Vietnam freight transport report q4 2010

... International Ltd Page Vietnam Freight Transport Report Q4 2010 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2010 Executive Summary Vietnam' s freight transport sector... of any information hereto contained Vietnam Freight Transport Report Q4 2010 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2010 CONTENTS Executive Summary ... Office of Vietnam © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q4 2010 Maritime Freight Vietnam' s port sector continues to outperform other sub-divisions of freight

Q4 2010 www.businessmonitor.com VietnaM freight transport Report INCLUDES 5-YEAR FORECASTS TO 2014 ISSN 1750-5364 Published by Business Monitor International Ltd. VIETNAM FREIGHT TRANSPORT REPORT Q4 2010 INCLUDES 5-YEAR FORECASTS TO 2014 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: July 2010 Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2010 Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. 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 Q4 2010 © Business Monitor International Ltd Page 2 Vietnam Freight Transport Report Q4 2010 CONTENTS Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 7 Vietnam Freight Transport Industry SWOT ........................................................................................................................................................... 7 Vietnam Political SWOT ........................................................................................................................................................................................ 8 Vietnam Economic SWOT ...................................................................................................................................................................................... 8 Vietnam Business Environment SWOT................................................................................................................................................................... 9 Market Overview ............................................................................................................................................. 10 Industry Trends And Developments ............................................................................................................ 12 Multi-Modal/Logistics ......................................................................................................................................................................................... 12 Road .................................................................................................................................................................................................................... 12 Air ........................................................................................................................................................................................................................ 13 Rail ...................................................................................................................................................................................................................... 14 Maritime .............................................................................................................................................................................................................. 14 Global Oil Products Price Outlook ............................................................................................................... 17 Table: Oil Product Price Data And Forecasts, 2010 (US$/bbl)........................................................................................................................... 18 Table: Oil Product Price Data And Forecasts, 2007-2014 (US$/bbl) ................................................................................................................. 19 Industry Forecast ........................................................................................................................................... 20 Air Freight ........................................................................................................................................................................................................... 20 Table: Air Freight, 2007-2014 ............................................................................................................................................................................. 20 Maritime Freight ................................................................................................................................................................................................. 21 Table: Maritime Freight, 2007-2014 (throughput, ‘000 tonnes) .......................................................................................................................... 21 Table: Inland Waterway Freight, 2007-2014 ....................................................................................................................................................... 21 Rail Freight ......................................................................................................................................................................................................... 22 Table: Rail Freight, 2007-2014 ........................................................................................................................................................................... 22 Road Freight ........................................................................................................................................................................................................ 22 Table: Road Freight, 2007-2014.......................................................................................................................................................................... 22 Trade Overview ................................................................................................................................................................................................... 23 Table: Trade Overview, 2007-2014 ..................................................................................................................................................................... 23 Table: Key Trade Idicators .................................................................................................................................................................................. 24 Table: Vietnam’s Main Import Partners, 2002-2008 (US$mn) ............................................................................................................................ 25 Table: Vietnam’s Main Export Partners, 2002-2008 (US$mn) ............................................................................................................................ 25 Company Profiles ........................................................................................................................................... 26 Vietnam Airlines .................................................................................................................................................................................................. 26 Doan Xa Port ....................................................................................................................................................................................................... 