... of any information hereto contained Vietnam Freight Transport Report Q3 2012 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q3 2012 CONTENTS Executive Summary ... International Ltd Page Vietnam Freight Transport Report Q3 2012 SWOT Analysis Vietnam Freight Transport Industry SWOT Strengths Weaknesses Opportunities Threats Vietnam' s strong... for exports would negatively affect Vietnam' s freight transport sector © Business Monitor International Ltd Page Vietnam Freight Transport Report Q3 2012 Vietnam Political SWOT Strengths
Q3 2012 www.businessmonitor.com VietnaM freight transport Report INCLUDES BMI'S FORECASTS ISSN 1750-5364 Published by Business Monitor International Ltd. VIETNAM FREIGHT TRANSPORT REPORT Q3 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: May 2012 Business Monitor International 85 Queen Victoria Street London EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 email: subs@businessmonitor.com web: http://www.businessmonitor.com © 2012 Business Monitor International. All rights reserved. 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Vietnam Freight Transport Report Q3 2012 © Business Monitor International Ltd Page 2 Vietnam Freight Transport Report Q3 2012 CONTENTS Executive Summary......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................ 7 Vietnam Freight Transport Industry SWOT ........................................................................................................................................................... 7 Vietnam Political SWOT ........................................................................................................................................................................................ 8 Vietnam Economic SWOT ...................................................................................................................................................................................... 9 Vietnam Business Environment SWOT................................................................................................................................................................. 10 Industry Trends And Developments ............................................................................................................ 11 Air ........................................................................................................................................................................................................................ 11 Maritime .............................................................................................................................................................................................................. 12 Rail ...................................................................................................................................................................................................................... 13 Market Overview ............................................................................................................................................ 14 Industry Forecast........................................................................................................................................... 18 Macroeconomic Outlook ...................................................................................................................................................................................... 18 Road Freight ........................................................................................................................................................................................................ 18 Table: Road Freight, 2009-2016 .......................................................................................................................................................................... 18 Rail Freight.......................................................................................................................................................................................................... 19 Table: Rail Freight, 2009-2016 ........................................................................................................................................................................... 19 Air Freight ........................................................................................................................................................................................................... 19 Table: Air Freight, 2009-2016 ............................................................................................................................................................................. 19 Maritime And Inland Waterways ......................................................................................................................................................................... 20 Table: Maritime Freight - Throughput, 2009-2016 ('000 tonnes) ........................................................................................................................ 20 Table: Inland Waterway Freight, 2009-2016 ....................................................................................................................................................... 20 Trade.................................................................................................................................................................................................................... 21 Table: Trade Overview, 2009-2016 ..................................................................................................................................................................... 21 Table: Key Trade Indicators, 2009-2016 (US$mn) .............................................................................................................................................. 21 Table: Main Import Partners, 2002-2009 (US$mn) ............................................................................................................................................. 22 Table: Main Export Partners, 2002-2009 (US$mn) ............................................................................................................................................. 22 Global Oil Products Price Outlook............................................................................................................... 23 Table: BMI's Refined Products Forecasts, 2010-2016 ......................................................................................................................................... 23 Political Outlook ............................................................................................................................................ 31 Long-Term Political Outlook ............................................................................................................................................................................... 32 Macroeconomic Outlook ............................................................................................................................... 35 Table: Vietnam - Economic Activity, 2011-2016 .................................................................................................................................................. 37 Company Profiles .......................................................................................................................................... 38 Vietnam Airlines Cargo ....................................................................................................................................................................................... 38 Vinatrans ............................................................................................................................................................................................................. 40 Country Snapshot: Vietnam Demographic Data ........................................................................................ 42 Table: Vietnam's Population By Age Group, 1990-2020 ('000) ........................................................................................................................... 43 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) .................................................................................................................. 44 Table: Vietnam's Key Population Ratios, 1990-2020 ........................................................................................................................................... 45 Table: Vietnam's Rural And Urban Population, 1990-2020 ................................................................................................................................ 45 BMI Methodology ........................................................................................................................................... 46 How We Generate Our Industry Forecasts .......................................................................................................................................................... 46 Transport Industry ............................................................................................................................................................................................... 46 Sources ................................................................................................................................................................................................................ 47 © Business Monitor International Ltd Page 3 Vietnam Freight Transport Report Q3 2012 © Business Monitor International Ltd Page 4 Vietnam Freight Transport Report Q3 2012 Executive Summary Despite the fact that the macroeconomic picture across the globe currently looks bleak for this year Vietnam's main export partners, the US, China and Japan, are all set to suffer slowdowns during 2012 Vietnam's freight transport industry appears to be heading towards a period of sustained healthy growth in the mid term. The country's nickname of the 'factory of Asia' - a reputation based on the country's booming exports, which have buoyed the freight sector - still stands, although exports are set to be adversely affected by the predicted 'hard landing' in China this year, as well as a weak eurozone. Leading the way in terms of annual growth in 2012 will be the road sector, which is set for 6.97% growth. Taking second spot by mode will be air freight, with 5.72% growth predicted, while rail freight will also enjoy healthy growth of 5.29%. Inland waterways will perform well this year, with annual growth forecast to come in at 5.11%. Meanwhile, the maritime sector will be led by the port of Ho Chi Minh City, which is expected to see very healthy tonnage throughput rates not only in 2012 but in the mid term also. However, we caution that in order for the country to fully realise its potential, there must continue to be investment in the sector through to the long term, if Vietnam is to ward off the spectre of overcapacity. The country's existing infrastructure is sadly lacking and needs a considerable financial injection if it is to fulfil its potential. Headline Industry Data 2012 rail freight tonnage is set to increase by 5.29% to 8.62mn tonnes. 