Vietnam freight transport report q3 2014

... Business Monitor International Page Vietnam Freight Transport Report Q3 2014 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis Strengths ■ Vietnam' s strong domestic growth... analysis of Vietnam' s shipping sector, please see BMI's Vietnam Shipping Report © Business Monitor International Page 24 Vietnam Freight Transport Report Q3 2014 Table: Maritime Freight (Vietnam. .. International Page 19 Vietnam Freight Transport Report Q3 2014 Table: Inland Waterway Freight (Vietnam 2011-2018) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Inland Waterway Freight Tonnes (000)

Q3 2014 www.businessmonitor.com VIETNAM FREIGHT TRANSPORT REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 1750-5364 Published by:Business Monitor International Vietnam Freight Transport Report Q3 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: May 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2014 Business Monitor International All rights reserved. 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All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Vietnam Freight Transport Report Q3 2014 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................... 9 Freight Transport ...................................................................................................................................... 9 Political ................................................................................................................................................. 12 Economic ............................................................................................................................................... 13 Business Environment .............................................................................................................................. 14 Industry Forecast .............................................................................................................. 15 Road Freight ......................................................................................................................................... 17 Table: Road Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Inland Waterways .................................................................................................................................. 18 Table: Inland Waterway Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Rail Freight .......................................................................................................................................... 20 Table: Vietnam Transport Network Length (km) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Table: Rail Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Air Freight ............................................................................................................................................ 22 Table: Air Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Maritime Freight ................................................................................................................................... 23 Table: Maritime Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Trade ................................................................................................................................................... 25 Table: Trade Overview (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table: Key Trade Indicators (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table: Top Import Destinations, 2004-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Table: Top Export Destinations, 2004-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Market Overview ............................................................................................................... 29 Industry Trends And Developments ................................................................................ 36 Multimodal ........................................................................................................................................... 36 Maritime .............................................................................................................................................. 36 Air ...................................................................................................................................................... 37 Company Profile ................................................................................................................ 40 Vietnam Airlines Cargo ............................................................................................................................ 40 Vietnam Petroleum Transport Company (VIPCO) .......................................................................................... 43 Vietnam National Shipping Lines (Vinalines) ................................................................................................ 45 Political Outlook ................................................................................................................ 49 Foreign Policy ........................................................................................................................................ 49 Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Long-Term Political Outlook ..................................................................................................................... 51 © Business Monitor International Page 4 Vietnam Freight Transport Report Q3 2014 Oil Price Outlook ............................................................................................................... 55 Bunker Fuel ............................................................................................................................................ 55 Table: BMI Crude Oil & Bunker Fuel Price Forecast (USD/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 The Storm Clears For Shipping ................................................................................................................. (Slightly) Better Times For Bunker Prices ................................................................................................... Long-Term Threats Linger ....................................................................................................................... Pressing Rotterdam & New York Harder .................................................................................................... Risks To Outlook .................................................................................................................................... Jet Fuel ................................................................................................................................................. 56 58 59 61 61 62 Table: BMI Crude Oil & Jet Fuel Price Forecast, USD/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Better Outlook Tames Price Fall ............................................................................................................... 62 Table: Total Air Freight And Passenger Volume Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Risks To Outlook .................................................................................................................................... 67 Diesel .................................................................................................................................................... 68 Table: BMI Crude Oil And Diesel Price Forecast (USD/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 New York's One-Off Heat Up .................................................................................................................... 68 NY: Short-Term Diesel Price Support Expected ........................................................................................... 71 Rotterdam: Green Policies Drive Diesel Forward ........................................................................................ 75 Singapore: Diesel Support With Power Risks ............................................................................................... 77 Risks To Outlook .................................................................................................................................... 81 Macroeconomic Forecasts ............................................................................................... 82 Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Demographic Forecast ..................................................................................................... 86 Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Methodology ...................................................................................................................... 90 Industry Forecast Methodology ................................................................................................................ 90 Sector-Specific Methodology .................................................................................................................... 91 Sources ................................................................................................................................................ 92 © Business Monitor International Page 5 Vietnam Freight Transport Report Q3 2014 BMI Industry View Latest data released by the General Statistics office of Vietnam (GSO) showed that real GDP accelerated by 5.0% year-on-year (y-o-y) in Q1 2014, slightly faster than the 4.9% print registered in the Q1 2013. Although it showed a deceleration from 6.0% recorded in Q4 2013, we believe that the economy is still on track to hit our 2014 growth forecast of 5.9% in 2014. This would mark a slight acceleration from the 5.4% registered in 2013, and is above estimates by the Asian Development Bank, which forecasts real GDP to reach 5.6% in 2014. We believe that the economy will be driven by a strengthening of private consumption, continued foreign direct investment into key areas of the economy, a more robust external sector, and a rebound in manufacturing activity over the coming quarters. That said, trend growth for the Vietnamese economy will average a slower 6.2% over the next decade, compared to 6.5% recorded in the past 10 years. Growth across the Vietnamese freight mix is set to be healthy in 2014 with the outperformer in terms of yo-y gains in tonnage throughput pencilled in to be the shipping sector where the Port of Da Nang will enjoy annual growth of 7.00%. Road freight with growth of more than 6% will also perform well, while the air and rail modes fall behind slightly on 3.00% and 3.12% respectively during 2014. Headline Industry Data ■ 2014 rail freight tonnage is set to increase by 3.12% to 6.73mn tonnes. ■ 2014 air freight tonnage is forecast to rise by 3.00% to 189,210 tonnes. ■ Tonnage handled at the Port of Ho Chi Minh City in 2014 is forecast to grow 6.06%, whereas tonnage handled at the Port of Da Nang is forecast to increase 7.00%. ■ 2014 road freight tonnage is forecast to grow by 6.01% to 811.04mn tonnes. ■ 2014 total trade is forecast to rise by 6.55%. Key Industry Trends World Bank Calls For Better Vietnamese Logistics: The World Bank has declared that enhanced freight logistics in Vietnam could benefit the country's economy. Between 1990 and 2007, Vietnam's GDP grew by an average of 7.4%, while between 2008 and 2018, the World Bank forecasts GDP to rise 5.6% per year on average, something that could improve with more competitive freight logistics. Better transport links would boost productivity and strengthen competitiveness with the World Bank reporting that a third of all truck journeys in Vietnam return back empty. © Business Monitor International Page 7 Vietnam Freight Transport Report Q3 2014 YICT Launches New Direct Weekly Shipping Service SVG: The Chinese Yantian International Container Terminal (YICT) has initiated a direct shipping service SVG to Vietnam, it was announced in April 2014. The service will first call at Hong Kong and then will sail to Haiphong, Vietnam. The service, operated by China United Lines, will be called in Yantian once-weekly, on Fridays. The launch of the new service will aid the transport growth demand between southern regions of China and Vietnam. Finnair Cargo Expanding In Vietnam: Finnair Cargo is building on its air freight growth at the beginning of 2014, by expanding its routes. The company's focus for its most immediate service expansion is in Vietnam, with the company enticed by the country's growth outlook and expanding air freight demand. The airline has announced that it will enhance its cargo offerings between Europe and Vietnam, with a third weekly freighter flight to Hanoi from March 31 2014. Key Risks To Outlook The US Agency for International Development (USAID) announced its five-year (2014-18) Country Development Cooperation Strategy for Vietnam. The strategy has three broad objectives which include broad-based sustainable growth, the increased provision of healthcare, and the strengthening of relations between the US and Vietnam. We see this as yet another step in the right direction for Vietnamese foreign policy, which has continued to build strong relationships with key trading partners in recent months. Indeed, several Vietnamese officials have been meeting with foreign government officials from around the world to improve relations and economic ties. The government has continued to make an active effort to improve the country's business environment in order to attract foreign investment. The fourth round of negotiations between Vietnam and South Korea for a bilateral free-trade agreement took place in March, and officials are looking to conclude negotiations by the end of 2014. Moreover, Vietnam has been forging very strong trade and investment ties with Japan in order to attract funding and expertise to develop the country's infrastructure as well as invest in the manufacturing sector. © Business Monitor International Page 8 Vietnam Freight Transport Report Q3 2014 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for thousands of kilometres on a north-south axis, creates a need for long-distance freight haulage. ■ A recovery of activity levels at the nation's ports in 2010 is expected to continue over the mid-term to 2018. ■ Vietnam's location on the South China Sea gives the country access to the main interAsian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics. Weaknesses ■ The generally poor state of the road network. Despite new highway construction, only 13.5% of the network is considered to be in good condition. Just 26% of the network has two or more lanes and only 29% is tarred. ■ Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underutilised. ■ Decades of under-investment have left the country with a port infrastructure system that is poor by international standards. Overcapacity is a growing problem. ■ Unresolved business environment issues and lack of significant improvement in access to infrastructure financing means that we remain very conservative on the growth potential of Vietnam's freight sector. ■ A slowdown affecting the US economy has a knock-on effect on Vietnam due to it being the Asian country's largest export partner. ■ Vietnamese shipping company Vinashinlines has announced that 90% of its vessels, including Diamond Way and Sea Eagle, have been sold. The firm added that a number © Business Monitor International Page 9 Vietnam Freight Transport Report Q3 2014 Vietnam Freight Transport Industry SWOT Analysis - Continued of the carriers had been purchased for prices above their original valuation, Hellenic Shipping News reported in early October 2013. Opportunities ■ The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. ■ Chinese investment could bring about much-needed improvements in the rail sector. ■ Growing international interest in Vietnam as a growth market within the box shipping sector. ■ The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. ■ The president of Russian Railways (RZD) has explained his belief that an investment in the construction of a new rail line in southern Vietnam will come in at more than US $2bn. Speaking to IA Prime, Vladimir Yakunin said that 'it is difficult to talk about it now, because there is no project', but as it stands, an agreement of intent was signed on March 11 2013 between RZD, Vietnamese Railways and the mineral deposit company An Vien, also from Vietnam. ■ It was announced in June 2013 that the Laos government is to build a new railway line between the country and its Asian neighbours, Vietnam and Thailand. The 220km line will run from Laos's Western border with Thailand to the Lao Bao border gate in Vietnam. Construction will commence in August 2013 with an expected completion date of the second half of 2017. ■ The 900,000 twenty-foot equivalent units (TEUs) deepwater Lach Huyen terminal project will entail a total investment of US$1.2bn and is likely to become operational in 2015. The terminal, likely to ease port congestion in Haiphong, will be able to accommodate vessels with a capacity ranging between 8,000TEUs and 9,000TEUs. © Business Monitor International Page 10 Vietnam Freight Transport Report Q3 2014 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ The Asian Development Bank (ADB) has announced that it will provide a US$410mn loan for the Vietnamese government, reports KHL Group. The loan will enable the government to develop a new arterial road between Ho Chi Minh City, the Mekong Delta and the south of the country. ■ Vietnam-based Rang Dong Group has filed a petition to secure approval for developing Phan Thiet airport, reported the Daily in August 2013, citing the company's chairman Nguyen Van Dong. ■ Two berths at Vietnam's first state-built seaport, the Cai Mep-Thi Vai international port in Ba RiaVung Tau province, are set to be leased for 30 years, according to official sources. ■ On November 14 2013, Vietnam's Phuong Nam Technology Science Institute and EDES were scheduled to sign a memorandum of understanding (MoU) for the construction of the US$3.6bn railway project in Vietnam. Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. ■ Vietnam is vulnerable to any slowdown in Chinese investment and to political risk in the sensitive South China Sea, subject to competing sovereignty claims. ■ A drop in international demand for exports would negatively affect Vietnam's freight transport sector. © Business Monitor International Page 11 Vietnam Freight Transport Report Q3 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the next five years. The oneparty system is generally conducive to short-term political stability. ■ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. ■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent. Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. ■ Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within the one-party system. Threats ■ Macroeconomic instabilities continue to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. ■ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. ■ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage. © Business Monitor International Page 12 Vietnam Freight Transport Report Q3 2014 Economic SWOT Analysis Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2012. ■ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20.7% in 2012. Weaknesses ■ Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy vulnerable to global economic uncertainties. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. ■ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. Opportunities ■ WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam greater access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. ■ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. ■ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s. Threats ■ Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis. ■ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy. © Business Monitor International Page 13 Vietnam Freight Transport Report Q3 2014 Business Environment SWOT Analysis Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country attractive to foreign investors. ■ Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond. Weaknesses ■ Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world. ■ Vietnam remains one of the world's most corrupt countries. According to Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123 out of 176 countries. Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how. ■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points. Threats ■ Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. ■ Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. © Business Monitor International Page 14 Vietnam Freight Transport Report Q3 2014 Industry Forecast Latest GDP figures show that the Vietnamese economy grew by 5.0% year-on-year (y-o-y) in Q1 2014, and we believe that our 2014 real GDP growth forecast of 5.9% remains in sight. Indeed, we believe that increased macroeconomic stability, combined with pro-growth policies will help the economy accelerate from 2013 levels. Key downside risks to this view include a faster-than-anticipated slowdown in China as well as the stalling of the country's reform drive. A breakdown of the data show that all sectors of the economy witnessed an acceleration in growth over the quarter: agriculture, forestry and fisheries, which accounts for approximately 13% of GDP grew by 2.4% yo-y in Q1 2014, while the industrial and construction sectors, which account for 40% of GDP expanded by 4.7% y-o-y. Importantly, the services sector which accounts for the lion's share of the economy at 47% of GDP, accelerated by a stellar 6.0% in Q1 2014, contributing a whopping 2.8 percentage points of the overall growth figure. Going forward, we expect that the manufacturing, construction and service sectors will continue to do well on the back of policy driven efforts to stimulate growth. GDP To Enjoy Healthy Medium Term Vietnam Real GDP Growth, % change y-o-y (2010-2018) 7 6.5 6 5.5 2018f 2017f 2016f 2015f 2014f 2013e 2012 2011 2010 5 Vietnam - Real GDP growth, % y-o-y e/f = BMI estimate/forecast. Source: Asian Development Bank, General Statistics Office © Business Monitor International Page 15 Vietnam Freight Transport Report Q3 2014 To keep pace with growth, Vietnam will need to invest in its logistics sector, but BMI expects a lot of this investment to come from outside logistic and freight transport companies which will be keen to enter and expand into this high growth market. We believe that rapid urbanisation, driven by a healthy pipeline of government-led infrastructure projects over the next five years, will continue to spur rural-urban migration and foreign direct investment (FDI) into developed cities such as Ho Chi Minh and Hanoi. We have also already witnessed this to some extent in Vietnam's port sector, with considerable investment being made by container shipping lines and global port operators in the development of modern box terminals at Vietnam's ports. This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can be achieved with greater links between the country and its main export partner the US. Direct container shipping links between Vietnam and the US have been in operation since 2009, which have cut both time and cost, as previously Vietnamese shipments had to be transhipped via Singapore. Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam's exports set to benefit from the slow but steady recovery in the US economy. Vietnam's export outlook will also continue to be bolstered by China's growth outlook. Although we project China's economic growth to slow over the medium term, the country's real GDP growth outlook remains robust. Vietnam plays a key role in China's coal supply chain. Vietnam is China's fifth-largest coal supplier providing the country with the thermal coal it requires for its power stations. Vietnam's role in this supply chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors' reliance on coal. While we believe that the percentage supplied by coal fired power plants within China's overall energy mix will slip over the medium term, it will nevertheless remain above 70%. However, we note that China's fake data is expected to distort more export numbers until at least June, making it difficult for the analysts to assess the strength of the country's trade. Despite the crackdown in May 2013 on the practice of inflated invoices, which were used to disguise capital inflows, over-invoicing is still prevalent. This implies that the export data then was artificially boosted, making the recent data look weak by comparison. According to Royal Bank of Scotland, the government data that revealed the March exports had unexpectedly declined 6.6% y-o-y marked the height of distortions (Bloomberg). China is hesitant to revise figures that it acknowledged were inflated, but this leaves the analysts to do a lot of explanation on why the trade numbers are better than they appear. © Business Monitor International Page 16 Vietnam Freight Transport Report Q3 2014 BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class, as the country starts to import more from abroad. Road Freight Road Dominates And Offers Best Links Into China Despite its low standing in road infrastructure, with the Global Economic Forum's Competitiveness Report 2013/14 ranking Vietnam's roads at 102 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logistics needs are primarily met by road. In 2014 and beyond, we predict that road freight volumes in Vietnam will account for the majority of freight carried in the country. Road Reliant Vietnam Freight Mode Breakdown (% Of Total), 2013 Source: BMI We forecast that growth in road freight volume will continue to impress, albeit not at the double-digit rate of growth seen in 2012 and the years preceding it. In 2014, we expect the sector to register y-o-y growth of 6.01%, up slightly on 2013's estimated 5.94%, to reach 811.037mn tonnes. Over the medium term, we forecast road freight volume growth will average 7.59% per annum reaching a projected 1.10bn tonnes by the end of 2018. © Business Monitor International Page 17 Vietnam Freight Transport Report Q3 2014 There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road freight expertise, expand in Vietnam. Both FedEx and DHL have expanded their role in Vietnam in recent times. While some companies are breaking into Vietnam by developing their own operations in the country, others are getting a head start by acquiring and joining up with domestic freight operators. This is the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group. Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's export supply chain. Road is the main form of transport linking Vietnam's factories to the country's ports and also plays a key role in linking Vietnam with its second-largest export partner China. Vietnam's northern border links the country's with the south of China. Road links continue to be developed between the two and with them trucking services. Kerry Asia Road Transport (Kart), for example, offers a twice-weekly trucking link connecting Shenzhen and Hanoi. Table: Road Freight (Vietnam 2011-2018) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Road Freight Tonnes (000) 654127.10 722156.40 765070.40 811036.61 878167.51 949432.46 1024120.02 1102546.65 Road freight tonnes, % yo-y 11.43 10.40 5.94 6.01 8.28 8.12 7.87 7.66 Road freight tonnes-km (mn ton km) 40130.10 43902.40 46790.70 50070.85 54324.79 58840.69 63573.48 68543.21 Road freight tonnes-km, % y-o-y 10.92 9.40 6.58 7.01 8.50 8.31 8.04 7.82 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Inland Waterways Mekong Offers Trade Links With Neighbours Vietnam's inland waterways play a considerable role in the country's freight transport sector, making it the second-largest freight transport mode in the country. In 2014, we forecast the inland waterways sector to grow by 6.64% to reach 192.821mn tonnes, which will be slightly down on 2013's estimated 7.31% annual growth figure. Over our forecast period, we anticipate average y-o-y growth of 6.34%. © Business Monitor International Page 18 Vietnam Freight Transport Report Q3 2014 Mekong Offers Trade Connections Map Of The Mekong River Source: BMI Vietnam's inland waterways stretch for 47,130km and the country's dense network of waterways ranks its seventh in the world in terms of length. The country's inland waterways include the Mekong River, which enables freight connections with Vietnam's neighbours. Although we highlight that the River's full potential has not been reached and so development in the River is an area for potential investment. © Business Monitor International Page 19 Vietnam Freight Transport Report Q3 2014 Table: Inland Waterway Freight (Vietnam 2011-2018) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Inland Waterway Freight Tonnes (000) 160164.50 168493.00 180812.70 192821.44 205047.81 218027.10 231629.74 245913.37 Inland waterway freight tonnes, % y-o-y 11.05 5.20 7.31 6.64 6.34 6.33 6.24 6.17 Inland Waterway freight tonneskm (mn ton km) 34371.70 37018.30 39344.40 42347.78 45596.91 49046.13 52661.00 56456.84 Inland Waterway freight tonneskm % y-o-y 8.50 7.70 6.28 7.63 7.67 7.56 7.37 7.21 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Rail Freight Network Lacking And No Impetus To Develop It Despite rail's potential as an overland trade link for Vietnam with its three neighbours, the mode's role in the country's freight transport sector remains small. In 2013, we estimate that Vietnam's rail freight volumes accounted for a negligible percentage of the total with the country's rail network transporting just 6.73mn tonnes of freight. In 2014, the rail freight sector is set for steady, if uninspiring, annual growth of 3.12%, which will at least provide something of a tonic from 2013's contraction of 6.82%. Indeed, positive growth has been lacking from this sector over recent years but is set to return at least over the medium term, with an average annual growth of 4.62% pencilled in between 2014 and 2018. There are two key factors that we believe have held back Vietnam's rail freight development and will continue to do so. © Business Monitor International Page 20 Vietnam Freight Transport Report Q3 2014 Table: Vietnam Transport Network Length (km) Vietnam Transport Network Length (km) Road 206,633 Railway 2,632 Inland Waterway 47,130 Source: CIA World Factbook (accessed January 21 2014) The first is the quality of Vietnam's railway infrastructure. The World Economic Forum's Global Competitiveness Report 2013/14 gives Vietnam's rail infrastructure a low ranking, placing it 58th globally out of 123 countries measured. A major problem for Vietnam's rail freight development is the relative shortness of the country's rail network. Vietnam's railway lines extend for just 2,632km; this compares with the country's 206,633km network of roads and 47,130km network of inland waterways. The second drawback for freight rail development in Vietnam is its gauge incompatibility with China. Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total. While the country has some standard gauge track, this system only accounts for 20% of the total. This means that rail freight trade between Vietnam and China is slowed by gauge changes, making road freight a more cost- and time-effective alternative; this stymies potential rail-freight projects between the two nations. BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam and Laos). Table: Rail Freight (Vietnam 2011-2018) 2011 Rail freight tonnes ('000) Rail freight tonnes, % y-o-y Rail freight tonnes-km (mn ton km) Rail freight tonnes-km, % y-o-y 2017f 2018f 7285.10 7003.50 6525.90 6729.53 6958.33 7306.25 7715.40 8178.32 -7.33 2012 4576.92 2.60 3.40 2016f 4162.00 4024.60 3804.10 3903.01 4020.10 4160.80 4343.88 -5.48 3.12 2015f 6.00 -3.30 -6.82 2014f 5.60 5.08 -3.87 2013e 3.00 5.00 3.50 4.40 5.37 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Page 21 Vietnam Freight Transport Report Q3 2014 Air Freight On Growth Trajectory As Vietnam Gets Better Connected Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector; although this is not expected to change, there is a lot of growth potential in this sector. The government has ambitious plans to modernise and expand the country's airport infrastructure over the long term. Since early 2012, Vietnam has announced that it was in the search for foreign investors to help construct two international airports: the USD1.2bn Van Don International airport in the northern province of Quang Ninh and the USD10bn Long Thanh International airport in the southern province of Dong Nai. For 2014, we are sticking to last quarter's forecast. We anticipate that the Vietnamese air freight sector will grow by 3.00%, up from 2013's 2.80%, to reach 189,210 tonnes. Over the forecast period, we predict Vietnam's air freight levels to grow on average per annum by 3.96% to reach 223,040 tonnes. Taking Off Vietnam Air Freight Tonnage, 000 tonnes 250 200 150 100 50 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 2010 0 Vietnam - Air Freight Tonnes (000) e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Page 22 Vietnam Freight Transport Report Q3 2014 BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes. In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi Minh City. Vietnam is also becoming globally better connected by air. In 2012, Emirates added a link with the country and Dubai, and in 2013, Finnair announced that it planned to launch new cargo routes to Hanoi. While still at the development stage, Vietnam is seeking to play a greater role in the electronics supply chain, a key source of demand for air freight transport options. One example has been the impact the local production of iPhones has had on China's air freight sector. Plans are in place for Vietnam-based facilities to produce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand. Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot. Vietnam's trade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term. The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, with the sector offering savings in transport time, along with environment controlled options, which are vital for the transport of some medicines and vaccinations. Table: Air Freight (Vietnam 2011-2018) Air freight tonnes (000) Air freight tonnes % y-o-y Air freight tonnes-km (mn ton km) Air freight tonnes-km % y-o-y 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 200.30 178.70 183.70 189.21 195.64 203.27 212.42 223.04 5.37 -10.78 2.80 3.00 3.40 3.90 4.50 5.00 426.70 480.90 469.80 477.79 489.73 504.42 522.08 542.96 -0.02 12.70 -2.31 1.70 2.50 3.00 3.50 4.00 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Maritime Freight Vietnam Catching The Eye Of Shippers Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping announced a new intra-Asia service at the end of 2013, which should provide upside risk for the sector going forward. The new intra-Asia service, which calls at the port of Ho Chi Minh, will boost both companies' intra-Asia operations and we have long highlighted intra-Asia trade as a region of strong growth and we note the port of Ho Chi Minh to be a specific beneficiary of the new route - with the launch of the service offering upside risk to our forecast for the port. © Business Monitor International Page 23 Vietnam Freight Transport Report Q3 2014 Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector. As highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulk commodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao. Vietnam is an oil-producing nation, but its consumption needs have come to outweigh its supply and so the country is making use of the liquid bulk shipping sector to import oil. Getting Better Connected UNCTADstat Liner Connectivity Index For Asia, 2004 & 2013 Source: UNCTADstat The development of Vietnam's liner connections has been highlighted by data from UNCTAD's liner connectivity index. In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container line connectivity, but by 2013, it had jumped up the rankings to ninth place out of its 14 Asian neighbours. Vietnam's growing role in the global container shipping sector is also in evidence in the port of Ho Chi Minh's box throughput. In 2014, we forecast container volumes to increase by 6.06% and over the medium term by an annual average of 6.88%. For more information on data and analysis of Vietnam's shipping sector, please see BMI's Vietnam Shipping Report. © Business Monitor International Page 24 Vietnam Freight Transport Report Q3 2014 Table: Maritime Freight (Vietnam 2011-2018) 2011 Port of Ho Chi Minh City (Saigon New) throughput, tonnes '000 2017f 2018f 33450.7 36029.4 38866.7 41222.6 43986.4 47175.8 50747.6 54212.2 Port of Ho Chi Minh City (Saigon New) throughput, tonnes, % y-o-y Port of Da Nang throughput, tonnes '000 2012 2013e 2014f 2015f 2016f 7.4 7.7 7.9 6.1 6.7 7.3 7.6 6.8 3868.0 4423.0 5010.2 5360.9 5709.4 6043.2 6406.8 6794.9 17.1 14.3 13.3 7.0 6.5 5.8 6.0 6.1 Port of Da Nang throughput, tonnes, % y-o-y e/f = BMI estimate/forecast. Source: Port authorities Trade Table: Trade Overview (Vietnam 2011-2018) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Imports, real growth, % y-o-y 4.10 9.09 7.90 7.50 7.50 7.30 7.20 7.00 Exports, real growth, % y-o-y 10.78 15.71 6.00 5.60 5.80 6.20 6.60 6.80 7.44 12.40 6.95 6.55 6.65 6.75 6.90 6.90 112.40 118.98 133.50 155.21 177.64 201.28 228.77 259.38 24.17 5.86 12.20 16.26 14.45 13.31 13.66 13.38 106.84 124.43 137.15 156.64 176.44 197.87 223.64 253.08 31.49 16.46 10.22 14.21 12.64 12.14 13.03 13.16 219.24 243.41 270.65 311.85 354.08 399.15 452.42 512.46 27.63 11.03 11.19 15.22 13.54 12.73 13.35 13.27 Total Trade, real growth, % y-o-y Imports, USDbn Import growth, % y-o-y Exports, USDbn Export growth, % y-o-y Total trade, USDbn Total trade growth, % y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Table: Key Trade Indicators (Vietnam 2011-2018) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Agricultural raw materials, exports, USDmn 3394.24 3608.58 4081.28 4788.31 5518.77 6395.90 7220.46 8316.09 Agricultural raw materials, exports, % y-o-y -1.23 6.31 13.10 17.32 15.26 15.89 12.89 15.17 © Business Monitor International Page 25 Vietnam Freight Transport Report Q3 2014 Key Trade Indicators (Vietnam 2011-2018) - Continued 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Agricultural raw materials, imports, USDmn 3732.44 4358.92 4811.99 5506.01 6211.26 6985.10 7895.91 8963.09 Agricultural raw materials, imports, % y-o-y 39.98 16.79 10.39 14.42 12.81 12.46 13.04 13.52 Ores and metals, exports, USDmn 794.19 935.47 1037.65 1194.16 1353.21 1524.20 1731.95 1965.97 Ores and metals, exports, % y-o-y 33.63 17.79 10.92 15.08 13.32 12.64 13.63 13.51 Ores and metals, imports, USDmn 4378.10 4656.14 5269.32 6186.47 7134.02 8083.40 9277.19 10527.14 Ores and metals, imports, % y-o-y 32.66 6.35 13.17 17.41 15.32 13.31 14.77 13.47 Iron and steel, exports, USDmn 2000.34 2391.69 2674.70 3108.23 3548.77 4072.72 4614.71 5302.47 Iron and steel, exports, % y-o-y 23.25 19.56 11.83 16.21 14.17 14.76 13.31 14.90 Iron and steel, imports, USDmn 75011.26 79418.42 89137.82 103675.47 118694.93 134336.54 152870.75 173188.67 Iron and steel, imports, % y-o-y 23.89 5.88 12.24 16.31 14.49 13.18 13.80 13.29 54309.54 63655.98 70415.19 80769.07 91290.42 102538.62 116323.91 131804.07 33.09 17.21 10.62 14.70 13.03 12.32 13.44 13.31 74000.95 78335.43 87894.53 102192.43 116964.18 132426.69 150603.59 170668.15 24.18 5.86 12.20 16.27 14.45 13.22 13.73 13.32 17072.69 19770.74 21721.94 24710.81 27748.03 31114.00 35014.38 39700.97 54.01 15.80 9.87 13.76 12.29 12.13 12.54 13.38 14084.81 14935.88 16812.80 19620.17 22520.59 25582.67 29134.64 33130.43 45.81 6.04 12.57 16.70 14.78 13.60 13.88 13.71 Manufactured goods, exports, USDmn Manufactured goods, exports, % y-o-y Manufactured goods, imports, USDmn Manufactured goods, imports, % y-o-y Fuels, exports, USDmn Fuels, exports, % yo-y Fuels, imports, USDmn Fuels, imports, % yo-y e/f = BMI estimate/forecast. Source: UNCTAD, BMI © Business Monitor International Page 26 Vietnam Freight Transport Report Q3 2014 Table: Top Import Destinations, 2004-2012 2004 2005 2006 China, Mainland, USDmn 4,595 5,900 7,391 12,710 15,974 16,441 20,019 24,594 China, Mainland, USDmn, % of total 14.4 16.0 16.5 20.3 19.8 23.5 24.0 23.5 27.2 Korea, Republic Of, USDmn 3,359 3,594 3,908 5,340 7,255 6,976 9,761 13,176 17,541 Korea, Republic Of, USDmn, % of total 10.5 9.8 8.7 8.5 9.0 10.0 11.7 12.6 12.7 Japan, USDmn 3,553 4,074 4,702 6,189 8,240 7,468 9,016 10,400 11,803 Japan, USDmn, % of total 11.1 11.1 10.5 9.9 10.2 10.7 10.8 10.0 8.5 Singapore, USDmn 3,618 4,482 6,274 7,614 9,378 4,248 4,101 6,391 11,421 Singapore, USDmn, % of total 11.3 12.2 14.0 12.1 11.6 6.1 4.9 6.1 8.3 Thailand, USDmn 1,859 2,374 3,034 3,744 4,906 4,514 5,602 6,384 7,310 5.8 6.5 6.8 6.0 6.1 6.5 6.7 6.1 5.3 Thailand, USDmn, % of total 2007 2008 2009 2010 2011 2012 37,647 TOTAL 31,969 36,761 44,891 62,765 80,714 69,949 83,365 104,510 138,166 TOTAL, top 5 countries, USDm 16,984 20,424 25,310 35,597 45,753 39,648 48,500 60,944 % from top 5 trade partners 53.1 55.6 56.4 56.7 56.7 56.7 58.2 58.3 85,721 62.0 Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report Table: Top Export Destinations, 2004-2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 5,025 5,924 7,845 10,105 11,887 11,356 14,238 16,928 19,427 19.0 18.3 19.7 20.8 19.0 19.9 20.4 18.2 17.0 2,899 3,228 3,243 3,646 4,850 4,909 7,309 11,125 14,755 10.9 9.9 8.1 7.5 7.7 8.6 10.5 12.0 12.9 3,542 4,340 5,240 6,090 8,468 6,292 7,728 10,781 13,722 Japan, USDmn, % of total 13.4 13.4 13.2 12.5 13.5 11.0 11.1 11.6 12.0 Korea, Republic Of, USDmn 608 664 843 1,243 1,794 2,065 3,092 4,715 5,199 Korea, Republic Of, USDmn, % of total 2.3 2.0 2.1 2.6 2.9 3.6 4.4 5.1 4.6 1,065 1,086 1,445 1,855 2,073 1,885 2,373 3,367 5,070 4.0 3.3 3.6 3.8 3.3 3.3 3.4 3.6 4.4 TOTAL 26,485 32,447 39,826 48,561 62,685 57,196 69,820 92,881 113,944 TOTAL, top 5 countries, USDm 13,139 15,242 18,616 22,939 29,072 26,507 34,740 46,916 58,173 United States, USDmn United States, USDmn, % of total China, Mainland, USDmn China, Mainland, USDmn, % of total Japan, USDmn Germany, USDmn Germany, USDmn, % of total © Business Monitor International Page 27 Vietnam Freight Transport Report Q3 2014 Top Export Destinations, 2004-2012 - Continued % from top 5 trade partners 2004 2005 2006 2007 2008 2009 2010 2011 2012 49.6 47.0 46.7 47.2 46.4 46.3 49.8 50.5 51.1 Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report © Business Monitor International Page 28 Vietnam Freight Transport Report Q3 2014 Market Overview According to reports by The Economic Times, Vietnam's economy grew by 5.0% in Q114, marking its fastest pace since 2011 and above the 4.8% registered in the same period a year ago. The growth was widespread with services up 6.0%, industry and construction up 4.7% and agro-forestry and fisheries up 2.4% in Q114. We believe that growth will remain strong in 2014 and accelerate to 5.9% in 2014 from 5.4% in 2013 on the back of growth supportive reform, which will continue to spur an increase in foreign direct investment, manufacturing activity and exports over the coming quarters. Government Policy To Ensure Growth Remains Strong We believe that government policies aimed at promoting balanced economic growth, improving the stability of the banking system, diversifying exports, attracting foreign investment and attracting investment in infrastructure bode well for the economic outlook. In terms of promoting balanced growth, we note that the State Bank of Vietnam (SBV) has continued to rein in inflation, which, at 4.8% year-on-year (y-o-y) in the first quarter, remains near record lows and well below the central bank's target of around 7.0%. The slight deceleration in economic activity in Q114, combined with the weak inflation data over the period prompted the SBV to cut its refinancing rate from 7.0% to 6.5% in March. External Sector To Provide Tailwind We expect the external sector (exports and foreign investment) to provide a tailwind to economic activity in the coming quarters. From a trade perspective, exports rose by 14.1% y-o-y in the first quarter, which helped bring the trade surplus to US1.0$bn for the first three months of the year and we expect this trend to remain in place. Indeed, the Vietnamese government has been making substantial efforts to promote trade and investment ties with other countries, and we believe it will help underpin exports over the coming months. A case in point was the fourth round of negotiations between Vietnam and South Korea for a bilateral free-trade agreement which took place in March, and officials are looking to conclude negotiations by the end of 2014. Moreover, Vietnam has been forging very strong trade and investment ties with Japan in order to attract funding and expertise to invest and develop the country's infrastructure and manufacturing sectors. While foreign direct investment fell by 30% y-o-y in the first quarter of 2014, it was not all bearish in our view. First, the number of projects increased by 32% y-o-y and second, the origin of the investments was much more diversified, which could suggests that it is more sustainable (see table). Third, we believe that © Business Monitor International Page 29 Vietnam Freight Transport Report Q3 2014 foreign investment will continue to pick up as the business environment becomes increasingly attractive, particularly as more State Owned Enterprises (SOEs) are restructured and the limits on foreign ownership are raised. Moreover, Vietnam still boasts competitive wages compared to other manufacturing hubs such as China, Indonesia and Malaysia, which bodes well for cost competitiveness. Signs of Strong Momentum Abound We witnessed some highly positive data in the third quarter of 2013 that indicate strong momentum for growth into 2014. We highlight the rebound in manufacturing production activity, with the HSBC Purchasing Managers' Index (PMI) recording a robust 51.5 reading in September, the strongest reading since April 2011 (see 'PMI Surprises To The Upside, VNI Testing Resistance', October 3 2013). More importantly, foreign direct investment (FDI) inflows into the country have accelerated significantly in recent months and are expected to surpass the government's full-year target of USD13bn - usually an indication of improving business sentiment, and a precursor for an acceleration in private sector investment. We believe that the positive ripple effects from the factors above will serve as strong tailwinds for 2014 growth. Chinese and US demand remain integral factors influencing the performance of the Vietnamese freight picture over the medium term. In terms of the former, China's real GDP grew by 7.7% in Q413, slightly above consensus expectations of 7.6%. For the year as a whole the economy also grew by 7.7%, which matches the performance seen in 2012. While a detailed breakdown of GDP by expenditure is unavailable as of yet, we do not expect its release to reveal a great deal of economic rebalancing taking place within the Chinese economy. The traditional drivers of real estate and infrastructure construction continue to dominate the economy. In terms of the US, we believe the appropriations bill recently passed by the US House of Representatives and Senate, and which President Barack Obama is expected to sign, may mark an easing in long-running partisan warfare over fiscal policy. Furthermore, we believe the deal will have positive ramifications for the economy in 2014, while still allowing for fiscal consolidation over the medium term. Finally, the bipartisan spending package sets the stage for a crisis-free resolution to the debt ceiling debate, which will come up in the weeks ahead. The appropriations package provides USD1.1trn for fiscal year 2014 (FY14), which runs through September 30, in line with a budget deal worked out between Democrats and Republicans in late 2013 that we noted as a meaningful first step toward de-escalating tensions over fiscal issues (see 'Deal Avoids Another Shutdown, But Future Progress Uncertain', December 11 2013). That legislation allowed higher © Business Monitor International Page 30 Vietnam Freight Transport Report Q3 2014 spending caps in FY14 than those initially envisioned by the budget sequester that went into effect in early 2013, reducing the drag the fiscal drag on the economy, one reason we see real GDP growth accelerating to 2.8% this year from our estimate of 1.8% in 2013. We believe that greater clarity about the trajectory of fiscal policy this year will allow the US Federal Reserve to continue reducing extraordinary monetary stimulus to the economy, eliminating its quantitative easing programme by end-2014. Domestically, over the longer term, imports will be boosted by Vietnam's young population, as younger populations are generally more supportive of private consumption. The country has a population of 90.7mn, according to estimates for 2013 by BMI, 60% of which is under 35. We forecast that the population will be 94.1mn by 2017, with 57% under 35, and will rise to 97.7mn by 2022. Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo. Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally. Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's World Factbook. BMI believes the sector requires substantial investment as the quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 102nd out of 142 countries surveyed in its Global Competitiveness Report 2013-2014, which has improved from 123rd in 2011-12. Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC), established in April 2003 as a state corporation operating railway transport and related services. Vietnam's rail network totals 2,632km. The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and 527km of 1.435m gauge. Vietnam's Ministry of Transport has decided to classify the country's airports with an aim to attract investment in the country's aviation sector. The ministry believes that it is a difficult task to attract investment in the sector as it requires huge investment capital and high techniques and a longer time frame to take back the investment capital. The country recorded an increase in capacity of its domestic airports from 6mn passengers in 2000 to 52mn in 2012. Meanwhile, an airport development programme approved in 2009 is moving ahead as per the schedule, according to the Civil Aviation Authorities of Vietnam. Vietnam is currently operating a state-owned airline © Business Monitor International Page 31 Vietnam Freight Transport Report Q3 2014 Vietnam Airlines, as well as private airlines, namely Vietjet Air, Air Mekong and a foreign invested airline Jetstar Pacific. Additionally, the government has also granted approval to the development of 25 airports. Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved. This total puts the country in a poor 97th place in comparison with other countries. Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% Of Total), 2013 Source: General Statistics Office Of Vietnam Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion. © Business Monitor International Page 32 Vietnam Freight Transport Report Q3 2014 BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep International Terminal (CMIT) since it opened in March 2011 as an important driver of growth. In addition to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011. Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks 98th out of 145 countries on the World Economic Forum's Global Competitiveness Report 2013-14 on the Quality of Port Infrastructure - an improvement on recent years. As such, APMT's commitment to improving CMIT's facilities is an important step both for the terminal and the country's shipping sector as a whole. The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger vessels to access the facility. BMI notes that these works are badly needed, as we are seeing a growing trend for shipping lines to order larger container vessels. The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping sector. State-owned shipbuilder Vinashin was bailed out in 2010 when its USD4.5bn debt threatened to bring down the entire Vietnamese economy. Widespread investment in the country's infrastructure is necessary if Vietnam is to compete with regional peers. Investment And Development Outlook The Vietnamese transport sector requires vast levels of investment. The majority of infrastructure investment in Vietnam over the next 10 years will be in the transport sphere, accounting for 65% by the end of 2021. Vietnam still suffers from a significant deficit in transportation infrastructure, and we believe the Vietnamese government will continue to develop this sector over the medium term. This is reflected in our forecast for transport infrastructure industry value, which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016. According to our key infrastructure projects database, there are USD171bn worth of infrastructure projects planned or currently under way in Vietnam's transport sector. One of the most expensive of these is a USD3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs a year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. © Business Monitor International Page 33 Vietnam Freight Transport Report Q3 2014 On November 14 2013, Vietnam's Phuong Nam Technology Science Institute and EDES were scheduled to sign a memorandum of understanding (MoU) for the construction of the USD3.6bn railway project in Vietnam. The project which will be implemented via a built, operate and transfer format, will connect Hoi Chi Minh City to Can Tho City. Upon signing the MoU, a JV will be formed by both the parties for executing the project as well as for conducting a feasibility study, which will be presented to the country's government. Meanwhile, in Q2 2014 it was announced that Vietnam's Ministry of Transport is planning to construct an elevated monorail system to ease its traffic congestion and connect the existing railway routes in the country's capital Hanoi. The monorail system will be developed on a design, construct, operate and transfer basis. The project will involve the construction of 14 stations. The monorail trains will run 4.5m above the ground at an average speed of 70km per hour. 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 USD6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities, it was announced in April 2013. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. The airport, which was approved in 2011 at a cost of USD6.74bn, will be the country's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year after becoming operational in 2020. Meanwhile, Shipowners in Vietnam are expected to offload more vessels form their fleets by the close of 2013, according to the Hellenic Shipping News. Firms planning to pare down their fleets include the Vinashin Joint Stock Company and Northern Shipping. Market analysts have previously warned that the economic potential of the Vietnamese shipping market has been limited by an excessive focus on non-core businesses. In the road freight sphere, bad news was delivered at the end of October 2013, when it was announced that the Vietnamese government has granted approval to Hanoi General Export-Import Joint Stock Company (Geleximco) to withdraw from the build-transfer model-based Hoa Lac-Hoa Binh expressway linking Hanoi © Business Monitor International Page 34 Vietnam Freight Transport Report Q3 2014 with localities in the northwest. The company invested USD17mn in the project, with USD2mn in the construction and USD12.4mn in land acquisition, over three years, according to the transport ministry. 'As the investment cost rose significantly and the property market at present is nearly frozen, it is impossible for us to reach the project deadline', Geleximco General Director Vu Van Tien said (Intellasia). The government has also approved a proposal by the country's Ministry of Transport and Ministry of Planning and Investment to alter the project's investment model to public-private partnership to make it more feasible and obtain official development assistance. © Business Monitor International Page 35 Vietnam Freight Transport Report Q3 2014 Industry Trends And Developments Multimodal World Bank Calls For Better Vietnamese Logistics The World Bank reported at the start of 2014 how more competitive freight logistics in Vietnam could benefit the country's economy. Between 1990 and 2007, Vietnam's GDP grew by an average of 7.4%, while between 2008 and 2018, the World Bank forecasts GDP to rise 5.6% per year on average. Better transport links would boost productivity and strengthen competitiveness with the World Bank reporting that a third of all truck journeys in Vietnam return back empty. A four step strategy has been proposed by the bank: firstly, 'better transport infrastructure and service delivery', second 'more predictable itineraries', third 'less inventory' and fourthly 'increased productivity'. Vietnam Open To Foreign Investment In Freight Sector Vietnam has opened its doors to foreign investment in the logistics sphere as of January 11 2014, which could spur on the industry going forward. Wholly-owned foreign-invested enterprises (FIE) offering certain logistic services, such as storage and warehouse services and freight forwarding services, will be permitted to enter the Vietnamese market although firms offering container handling services and road transport services will still require joint ventures (JVs) with Vietnamese partners. Container handling services still require JVs with Vietnamese firms with foreign capital contribution not exceeding 50%, except at airports, for instance. Maritime YICT Launches New Direct Weekly Shipping Service SVG The Chinese Yantian International Container Terminal (YICT) has started once-weekly direct shipping service SVG to Vietnam, it was announced in April 2014. The service will first call at Hong Kong and then will sail to Haiphong, Vietnam. The service, operated by China United Lines, will be called in Yantian on Fridays. The launch of the new service will aid the transport growth demand between southern regions of China and Vietnam. © Business Monitor International Page 36 Vietnam Freight Transport Report Q3 2014 Shipping Agents To Increase Container Transportation Cost Several shipping agents have announced hikes in the haulage rates by hundreds of dollars for each goods container shipped between Vietnam and the EU, the US and Australia, reported VietNamNet Bridge in March 2014. Hapag-Lloyd is set to hike rates for transporting goods from Vietnam to the US and Canada by USD240 and USD300 per twenty-foot equivalent unit (TEU) and forty-foot equivalent units (FEU) respectively. The revised rates will be effective from April 1. Meanwhile, Cosco and US Lines have revealed similar rises in transport costs. Hapag-Lloyd and other shipping firms also intend to increase the freight rate for goods transported from the US or Canada to Vietnam by USD40 per TEU and USD100 per FEU respectively. This hike will be applicable from April 15. Vietnam Urged To Put In Place New Port Strategy Vietnam has been advised to implement a double strategy by the general director of Maersk in Vietnam to overcome the problems currently afflicting the country's shipping industry. According to Bich Nguyen, speaking to Port Strategy in February 2014, among the problems accruing at the moment is poor channel dredging, so that larger vessels cannot access Vietnam's river ports. Nguyen stated: 'It is important for the country not to build more ports but to focus on 1) improving the utilisation of already invested ports in Cai Mep areas and 2) maintaining sufficient channel draft level at other river ports by regular dredging activities. One of the biggest challenges for shipping liners to operate in Vietnam river ports is insufficient channel draft and the rivers are narrowing up quickly.' Air Finnair Cargo Expanding In Vietnam Finnair Cargo is building on its air freight growth at the beginning of 2014, by expanding its routes. The company's focus for its most immediate service expansion is in Vietnam, with the company enticed by the country's growth outlook and expanding air freight demand. Finnair Cargo has announced that it will enhance its cargo offerings between Europe and Vietnam, with a third weekly freighter flight to Hanoi from March 31 2014. Further cargo capacity will be offered in the © Business Monitor International Page 37 Vietnam Freight Transport Report Q3 2014 bellyhold of the company's passenger planes from June 2 2014, when Finnair commences its seasonal passenger flights to Vietnam. Finnair Cargo will therefore boost the number of cargo flights from Europe to Vietnam to six per week, increasing the capacity from 155,000 tonnes to 315,000 tonnes. Of this, 270,000 tonnes will be carried by MD11F (freighter) and 45,000 tonnes by A340 passenger planes. Finnair Cargo's Hanoi expansion will offer further growth options for company, which has so far enjoyed year-on-year (y-o-y) freight growth for the first two months of 2014. In February 2014 Finnair Cargo's operations expanded by 8.2% y-o-y in terms of cargo handled. Year-to-date data show a 9.8% increase. Asia makes up the largest part of Finnair Cargo's operations, with 51% of the company's total cargo tonnage flown to the region in the first two months of 2014. Volumes to the region are however down y-o-y, declining by 3.6% for January and February 2014. Despite this decline Finnair Cargo is continuing its Asia growth strategy, but BMI notes it is focusing its expansion on an emerging aviation market in Asia, Vietnam. In 2013 Vietnam's air freight increased by 2.8%, following a 10.8% decline in air cargo volumes in 2012. In 2014 we project this growth in air freight demand in Vietnam to continue, with a growth y-o-y of 2.8% projected. BMI projects the country's air cargo sector will continue to expand and growth will strengthen over the medium term. Between 2014-2018 we project the country's air freight levels to increase by 21.4% to reach a forecast 223,040 tonnes in 2018. Reforms Needed To Maximise Benefits Of Airport Privatisation Vietnam's Ministry of Transport is awaiting approval from the prime minister of Vietnam, Nguyen Tan Dung, to partially privatise the country's state-owned airport operator, Airports Corporation of Vietnam (ACV). We believe that the plan to divest ACV is positive for the growth outlook of Vietnam's airport sector, but highlight that regulatory reforms are necessary to maximise the benefits of private sector participation. According to Vietnam's Ministry of Transport (MOT), it is seeking to sell a 25% stake in ACV this year, with the government holding the remaining 75%. ACV currently manages 22 airports in Vietnam, with more than 50% of its revenues from the Tan Son Nhat and Noi Bai international airports. We believe that the plan to partially privatise ACV is positive for the growth outlook of Vietnam's airport sector. In recent years, we have seen delays to several airport projects in Vietnam due to the lack of funds (see our Industry Forecast 'Transport Infrastructure - Q2 2014', January 16 2014). We have also seen the development of several airports - e.g. Dong Hoi airport - that have operated well below capacity and © Business Monitor International Page 38 Vietnam Freight Transport Report Q3 2014 resulted in losses for ACV. Both scenarios took place despite the rapid rise in the number of international visitors into Vietnam and the increase in purchasing power among Vietnamese consumers (see chart). In our opinion, both scenarios have arise due to a lack of private sector participation. As a state entity, ACV is driven by the whims of the government and not by market forces. This had led to the construction of airports projects that are not financially viable and do not provide a positive rate of return to ACV. With great private participation, we believe the Vietnamese government would be able to unlock a sizeable amount of capital for the development of new airports in Vietnam as well as increase the likelihood for airport projects to be driven by market forces. According to the MOT, the partial divestment of ACV would raise around VND3.7trn (USD175.6mn) as the ministry valued ACV's chartered capital at VND14.69trn at the end of 2013. The funds raised from the sale of ACV are expected to be used as seed money for the development of new airport projects, such as the USD10bn Long Thanh international airport project and the Noi Bai international airport expansion project. Should these projects move forward and start construction works, this would boost the growth of Vietnam's airport infrastructure sector over the coming years. At present, we are forecasting real growth for the sector to average 2.4% per annum between 2014 and 2018. Regulatory Reforms Essential However, we highlight that the privatisation of ACV is not the be all and end all in generating sustainable growth in Vietnam's airport infrastructure sector. Regulatory reforms are also necessary to eliminate existing hurdles to project execution such as permit approvals, environmental clearances and land acquisition. The Vietnamese government has made some progress in this regard, having recently strengthened its land regulations in November 2013 (see 'Revised Land Law A Major Step In Tackling Corruption', December 9 2013) and announced a new resolution to eliminate unnecessary administration procedures for investment projects in February 2014. According to the Ministry of Justice (cited from Intellasia), the number of administrative procedures that companies have to follow from the beginning to the implementation phase will be cut down from 34 to 22. This would reduce the time taken to complete the entire administrative process by 50% and save companies up to VND1.3trn per annum. Regulatory reforms are also needed to create a legal framework that ensures a competitive market and eliminates economic wastages. At present, ACV is operating as a monopoly in Vietnam's airport sector. This creates significant scope for corruption and rent-seeking as private investors that own ACV could focus on eliminating the competition and arbitrarily raise fees that are not in the public's interest. © Business Monitor International Page 39 Vietnam Freight Transport Report Q3 2014 Company Profile Vietnam Airlines Cargo SWOT Analysis Strengths ■ Vietnam Airlines Cargo is the main air cargo provider in Vietnam. ■ The recent green light given to the purchase of Jetstar Pacific will only strengthen the company's domestic position. Weaknesses ■ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant on using the bellyholds of its parent company's planes. Opportunities ■ The air carrier is well placed to benefit from Vietnam's growing role in the trade sector. The country has flooded money into the development of the country's port sector, but BMI believes aviation also stands to benefit. ■ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could result in cargo being transported in the bellyholds of aircraft in the future. ■ At the end of 2012, Vietnam Airlines announced that it was to introduce a new air route linking the Vietnamese capital with Jakarta, in a bid to 'boost tourism and economic links between Vietnam and Indonesia', according to Bloomberg Business Week. The flights will depart on Tuesdays, Wednesdays, Fridays and Sundays, leaving Ho Chi Minh City at 10am local time, and arriving in Jakarta at 1pm local time. Jakarta is now connected to six ASEAN countries in total. ■ Vietnam Airlines has increased the frequency of its flights to Gatwick Airport, London, it was announced in April 2013, potentially