 tonnes - % change y-o-y Inland waterway freight, ... our presence in Vietnam will lead to the strengthening and streamlining of the processes of logistics and freight forwarding from the Far East to the rest of the world.' © Business Monitor International Page 33 Vietnam Freight Transport Report Q2 2014 Underlining the pull of Vietnam at present is the news that Cargo-Partner, the Austrian transport and logistics company, has also chosen Vietnam to act... Page 21 Vietnam Freight Transport Report Q2 2014 Since early 2012, Vietnam has announced that it was in the search for foreign investors to help construct two international airports: the US$1.2bn Van Don International airport in the northern province of Quang Ninh and the US$10bn Long Thanh International airport in the southern province of Dong Nai For 2014, we predict that the Vietnamese air freight. .. boost skills levels could leave Vietnam a second-rate economy for an indefinite period © Business Monitor International Page 14 Vietnam Freight Transport Report Q2 2014 Industry Forecast Vietnam' s latest real GDP reading, which showed that the economy expanded by 6.0% year-on-year (y-o-y) in Q4 2013, confirms our belief that 2014 will prove to be a fruitful year for the Vietnamese economy Not only are