2012 air freight tonnage is forecast to rise by 5.72% to 206,960 tonnes. Tonnage handled at the Port of Ho Chi Minh City in 2012 is forecast to grow 7.96% in 2012, whereas tonnage handled at the Port of Da Nang is forecast to increase 3.08%. 2012 road freight tonnage is forecast to grow by 6.97%. 2012 total trade is forecast to rise by 8.45% Key Industry Trends Saudia Expands Far East Connections As Middle Eastern Air Freight Sees Fastest 2011 Growth A new service that has been launched by Saudi Airlines Cargo is indicative of a range of trends emerging, namely the declining reliance of mainland China on the airport hubs of Hong Kong and Singapore, and the rapid growth of the Middle Eastern air cargo carriers. The freight wing of Saudi Airlines, Saudi Airlines Cargo (generally known as Saudia) launched a new dedicated freighter flight between the European hub of Brussels and the Chinese industrial centre of Guangzhou on March 4. © Business Monitor International Ltd Page 5 Vietnam Freight Transport Report Q3 2012 Maersk Line And BSNF Announce Asia-US Trade Route Danish shipper Maersk Line and BSNF Railway, a US subsidiary of Warren Buffett's Berkshire Hathaway, announced the launch of a sea and rail carrier service connecting the US with Asia in March 2012. The route will carry freight from China via South Korea, Japan, Malaysia and Vietnam and reach Chicago, Dallas, Fort Worth, Houston, Memphis and Ohio before anchoring at the Port of Los Angeles. Cai Mep-Thi Vai Ports Underused, Despite US$7bn Investment Ports in the Cai Mep-Thi Vai region of the Vietnamese province of Ba Ria-Vung Tau have been struggling to attract vessels. According to the Vietnam Port Association (VPA), the ports have a total container handling capacity of as much as 8mn twenty-foot equivalent units (TEUs); however, the actual demand only comes to around 5mn TEUs. This is despite a total investment of over US$7bn by the end of 2011. Key Risks To Outlook The freight industry in Vietnam is no different to its regional peers in that volumes from the Asia Pacific region are very much reliant on the level of demand from the West in the key markets of the eurozone and, particularly, the US. With BMI forecasting a recession in the eurozone in 2012, and continued sluggish growth in the US, consumer confidence in purchasing expensive discretionary items has fallen. The hard landing expected in China - as one of Vietnam's largest export partners - will also have an impact on Vietnam. We see downside risk in the form of the rate hikes being introduced for imports and exports in the shipping sphere. A report published in March 2012 by VietNamNet Bridge has stressed that 2012 could prove to be a difficult year for Vietnamese shippers due to oversupply of vessel tonnage. The report explained that various shipping lines have made their intentions known that they are to up their rates from the current rate of US$700 per TEU to around US$1,400 per TEU. However, Vietnam Ship Owners' Association chairman Do Xuan Quynh moved to assuage any fears, saying that the planned rate hikes would not result in any great change. Furthermore, any drop off in Chinese demand would have negative connotations for the Vietnamese shipping and ports sector. If Chinese economic growth slows, as we believe it will, volumes on intra-Asia routes will be hard hit. Given the fact that the region was flooded with interest from international lines and terminal operators in the wake of the global economic crisis, this is a cause for concern. © Business Monitor International Ltd Page 6 Vietnam Freight Transport Report Q3 2012 SWOT Analysis Vietnam Freight Transport Industry SWOT Strengths Weaknesses Opportunities Threats Vietnam's strong domestic growth rate, coupled with its geography: it stretches for thousands of kilometres on a north-south axis, creating a need for long-distance freight haulage. Recovery of the nation's ports in 2010 is expected to continue over the mid-term to 2016. Vietnam's location on the South China Sea gives the country access to the main interAsian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics. The generally poor state of the road network. Despite new highway construction, only 13.5% of the network is considered to be in good condition. Just 26% of the network has two or more lanes and only 29% is tarred. Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underutilised. Decades of under-investment have left the country with a port infrastructure system that is poor by international standards. Overcapacity is therefore a growing problem. The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. Chinese investment could bring about much needed improvements in the rail sector. Growing international interest in Vietnam as a growth market within the box shipping sector. Vietnam risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. Vietnam is vulnerable to any slowdown in Chinese investment. A drop in international demand for exports would negatively affect Vietnam's freight transport sector. © Business Monitor International Ltd Page 7 Vietnam Freight Transport Report Q3 2012 Vietnam Political SWOT Strengths Weaknesses Opportunities Threats The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the next five years. The oneparty system is generally conducive to short-term political stability. Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent. The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within the one-party system. Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage. © Business Monitor International Ltd Page 8 Vietnam Freight Transport Report Q3 2012 Vietnam Economic SWOT Strengths Weaknesses Opportunities Threats Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2011. The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 14.0% in 2010. Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to global economic uncertainties in 2012. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s. Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis. Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy. © Business Monitor International Ltd Page 9 Vietnam Freight Transport Report Q3 2012 Vietnam Business Environment SWOT Strengths Weaknesses Opportunities Threats Vietnam has a large, skilled and low-cost workforce, that has made the country attractive to foreign investors. Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond. Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world. Vietnam remains one of the world's most corrupt countries. According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries. Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how. Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points. Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q3 2012 Industry Trends And Developments Air Saudia Expands Far East Connections As Middle Eastern Air Freight Sees Fastest 2011 Growth BMI believes that a new service launched by Saudi Airlines Cargo is reflective of a number of trends, namely the declining reliance of mainland China on the airport hubs of Hong Kong and Singapore, and the rapid growth of the Middle Eastern air cargo carriers. Saudi Airlines Cargo, the freight wing of Saudi Airlines, generally known as Saudia, launched a new dedicated freighter flight between the European hub of Brussels and the Chinese industrial centre of Guangzhou on March 4. An MD11F freighter aircraft will be deployed on the new service, taking the total capacity serving the Chinese city - the largest manufacturing base in south China - to 180 tonnes each week. In addition to the new freighter service, Saudia also offers capacity on Saudi Airlines passenger services to Guangzhou, taking the total number of services to five each week. Vikram Vohra, Saudia's regional sales manager for the Far East, said of the launch: 'This new expansion comes at a fitting time as China's export market fully reopens after Chinese New Year. It will enable Saudi Cargo to take a leading position from Guangzhou, offering shippers dedicated capacity and access to its worldwide global network.' We believe that this is another instance of how the Chinese mainland is becoming increasingly connected with other regions globally, reducing its reliance on transhipment through Hong Kong and Singapore's Changi airport. This was covered in detail by BMI recently (see our online service, February 28, 'First Direct Freighter Service From Chinese Mainland To Africa Reflects Global Trends'), following the launch of a direct route between Guangzhou and Nairobi by a joint venture between Kenya Airways Cargo (KQ Cargo) and KLM Cargo. The trend has also been seen in containerised shipping: as the centres of Chinese production have moved further inland, and mainland China has developed its own facilities, growth at the ports of Hong Kong and Singapore has slowed. BMI notes that the Guangzhou service is not the only new Far East service announced by Saudia of late. The air freight carrier is also to launch a new twice-weekly service linking Vietnam, the Middle East and Frankfurt on March 25. This is aimed at catching the emerging trade out of Vietnam as Chinese labour increases in cost and Vietnam develops into an ever more important exporter. These two new freighter services are yet more instances of aggressive expansion by new Gulf-based carriers. Other companies from the region growing rapidly include Etihad Crystal Cargo and Qatar Airways Cargo. Saudia was only established in 2008, but already has 12 dedicated freighters in its fleet (in addition to offering belly hold capacity on Saudi Airlines' 140 passenger aircraft), and offers services connecting the Middle East with Europe, Asia and the US. © Business Monitor International Ltd Page 11 Vietnam Freight Transport Report Q3 2012 It is companies such as Saudia, and the on-the-ground investment being put into new airport facilities, that made the Middle East region the fastest-growing in the world in terms of air freight kilometres in 2011, expanding by 8.2% compared to a global decline of 0.6%. Meanwhile, German freight carrier DHL announced the launch of two new direct flights from Hong Kong to Vietnam and China, reported transportweekly.com in March. The Hong Kong-Ho Chi Minh City service shortens the transit time between Vietnam, the US and Europe by two hours. The Hong