opening the door for further link ups between the two countries. ■ In order to ease congestion at Ho Chi Minh City's Tan Son Nhat International Airport, Vietnam, officials at a meeting in Hanoi in July 2013 called for a new airport to be built in the country. Thanh Nien News reported the chairman of the board, Airports Corporation of Vietnam, Nguyen Nguyen Hung as stating: 'We should have started construction by now, in order to have the first phase completed by 2020.' © Business Monitor International Page 40 Vietnam Freight Transport Report Q3 2014 SWOT Analysis - Continued ■ There is further room for co-operation between Vietnam and the US in the coming years, it was declared at the US-Viet Nam Aviation Co-operation Working Group held in Ho Chi Minh City in September 2013. ■ Vietnam Airlines began to take delivery of some 900 Nordisk light weight air cargo containers in January 2014. With the containers weighing less than conventional boxes due to being fashioned from AKE aluminium as opposed to normal aluminium, the costs associated with handling them will reduce due to lower fuel consumption and reduced carbon emissions. Threats ■ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Company Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the domestic market. In 1993, it was established as Vietnam's national carrier. The cargo carrier's operations are concentrated in Asia, catering for the domestic market. The airline operates its cargo business by transporting goods in the bellyholds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to other Chinese airports. It has also developed routes to Australia, with freight connections to Melbourne and Sydney. Allied to Vietnam Airlines Cargo's cargo links to three destinations in Europe (Paris, Frankfurt and Moscow), parent company Vietnam Airlines began operating a direct air route to the UK in the last months of 2011. The service flies to Gatwick Airport, with cargo space available in the bellyholds of planes going to and from London. Etihad Airways announced at the start of the October 2013 that it had launched its first commercial passenger service between Abu Dhabi and Ho Chi Minh City. Vietnam © Business Monitor International Page 41 Vietnam Freight Transport Report Q3 2014 Airlines is its codeshare partner and its VN code will be placed on the Abu Dhabi-Ho Chi Minh City sector. Taking advantage of the fast-growing market, Etihad Airways President and CEO James Hogan explained that: 'The United Arab Emirates is Vietnam's seventh largest trading partner and its largest in the Gulf region. In 2012, exports from Vietnam to the UAE exceeded USD2bn for the first time - up 82% on 2011 - and forecast to exceed USD4bn in 2013. The 13.1-tonne belly-hold capacity of our Airbus A330-200 aircraft, which equates to more than 9,500 tonnes per year, gives us sufficient capacity to boost the volume and value of trade between the UAE and Vietnam and to other markets in the GCC, Europe and North America.' Latest Activity Twentieth Member Added To Alliance Garuda Indonesia was welcomed as the latest member to the global airline alliance, SkyTeam, in March 2014. Along with Vietnam Airlines, the other members are: Aeroflot, Aerolíneas Argentinas, Aeroméxico, Air Europa, Air France, Alitalia, China Airlines, China Eastern, China Southern, Czech Airlines, Delta Air Lines, Garuda Indonesia, Kenya Airways, KLM Royal Dutch Airlines, Korean Air, Middle East Airlines, Saudia, TAROM and Xiamen Airlines. Michael Wisbrun, SkyTeam's Managing Director, stated: 'Garuda's entry into the alliance will give its customers access to SkyTeam's 1,064 destinations, covering over 90% of the most relevant traffic flows in the world. Garuda strengthens our presence throughout the Asia Pacific region for our 588 million global passengers.' He added: 'SkyTeam aims to boost its members' competitiveness by strengthening network and hubs, enhancing its global footprint, improving customer experience and introducing innovative initiatives that enhance customer benefits.' © Business Monitor International Page 42 Vietnam Freight Transport Report Q3 2014 Vietnam Petroleum Transport Company (VIPCO) SWOT Analysis Strengths ■ Around 60% of VIPCO's fleet is employed by Petrolimex. ■ The company boasts a relatively young fleet. ■ It has diversified away from operating in a single sector, with a real estate arm. Weaknesses ■ VIPCO only operates in one shipping sector. Opportunities ■ The company plans to expand its fleet, although no further information is currently forthcoming. ■ Petrolimex made a company announcement at the end of July 2013 to state that it had signed a memorandum of understanding (moU) with Japan International Cooperation Agency (JICA) and Tamada Industries, Inc. (Tamada) relating to 'cooperation in the trial project of double-shell tank against harmful matters'. ■ Both box and tonnage throughput growth at Vietnam's largest port, the Port of Ho Chi Minh City, is set to be healthy over the medium term. Threats ■ Vietnam's reliance on imported refined products is decreasing as the country brings online more refining capacity, which could negatively affect VIPCO. In the longer term, Vietnam's refining capacity could allow the state to export. Company Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime transport for petroleum products. The company has a diversified portfolio, including units that support its product tanker fleet - such as its port operations and freight forwarding services. It is also engaged in real estate. Strategy VIPCO has developed a fleet of six product tankers with a total capacity of 176,111 deadweight tonnes (DWT). The fleet is relatively young with an average age of 16 years. VIPCO has a fleet expansion strategy in place and is prepared to invest either in newbuilds or purchasing tankers under the age of 10 years. The company plans to boost its fleet to 200,000DWT. © Business Monitor International Page 43 Vietnam Freight Transport Report Q3 2014 The majority of VIPCO's tanker fleet (60%) is employed to meet the transport needs of the Vietnam National Petroleum Corporation (Petrolimex). The remaining 40% is charted to other consignees. Via its connection with Petrolimex, the company is able to cater for Vietnam's oil sector. While Vietnam has estimated oil reserves of 4.6bn barrels, it imports refined products. The company's shipping unit is complemented by its petrochemical terminal's sector. The board of directors of Petrolimex announced the establishment of a new whollyowned subsidiary, PG Tanker, in 2013, with Nguyen Anh Dung made chief executive officer. Headquartered in Hanoi, the subsidiary will be charged with transporting oil products, marine services and the repair and building of tankers. Financial Data 2013 Deputy General Director Tran Ngoc Nam explained at the end of December 2013 that profits were low at Petrolimex, owing to the Vietnamese government's efforts to curb inflation and stabilise the economy through retail price adjustment. In the first half of 2013 the company announced profits of VND898bn (USD42.69mn), however, according to Viet Nam News, earnings fell short 'of the full-year target of the country's largest fuel wholesaler at VND1.98trn (USD94.2mn) in 2013. With only 45% of the plan covered, Petrolimex said it will exert efforts to make it in the second half of this year.' Latest Activity Petrolimax Gains 'Outstanding' Tag Petrolimax was awarded the tag of one of the 'Top 100 Most Outstanding Enterprises In 2013' in Vientiane, Laos, in February 2014. According to Petrolimax: 'This programme was sponsored by the Ministry of Information, Culture and Tourism, the Ministry of Industry and Trade of Laos, and the Union of Vietnamese Scientific and Technological Associations. The award giving ceremony was directly broadcasted by Laotian Television and relayed by Vietnamese Television.' © Business Monitor International Page 44 Vietnam Freight Transport Report Q3 2014 Vietnam National Shipping Lines (Vinalines) SWOT Analysis Strengths ■ Diversified fleet operating in dry bulk, container and oil transport. ■ Largest commercial shipping line in Vietnam. ■ On December 16 2012, Vinalines launched the second biggest bulk carrier in Vietnam in Hai Phong city. Named Vosco Sunrise, the bulk carrier has been designed to cater for a deadweight of 56,200DWT. Weaknesses ■ Vietnam does not play a role on the major Asia-Europe routes, despite developing as a direct port of call on these routes. ■ The USD3.6bn Van Phong International Port project, primarily constructed by stateowned Vinalines, was suspended in June 2011 following a reassessment of the geological conditions at the project site. ■ Vietnamese shipping company Vinalines is currently USD2.1bn in debt, reported Reuters in June 2012. ■ Vinalines' heavy exposure to Vietnam's domestic transport sector, which has been performing well recently, indicates that the firm's struggles go beyond the troubles facing the global industry. ■ According to chairman of Vietnam Shipowners' Association Vu Xuan Quynh, a large sell off of old tonnage is needed, with Vinalines seeking to offload around 1.4m DWT of ships, Sea Ship News reported in July 2013. ■ Vinalines was asked by the government to withdraw its plans to participate in the development of the northern Lach Huyen Port, reported Sea Ship News in March 2013. The company will continue to concentrate on its ongoing port projects; however, Hanoi said that it needs to make arrangement of funds before it can mull over additional expansion. Vinalines teamed up with Japan's Itochu, MOL and NYK for the development of the port. ■ The death sentence handed out to Vinalines' former chairman at the end of 2013 for embezzlement has done little for the company's reputation. © Business Monitor International Page 45 Vietnam Freight Transport Report Q3 2014 SWOT Analysis - Continued Opportunities ■ Vietnam is expanding its role in the global box market and it is fast becoming a mainstay port of call on Asia-Europe services. ■ Potential to increase its intra-Asia role, shown by the expansion work at Cai Mep, and well placed to be chosen as a partner on these services by major lines. Threats ■ While Vietnam has invested heavily in its port network, the logistics supply chain could be let down by the landside freight network, which will have a negative impact on operators. ■ In 2011, Vinalines posted its first ever loss in 15 years of operations, with further losses expected. ■ Overcapacity is a threat over the medium term, unless money is pumped into port facilities and infrastructure. ■ Vietnamese police issued an arrest warrant for the former chairman due to the scandal rocking the debt-mired company. Duong Chi Dung has been accused of deliberately mismanaging Vinalines during his tenure. ■ Vinalines has been stung by the poor performance of the three container terminals it has joint venture interests in. Company Overview Vinalines is Vietnam's largest commercial shipping line. Established in 1996, it caters for domestic trade in Vietnam and offers intra-Asia services. The company also has a port operating division that is the largest in Vietnam, controlling and managing ports in Quang Ninh, Hai Phong, Da Nang, Ho Chi Minh and Can Tho. Strategy Vinalines' 14 shipping companies operate a diverse fleet, dominated by dry bulk vessels but also boasting container ships, oil and product oil vessels. According to the company's website, Vinalines' fleet consisted of 128 vessels. The line is looking to expand, with a plan centred on increasing the proportion of specialised vessels such as box ships or oil tankers. In order to achieve this, the line was seeking to spend USD2bn on ordering new ships from Vietnamese yards seeking state funding for the plan. Vinalines has in fact ended up expanding its fleet quicker than intended, with the shipping line taking on 36 vessels © Business Monitor International Page 46 Vietnam Freight Transport Report Q3 2014 from the debt laden Vietnamese shipbuilder Vinashin in July 2010. Vinaline's chairman, Duong Chi Dung, said at the time that up to two-thirds of the acquired vessels could not be used as they failed to meet technical requirements. He estimated that the company would need to spend USD26mn to repair the vessels and purchase insurance cover. Dung added that the company expected some financial aid from the government for the project. Vinalines services the trade needs of Vietnam's domestic shipping market, but also has exposure to the intra-Asia trade lane after joining forces with NYK in December 2010 to launch a Thailand-Vietnam-Singapore (TVS) service. Vinalines provides a 1,100 twentyfoot equivalent unit (TEU) vessel for the service. BMI believes that Vinalines' presence on the intra-Asia trade route will increase, with major lines looking to expand into the route and the company well placed to enter partnerships with them. Vinalines is also increasing its contacts in the container sector, partnering with a number of the majors on container terminal projects in Vietnam. According to Port Strategy, Vietnam is of increasing interest in East Asia, due to the fact that it is focusing on becoming better connected with both short and long haul destinations. Providing the bedrock to this strategy are the new terminals constructed in the Cai Mep area. In September 2013, the wholly owned limited liability company, Quy Nhon port under Vinalines launched an initial public offering as part of ongoing restructuring of the company, approved back in February 2013. In a high-profile court case in Hanoi in January 2014, the former chairman of Vinalines, Duong Chi Dung admitted to handing out bribes to members of the country's ruling communist party in a bid to avoid his imminent arrest for embezzlement. Dung was sentenced to death in December for siphoning off millions of dong from the company. Financial Data 2013 Vinalines is bracing itself for a full-year loss of VND2.1trn (USD101mn) already as the company continues to perform abysmally following 2012's reported loss of VND2.44trn. The company's CEO, Nguyen Canh Viet, said: 'There are few transporting contracts amid these crisis times, while several partners refused to clear their payment on time, despite the cheap fares.' 2012 Vinalines announced a VND1,439bn (USD69.2mn) loss during the first half of 2012, which is around double the losses incurred for the corresponding period a year previous. The loss was attributed to a 'perfect storm of liquidity and jobs woes', according to Vinalines Director Nguyen Canh Viet, reported by Vietnam Investment Review. © Business Monitor International Page 47 Vietnam Freight Transport Report Q3 2014 Financial Data 2011 Vinalines recorded a VND62.15bn (USD3mn) profit for 2011, despite posting a loss of VND660bn (USD32mn) in H111 - the first time this has ever occurred in the company's 15 years of operations. The results came as a surprise to analysts who were expecting the company to suffer from the sinking of the bulker Vinalines Queen. In 2011, Vinalines shipped 36.8mn tonnes of cargo, which was a 1% annual increase on 2010. Latest Activity Vinalines Announces New President The new president of Vinalines was announced on March 18 2014 at the company's head office by Vietnam's Vice Minister Of Transport Nguyen Hong Truong. The appointment of Le Anh Son was attended by various key governmental figures. Truong made the announcement, stating that the new appointee would be expected to prove that his experience counted and backed the new president to guide Vinalines through a challenging time. © Business Monitor International Page 48 Vietnam Freight Transport Report Q3 2014 Political Outlook Foreign Policy BMI View: We believe that China's growing military presence in the region will continue to dominate Vietnam's foreign policy agenda over the coming years. Vietnam is likely to continue to fall further behind in an arms race with China due to the latter's wide technological lead with regards to its military capabilities and stronger financial position. Nonetheless, we expect Hanoi to maintain a sizeable defence budget over the coming years. There is evidence to suggest that escalating concerns over China's growing military presence in the region will continue to dominate Vietnam's foreign policy agenda over the coming years. Despite an agreement by Hanoi and Beijing in mid-2013 to establish a naval emergency hotline to improve communications between the two navies, which has helped to calm bilateral tensions over territorial disputes in the South China Sea, we believe that the broader picture remains largely unchanged. We believe that Vietnam will maintain its present stance of trying to engage China, by playing catch-up in the form of an arms race to boost the former's military capabilities. Meanwhile, we expect Hanoi to continue to deepen ties with the US and members of the Association of South East Asian Nations (ASEAN) as a counterbalance against China's