KongChengdu service will ensure evening pick-up and next-day delivery for shipments to South Western China. Maritime Cai Mep-Thi Vai Ports Underused, Despite US$7bn Investment A lack of container traffic at the beginning of 2012 poses problems for Vietnam's ports. According to the Vietnam Port Association (VPA), ports in the province of Ba Ria-Vung Tau have a total container handling capacity of as much as 8mn twenty-foot equivalent units (TEUs); however, the actual demand only comes to around 5mn TEUs. Ports in the Cai Mep-Thi Vai region of Ba Ria-Vung Tau have been failing to attract a significant number of vessels, despite a total investment of over US$7bn by the end of 2011, according to transportweekly.com. The region contains several modern container ports and is set to open several more facilities in 2012 and 2013. Industry analysts attributed the failure to a lack of infrastructure, which has caused capacity to remain largely underutilised. Only 62.5% of overall port capacity in the province of Ba Ria-Vung Tau is currently used. To underline the point, route 956, which connects route 51 with a number of seaports, is yet to be completed. Discussing the situation, Luong Anh Tuan, deputy director of the provincial department of transport, said: 'This is because we have failed to finish the site clearance and compensation tasks due to a capital shortage.' Meanwhile, in March 2012 it was reported that increases in container shipping fees are creating difficulties for Vietnamese exporters, according to a report in Vietnam News. Several overseas shipping lines, including CMA, Hapag-Lloyd, Maersk Line, NYK and OOCL, have raised their rates for routes between Vietnam and a variety of other countries. Exporters are affected because many exports are charged under cost and freight delivery conditions, meaning that it is the sellers who bear the transportation costs. China Issues South China Sea Warning The Chinese government issued a warning to foreign shipping companies operating in the South China Sea in April 2012. Tensions rose following an incident which saw the Philippine navy frigate Gregorio del Pilar involved in a stand-off with two Chinese surveillance vessels after it had intercepted Chinese fishing vessels traversing the region. © Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q3 2012 The Chinese government subsequently declared that it hoped 'irrelevant parties' would stay out of the South China Sea in the future. The dispute centres upon lucrative oil and gas reserves located around the Spratly Islands, an area claimed by a variety of countries including Brunei, China, Malaysia, the Philippines, Taiwan and Vietnam. In other bad news for Vietnam, a Vietnamese container vessel, the Truon Hai Star, reportedly sank off the south of the country following a collision with a vessel from Thailand in April, according to the Journal of Commerce. All 16 crew members were rescued and 30 of the 60 containers, most of which contained vehicles and vehicle parts, were salvaged. It is thought that the vessel itself was worth about US$2mn. Rail Maersk Line And BSNF Announce Asia-US Trade Route Danish shipper Maersk Line and BSNF Railway, a US subsidiary of Warren Buffett's Berkshire Hathaway, announced in March the launch of a sea and rail carrier service connecting Asia with the US, reports DC Velocity. The route will carry freight from China via South Korea, Japan, Malaysia and Vietnam and reach Chicago, Dallas, Fort Worth, Houston, Memphis and Ohio before anchoring at the Port of Los Angeles. The pair promised that cargo carried on the Flagship line would reach its delivery target on schedule 95% of the time. © Business Monitor International Ltd Page 13 Vietnam Freight Transport Report Q3 2012 Market Overview Growth Rate Cools In 2012 As of April 12 2012, Vietnam was the most improved sovereign in our ratings league table - up four points to 58 (D+) - given that the latest print showed real GDP growth slowing to 4.0% year-on-year (y-oy), the worst quarterly outturn since the height of the global recession in Q109. However, slower growth has been steered by much more sensible monetary and fiscal policies, which have in turn helped to ease the country's macroeconomic imbalances (such as a persistent trade deficit and double-digit inflation). State-owned companies remain cash-strapped and awash with bad debt, which may have to be backstopped by the government. Moreover, as we have seen elsewhere, the recent spike higher in global oil prices is a concern for the region's energy importers. Vietnam is in the somewhat strange position of being a large crude oil producer, but major importer of petroleum products, due to the lack of refining capabilities. Vietnam To Ride Out The Global Economic Storm Vietnam Real GDP Growth, 2000-2016 (%) e/f= BMI estimate/ forecast. Source: Asian Development Bank, General Statistics Office Economic headwinds that have hit in 2012 in the US and eurozone should continue to act as a dampener on external demand throughout the year. Also, Vietnam's largest export partner, China, is set to see a cooling of GDP growth in both 2012 and 2013. This suggests that production activity in the manufacturing sector and other export-based industries could face difficulties, with a negative effect on the freight transport industry expected. © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q3 2012 Retail sales have moderated considerably since November 2010, when the State Bank of Vietnam (SBV) initiated its monetary tightening cycle. Retail sales growth slowed from 32.5% in November 2010 to 22.6% in June 2011, indicating that the measures have dampened private consumption growth. Nonetheless, retail sales remain at double-digit growth rates, indicating that private consumption growth remains resilient. This supports our view that private consumption would remain resilient on the back of robust labour market conditions and rising wages in Vietnam, boding well for containerised imports. However, public spending cuts and a subdued outlook on gross fixed capital formation (GFCF) growth due to high lending rates would lead to continued moderation in domestic demand throughout the year. Road Freight Remains The Dominant Force Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo. Few foreign companies are present in the market, and there are many small, family owned road freight companies operating informally. Road Dominates Proceedings Vietnam Freight Transport Mode Breakdown, 2008 (% of total) Source: General Statistics Office of Vietnam Vietnam has a national road network of 180,549 kilometres (km), 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. © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q3 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. Railway infrastructure in Vietnam was ranked 101 out of 123 by the WEF. 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. Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, like Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion. Room For Improvement Across The Board Vietnam Transport Infrastructure Rankings * Rail infrastructure is measured out of 123. Source: World Economic Forum's Global Competitiveness Index Vietnam's port infrastructure is poor by international standards. The WEF's 2011 Global Competitiveness Report ranks it 111th out of 142 countries, placing it 12th in the region, just one place ahead of the Philippines, the regional underperformer. © Business Monitor International Ltd Page 16 Vietnam Freight Transport Report Q3 2012 Investment And Development Outlook According to our key infrastructure projects database, there are US$171bn-worth of infrastructure projects planned, or currently under way, in Vietnam's transport sector. One of the most expensive of these is a US$3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs per year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. The air freight sector will undoubtedly benefit from the planned construction work on a new passenger terminal at Long Thanh international airport. Costing an estimated US$6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. © Business Monitor International Ltd Page 17 Vietnam Freight Transport Report Q3 2012 Industry Forecast Macroeconomic Outlook Vietnam Will Not Escape Global Headwinds The real GDP growth rate in Vietnam slowed to 4.0% year-on-year (y-o-y) in Q112 and we may be looking to revise down our already-weak full-year forecast of 5.8% (also below the government's target of 6.0%) in the coming days. There is some good news on the horizon, however, in that the World Bank has announced that it will grant a US$522mn loan to Vietnam to develop its urban, energy and forest sectors. Some of the sectors that will benefit from the funds include the Mekong Delta Region Urban Upgrade Project, the Second Power Sector Reform Development Policy Operation, and the Forest Sector Development Project. The Mekong Delta Region project will utilise the funds to enhance infrastructure and services for residents in the Mekong delta city of Can Tho as well as those living in the Mekong delta provinces of My Tho, Dong Thap, Kien Giang, Ca Mau and Tra Vinh. The move demonstrates the continued strong relationship between the World Bank and Vietnam, according to World Bank Country Director for Vietnam Victoria Kwakwa. Meanwhile, Vietnam's two biggest export partners, China and Japan, are expected to encounter differing growth patterns in 2012. China's rapid growth will cool somewhat to 8.1% in 2012, down from 9.2% in 2011, and this is set to slip again in 2013. Although Japan will avoid the contraction it saw in 2011, it will still only post 1.8% growth in 2012, which we also forecast will fall in 2013. This will impinge on Vietnam's freight industry, due to its exposure to these economies. Road Freight Table: Road Freight, 2009-2016 2009 Road freight, '000 tonnes 2010 2011e 2012f 2013f 2014f 2015f 2016f 494,649.80 563,406.12 599,863.21 641,689.03 688,531.87 738,564.31 789,140.46 846,827.50 - % change y-o-y 8.50 13.90 6.47 6.97 7.30 7.27 6.85 7.31 Road freight, mn tonnes/km 30,261.40 34,467.73 36,840.47 39,562.62 42,611.29 45,867.56 49,182.10 52,897.32 - % change y-o-y 8.20 13.90 6.88 7.39 7.71 7.64 7.23 7.55 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 18 Vietnam Freight Transport Report Q3 2012 Road Freight Continues To Dominate We are predicting average growth over our forecast period of 7.14%, seeing tonnage reach 846.83mn tonnes by 2016. For 2012, we expect year-on-year (y-o-y) growth of a slightly slower than the mid-term average - 6.97%, which is up from an estimated 6.47% in 2011, but down on 2010's double digit growth. Rail Freight Table: Rail Freight, 2009-2016 Rail freight, '000 tonnes 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 8,068.10 7,809.92 8,187.28 8,620.20 9,105.06 9,622.93 10,199.06 