growing military presence and political clout in the region. Falling Behind In The Arms Race With China According to a report published by the Australian government's Defence Intelligence Organisation (DIO), China's defence budget has averaged annual growth of around 10% over the last decade. China's military spending increased by 8.7% (in real terms) from 2011 to US$106bn in 2012, dwarfing Vietnam's defence budget of US$3.3bn in 2012, although it is expanding at a more rapid pace of 16.9%. Given the wide technological lead that China has over Vietnam in terms of the modernisation of the two countries' military, and that China is in a much better position to be able to finance further investment in its military, we believe that Vietnam is likely to fall further behind in the arms race. Indeed, the Vietnamese government's efforts on the economic front to address the country's fiscal imbalances and reduce the budget deficit (which stood at an estimated 5.1% of GDP in 2013), will limit the amount of resources that can be further allocated towards military spending over the coming years. © Business Monitor International Page 49 Vietnam Freight Transport Report Q3 2014 Aggressive Stance Towards China Could Boost Domestic Support Vietnam - Short-Term Political Risk Ratings Source: BMI Leveraging On Anti-Chinese Sentiment Nonetheless, we believe that Hanoi will maintain a sizeable defence budget as a means to assure the Vietnamese public that the government will respond seriously to any move by Beijing that would be viewed as a threat to the country's sovereignty and territorial claims in the South China Sea. We note that antiChinese sentiment in Vietnam has grown rapidly as a result of the increasing frequency at which the two countries have engaged in territorial disputes in the South China Sea in recent years. Thus, adopting an aggressive stance against Beijing could also prove to be an effective strategy in boosting political support for the ruling Communist Party of Vietnam (CPV), which is in line with the party's efforts in recent years to ease public dissent towards the government - mainly due to rampant corruption and lack of progress on democratic reforms. Table: Vietnam Political Overview System of Government Head of State Head of Government Last Election © Business Monitor International Single-Party Socialist Republic President Truong Tan Sang (serving first five-year term) Prime Minister Nguyen Tan Dung (serving second five-year term) Parliamentary - May 2011 Page 50 Vietnam Freight Transport Report Q3 2014 Vietnam Political Overview - Continued Presidential - July 2011 Composition Of Current Government Key Figures Communist Party of Vietnam The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nguyen Phu Trong, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung, and Minister of Public Security Tran Dai Quang. Other Key Posts Main Political Parties (number of seats in parliament) National Assembly Chariman - Nguyen Sinh Hung, Minister of National Defence - Phung Quang Thanh, Minister of Planning and Investment - Bui Quang Vinh, Vice President Nguyen Thi Doan, Central Bank Governor - Nguyen Van Binh. Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reformminded faction originating from Southern Vietnam and an older generation, originating from the North, more aligned to traditionally communist ideology. Next Election Presidential and Parliamentary - May 2016 Ongoing Disputes Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South China Sea Key Relations/ Treaties ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council BMI Short-Term Political Risk Rating BMI Structural Political Risk Rating 79 57.7 Source: BMI Long-Term Political Outlook BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US. Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam (CPV)'s monopoly on political power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a more pluralistic society over the coming decade and beyond. © Business Monitor International Page 51 Vietnam Freight Transport Report Q3 2014 Indeed, the CPV's strict control of the media and political opinion is already cracking, with a growing number of internet bloggers becoming increasingly critical of government policy. Challenges And Threats To Stability Inflation And Devaluation As Drivers Of Discontent: As in neighbouring China, economic growth has brought sizeable material gains for the majority of the population. However, the Vietnamese government's loose fiscal and monetary policies have led to high levels of inflation and repeated devaluations of the dong in recent years, which have eroded the real value of wages and savings. A failure to contain inflation at a reasonable level and uphold the real value of the dong could undermine confidence in the regime. Divisions Within The Communist Party: High inflation and devaluation have opened schisms within the CPV leadership between proponents of continued economic reform and a more conservative wing which believes that a deceleration or even reversal of reform policies would benefit macroeconomic stability. Ethnic And Regional Tensions: Vietnam is relatively homogeneous, with ethnic Viet comprising almost 90% of the population. Ethnic 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. © Business Monitor International Page 52 Vietnam Freight Transport Report Q3 2014 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 57.7/100 is weighed down by a score of 29.0 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up three scenarios for Vietnam's political future: Scenarios For Political Change Enter graphic title Core Scenario - CPV Turns Into A Technocratic Enter graphic subtitle Regime: Our core scenario is for the CPV to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older more traditionally minded party members. However, intermittent periods of harsh repression against pro-democracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best-Case Scenario - Gradual Political Liberalisation: Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National © Business Monitor International Page 53 Vietnam Freight Transport Report Q3 2014 Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held, but where only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan and Japan have shown that even dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario - Mass Unrest And Violent Suppression: Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Page 54 Vietnam Freight Transport Report Q3 2014 Oil Price Outlook Bunker Fuel BMI View: In the short-term, the slow return to health of the shipping sector from a wider economic recovery in Europe and the US will ease the rate of decline in bunker fuel prices. The shift in refining production away from residual fuel oil will also moderate this expected fall. However, in the longer term, stringent fuel standards to come into effect in the shipping sector will once again increase the rate of decline in high sulphur bunker fuel prices. Table: BMI Crude Oil & Bunker Fuel Price Forecast (USD/bbl) 2012 2013 2014f 2015f 2016f 2017f 2018f 111.70 108.79 104.96 102.00 101.00 99.00 98.00 93.30 98.01 99.04 101.00 96.00 94.00 95.00 108.88 105.36 101.84 100.50 98.50 96.50 95.50 Rotterdam 101.52 95.07 89.89 88.00 84.00 81.83 80.00 New York 104.67 97.52 96.97 93.00 88.00 84.00 81.00 Singapore 102.46 93.96 89.32 87.86 85.73 83.60 82.47 Global 102.88 95.52 92.06 89.62 85.91 83.14 81.16 Rotterdam 97.47 91.24 86.20 85.05 83.00 80.82 79.00 New York 100.32 93.13 91.07 89.00 86.00 83.00 80.70 Singapore 101.08 95.84 91.14 88.50 84.83 82.70 81.70 99.62 93.40 89.47 87.52 84.61 82.17 80.47 Rotterdam 99.50 93.16 88.04 86.53 83.50 81.33 79.50 New York 102.50 95.33 94.02 91.00 87.00 83.50 80.85 Singapore 101.77 94.90 90.23 88.18 85.28 83.15 82.09 Global 101.25 94.46 90.76 88.57 85.26 82.66 80.81 Crude Oil Brent WTI Dubai Bunker Fuel 180 Bunker Fuel 380 Global Bunker Fuel Average f=forecast. Source: Bloomberg, BMI With the exception of New York, bunker fuel prices broadly continued a downward shift in Q1 2014. This aligns with our view that bunker prices are set to trend downwards alongside weaker crude oil prices. New © Business Monitor International Page 55 Vietnam Freight Transport Report Q3 2014 York's divergence from the norm can be attributed to the cold snap that persisted in the US East Coast through much of the quarter. Frigid weather and blustering wind had limited the number of barges that could berth at the New York harbour, thereby driving up prices to a 12-month high in mid-February. Cold Sees New York Buck Downtrend In Q114 Bunker Fuel 180 Prices (USD/bbl) Source: Bloomberg However, we do note that the downward movement in Rotterdam and Singapore has been less pronounced than in 2012 and 2013. This is an outcome of the following: an improving outlook for the global shipping sector as European and the US economies recover, and from a reduction in heavy bunker supplies. These are trends that will continue throughout 2014 to slow the rate of decline in bunker fuel prices. The Storm Clears For Shipping We are positive about the outlook of global container trade in H1 2014, with economic recovery continuing in the United States and Europe, and China's economy rebalancing towards a somewhat slower, but more consumer-oriented growth pattern. While there have been worries about slower expansion of emerging markets, their growth will still remain in positive territory. © Business Monitor International Page 56 Vietnam Freight Transport Report Q3 2014 Improving Outlook At European Ports Box Traffic At Top European Ports, TEUs f=forecast. Source: Various Port Authorities Overall, our moderate optimism is based on the fact that global consumers are loosening their purse strings a little more than in recent years. According to our estimates, global consumption grew by an average of 2.4% over 2011-2013, but will rise to 2.7% in 2014 and to 3.0% in 2015. As the majority of international trade in consumer goods is containerised, this increase in demand will translate into greater box traffic and shipping demand. © Business Monitor International Page 57 Vietnam Freight Transport Report Q3 2014 Chinese Consumers To Support Demand China - GDP & Household Spending (% Change Y-o-Y) f=forecast. Source: China National Bureau Of Statistics, BMI (Slightly) Better Times For Bunker Prices Lower production of heavy bunker fuel oil will also see the slower fall of bunker fuel prices in 2014 than in the previous two years. Some of Asia's largest refineries are shifting their product slates to produce cleaner and lighter fuels and other industrial oil products with higher margins. Greater sophistication of refineries is also resulting in fewer barrels of residual oil available to the market. For example, South Korea's Hyundai Oilbank intends to reduce fuel oil production at its Daesan plant in 2014. Heavy fuel oil output will also be hit by new government regulations in Japan, which mandates that refiners increase the ratio of residue cracking to crude distillation from 10% to 13% with effect from April 2014. With more cracking of residual fuel oil, this will make fewer volumes of heavier oil available. In Europe, upgrading of Russian refineries to add hydrocrackers will similarly privilege production of lighter products over bunker fuel oil. This will provide some support to bunker fuel prices in 2014 and early 2015, alleviating some of the effects of lower crude prices. © Business Monitor International Page 58 Vietnam Freight Transport Report Q3 2014 Long-Term Threats Linger However, in the longer term weaker demand will exert more downward pressure on bunker fuel prices. Fuel efficiency We expect an increase in new and more fuel-efficient ships - especially container ships. Importantly, these ships are also larger, thereby further reducing overall bunker fuel demand as older ships are phased out. 2013 has seen ships with new mega-vessel capacity, including Maersk Line's Triple E-Type 18,000 twenty-foot equivalent unit vessel, the largest ship to date, come online. One of the latest product developments is from China's Shanghai Merchant Ship Design & Research Institute (SDARI), which has reportedly designed a very large ore carrier (VLOC) that can cut fuel consumption by almost 18%. Overall Cleaner Shipping Industry These efficiency trends are also part of a broader push for a greener industry by both governments with forward-leaning environmental policies and major ports such as Los Angeles and Hong Kong. ■ UN International Convention for the Prevention of Pollution from ships (MARPOL): Limits sulphur content in bunker fuel to less than 2.5% from 2012 and no more than 0.5% from 2020; ■ Emission Control Area (ECAs): In North America and northern Europe (comprising the Baltic Sea, North Sea and English Channel), strict sulphur standards on bunker fuel have been imposed that will come into effect in 2015. By 2020, the European Union (EU) will impose a strict 0.1% limit on sulphur content of all vessels entering the EU ECA. ■ Energy Efficiency Design Index (EEDI): The International Maritime Organisation (IMO)'s EEDI will require new ships to cut its carbon dioxide emissions per dry weight tonnage capacity by 10% in 2015, 20% by 2020 and 30% by 2025. Assuming no relaxation of these policies, the shipping industry will have to meet these requirements either by retrofitting their vessels with scrubbers to reduce emissions, or switching to cleaner alternative fuels such as marine gasoil. Refineries are ramping up their production of low sulphur marine gasoil and ultra low sulphur diesel to meet increasingly stringent shipping requirements that will see these two fuels gain at the expense of traditional high sulphur fuel oil. © Business Monitor International Page 59 Vietnam Freight Transport Report Q3 2014 Rise Of LNG Liquefied natural gas (LNG) could be a particularly potent threat, as it could cost less than high sulphur bunker fuel, which use would have to be complemented with expensive scrubbing measures to meet new emission requirements and the adaptability of vessels to scrubbers (see 'LNG Bunker Fuel: Price Lends Support To Long-Term Development', August 21 2013). Possible Rise Of LNG Forecast - Bunker Fuel, LNG And Gasoil (USD/mnBTU) f=forecast. Source: Bloomberg, BMI Det Norske Veritas, a ship classification bureau, estimates that 19-45% of ships will be powered using LNG by 2030. Several European ports have invested in LNG shipping infrastructure to support this new industry, while Singapore has also engaged Lloyd's Register to help develop its port's LNG bunkering capabilities. While this remains a long-term prospect that will only kick in towards the end of our forecast period, it will dampen oil-based bunker fuel demand in the long term © Business Monitor International Page 60 Vietnam Freight Transport Report Q3 2014 Pressing Rotterdam & New York Harder We note the shift towards a cleaner shipping industry will hit demand and prices at New York and Rotterdam harder towards the tail end of our forecast period to 2018 given stricter standards in North America and North West Europe. Neither do we expect a sharp enough contraction in high sulphur bunker fuel supply to arrest a quicker fall in prices. In contrast, the slower adoption of these standards in Asia and the Middle East may see bunker fuel prices in Singapore experience a slower rate of decline. Long-Term Decline Accelerated By Regulatory Developments Forecast - Bunker Fuel Prices (USD/bbl) f=forecast. Source: Bloomberg, BMI Risks To Outlook The following factors will present risks to our outlook: ■ Crude oil prices. A spike or collapse in crude oil prices will affect our bunker fuel price, which is derived by forecasting the spread between crude and bunker fuel prices; ■ Larger-than-expected cutback in high sulphur bunker fuel production. This may come about particularly from the shutdown of older refineries in Europe and East Asia, and put upward pressure on prices. © Business Monitor International Page 61 Vietnam Freight Transport Report Q3 2014 ■ LNG prices. We have assumed LNG prices of about USD10 per mn British Thermal Units (mnBTU) in assessing the commercial viability of natural gas over oil-based bunker fuel in projecting the switch. Higher-than-projected prices, should there be delays in expected global LNG supply growth, will pose some upside risk to our bunker fuel price forecast. Nonetheless, we do not see this as a large risk as ships will have to turn to a cleaner fuel regardless to meet environmental regulations. ■ Fuel efficiency of LNG: The fuel efficiency of LNG as a shipping fuel, with future technology, is assumed to be the same as the oil-based bunker fuel we are forecasting. If it proves to be less fuel efficient, cost economics may not favour LNG as much. Once again, however, we note that the upside gains from this will more likely accrue to fuels such as ultra-low sulphur diesel or low sulphur bunker fuel - a different product from that we are forecasting. Jet Fuel BMI View: The prices of jet fuel are expected to trend downwards, alongside an expected softening of crude oil prices in the next five years. Nonetheless, this decline will be tempered by a better outlook for both air transport and shipping with economic recovery in the US and Europe, though a more cloudy outlook for Asia underpins our projections for prices in Singapore to experience a faster rate of decline than in Rotterdam and New York. Table: BMI Crude Oil & Jet Fuel Price Forecast, USD/bbl 2012 2013 2014f 2015f 2016f 2017f 2018f 111.70 108.79 104.96 102.00 101.00 99.00 98.00 93.30 98.01 99.04 101.00 96.00 94.00 95.00 108.88 105.36 101.84 100.50 98.50 96.50 95.50 Rotterdam 131.41 127.30 126.58 125.78 124.78 122.78 121.78 New York 130.74 125.10 126.46 125.67 123.14 121.96 120.16 Singapore 126.90 122.65 120.37 118.47 116.12 113.59 112.07 Crude Oil Brent WTI Dubai Jet Fuel f=forecast. Source: Bloomberg, BMI Better Outlook Tames Price Fall Jet fuel has trended downwards alongside the fortune of crude oil prices. However, a pick-up in air traffic activity - seen in recent months - will likely see a smaller decline in jet fuel prices vis-à-vis bunker fuel in 2014. IATA continues to uphold its optimism regarding air transport growth. It noted a 'strong start' to 2014 for both air freight and passenger makrets, a trend the IATA is optimistic will continue throughout the year on the back of economic recovery, especially in Europe and the US. © Business Monitor International Page 62 Vietnam Freight Transport Report Q3 2014 For freight in particular, IATA's chief executive Tony Tyler notes that 3.6% year-on-year (y-o-y) growth in air freight for the first two months of 2014 is a 'significant step up' from the 1.4% y-o-y increase seen over the whole of 2013. During this period, activity in the Middle East continued to see the greatest growth, coming in at 11.9% y-o-y in February 2014, thanks to new hubs in the Gulf that have increased capacity. Europe's economic recovery has also helped the region average a 5.7% y-o-y growth for January and February 2014. A Flying Start To The Year Air Freight Y-o-Y Growth In First Two Months Of 2014 (%) Source: IATA IATA also expects strong demand for passenger air travel. Passenger traffic for February 2014 - the most recently available data - saw a 5.4% y-o-y growth, marking year-to-date growth of 6.9%. Full year passenger traffic growth in 2013 was 5.2%. As in the case of air freight, the Middle East saw the strongest growth of about 15.8% in the first two months of 2014. However, we note that Europe's 6.1% and AsiaPacific's 6.0% over the same period is the more notable, as they account for 23.9% and 33.7% of total passenger market share as of February 2014. © Business Monitor International Page 63 Vietnam Freight Transport Report Q3 2014 Growth Preparing To Jet Off Passenger Demand Y-o-Y Growth In The First Two Months Of 2014 (%) Source: IATA Table: Total Air Freight And Passenger Volume Growth RPK (Feb) (% chg y-o-y) FTK (Feb) (% chg y-o-y) YTD RPK (% chg y-o-y) YTD FTK (% chg y-o-y) International 5.5 2.8 6.9 4.0 Domestic 5.3 3.6 6.8 1.6 Total Market 5.4 2.9 6.9 3.6 RPK: Revenue-Passenger-Kilometres; FTK: Freight-Tonne-Kilometres; YTD: Year-to-date. Source: IATA With our expectations that the global economy is set on a road of firmer recovery in 2014, this will continue to support the air freight and passenger industry, thereby supporting jet fuel demand (see 'Developed States To Lead Global Recovery In 2014', December 2013). However, the EU's decision to scrap jet fuel import duties from January 1 2014 will help soften prices in the Rotterdam market. The downward trend in crude prices will also add to the easing of jet fuel prices. © Business Monitor International Page 64 Vietnam Freight Transport Report Q3 2014 However, the extent of this decrease will be capped by continued recovery in the air freight and passenger sector driving fuel demand. Softer Prices But Supported By Expected Industry Growth Jet Fuel Prices (USD/bbl) Source: Bloomberg 2014 opened with lower European prices, but since the start of April 2014 prices at Rotterdam have seen a stronger uptick than in New York or Singapore. The strong growth recorded in Europe for both the cargo and passenger segments is significant given Europe is the world's second largest market for both air freight and passenger travel. © Business Monitor International Page 65 Vietnam Freight Transport Report Q3 2014 European Growth A Significant Boost Distribution Of Air Freight (LHC) & Passenger Travel (RHC) Market By Region Source: IATA The trend underpins our forecast for just a 1% y-o-y fall in jet fuel prices for 2014 in Rotterdam. The subsequent fall in prices seen from 2015 to 2018 is an outcome of our expectations for crude prices (with the exception of WTI) to fall, but we highlight our forecast for the rate of jet fuel price decline to be slower than for crude prices. In New York, moderate but healthy growth in both freight and passenger travel will also provide some support for prices. In addition, trade links across the Atlantic will also see New York trend closer towards Rotterdam. Of greater concern is the price of jet fuel in Singapore. While passenger demand growth remains robust, the freight picture in Asia is more worrying as the region experienced only a 0.1% increase in air freight demand in February 2014. While this was in part a result of the Lunar New Year holidays taking place in much of East Asia during the month, freight demand prior to the holidays - where stockpiling was to be expected - only grew 3.8% y-o-y, a little below the global average in January 2014. We note that economic growth slowdown in China - which could hit other Asian countries that together make up the supply chain of Asia Inc. - will affect air freight demand. While Europe's recovery could help support China's export industries, growing credit problems within China could limit the extent to which European demand will re-fuel Chinese growth. Therefore, we have a more moderate view on jet fuel prices © Business Monitor International Page 66 Vietnam Freight Transport Report Q3 2014 in Singapore, projecting that it will have a faster rate of decline over our forecast period than prices in Rotterdam or New York. Faster Fall In Singapore BMI's Jet Fuel Price Forecast (USD/bbl) f=forecast. Source: Bloomberg, BMI Risks To Outlook The risks to our outlook are mainly to the upside: ■ Crude oil prices: Given that our fuel price forecast is largely based on crude oil price expectations, fluctuations to crude oil prices will have a significant impact on our projections. ■ European recovery: If this has a stronger-than-expected impact on the Chinese economy, it will strengthen air cargo demand within the Asia-Pacific region and better support prices in Singapore. © Business Monitor International Page 67 Vietnam Freight Transport Report Q3 2014 Diesel BMI View: An expected fall in crude oil prices will see diesel/gasoil prices in New York, Rotterdam and Singapore follow a downtrend over our forecast period from 2014 to 2018. However, diesel prices will fall at a slower rate than gasoline. This is a result of our projections for diesel demand to remain relatively robust particularly in the transport segment. The rise of renewable energy, however, poses downside risks to our forecast as it could displace the role of diesel in power generation. Table: BMI Crude Oil And Diesel Price Forecast (USD/bbl) 2012 2013 2014f 2015f 2016f 2017f 2018f 111.70 108.79 104.96 102.00 101.00 99.00 98.00 93.30 98.01 99.04 101.00 96.00 94.00 95.00 108.88 105.36 101.84 100.50 98.50 96.50 95.50 Rotterdam 130.36 124.81 121.23 119.89 117.99 115.14 113.34 New York 130.79 126.56 126.28 122.79 119.97 116.53 116.41 Singapore 128.18 123.15 121.10 119.37 117.00 114.63 113.26 Global 129.78 124.84 122.87 120.68 118.32 115.43 114.34 Crude Reference Brent WTI Dubai Diesel f=forecast. Source: Bloomberg, BMI New York's One-Off Heat Up Diesel prices in the New York market diverged from that in Rotterdam and Singapore in Q1 2014, owing to the cold snap in the US East Coast. High demand for heating oil saw the price of diesel in New York spike to as high as USD144.91 per barrel (bbl) in early February, while Singapore and Rotterdam only reached a peak of USD125.75/bbl and USD123.99/bbl respectively over the same period. © Business Monitor International Page 68 Vietnam Freight Transport Report Q3 2014 Cold Snap Sees New York Diverge Diesel/Gasoil Prices (USD/bbl) Source: Bloomberg However, we note that this is most likely a false break for New York. The end of winter has seen diesel price at the New York market quickly come back down to converge with those in Rotterdam and Singapore. © Business Monitor International Page 69 Vietnam Freight Transport Report Q3 2014 Winding Down From A False Resistance Break New York - Diesel Price (USD/bbl) Source: Bloomberg, BMI Diesel/gasoil prices in Singapore and Rotterdam were less volatile in Q1 2014 and traded only sideways through much of the period. The difference between the lowest and the highest point during the quarter was USD7.28/bbl in Rotterdam and USD6.01/bbl in Singapore. This is much a result of the relative stability in crude oil prices over the same period. © Business Monitor International Page 70 Vietnam Freight Transport Report Q3 2014 Diesel/Gasoil Prices Flanked By Crude Stability Crude Oil Vs. Diesel/Gasoil Prices (USD/bbl) Source: Bloomberg, BMI NY: Short-Term Diesel Price Support Expected Diesel prices in New York are expected to follow international crude price trends. Although WTI is expected to increase over 2014, the global nature of the oil products market will see diesel prices in New York trace diesel/gasoil prices in Rotterdam and Singapore, which are expected to fall alongside the price of crude oil. However, we are bullish about New York prices in the short term. © Business Monitor International Page 71 Vietnam Freight Transport Report Q3 2014 WTI Marching To A Slightly Different Tune Brent, WTI & Dubai - Quarterly Crude Price Forecast (USD/bbl) f=forecast. Source: Bloomberg, BMI Market demand, particularly in the transport sector, will provide some support for diesel prices in New York. Our Autos team has noted that diesel is gaining traction in various segments of the automobile market. On the back of positive data from the residential housing sector as recovery continues, light truck sales in the US is expected to increase 5.3% year-on-year (y-o-y) in 2014. © Business Monitor International Page 72 Vietnam Freight Transport Report Q3 2014 Trucking Upwards US - Light Truck Sales (units) 15M 10M 5M 2018f 2017f 2016f 2015f 2014f 2013 2012 0M f=forecast. Source: US Dept of Transport, BMI The Autos team notes that diesel cars have seen considerable growth in sales; in March 2014 it saw the highest y-o-y growth rate among cars running on alternative fuels (see 'Diesel Could Be VW's Lifeline', April 7). Prices in New York are set to enjoy some support from this, given that Massachusetts and New York are two of the three states in the US that experienced the fastest growth in diesel cars and SUVs from 2010 to 2012, according to a 2013 research by R.L Polk and Co. Diesel demand will also be partially supported by growth in the rail freight sector, particular as producers turn to rail for the delivery of crude oil and oil products to bypass pipeline bottlenecks. Rising transportation of other bulk products such as coal and agricultural produce via rail will also bolster demand for rail freight. This growth will in turn be supported by investment into the US rail network. Our Shipping & Freight team forecasts a 3% y-o-y growth in US rail freight volumes, slightly up from its estimate of 2.3% in 2013 (see ' Freight Transport Industry Forecast - United States - Q2 2014', April 2). © Business Monitor International Page 73 Vietnam Freight Transport Report Q3 2014 Rail Speeding Up US - Rail Freight Tonnes ('000) & Growth (RHS) e/f = estimate/forecast. Source: North American Transport Statistics Database Nonetheless, this increase in demand will not significantly boost diesel prices. In addition to the downtrend in crude prices, diesel consumption will still make up less than 25% of total US oil consumption by 2018, despite a rise in demand from an estimate of 3.79mn barrels per day (b/d) in 2013 to 4.27mn b/d in 2018. In contrast, the US' diesel production is expected to rise from an estimate of 4.56mn b/d in 2013 to 5.01mn b/d in 2018 - a little more than the increase in domestic demand. © Business Monitor International Page 74 Vietnam Freight Transport Report Q3 2014 Diesel Production: More Than Sufficient US - Diesel Production & Consumption ('000b/d) e/f=estimate/forecast. Source: EIA, BMI Therefore, we expect the US diesel market to remain well-supplied. In addition, we highlight an expected loosening in the global diesel market would check diesel prices in the US from falling too far away from those in Singapore and Rotterdam. This underpins our view for prices in New York to converge more closely with the other markets in the longer-term. Rotterdam: Green Policies Drive Diesel Forward In Europe, environmental regulations for the transport sector are likely to provide some support to diesel prices. The uptake of diesel-powered cars, many of which are more fuel-efficient and are equipped with clean diesel technology, continues to rise in the region. According to the European Environment Agency (EEA), diesel cars have increased their market share from 31% of the European car market in 2000 to 54.9% in 2012. There is room for further expansion, as high oil prices prompt new buyers to look to more energy-efficient cars to save long-term costs. © Business Monitor International Page 75 Vietnam Freight Transport Report Q3 2014 Diesel Takes The Cake Share In The EU-15 Vehicle Market By Fuel Type Source: European Automobile Manufacturers Association The increase in diesel cars will limit the extent to which diesel prices in Europe will decrease in the shortterm despite a fall in crude feedstock prices. Further price support will come from a reduction of the continent's refining capacity owing to poor refining margins in Europe's older plants. Another key support for diesel will come from the shipping industry. The implementation of the Emissions Control Area (ECA) from 2015 will oblige the shipping sector to switch away from heavy fuel oil. Marine gasoil is expected to emerge as one of the preferred alternatives to heavy fuel oil. While natural gas could be a cheaper alternative, it would take time for gas to be credible alternative in view of the lack of gas bunkering facilities and the lack of physical liquidity in gas markets (see 'LNG Bunker Fuel: Price Lends Support To Long-Term Developments', August 21 2013). Therefore, while high diesel prices relative to other fuels could slow further uptake of diesel cars in the land transport sector from 2015, the marine sector will continue to keep overall diesel demand buoyant. Nonetheless, supply and demand for diesel in Europe will be balanced out in the longer term, notwithstanding our expectations for healthy demand and for less production in the region. US refineries are © Business Monitor International Page 76 Vietnam Freight Transport Report Q3 2014 not only boosting diesel production for the domestic market, but primarily targeting the European export market in view of the large opportunity across the pond. In addition to lower crude prices, this supports our view for diesel/gasoil prices to trend downwards in Rotterdam over our forecast period to 2018 despite relatively healthy demand. Singapore: Diesel Support With Power Risks Diesel is also expected to see relatively robust demand in Asia. In the short term, the land transport and the power sector - especially in South Asian countries such as India - will support consumption. For the latter, economic expansion will continue to drive demand from the commercial and private vehicle sector. State-regulated fuel prices also favour diesel over gasoline consumption. In fact, India was the world's second largest market for passenger diesel cars after Europe in 2012, according to a report by Bosch Media Service. The commercial vehicle segment in India is also a large diesel consumer. Unless India dramatically revises diesel prices upwards, the country can expect to see a continued uptake of diesel cars from costconscious consumers as car consumption rises. Transport Powers Diesel Consumption India - Distribution Of Diesel Consumption In 2013, By Industry (LHC) & Vehicle Segment (RHC) Source: Nielson for India's Ministry of Petroleum and Natural Gas © Business Monitor International Page 77 Vietnam Freight Transport Report Q3 2014 The power demands of South Asia's expanding economies will also lift diesel consumption. Sri Lanka, Bangladesh and Pakistan will continue to rely on