10,612.12 -4.87 -3.20 4.83 5.29 5.62 5.69 5.99 4.05 3,805.10 3,717.58 3,893.05 4,094.36 4,319.82 4,560.63 4,799.43 5,120.22 -8.77 -2.30 4.72 5.17 5.51 5.57 5.24 6.68 - % change y-o-y Rail freight, mn tonnes/km - % change y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Rail Recovers The rail freight sector will perform steadily over the mid term to 2016, putting the four years of contractions between 2007 and 2010 firmly behind it. In 2012, we expect growth of 5.29% to reach 8.62mn tonnes, with the average annual growth over the forecast period edging just past this figure, at 5.33%, to reach 10.61mn tonnes in 2016. Air Freight Table: Air Freight, 2009-2016 Air freight, '000 tonnes - % change y-o-y Air freight, mn tonnes/km - % change y-o-y 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 139.60 186.00 195.76 206.96 219.51 232.90 248.23 264.78 6.24 33.24 5.25 5.72 6.06 6.10 6.58 6.67 316.60 492.20 516.23 543.79 574.66 607.63 643.02 686.43 7.10 55.46 4.88 5.34 5.68 5.74 5.82 6.75 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Growth Steady, But Work To Be Done Just as is the case with both the road and rail freight sectors, air freight is set to enjoy steady growth rates over the medium term. We have pencilled in annual average growth of 6.23% over our forecast period, © Business Monitor International Ltd Page 19 Vietnam Freight Transport Report Q3 2012 with tonnage throughput increasing from 206,960 tonnes in 2012 to 264,780 tonnes by the end of 2016. In 2012, BMI forecasts y-o-y growth of 5.72%, up slightly on 2011's 5.25%. The huge double-digit growth of 2010 will be a thing of the past though. Maritime And Inland Waterways Table: Maritime Freight - Throughput, 2009-2016 ('000 tonnes) 2009 Port of Ho Chi Minh City (Saigon New) - % change y-o-y Port of Da Nang - % change y-o-y 2010 2011e 2012f 2013f 2014f 2015f 2016f 19,140.00 31,132.00 33,450.71 36,111.78 39,148.54 42,406.25 45,902.18 49,652.56 -5.15 62.65 7.45 7.96 8.41 8.32 8.24 8.17 3,132.00 3,303.04 3,394.27 3,498.97 3,618.45 3,746.62 3,915.76 4,097.21 14.21 5.46 2.76 3.08 3.41 3.54 4.51 4.63 2015f 2016f e/f = BMI estimate/forecast. Source: Port authorities Table: Inland Waterway Freight, 2009-2016 2009 Inland waterway freight, '000 tonnes - % change y-o-y Inland waterway freight, mn tonnes/km - % change y-o-y 2010 2011e 2012f 2013f 2014f 135,688.40 142,201.44 148,378.09 155,960.44 164,659.38 174,401.76 184,807.51 196,014.15 2.00 4.80 4.34 5.11 5.58 5.92 5.97 6.06 25,365.20 25,593.49 26,752.09 28,084.60 29,568.40 31,159.70 32,622.02 34,541.55 2.00 0.90 4.53 4.98 5.28 5.38 4.69 5.88 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam The Port of Ho Chi Minh will lead the way in tonnage growth rate terms over the mid term, while also dwarfing the Port of Da Nang in actual tonnage handled. We are sticking to Q212's tonnage throughput growth forecast of 7.96%, to reach 36.11mn tonnes. Over the forecast period, we expect to witness an average annual growth figure of 8.22%, reaching 49.65mn tonnes by the end of 2016. Da Nang port will see slower growth in 2012 (3.08%) when compared to Ho Chi Minh, but this figure represents a slight improvement on 2011. Between 2012 and 2016, average y-o-y growth will be 3.83%. Meanwhile, inland waterways will also enjoy healthy growth of 5.73% over the medium term, coming in slightly better than our forecast growth of 5.11% for 2012. © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q3 2012 Trade Table: Trade Overview, 2009-2016 Real 2009e 2010e 2011e 2012f 2013f 2014f 2015f 2016f Imports, real growth, % y-o-y -13.81 22.40 15.32 8.00 6.80 6.50 6.50 6.50 Exports, real growth, % y-o-y -15.00 24.81 15.00 8.90 8.00 8.00 8.00 8.00 Total trade, real growth, % y-o-y -14.40 23.61 15.16 8.45 7.40 7.25 7.25 7.25 73.27 90.90 115.19 132.94 151.12 171.73 194.26 219.72 - % change y-o-y -12.87 24.06 26.71 15.41 13.68 13.64 13.12 13.10 Exports, US$bn 63.63 80.27 101.42 118.02 135.67 156.35 179.36 205.72 - % change y-o-y -9.57 26.14 26.36 16.37 14.95 15.24 14.71 14.70 Total trade, US$bn 136.91 171.17 216.61 250.96 286.79 328.09 373.61 425.43 - % change y-o-y -11.37 25.03 26.55 15.86 14.28 14.40 13.88 13.87 Nominal Imports, US$bn e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Table: Key Trade Indicators, 2009-2016 (US$mn) 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 2,300.36 2,934.07 3,740.00 4,372.50 5,044.87 5,832.66 6,708.89 7,734.62 -4.78 27.55 27.47 16.91 15.38 15.62 15.02 15.29 2,112.00 2,678.93 3,459.79 4,030.54 4,615.22 5,278.13 6,002.55 6,829.93 -12.61 26.84 29.15 16.50 14.51 14.36 13.72 13.78 Exports 454.57 590.76 763.97 899.90 1,044.40 1,213.71 1,402.02 1,613.96 - % change y-o-y -17.85 29.96 29.32 17.79 16.06 16.21 15.52 15.12 2,651.69 3,371.43 4,362.78 5,087.37 5,829.65 6,671.25 7,590.94 8,593.95 -6.13 27.14 29.40 16.61 14.59 14.44 13.79 13.21 460.09 604.16 787.39 931.19 1,084.05 1,263.15 1,462.36 1,673.23 11.94 31.31 30.33 18.26 16.42 16.52 15.77 14.42 5,305.13 6,644.99 8,490.47 9,839.37 11,221.17 12,787.89 14,499.96 16,331.78 7.26 25.26 27.77 15.89 14.04 13.96 13.39 12.63 Agricultural raw materials Imports - % change y-o-y Exports - % change y-o-y Ores and metals Imports - % change y-o-y Iron and steel Exports - % change y-o-y Imports - % change y-o-y © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q3 2012 Table: Key Trade Indicators, 2009-2016 (US$mn) 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 29,919.67 38,212.34 48,758.49 57,035.10 65,833.57 76,142.41 -8.04 27.72 27.60 16.97 15.43 15.66 47,971.77 59,491.63 75,358.74 86,956.27 -12.02 24.01 26.67 15.39 13.66 13.63 13.11 13.02 13,275.05 16,917.99 21,550.88 25,186.76 29,051.90 33,580.54 38,617.55 44,662.10 -10.51 27.44 27.38 16.87 15.35 15.59 15.00 15.65 11,062.37 14,052.49 18,170.99 21,181.27 24,265.01 27,761.40 31,582.17 36,034.42 -19.90 27.03 29.31 16.57 14.56 14.41 13.76 14.10 2006 2007 Manufactured goods Exports - % change y-o-y Imports - % change y-o-y 87,608.50 100,625.66 15.06 14.86 98,836.82 112,307.15 127,027.23 143,571.71 Fuel Exports - % change y-o-y Imports - % change y-o-y e/f = BMI estimate/forecast. Source: UNCTAD, BMI Table: Main Import Partners, 2002-2009 (US$mn) 2002 2003 2004 2005 Mainland China 2,158.84 3,138.55 4,595.10 5,899.70 7,391.30 12,710.00 15,652.10 16,441.00 Japan 2,504.65 2,982.06 3,552.60 4,074.10 4,702.10 6,188.90 0.00 7,468.09 Korea 2,279.60 2,625.44 3,359.40 3,594.10 3,908.40 5,340.40 7,066.30 6,976.36 955.24 1,282.19 1,858.60 2,374.10 3,034.40 3,744.20 4,905.60 4,514.07 2,533.49 2,875.82 3,618.40 4,482.30 6,273.90 7,613.70 9,392.50 4,248.36 2008 2009 Thailand Singapore 2008 2009 Source: IMF's Direction of Trade Statistics Table: Main Export Partners, 2002-2009 (US$mn) 2002 2003 2004 2005 United States 2,453.15 3,939.56 5,024.80 5,924.00 7,845.10 10,104.50 11,868.50 11,355.80 Japan 2,436.96 2,908.60 3,542.10 4,340.30 5,240.10 6,090.00 8,537.90 6,291.81 Mainland China 1,518.33 1,883.12 2,899.10 3,228.10 3,242.80 3,646.10 4,535.70 4,909.03 66.67 74.67 120.20 103.90 155.70 236.90 516.90 2,486.49 1,328.33 1,420.86 1,884.70 2,722.80 3,744.70 3,802.20 4,225.20 2,276.72 Switzerland Australia 2006 2007 Source: IMF's Direction of Trade Statistics © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q3 2012 Global Oil Products Price Outlook BMI View: Refined products prices remained at record levels in Q112, with many ticking higher than in 2011. For this reason, we have decided to upwardly revise our forecasts for all fuels prices for 2012 and beyond. The adjustment is in part a result of the March revision of our benchmark crude forecasts, but it is also a more fundamental reassessment which addresses the most recent developments in the supply and demand dynamics in different fuels markets. We have also seized this opportunity to introduce a new set of forecasts for bunker fuels. When we last published our Global Oil Products Outlook markets were hoping that crude prices would fall as Libyan output recovered at a faster rate than expected and problems caused by political disruption and outages around the world receded. However, supply issues have continued to dominate, with significant outages persisting in Syria, Yemen and South Sudan. Non-OPEC production also continued to disappoint in March, with unplanned maintenance in the North Sea and Canada hitting output. Furthermore, uncertainty with regard to the sanctions imposed on Iran has led to very volatile price movements. In light of these developments, we revised our West Texas Intermediate (WTI) and Brent forecasts in February 2012 before extending this revision to our OPEC basket, Urals and Dubai benchmarks. This has also prompted a reassessment of our refined products forecasts, which are calculated by estimating the future spreads between each product and its regional benchmark – WTI for New York, Brent for Rotterdam and Dubai for Singapore. Table: BMI's Refined Products Forecasts, 2010-2016 2010 2011e 2012f 2013f 2014f 2015f 2016f Brent 80.26 111.05 115.00 110.00 108.00 106.00 102.00 WTI 79.51 95.05 100.00 95.00 98.00 98.00 96.00 Dubai 78.10 106.15 112.00 107.25 105.50 103.50 99.50 Rotterdam 91.32 127.91 133.54 127.98 125.44 122.92 118.41 New York 91.87 128.24 134.32 129.33 125.33 123.33 119.33 Singapore 90.07 125.67 127.00 119.25 116.66 113.88 109.15 Global 91.09 127.27 131.62 125.52 122.48 120.04 115.63 Rotterdam 90.28 125.59 133.00 127.10 124.25 121.43 116.66 New York 90.70 124.72 133.32 124.99 122.99 120.99 116.99 Crude benchmarks Jet fuel Gasoil/diesel © Business Monitor International Ltd Page 23 Vietnam Freight Transport Report Q3 2012 Table: BMI's Refined Products Forecasts, 2010-2016 2010 2011e 2012f 2013f 2014f 2015f 2016f Singapore 90.26 126.26 127.25 119.73 116.90 113.99 108.94 Global 90.42 125.52 131.19 123.94 121.38 118.80 114.20 Rotterdam 85.75 114.42 121.57 116.11 113.71 111.33 106.98 New York 89.14 119.30 124.25 117.06 115.06 113.06 109.06 Singapore 88.43 119.91 125.76 119.63 116.65 113.53 108.53 Global 87.77 117.88 123.86 117.60 115.14 112.64 108.19 Rotterdam 81.01 106.07 112.51 108.76 108.50 105.00 101.10 Singapore 78.94 102.46 108.05 105.67 105.83 102.11 98.25 Global 79.97 104.26 110.28 107.22 107.17 103.55 99.67 Rotterdam 70.89 97.27 105.00 101.00 99.90 98.71 95.44 New York 73.64 101.09 109.00 101.46 99.46 97.46 93.46 Singapore 71.97 100.14 108.08 103.73 102.33 100.64 96.93 Global 72.17 99.50 107.36 102.06 100.56 98.94 95.28 Rotterdam 68.46 94.03 101.55 98.07 97.22 95.98 92.95 New York 70.76 97.13 106.00 98.87 96.87 94.87 90.87 Singapore 70.86 98.94 107.09 102.83 101.43 99.74 96.03 Global 70.03 96.70 104.88 99.92 98.50 96.86 93.28 Rotterdam 69.68 95.65 103.28 99.54 98.56 97.35 94.19 New York 72.20 99.11 107.50 100.16 98.16 96.16 92.16 Singapore 71.41 99.54 107.59 103.28 101.88 100.19 96.48 Global 71.10 98.10 106.12 100.99 99.53 97.90 94.28 Gasoline Naphtha Bunker fuel 180 Bunker fuel 380 Bunker fuel e/f = estimate/forecast. Source: Bloomberg, BMI However, rather than a simple adjustment aimed at bringing our fuels forecasts in line with our upstream expectations, the latest revision addresses the more fundamental aspects of the global and local supply and demand dynamics that are in play in downstream markets. The broader picture appears to be rather bleak and we expect both refiners and customers will continue to struggle, as they did in 2011. Record © Business Monitor International Ltd Page 24 Vietnam Freight Transport Report Q3 2012 high crude prices will continue to eat into refining margins as downstream operators attempt to pass on rising feedstock costs to their customers via higher end-product prices. With regard to customers, we have identified the four main markets using the products they each use most often: kerosene in the aviation sector, gasoline and diesel for retail users and land freight operators, naphtha in the petrochemicals industry and bunker fuel for the shipping sector. All of these sectors are set to suffer from record-high fuel prices in both the short term and the longer term. Indeed, although we anticipate prices will begin to recede in 2013, our forecasts suggest that they will remain elevated for the foreseeable future due to stubbornly high crude prices, but also due to wider crack spreads. As the refining industry is restructured, and many operators are forced to shut down, often inelastic demand will have to be met by a shrinking pool of suppliers. In a nutshell, refiners and their customers will be forced to bite the bullet in 2012 as they did in 2011. However, we do see the two industries' fates diverging over the course of the year. Many refiners, forced to incur colossal losses in recent years, have fallen into bankruptcy or have had to shut some of their plants, which implies that the surviving operators now have greater market power (depending on the region) and will be able to pass on rising costs to their customers. Meanwhile, inelastic demand will mean customers will be price-takers rather than price-makers. Refiners: Faltering Light At The End Of The Tunnel With regard to downstream operators, BMI sees three main geographic blocks emerging: North America, emerging markets and Europe. In the US, although higher feedstock prices have caused many refineries to close in the north east, cheap domestic crudes in the Midwest, Rockies and on the Gulf Coast have generated very high margins. Rising gasoline margins, compounded by growing diesel export volumes to booming Latin American markets, offer substantial opportunities for growth, particularly in the Gulf Coast region. In emerging markets, high crude prices have forced many governments to revise their fuel subsidies. Although we still expect many refiners to incur losses in 2012, as they will still be expected to perform their 'national duty' and provide cheap energy to fuel growth, their prospects are clearly improving. Indeed, India, Iran, Nigeria, Indonesia and China, among others, have all liberalise prices – or are expected to – to different degrees. This offers growth opportunities not only for domestic operators but also, in some cases, for foreign operators. In Europe the outlook is much bleaker, with many plants shutting or being mothballed. Europe's largest independent refiner, Petroplus, was forced to file for insolvency in January 2012. Neighbouring emerging markets, rather than offering prospects for export, are a source of competition, as Russia, the Middle East, North Africa and even India, enjoy cheap feedstock and are constantly raising capacity and standards. Mediterranean refiners will continue to suffer much more than their North West European counterparts, as they are more exposed to this direct competition. Consequently, operators willing to © Business Monitor International Ltd Page 25 Vietnam Freight Transport Report Q3 2012 approach the European market would be better advised to invest in neighbouring oil-rich countries, particularly in India and the Middle-East, as these countries also have access to booming Asian markets. Emerging Downstream Powers Refining Capacity, 2011-2021 (% change y-o-y) e/f = estimate/forecast. Source: BMI However, we have noticed that refining margins are starting a slow and difficult recovery and, as more operators are forced out of business by this cyclical downturn, the surviving companies will record greater profits, or at least contain their losses. Therefore, the first glimpses of a recovery are emerging. Nonetheless, this will be a slow process and many refiners will remain under intense pressure for the foreseeable future. Moreover, a worsening eurozone crisis and uncertainty over economic growth pose clear downside risks to this outlook. Jet fuel: Battling Spiking Kerosene Prices And Falling Trade Volumes Despite slowing demand on the back of macroeconomic factors, the price of jet fuel is ticking up, with BMI projecting an average global price of US$131.62 per barrel (bbl) in 2012 compared to US$127.27/bbl in 2011. With kerosene being at the lighter end of the barrel, any price movement seen in benchmark crudes will be amplified, thus making it harder for airline and air freight companies to hedge against the risks posed by volatile fuel prices. The only region still displaying any real year-on-year (y-o-y) growth in air freight volumes is the Middle East, with carriers such as Emirates and Etihad expanding capacity. Other flag carriers are growing more wary, as rising fuel costs place pressure on their bottom lines and demand falls, indicating a tough year for the sector in 2012. © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q3 2012 Flying Low IATA Global Air Freight Traffic Growth, January 2010-February 2012 (% y-o-y) Source: International Air Transport Association (IATA) Operators are already starting to react to the squeeze and some of them, such as Qantas, are experimenting with biofuels. The Australian firm has signed agreements with two manufacturers of alternative aeroplane fuels: Solazyme, which is developing algae-based fuels, and Solena, which is working on water-based fuels. Virgin announced in October 2011 that it was working on a new lowcarbon aviation fuel for Virgin Atlantic and the firm hopes to have a testing facility located in Australia by 2013. UK-based Thompson carried out its first flight using alternative fuels in October 2011, and other companies, including KLM, Lufthansa, Finnair, Aeromexico, United Airlines and Alaska Airlines, have shown interest in this technology. Nonetheless, alternative fuels do not yet present a price-effective alternative to oil-based products and there development on an industrial scale is still many years away. BMI, therefore, believes that more companies will be tempted to react to the squeeze by following Cathay Pacific's example. The Hong Kong-based company has made the decision to park two of its older freighters, a strategy we believe will become more prevalent in 2012. Gasoline And Diesel: Prices Reach A Zenith Our average global gasoline price was US$20/bbl higher in 2011 at US$117.88/bbl than in 2010, and we expect prices to persist at this level in 2012, when we forecast they will reach US$123.86/bbl. However, we believe pressure on consumers has led to significant demand destruction, which means that prices will have to come down over the coming months. © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q3 2012 Although miles travelled in the US started growing again month-on-month (m-o-m) in December 2011 and January 2012, after nearly a whole year of m-o-m declines, y-o-y growth remains negative. Meanwhile, US intercity bus services, which expanded 7.10% in 2011, are set to continue to grow in 2012 thanks to the fact the US consumers are using their private cars more sparsely in reaction to rising gasoline prices. Additionally, light vehicle sales were up 13.80% y-o-y in the first two months of 2012, as more individuals replace their old vehicles with more fuel-efficient models. Thus, the total number of light vehicles sold in February 2012 accounted for combined fuel consumption of 23.9 miles per gallon (mpg), an improvement on the previous record of 23.5mpg set in January 2012. This trend indicates that more consumers are turning towards diesel cars, which tend to be more efficient. Hart Energy estimates that diesel engines carry vehicles 25% further per tank than gasoline engines. Although diesel only powers about 3% of US passenger vehicles, this figure could reach 8% by 2025, according to Allen Schaeffer, executive director of the Diesel Technology Forum. The Slow Movement Kilometres Travelled In The US, January 2011-January 2012 Source: US Federal Highway Administration Diesel car and truck sales in the US jumped by 35% in Q112, with sales of hybrid vehicles up 37%. This trend has also been observed in other countries such as the UK, where the market share for diesel cars increased from 48.50% in Q111 to 50.40% in Q112, while the market share held by gasoline vehicles fell from 50.10% in Q111 to 48.20% in Q212. Growth in diesel demand has also been buoyed by tightening fuels standards across the globe. Meanwhile, the shutdowns or mothballing of numerous refineries in diesel markets, as is the case with the bankruptcy of Petroplus, points to shrinking supply at a time of rising demand. The shutdown of several © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q3 2012 refineries in the US north east suggests that the region will have to rely nearly entirely on other states for its fuels needs, something that will be even more prevalent with regard to diesel. Consequently, we see much more upside potential to diesel prices than we do for gasoline. This is reflected in our forecasts, which see global diesel prices appreciating by an average of 4.52% in 2012 to US$131.19/bbl. Naphtha: Asia Stays Afloat While Europe Sinks Unlike kerosene, naphtha, which is closer to the bottom end of the barrel, trends closer to benchmark crudes. BMI is projecting an average global price of US$108.05/bbl in 2012 compared to US$102.46/bbl in 2011. The rise in prices will be fuelled both by higher crude prices and by narrowing spreads. According to our revised forecasts, Rotterdam will see its naphtha crack spread (compared to Brent) increase from -US$4.98/bbl in 2011 to US$0.50/bbl in 2014, while Singapore will see its naphtha crack spread rise from -US$3.69/bbl (against the Dubai Fateh) in 2011 to US$0.33/bbl in 2014. A stronger appreciation of naphtha in Europe will hurt the continent's already ailing petrochemicals markets. In reality, naphtha's relatively small price differential with regional benchmark crudes implies similar trends for profit margins in the petrochemicals industry and in the refining sector. Hop And Stop Naphtha Crack Spreads, 