diesel as a quick and easily accessible source of power over alternative fuels. A longer term source of diesel demand will come from the marine sector as Asia prepares for cleaner and more stringent marine fuel standards. Clean gasoil in particular is set to gain as ships move away from heavy bunker oil. Strong growth in Asia's agriculture sector, as forecast by our Agribusiness team, will also promote greater diesel use in its operations (see 'Agribusiness: Regional Overview - Asia', April 4). For instance, agriculture accounted for 13% of total Indian diesel consumption in 2013. Another emerging demand source for diesel could come from mobile towers and data centres in Asia. Back-up diesel generators will likely be required to support the growing number of these facilities to improve coverage, as projected by our Telecoms team. Despite these sources of diesel consumption growth, the effect on diesel prices in Singapore is unlikely to outstrip that of the fall in crude prices. ■ Firstly, demand could be adequately met by the expansion in Asia's refined product output, especially in India and China. According to our forecasts, we expect India to be a net exporter of diesel. China's imports of diesel have also been on the downtrend on the back of the country's increasing capacity to meet its demand growth. Moreover, many of the refineries in the region, especially in Singapore and South Korea, have upgraded their facilities to increase their production of ULSD to meet demand. © Business Monitor International Page 78 Vietnam Freight Transport Report Q3 2014 Rising Domestic Production Hits Diesel Imports China - Diesel Imports ('000 tonnes) Source: China General Customs Administration ■ Secondly, the slowness of South Asia to catch on to European fuel standards mean that the diesel demanded in South Asia will most likely be of higher sulphur content - and cheaper - than the gasoil contract we are tracking for Singapore. Therefore, the effects of rising demand will not be entirely reflected in Singapore contract prices, especially with India's ability to meet its domestic diesel demand without relying on exports. While India is looking to implement European fuel standards in the country to reduce pollution, the Auto Fuel Policy Panel convened by its Oil Ministry does not see this happening until April 2021 at the very least. This gives Indian refiners little incentive to upgrade their refineries to produce cleaner diesel in the short- to medium-term. © Business Monitor International Page 79 Vietnam Freight Transport Report Q3 2014 Diesel Output: More Than Enough For Local Needs India - Diesel Production & Consumption ('000b/d) e/f=estimate/forecast. Source: EIA, BMi ■ Thirdly, we expect these consumption gains to be moderated by a decline in demand from the power sector in the longer term. Indonesia, in particular, is converting some of its diesel power plants to run on gas to reduce the cost of power generation. This will make up for the increase in diesel passenger vehicle sales - especially for motorbikes - that our Autos team expects to see. Plans to build up liquefied natural gas (LNG) import capabilities in South Asia could also see South Asia rely less on gasoil to meet its shortfall in power supply, thereby posing a significant downside risk to the region's demand in the longer term. Pakistan, in particular, presents the biggest risk as it could start LNG imports by 2015 - price permitting. © Business Monitor International Page 80 Vietnam Freight Transport Report Q3 2014 Crude Effect Pushes Price Down Diesel/Gasoil Price Forecast (USD/bbl) f=forecast. Source: Bloomberg, BMI Risks To Outlook The use of renewable energy for power generation presents the biggest downside risk to our outlook. Several energy-intensive industries deploying small power generators for production are looking to renewable sources of energy. ■ Telecoms: Microsoft, for example, has sought to revamp the design of its data centre that will eradicate the need for diesel generators and will tap alternative backup energy options instead. A similar uptake of renewable energy especially in the large data centers in Asia would reduce long term demand for diesel. ■ Mining: A deal by First Solar to supply solar panels to mines in Western Australia will displace the role of diesel generators for mining operators. The replication of this in other mining sites globally will reduce one large source of diesel demand. Power: The potential for gains for solar energy over diesel is particularly large in the Middle East. If this takes off, it will free up significant diesel produced by the region's large refineries for the world market, provided that these refineries do not cut back on diesel output. © Business Monitor International Page 81 Vietnam Freight Transport Report Q3 2014 Macroeconomic Forecasts BMI View: Vietnam's latest real GDP reading, which showed that the economy expanded by 6.0% year-onyear (y-o-y) in Q413, has reaffirmed our conviction that the Vietnamese economy will begin 2014 on a strong note. Not only are we witnessing more evidence of a sustained pick-up in production activity and employment in the manufacturing sector, but we also expect foreign direct investment (FDI) inflows to accelerate as the economic recovery gathers pace over the coming quarters. We forecast real GDP growth to come in at 5.9% in 2014, versus Bloomberg consensus of 5.5%. In line with our view that the Vietnamese economy would accelerate forcefully into the final months of the year (see 'Economy Picking Up Pace', October 4 2013), latest data released by the General Statistics Office (GSO) showed that the economy expanded by 6.0% year-on-year (y-o-y) in Q413. This translates into fullyear growth of 5.4% for 2013, just slightly above our forecast of 5.3%. The latest GDP reading, combined with the strong set of economic data we have seen in recent weeks (accelerating foreign direct investment inflows, remittances, and merchandise trade exports), have reaffirmed our conviction that the Vietnamese economy will begin 2014 on a strong note. © Business Monitor International Page 82 Vietnam Freight Transport Report Q3 2014 Looking At A Strong Start For 2014 Vietnam - Real GDP Growth, % (LHS) & Contribution By GFCF & Private Consumption, pp (RHS) Source: BMI, General Statistics Office. (e = estimates, f = BMI forecasts) Signs Of Improvement Despite the lack of progress with regards to banking sector reforms and efforts to ease lending conditions (credit growth is estimated to have expanded by around 9% in 2013, well under the State Bank of Vietnam's initial target of 12%), the economy appears to be holding up well. Not only are we witnessing more evidence of a sustained pick-up in production activity and employment in the manufacturing sector (see 'Strong PMI Reading Reinforces Outlook On Growth', November 5 2013), but we also expect foreign direct investment (FDI) inflows into the export sector to accelerate as the economic recovery gathers pace over the coming quarters. Private Sector Investment To Drive Recovery According to figures published by GSO, FDI-related exports made up an estimated 67% of the country's total exports for the first 11 months of the year. Thus, although increased FDI inflows could potentially result in a temporary deterioration in the country's trade and current account dynamics due to a burst of © Business Monitor International Page 83 Vietnam Freight Transport Report Q3 2014 capital goods imports in the near term, we believe that this is a long-term positive for the economy. Furthermore, we view FDI inflows as a crucial source of economic growth over the coming quarters given that the Vietnamese government is struggling to unlock domestic lending. We forecast real gross fixed capital formation (GFCF) growth to come in at around 10% in 2014, contributing around 2.7 percentage points (pp) to our real GDP growth forecast of 5.9%. Expenditure Breakdown Private Consumption: We expect private consumption to grow at a relatively resilient pace of 6.5% in 2014. However, we note that the risk of further bankruptcies among SMEs could potentially lead to widespread job losses, especially in export-driven sectors. Uncertainties over the outlook for employment could, in turn, prompt households to cut back on spending. Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2014, partly led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the coming months as the effect of rate cuts in 2013 by the SBV begins to kick in. We are also seeing evidence that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to accelerate substantially from 4.1% in 2013 to 10.0% in 2014. Public Spending: We expect total public spending to remain relatively resilient in 2014, expanding at a respectable pace of 6.5%. However, there is limited room for the government to increase spending further owing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks. Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy, although we expect external demand to pick up in 2014. Vietnam's trade account has fallen back into deficits in recent months, but we see the case for a substantial pickup in external demand on the back of a rebound in regional growth over the coming quarters. Accordingly, we still expect exports to expand at a moderate pace of 5.6% in 2014. © Business Monitor International Page 84 Vietnam Freight Transport Report Q3 2014 Table: Vietnam - Economic Activity 2011 Nominal GDP, VNDbn 3 Nominal GDP, US$bn 3 2012 2013e 2014f 2015f 2016f 2017f 2018f 2,779,880.2 3,245,419.2 3,584,261.0 4,012,847.7 4,494,844.6 5,033,219.9 5,616,365.8 6,269,265.3 134.6 155.6 170.6 195.1 221.1 249 280.8 316.6 6.2 5.2 5.4 5.9 6.4 6.6 6.4 6.4 GDP per capita, US$ 3 1,497 1,713 1,860 2,108 2,368 2,643 2,957 3,309 Population, mn 4 89.9 90.8 91.7e 92.5 93.4 94.2 95 95.7 Industrial production, %yo-y, ave 1,5 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 Unemployment, % of labour force, eop 2,6 3.6 3.2 3.7e 3.5 3.5 3.6 3.5 3.5 Real GDP growth, %y-o-y 3 Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI. © Business Monitor International Page 85 Vietnam Freight Transport Report Q3 2014 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split. Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 86 Vietnam Freight Transport Report Q3 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050 Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695 Total © Business Monitor International Page 87 Vietnam Freight Transport Report Q3 2014 Vietnam's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 2 4 7 12 17 21 24 30 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12 © Business Monitor International Page 88 Vietnam Freight Transport Report Q3 2014 Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued 100+ years 1990 1995 2000 2005 2010 2013e 2015f 2020f 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Key Population Ratios, 1990-2020 Dependent ratio, % of total working age Dependent population, total, '000 1990 1995 2000 2005 2010 2013e 75.8 71.0 61.3 50.8 42.9 41.4 2015f 2020f 41.3 41.9 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 Active population, total, '000 58.5 62.0 66.3 70.0 70.7 70.8 70.5 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 Youth population, total, '000 60.9 50.9 40.9 33.6 32.1 31.7 30.2 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age Pensionable population, total, '000 10.0 10.1 10.3 9.9 9.3 9.3 9.6 11.6 3,934 4,491 5,190 5,579 5,823 6,037 6,343 7,965 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI © Business Monitor International Page 89 Vietnam Freight Transport Report Q3 2014 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account ■ Testing the directional movement and magnitude of coefficients ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ■ All results are assessed to alleviate issues related to autocorrelation and multicollinearity © Business Monitor International Page 90 Vietnam Freight Transport Report Q3 2014 BMI uses the selected best model to perform forecasting. It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology There are a number of principal criteria that drive our forecasts for each transport variable: ■ GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI's own macroeconomic and demographic forecasts. ■ Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ■ Trends manifested through historical data; ■ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). • Port Traffic Port traffic levels act as a 'second opinion' on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. ■ Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ■ Trends in historical modal split data; ■ Evidence of government policy favouring one or more modes over others; ■ Government and or private sector investment plans in specific modes. © Business Monitor International Page 91 Vietnam Freight Transport Report Q3 2014 Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Page 92 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... between 2014 and 2018 There are two key factors that we believe have held back Vietnam' s rail freight development and will continue to do so © Business Monitor International Page 20 Vietnam Freight Transport Report Q3 2014 Table: Vietnam Transport Network Length (km) Vietnam Transport Network Length (km) Road 206,633 Railway 2,632 Inland Waterway 47,130 Source: CIA World Factbook (accessed January 21 2014) ... 6.00 -3.30 -6.82 2014f 5.60 5.08 -3.87 2013e 3.00 5.00 3.50 4.40 5.37 e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam © Business Monitor International Page 21 Vietnam Freight Transport Report Q3 2014 Air Freight On Growth Trajectory As Vietnam Gets Better Connected Vietnam' s air freight sector may only account for a small percentage of the country's freight transport sector;... predict Vietnam' s air freight levels to grow on average per annum by 3.96% to reach 223,040 tonnes Taking Off Vietnam Air Freight Tonnage, 000 tonnes 250 200 150 100 50 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 2010 0 Vietnam - Air Freight Tonnes (000) e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam © Business Monitor International Page 22 Vietnam Freight Transport Report Q3 2014. .. Monitor International Page 19 Vietnam Freight Transport Report Q3 2014 Table: Inland Waterway Freight (Vietnam 2011-2018) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Inland Waterway Freight Tonnes (000) 160164.50 168493.00 180812.70 192821.44 205047.81 218027.10 231629.74 245913.37 Inland waterway freight tonnes, % y-o-y 11.05 5.20 7.31 6.64 6.34 6.33 6.24 6.17 Inland Waterway freight tonneskm (mn ton.. .Vietnam Freight Transport Report Q3 2014 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ The Asian Development Bank (ADB) has announced that it will provide a US$410mn loan for the Vietnamese government, reports KHL Group The loan will enable the government to develop a new arterial road between Ho Chi Minh City, the Mekong Delta and the south of the country ■ Vietnam- based... of Ho Chi Minh's box throughput In 2014, we forecast container volumes to increase by 6.06% and over the medium term by an annual average of 6.88% For more information on data and analysis of Vietnam' s shipping sector, please see BMI's Vietnam Shipping Report © Business Monitor International Page 24 Vietnam Freight Transport Report Q3 2014 Table: Maritime Freight (Vietnam 2011-2018) 2011 Port of Ho... development assistance © Business Monitor International Page 35 Vietnam Freight Transport Report Q3 2014 Industry Trends And Developments Multimodal World Bank Calls For Better Vietnamese Logistics The World Bank reported at the start of 2014 how more competitive freight logistics in Vietnam could benefit the country's economy Between 1990 and 2007, Vietnam' s GDP grew by an average of 7.4%, while between 2008... International Page 16 Vietnam Freight Transport Report Q3 2014 BMI believes that Vietnam' s textile sector will also benefit from the development of China's middle class, as the country starts to import more from abroad Road Freight Road Dominates And Offers Best Links Into China Despite its low standing in road infrastructure, with the Global Economic Forum's Competitiveness Report 2013/14 ranking Vietnam' s roads... forecast road freight volume growth will average 7.59% per annum reaching a projected 1.10bn tonnes by the end of 2018 © Business Monitor International Page 17 Vietnam Freight Transport Report Q3 2014 There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road freight expertise, expand in Vietnam Both FedEx and DHL have expanded their role in Vietnam in... Business Monitor International Page 23 Vietnam Freight Transport Report Q3 2014 Vietnam' s ports and shipping sectors play a role in the global dry, liquid and container sector As highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulk commodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao Vietnam is an oil-producing nation, but