2009-2016 (US$/bbl) f = forecast. Source: BMI, Bloomberg Much like the downstream segment, the European petrochemicals industry is facing a cyclical downturn, which implies that Indian and Middle Eastern operators could strengthen their presence on the continent. Furthermore, as our Asian naphtha forecast is indexed on Dubai Fateh crude, Middle Eastern petrochemicals operators will benefit from lower feedstock costs than their European counterparts that use Brent-indexed naphtha. © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q3 2012 Bunker Fuels: High Fuel Costs Put Struggling Shipping Sector Under Pressure BMI identifies a similar situation to the aviation sector in the shipping sector, with bunker prices increasing despite macroeconomic factors pointing to a slowdown in trade. Higher bunker prices were one of the major reasons behind losses for many carriers in 2011. In the box shipping sector for example, Maersk Line and Hapag-Lloyd , two lines that publish their fuel costs, saw their average fuel price per tonne increase by 35.4% and 12% y-o-y to US$620mn and US$679mn respectively. Our forecasts, calculated based on an unweighted average of Bunker fuel 180 and 380 for each of the three regions we cover, will not give the industry cause for celebration. BMI estimates that the global bunker fuel average will increase by 8.2% y-o-y, from US$98.10/bbl in 2011 to an average of US$106.12/bbl in 2012. This leaves carriers with very little room for manoeuvre. Sinking Ship Suez Canal Throughput Container Ship Net Tonne, February 2010-March 2012 (% change y-o-y) Source: Suez Canal Authority Slowsteaming and super slowsteaming, are being rolled out in a bid to save fuel. Carriers have also tried to pass along their fuel costs to shippers. We expect this strategy to continue over 2012, although it could cause problems and strain liner-shipper relations. As was the case during the last bunker fuel price peak in 2008, carriers are looking at alternative fuel sources, with liquefied natural gas (LNG) now being considered as a possible shipping fuel. Det Norske Veritas (DNV), a ship classification bureau, estimates that 19-45% of ships will be powered by LNG by 2030. While Maersk Line wants to test biofuels, and NYK Line is trialling a solar power-assisted car carrier, BMI believes that the most likely alternative to bunker fuel will ultimately be LNG. However, this remains a long-term prospect and high fuel costs over coming years will place a great deal of pressure on carriers and shippers alike. © Business Monitor International Ltd Page 30 Vietnam Freight Transport Report Q3 2012 Political Outlook Further Reforms Crucial In Reinforcing Confidence In The CPV BMI View:Despite growing concerns that recent political uprisings in the Middle East would spread towards other authoritarian regimes including Vietnam, we believe that the risk of a major political upheaval in Vietnam remains remote in the medium term. We note that there has been a decisive shift in the Communist Party of Vietnam (CPV)'s direction towards allowing for democratic reforms and addressing rampant corruption. We believe that further reforms will be crucial in reinforcing confidence in the CPV's leadership over the coming years. The need for political reforms has become increasingly crucial in reinforcing public confidence in Vietnam's single-party system of government, which the ruling Communist Party of Vietnam (CPV) has fervently tried to defend over the decades. In light of the recent political turmoil in the Middle East and large-scale protests against authoritarian governments in countries such as China and Russia, international political observers are beginning to warn of a similar political uprising in Vietnam. From our perspective, we believe that examples of successful uprisings in the Middle East, which have toppled authoritarian governments and paved the way for democratic reforms in the case of Libya and Egypt, could in turn, fuel political dissidents' desire for reforms in Vietnam. Indeed, the threat of social instability, which is why we are keeping a score of 57.5 (out of a score of 100) for the 'Social Stability' subcomponent of our political risk rating. This translates into a score of 76.9 for our overall short-term political risk rating for Vietnam. However, we believe that concerns of a major political upheaval are unwarranted, at least for now. Conditions In Vietnam Are Starkly Different We note that several factors separate Vietnam from countries that have experienced some form of major political uprising in recent years. Firstly, in terms of the direction of the CPV's economic policies over the past decade, we have witnessed a great amount of effort from the government in ensuring that the lowerincome population has been given a fair chance to participate in the country's growth. Although the poverty rate in Vietnam remains relatively high, we have witnessed a significant improvement from 22.0% in 2005 to 9.5% in 2010. A large proportion of the lower-income groups have also benefited from the government's economic policies in recent years. The agricultural sector, which employs a dominating share of the country's low-skilled workers, continues to enjoy considerable amount of financial support from the government in terms of preferential lending rates from state-owned banks. Government-led investment in the development of the agricultural sector has also helped to improve productivity and boost rural incomes. Although such policies have contributed to Vietnam's deteriorating fiscal position, these subsidies have at least helped to mitigate unrest among the lower-income groups. Secondly, we note that although land rights violations and corruption remain rampant in Vietnam and have been a key source of dissent against the government, we have at least witnessed a strong commitment by the CPV to address these problems in recent years. According to the Transparency International 's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries, an © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q3 2012 encouraging improvement from the country's previous ranking of 116 out of 178 countries in 2010. The increase in incidents of public unrest globally is expected to put further pressure on the CPV to speed up efforts on this front and we believe that addressing corruption will remain on top of the government's agenda in 2012. Indeed, success in tackling corruption would represent a major step in reinforcing confidence in the CPV's leadership and this would, in turn, boost the CPV's credibility in pushing forward with further political reforms over the coming years. A Decisive Shift Towards Further Reforms In recent years, we have witnessed a decisive shift in the CPV's policymaking process whereby senior conservative members within the politburo have taken a step back from economic policy decisions and more towards a supervisory role within the CPV. The National Assembly - a 493-member unicameral body that is re-elected every five-years - has also been given more power in setting the direction of the country's economic policies. We see these developments as a positive sign that the government will allow for more economic reforms while taking further steps in the direction of democratic reforms. More importantly, we believe that these reforms will be crucial for the country in extending its economic footprint globally and we expect further progress on this front over the coming years. Long-Term Political Outlook Key Political Challenges Over The Coming Decade BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US. Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam's (CPV) monopoly on political power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a more pluralistic society over the coming decade and beyond. Indeed, the CPV's strict control of the media and political opinion is already cracking, with a growing number of internet bloggers becoming increasingly critical of government policy. Challenges And Threats To Stability Inflation and devaluation as drivers of discontent: As in neighbouring China, economic growth has brought sizeable material gains for the majority of the population. However, the Vietnamese government's loose fiscal and monetary policies have led to high levels of inflation and repeated devaluations of the dong in recent years, which have eroded the real value of wages and savings. A failure to contain inflation at a reasonable level and uphold the real value of the dong could undermine confidence in the regime. © Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q3 2012 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. That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respective politburos have decreased tension between them. Nonetheless, we believe Vietnam will seek increasingly close relations with the US - and potentially India and Japan - in the defence sphere, as a hedge against China's rising power in the region. Vietnam's long-term political risk rating of 53.8/100 is weighed down by a score of 27.6 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these © Business Monitor International Ltd Page 33 Vietnam Freight Transport Report Q3 2012 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 Communist Party of Vietnam (CPV) to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older more traditionally-minded party members. However, intermittent periods of harsh repression against prodemocracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best Case Scenario: Gradual Political Liberalisation Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held but only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan, and Japan have shown that even dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario: Mass Unrest And Violent Suppression Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe that at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Ltd Page 34 Vietnam Freight Transport Report Q3 2012 Macroeconomic Outlook Global Headwinds To Depress Real GDP Growth In 2012 BMI View: Vietnam's real GDP growth is expected to remain subdued at 5.8% in 2012, in line with our view that external demand will continue to cool over the coming months. We expect net exports to remain a major drag on growth before we see a recovery in external demand in late-2012. The threat of a severe credit squeeze due to growing risk aversion towards heavily indebted emerging markets places further downside risk to our outlook on Vietnam's economic growth. Preliminary figures published by the General Statistics Office (GSO) showed that Vietnam's real GDP growth is expected to come in at around 5.9% in 2011, closely in line with our forecast of 6.0%. We are convinced that real GDP growth will remain subdued at 5.8% in 2012 (compared to the government's target of 7.0%) before we see a recovery in external demand, which is expected to come only in late2012. Manufacturing sector growth is expected to experience a significant slowdown, potentially resulting in higher unemployment. Furthermore, falling crop prices are also having a negative impact on rural incomes. We believe these factors will translate into a slowdown in private consumption growth in 2012. Given that Vietnam remains heavily reliant on foreign capital inflows to fuel investment, we are increasingly concerned that growing risk aversion towards heavily indebted emerging markets could be detrimental to Vietnam's short-term economic growth. However, we are seeing positive signs of a shift in the Vietnamese government's traditional pro-growth stance towards a more balanced and sustainable growth model. This supports our view that policymakers will avoid introducing aggressive public spending programs to boost growth. While this suggests 2012 growth will miss the government's target, we see this as a positive for the long-term outlook. Private Consumption Unlikely To Avert Slowdown Our view that manufacturing sector growth will continue to cool in 2012 will be negative for private consumption growth. We note that the manufacturing sector makes up 19.4% of GDP and remains a key driver of the economy, contributing 2.1 percentage points (pp) to real GDP growth of 5.9% in 2011. Furthermore, the industrial sector - which includes the manufacturing and constructions sub-sectors presently employs an estimated 22.4% of the labour force. Given that the US, eurozone and China remain the largest export destinations for Vietnam and that our global team expects growth to remain depressed in these markets, we are skeptical that the manufacturing sector will be able to avert a slowdown over the coming months. Thus, we see an increasing likelihood that a slowdown in external demand could eventually result in higher unemployment in the manufacturing sector. In terms of the agricultural sector, which remains the largest source of employment in Vietnam (40.0% of the labour force), we believe that falling crop prices will have a negative impact on rural incomes. This presents further downside risks to our outlook for private consumption growth. On the whole, our view © Business Monitor International Ltd Page 35 Vietnam Freight Transport Report Q3 2012 that external demand will only see a recovery in late-2012 compels us to pencil in a subdued private consumption growth of 5.7% in 2012, compared to 6.4% in 2011. Credit Squeeze To Delay Investment Projects Back in December, we mentioned that the growing risk of a credit squeeze in Asia - largely a result of the unfolding eurozone debt crisis - was becoming a serious threat to trade and economic growth in the region (see 'Credit Squeeze A Destabilising Risk In The Region', December 20). With the Vietnamese economy being heavily reliant on European bank funding, we warn that difficulties in obtaining financing would force businesses to delay investment projects. Furthermore, growing risk aversion suggests that foreign direct investment (FDI) inflows could also shrink as multi-national companies (MNCs) attempt to strengthen their balance sheets and reduce their portfolio exposure to emerging markets. Having said that, we are expecting 400bps worth of rate cuts in 2012 (taking the central bank's policy rate from 15.00% to 11.00% by end-2012) and this could perhaps cushion the impact of a credit squeeze coming from European banks. Nonetheless, foreign capital inflows have played a key role in driving gross fixed capital formation (GFCF) growth in recent years and we believe that the above factors will keep GFCF growth depressed over the coming months. Unless we see a recovery in investor sentiment (not our core view), we are keeping our forecasts for GFCF growth to remain subdued at 5.1% in 2012. Growing Fiscal Debt Burden To Keep Public Spending In Check The unfolding sovereign debt crisis in the eurozone has severely undermined foreign investors' confidence in heavily indebted countries. We believe that this will, to a certain extent, help deter Vietnamese policymakers from taking on further debt to fund public spending programs to boost growth. Indeed, we are beginning to witness a shift in the government's traditional pro-growth stance, with Prime Minister Nguyen Tan Dung reiterating the government's resolve in maintaining a more stable and sustainable growth model. Although we expect welfare subsidies to remain large in light of a challenging economic environment in 2012 and our view that rural incomes could decline as a result of falling crop prices, we believe spending cuts will come from government-funded investment projects. The Vietnamese government's resolve to bring down inflation even at the expense of slower economic growth in 2012, suggests that public spending will be kept in check. Accordingly, we expect public spending growth to ease from 5.9% in 2011 to 5.0% in 2012. Trade Deficit Set To Stay An 8.5% devaluation in the Vietnamese dong in the beginning of 2011 has helped to reduce Vietnam's trade deficit from US$12.1bn in 2010 to US$9.3bn in 2011. However, we warn that external demand may turn out to be weaker than we initially expected. Thus, it is possible to see the trade deficit widen in 2012. As mentioned before, as our global team is pencilling in a bleak outlook for eurozone, US and China growth, we in turn expect Vietnamese export growth to ease from an expected 15.0% in 2011 to 8.9% in 2012. Consequently, we continue to see net exports as a key drag on growth and we are happy to maintain our forecast for real GDP growth to come in at 5.8% in 2012, down from 5.9% in 2011. © Business Monitor International Ltd Page 36 Vietnam Freight Transport Report Q3 2012 Table: Vietnam - Economic Activity, 2011-2016 2011e 2012f 2013f 2014f 2015f 2016f Nominal GDP, VNDbn 2 2,487,631.9 2,854,800.0 3,195,190.0 3,617,838.8 4,077,805.6 4,597,168.3 Nominal GDP, US$bn 2 120.4 135.7 153.6 175.9 200.6 228.7 5.9 5.8 6.5 7.3 7.3 7.4 1,357 1,512 1,694 1,921 2,170 2,452 88.8 89.7 90.7 91.6 92.4 93.3 Industrial production 1,4 index, % y-o-y, ave 14.0 9.0 16.0 14.0 13.0 12.0 Unemployment, % of 4 labour force, eop 5.0 5.0 5.0 5.0 5.0 5.0 Real GDP growth, % 2 change y-o-y GDP per capita, US$ Population, mn e 2 3 f 1 2 Notes: BMI estimates. BMI forecasts. at 1994 prices; Sources: Asian Development Bank, General Statistics 3 4 Office. World Bank/UN/BMI; General Statistics Office. © Business Monitor International Ltd Page 37 Vietnam Freight Transport Report Q3 2012 Company Profiles Vietnam Airlines Cargo 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 belly hold 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 belly holds of aircraft in the future. Threats While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the domestic market. In 1993, it was established as Vietnam's national carrier. The cargo carrier's operations are concentrated in Asia, catering for the domestic market. The airline operates its cargo business by transporting goods in the belly holds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing: China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to other Chinese airports. It has also developed routes to Australia, with freight connections to Melbourne and Sydney. Allied to Vietnam Airlines Cargo's cargo links to three destinations in Europe (Paris, Frankfurt and Moscow), 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 belly holds of planes going to and from London. Financial Results 2011 Not available at the time of writing. © Business Monitor International Ltd Page 38 Vietnam Freight Transport Report Q3 2012 Latest Activity BMI notes that air freight volumes throughout the Asia Pacific region, including Vietnam, have been particularly buffeted by global macroeconomic headwinds. Volumes from the region are reliant on Western demand in the key markets of the eurozone and US for consumer electronics. With BMI forecasting a recession in the eurozone in 2012, and continued sluggish growth in the US, consumer confidence in purchasing expensive discretionary items has fallen. Asia Pacific has been one of the underperforming regions in recent months, according to IATA freight tonne-km monthly year-on-year (y-o-y) growth figures. Over the 12 months to February (last available data), the Asia Pacific region averaged monthly y-o-y growth of -5.0%, compared to the global figure of -1.4%. Over the coming 12 months, we see little scope for improvement in this scenario. © Business Monitor International Ltd Page 39 Vietnam Freight Transport Report Q3 2012 Vinatrans Strengths Vinatrans is a diversified logistics company, offering a wide variety of services. Weaknesses The company is exposed to the weaknesses inherent in state-owned companies, such as inefficiency and underfunding. Opportunities BMI has identified intra-Asia trade as a market to watch, as consumer demand in the traditional markets of the US and Europe remains sluggish. Vietnam is part of the ASEAN 5. As such, it should see an uptick in trade as a result of the group's free trade agreement (FTA) with China. Threats Rising fuel prices pose a threat to logistics companies' profit margins. The rate of economic growth in Vietnam has far outpaced the country's infrastructure. Road, railways and ports are all badly in need of upgrades. Overview Vinatrans is a state-owned Vietnamese freight forwarding company, providing door-to-door logistics worldwide and a number of related services. These include air freight and sea freight forwarding (including customs clearance, cargo surveying, insurance, air consolidation for inbound and export cargoes, and exhibition or project handling), shipping (including chartering, husbandry, crewing, and brokerage services) as well as warehousing and cold storage provision. The company is 100% owned by the Vietnamese Ministry of Trade and acts as an agent for several foreign organisations including BAX Global, Hapag-Lloyd Container, Zim Israel Navigation Company and Panalpina. The firm's warehousing and storage facilities in 2 Vietnam include: a 2,500 square metre (m ) Container Freight Station (CFS) for sea and air 2 cargo; a joint venture (JV) cold storage facility of 2,800m , run by Vinatrans and Konoike 2 2 Transport Company of Japan; 40,000m of covered warehousing; and 50,000m of open storage. Strategy BMI has been following the trend of increasing investment in the Vietnamese port sector as the country establishes itself as a centre of production, particularly for the textile industry. We caution, however, that as many factories are situated inland, investment in the supply chain as a whole, including road, air, rail and storage, are needed to deal with increasing demand. Having declined by 10% year-on-year (y-o-y) in 2009, Vietnamese exports returned to growth in 2010. The volume of imports and exports is forecast to grow by 20% in 2011. According to the Civil Aviation Authority of Vietnam, air freight to and from the country increased by 37% y-o-y to reach 340,000 tonnes in 2010. As such, we see growth opportunities for Vinatrans in the sector. We note that several air cargo carriers have already spotted the potential in the market. Chinese carrier Jade Cargo has recently opened the first air freight link between Vietnam and Amsterdam. In 2009 Lufthansa Cargo, the air freight subsidiary of Deutsche Lufthansa, launched a weekly direct service between Frankfurt and Hanoi, which it is considering doubling in the future to keep up with demand. From late-June 2011, Vietnam Airlines is planning to increase its flights between Hanoi and Paris, Hanoi and Moscow, and Hanoi and Frankfurt, which could potentially mean an increase in the amount of freight carried on the routes. © Business Monitor International Ltd Page 40 Vietnam Freight Transport Report Q3 2012 Financial Results Vinatrans has reported consolidated earnings for the second quarter and first half of 2010. In Q210, the company made a net profit of VND5.06bn on revenues of VND 109.42bn, versus VND 3.42bn and VND62.99bn respectively in the same period of 2009. The company made a net profit of VND9.94bn in H110, down 14.16% on a year earlier. Net revenues, however, rose 44.05% y-o-y to VND189.08bn during the period. Six-month earnings per share (EPS) were VND1,816, compared to VND2,117 in the same period in 2009. The company was targeting pre-tax profit of VND23bn on revenues of VND300bn for 2010, and a dividend payout equivalent to VND1,500 per share for the year. Latest Activity Vietnam Freight Forwarders Association Fears Logistics Companies Too Small According to the Vietnam Freight Forwarders Association (Viffas), Vietnam now has more than 1,000 enterprises which provide logistics services, most of which (about 600-700 enterprises) are located in Ho Chi Minh City. Commenting on the capabilities of the enterprises, Mai Xuan Thieu, head of the Vietnam Logistics Institute, said the majority have a modest capital of VND1-1.5bn. As a result, most Vietnamese logistics firms act as agents for multinational groups. Thieu believes that many are not capable of providing enough transport services in Vietnamese territory with competitive costs. Currently, Vietnamese companies can only meet 25% of total domestic demand. BMI believes this is a cause for concern, given that we expect the country's trade volumes to continue growing. © Business Monitor International Ltd Page 41 Vietnam Freight Transport Report Q3 2012 Country Snapshot: Vietnam Demographic Data 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 2011, the change in the structure of the population between 2011 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. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 42 Vietnam Freight Transport Report Q3 2012 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2012f 2015f 2020f 67,102 74,008 78,758 83,161 87,848 89,730 92,443 96,355 0-4 years 9,340 9,212 7,002 6,776 7,186 7,186 7,026 6,529 5-9 years 8,685 9,193 9,124 6,921 6,703 6,885 7,143 6,982 10-14 years 7,504 8,604 9,142 9,038 6,844 6,539 6,668 7,104 15-19 years 7,127 7,408 8,535 9,064 8,963 8,161 6,806 6,628 20-24 years 6,492 7,003 7,305 8,420 8,954 9,115 8,892 6,745 25-29 years 5,893 6,361 6,879 7,167 8,284 8,602 8,862 8,803 30-34 years 4,884 5,779 6,250 6,765 7,058 7,475 8,202 8,779 35-39 years 3,965 4,794 5,688 6,163 6,677 6,770 6,991 8,131 40-44 years 2,420 3,884 4,710 5,614 6,086 6,304 6,609 6,925 45-49 years 2,039 2,358 3,802 4,653 5,548 5,761 6,012 6,536 50-54 years 1,933 1,968 2,287 3,739 4,580 4,936 5,449 5,914 55-59 years 1,946 1,843 1,887 2,201 3,617 4,001 4,446 5,305 60-64 years 1,544 1,822 1,737 1,767 2,076 2,573 3,455 4,268 65-69 years 1,283 1,391 1,659 1,582 1,621 1,649 1,927 3,233 70-74 years 919 1,084 1,194 1,439 1,389 1,384 1,438 1,729 1,127 1,305 1,559 1,852 2,264 2,388 2,516 2,743 Total 75+ years f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 43 Vietnam Freight Transport Report Q3 2012 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2012f 2015f 2020f 0-4 years 13.92 12.45 8.89 8.15 8.18 8.01 7.60 6.78 5-9 years 12.94 12.42 11.58 8.32 7.63 7.67 7.73 7.25 10-14 years 11.18 11.63 11.61 10.87 7.79 7.29 7.21 7.37 15-19 years 10.62 10.01 10.84 10.90 10.20 9.10 7.36 6.88 20-24 years 9.68 9.46 9.27 10.13 10.19 10.16 9.62 7.00 25-29 years 8.78 8.60 8.73 8.62 9.43 9.59 9.59 9.14 30-34 years 7.28 7.81 7.94 8.14 8.03 8.33 8.87 9.11 35-39 years 5.91 6.48 7.22 7.41 7.60 7.55 7.56 8.44 40-44 years 3.61 5.25 5.98 6.75 6.93 7.03 7.15 7.19 45-49 years 3.04 3.19 4.83 5.59 6.32 6.42 6.50 6.78 50-54 years 2.88 2.66 2.90 4.50 5.21 5.50 5.89 6.14 55-59 years 2.90 2.49 2.40 2.65 4.12 4.46 4.81 5.51 60-64 years 2.30 2.46 2.21 2.12 2.36 2.87 3.74 4.43 65-69 years 1.91 1.88 2.11 1.90 1.85 1.84 2.08 3.36 70-74 years 1.37 1.46 1.52 1.73 1.58 1.54 1.56 1.79 75+ years 1.68 1.76 1.98 2.23 2.58 2.66 2.72 2.85 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 44 Vietnam Freight Transport Report Q3 2012 Table: Vietnam's Key Population Ratios, 1990-2020 1990 1995 2000 2005 2010 2012f 2015f 2020f 75.5 71.2 60.5 49.7 42.1 40.9 40.6 41.6 Dependent population, 2 total, '000 28,859 30,790 29,679 27,609 26,006 26,031 26,717 28,321 Active population, % of 3 total 57.0 58.4 62.3 66.8 70.4 71.0 71.1 70.6 Active population, total, 4 '000 38,243 43,218 49,079 55,552 61,842 63,699 65,725 68,034 Youth population, % of 5 total working age 66.8 62.5 51.5 40.9 33.5 32.4 31.7 30.3 Youth population, total, 6 '000 25,529 27,009 25,268 22,735 20,732 20,610 20,837 20,615 Pensionable population, 7 % of total working age 8.7 8.7 9.0 8.8 8.5 8.5 8.9 11.3 Pensionable population, 8 '000 3,330 3,780 4,411 4,874 5,274 5,421 5,881 7,706 Dependent ratio, % of 1 total working age 1 2 3 f = BMI forecast; 0>15 plus 65+, as % of total working age population; 0>15 plus 65+; 15-64, as % of total 4 5 6 7 8 population; 15-64; 0>15, % of total working age population; 0>15; 65+, % of total working age population; 65+. Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2012f 2015f 2020f Urban population, % of total 20.3 22.2 24.3 26.4 28.7 29.7 31.2 33.9 Rural population, % of total 79.7 77.8 75.7 73.6 71.3 70.3 68.8 66.1 Urban population, '000 13,438.6 16,201.6 18,865.4 21,940.1 25,212.5 26,649.9 28,842.1 32,664.4 Rural population, '000 52,761.4 56,778.4 58,770.0 61,166.2 62,635.9 63,080.4 63,600.5 63,690.7 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 45 Vietnam Freight Transport Report Q3 2012 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part of all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Transport Industry There are a number of principal criteria that drive our forecasts for each transport variable: GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI’s own macroeconomic and demographic forecasts. © Business Monitor International Ltd Page 46 Vietnam Freight Transport Report Q3 2012 Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: 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. Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Ltd Page 47 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... 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 © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q3 2012 Vietnam' s railway transport sector has just one operator, the Vietnam Railway Corporation (VRC),... the year Also, Vietnam' s largest export partner, China, is set to see a cooling of GDP growth in both 2012 and 2013 This suggests that production activity in the manufacturing sector and other export-based industries could face difficulties, with a negative effect on the freight transport industry expected © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q3 2012 Retail sales... of Vietnam Growth Steady, But Work To Be Done Just as is the case with both the road and rail freight sectors, air freight is set to enjoy steady growth rates over the medium term We have pencilled in annual average growth of 6.23% over our forecast period, © Business Monitor International Ltd Page 19 Vietnam Freight Transport Report Q3 2012 with tonnage throughput increasing from 206,960 tonnes in 2012. .. costs place pressure on their bottom lines and demand falls, indicating a tough year for the sector in 2012 © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q3 2012 Flying Low IATA Global Air Freight Traffic Growth, January 2010-February 2012 (% y-o-y) Source: International Air Transport Association (IATA) Operators are already starting to react to the squeeze and some of them,... community If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble © Business Monitor International Ltd Page 34 Vietnam Freight Transport Report Q3 2012 Macroeconomic Outlook Global Headwinds To Depress Real GDP Growth In 2012 BMI View: Vietnam' s real GDP growth is expected to remain subdued at 5.8% in 2012, in line with... in 2012 (3.08%) when compared to Ho Chi Minh, but this figure represents a slight improvement on 2011 Between 2012 and 2016, average y-o-y growth will be 3.83% Meanwhile, inland waterways will also enjoy healthy growth of 5.73% over the medium term, coming in slightly better than our forecast growth of 5.11% for 2012 © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q3 2012. .. 13.90 6.47 6.97 7.30 7.27 6.85 7.31 Road freight, mn tonnes/km 30,261.40 34,467.73 36,840.47 39,562.62 42,611.29 45,867.56 49,182.10 52,897.32 - % change y-o-y 8.20 13.90 6.88 7.39 7.71 7.64 7.23 7.55 e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 18 Vietnam Freight Transport Report Q3 2012 Road Freight Continues To Dominate We are predicting.. .Vietnam Freight Transport Report Q3 2012 Vietnam Business Environment SWOT Strengths Weaknesses Opportunities Threats Vietnam has a large, skilled and low-cost workforce, that has made the country attractive to foreign investors Vietnam' s location - its proximity to China and South East Asia, and its good... Philippines, the regional underperformer © Business Monitor International Ltd Page 16 Vietnam Freight Transport Report Q3 2012 Investment And Development Outlook According to our key infrastructure projects database, there are US$171bn-worth of infrastructure projects planned, or currently under way, in Vietnam' s transport sector One of the most expensive of these is a US$3.6bn plan to build the Van... Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q3 2012 Although miles travelled in the US started growing again month-on-month (m-o-m) in December 2011 and January 2012, after nearly a whole year of m-o-m declines, y-o-y growth remains negative Meanwhile, US intercity bus services, which expanded 7.10% in 2011, are set to continue to grow in 2012 thanks to the fact the US consumers