28 Vietnam Petroleum Transport Jsc (VIPCO)......................................................................................................................................................... 30 BMI Methodology ........................................................................................................................................... 31 How We Generate Our Industry Forecasts .......................................................................................................................................................... 31 Transport Industry ............................................................................................................................................................................................... 31 Sources ................................................................................................................................................................................................................ 32 © Business Monitor International Ltd Page 3 Vietnam Freight Transport Report Q4 2010 © Business Monitor International Ltd Page 4 Vietnam Freight Transport Report Q4 2010 Executive Summary Vietnam's freight transport sector continues to develop in line with the country's growing consumer base and strengthening trade links with markets both in Asia and further afield. The country's growing recognition as a region trade hub has attracted foreign freight transport operators to the market and in June Damco, the logistics division of Denmark-based shipping group AP Moller Maersk, announced the introduction of a new cross-border trucking service linking Vietnam with Thailand and Cambodia. Damco has been building its presence in the South-East Asian market, and in 2009 opened a new transportation hub in Thailand's Samrong district. Vietnam's favourable demographics have caught the attention of China, Japan and other major Asian exporters who are looking increasingly to their own backyards for growth opportunities. China, in particular, is keen to foster ties with its neighbours, and this year signed a free trade agreement (FTA) with the ASEAN-5 (Malaysia, Singapore, the Philippines, Thailand and Indonesia) and Brunei, creating the world's third-largest trade bloc. The agreement eliminates tariffs on 90% of goods traded between the countries and China. Four other states, Laos, Cambodia, Vietnam and Myanmar, are on course to merge with the bloc in 2015. Vietnam's ability to capitalise on new trade opportunities will depend on the provision of new freight transport infrastructure. The government is securing investment to help develop the country's transport network with roads one of the main areas targeted. In June Vietnam opened a newly constructed bridge, which will provide connection between the Cat Lai Port and Hanoi Highway in Ho Chi Minh City's District Two. The construction work of the three-lane bridge got completed three months ahead of schedule. The bridge is 413.7m long and 12.5m wide and is part of a city project to broaden interprovincial Road 25B that connects the bridge to the port. In 2011 we see continued growth in freight carried by road with volumes carried rising by 6.62% to 28.62 billion tonne-km (bntkm) following this year's expected 4.8% increase. The expansion of Vietnam's rail freight sector is expected to continue, despite the recent decision of the Vietnamese National Assembly not to endorse the plan for the construction of a north-south high-speed railway. In 2011, Rail freight volumes, forecast to enjoy a partial recovery of 3.3% in 2010 are expected to grow at an accelerated rate, increasing by 4.6% to 4.09bntkm. Airfreight volumes should follow a similar pattern, growing by 4.7% in 2011 to 294.03bntkm following on from a predicted 3.3% increase in volumes this year. Aside from of the much-publicised travails of Vietnam's national shipbuilding company Vinashin, Vietnam's maritime sector should continue on the upward trend established in 2010. The country's largest © Business Monitor International Ltd Page 5 Vietnam Freight Transport Report Q4 2010 port Saigon New Port (SNP) finds is expected to experience a 7.5% growth in throughput in 2011 when it will handle 21.84mn tonnes. This is a slight gain on this year's growth rate when we expect the facility to be handling 20.33mn tonnes - a y-o-y increase of 6.2%. The Port of Da Nang (PDN), a smaller facility in central Vietnam, growth is expected to continue to post weaker growth than SNP, with tonnage volumes forecast to increase by 2.8% y-o-y to 2.69mn tonnes. This year the port is expected to report growth of 2.3% In recent years, Vietnam has enjoyed strong export led growth but as the internal market gathers pace we expect overall trade growth to ease down. In real terms, exports and imports combined were growing at more than 20% per annum earlier this decade, but in the global downturn of 2009 they contracted by 14.5%. In 2011, we expect total trade to grow by 6.2% y-o-y in real term, building on this year's projected 5.4% increase. Imports are expected to grow by 6% with exports increasing by 6.5%. © Business Monitor International Ltd Page 6 Vietnam Freight Transport Report Q4 2010 SWOT Analysis Vietnam Freight Transport Industry SWOT Strengths Weaknesses Opportunities Threats ƒ Strong growth rate coupled with geography (long country stretching for thousands of kilometres on a north-south axis) creates need for long-distance freight haulage. ƒ Recovery at ports in 2010 is expected to continue over the mid-term. ƒ Location on the South China Sea gives the country access to main inter-Asian shipping routes, as well as access to developing land transport links with ASEAN countries, allowing it scope to develop trade logistics. ƒ Generally poor roads. Despite new highway construction, only 13.5% of road network is considered in good condition, 26% has two or more lanes and 29% is tarred. ƒ Traditionally low investment in rail; although attempts are being made to rectify this, the potential of rail for cost-effective bulk freight is being underutilised. ƒ Decades of under-investment have left the country with a port infrastructure system ranked 99th out of 133 countries by World Economic Forum Competitiveness Report. ƒ The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. ƒ Growing international interest in Vietnam as a growth market in box shipping sector. ƒ Opening of deepwater container terminal in 2009 set up better shipping links to US. ƒ Potential 'stop-go' in economic gowth as the government may be forced to tighten monetary and fiscal policy in response to overheating. ƒ State-owned freight companies may be unprepared to compete as the doors are gradually opened for international companies to enter the Vietnamese market. © Business Monitor International Ltd Page 7 Vietnam Freight Transport Report Q4 2010 Vietnam Political SWOT Strengths Weaknesses Opportunities Threats ƒ The Communist Party appears committed to market-oriented reforms, although specific economic policies will undoubtedly be discussed at the 2011 National Congress. The one-party system is generally conducive to short-term political stability. ƒ Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. ƒ Corruption among government officials poses a hreat to legitimacy Communist Party. ƒ Increasing (albeit limited) public dissatisfaction with leadership's control over dissent. ƒ The government recognises the threat that corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. ƒ Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances. ƒ The slowdown in growth in 2009 and 2010 is likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. ƒ Although strong domestic control will ensure little change to political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. ƒ Relations with China have deteriorated due to Beijing's assertive stance over disputed islands in South China Sea and domestic criticism of large Chinese investment into a bauxite mining project in central highlands, which could cause environmental damage. Vietnam Economic SWOT Strengths Weaknesses Opportunities Threats ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.6% annually between 2000 and 2009. ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004. ƒ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable as the global economy continues to suffer in 2010. The fiscal picture is clouded by considerable 'off-the-books' spending. ƒ Heavily managed and weak dong reduces incentives to improve quality of exports, and also serves to keep import costs high, thus contributing to inflationary pressures. ƒ WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. ƒ Government will, despite current macroeconomic woes, continue to move forward with market reforms, including privatisations and liberalising banking sector. ƒ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s. ƒ Inflation and deficit concerns have caused some investors to re-assess hitherto upbeat view of Vietnam. If the government focuses on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability. Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy. ƒ © Business Monitor International Ltd Page 8 Vietnam Freight Transport Report Q4 2010 Vietnam Business Environment SWOT Strengths Weaknesses Opportunities Threats ƒ Large, skilled, low-cost workforce has made the country attractive to foreign investors. ƒ Vietnam's location (proximity to China and South East Asia) and good sea links makes it a good base for foreign companies to export to the rest of Asia, and beyond. ƒ Infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world. ƒ Vietnam is one of the world's most corrupt countries. Its score in Transparency International's 2009 Corruption Perceptions Index was 2.7. ƒ Increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers possibility of the transfer of high-tech skills. ƒ Pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points. ƒ Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. ƒ Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. © Business Monitor International Ltd Page 9 Vietnam Freight Transport Report Q4 2010 Market Overview In January 2007, Vietnam officially joined the World Trade Organisation (WTO), an event seen as an important milestone in the country's closer integration into the global economy. WTO membership has helped boost Vietnam's international trade and develop its freight transport capabilities. Road transport is the most advanced in terms of freight sector privatisation and is the dominant mode for freight, with a market share of around 60% of domestic cargo. There are over 1,050 enterprises registered in the road transport business, which include 16 state-owned enterprises (SOEs), 233 limited liability companies, 350 private companies and 450 joint stock companies. Very few foreign-invested companies are present. Most road transport companies are of small or medium size, and each company, on average, owns about 50 vehicles. In addition, tens of thousands of individual household businesses exist that operate informally in the road freight sector, and are thus difficult to account for and monitor. Vietnam has a national road network of some 222,179km. Of this, only 42,167km, or 19%, is paved. In addition, recent surveys indicate that approximately 40% of the network is in poor to very poor condition and will require substantial investment even to reach a maintainable condition. The quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be poor and was ranked 102 out 133 nations surveyed in the WEF 2010 Global Competitiveness Report. Vietnam's railway transport sector has only one operator, the Vietnam Railway Corporation (VRC), established by law in April 2003 as a state corporation operating railway transport and related services. The government has announced plans to separate the management of rail infrastructure from passenger and cargo services. Vietnam's rail network totals 2,600km (excluding sidings). The network is mixedgauge, comprising 2,169km of 1.000m gauge and 178km of 1.435m gauge. The network has 1,790 bridges totalling 45km and 11.5km of tunnels. The principal axis is Hanoi-Ho Chi Minh City (1,726km). Other lines emanating from Hanoi are to Hai Phong (102km), Lao Cai (296km) and Dong Dang (162km). Railway infrastructure in Vietnam was ranked 58 out of 114 by the WEF. There are two principal airlines operating in Vietnam: Vietnam Airlines and Pacific Airlines. Both are majority state owned, although Australia's Qantas is now a minority shareholder in Pacific Airlines. The government has announced plans to build the country's largest airport at Long Thanh in the southern province of Dong Nai, at an estimated cost of US$8bn. The authorities also plan to expand Noi Bai International airport in Hanoi. The three major airports handling freight are located at Ho Chi Minh City, Hanoi and Da Nang, each of which have international connecting flights. Minor airports such as Cat Bi at © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q4 2010 Haiphong are generally used for domestic flights to the three larger hubs. In 2010, Vietnam's air transport infrastructure was ranked 84/ 133 nations by the WEF. UNCTAD shipping fleet statistics indicate that by the end of 2007, Vietnam had 387 commerical vessels with a total capacity of 3.14mn DWT and ranked 28th out of 162 countries around the world (but fourth in ASEAN after Singapore, Malaysia and Thailand). The average vessel size is 2,650DWT. Vietnam's fleet structure lacks specialised container vessels, bulk cargo ships, large oil and liquefied petroleum gas (LPG) tankers. Multi-function ships and bulk cargo ships account for 87% in number and 63% in tonnage, and container ships account for only 2.2% in number and 9% in tonnage. The largest local operator is the Vietnam National Shipping Lines (Vinalines). Vietnam's dense river and canal network provides the country with a highly developed inland waterway system. This is the second-largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Currently, the inland waterway transport sub-sector is managed by two state corporations affiliated to the Ministry of Transport, one SOE affiliated to the Vietnam Inland Waterway Authority, and some enterprises managed by other ministries, operating in support of the power generation, cement and paper industries. In addition, there are about 230 co-operatives and hundreds of inland waterway transport enterprises in the country. Vietnam's seaport network comprises many small- and medium-sized entities, with inefficient distribution. Most big ports are located far inside rivers, like Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer from and to ports, due to traffic congestion. Except for several new ports or upgraded ports, most ports have been operating for many years, lack investment and are seriously degraded. The loading and unloading equipment in some ports is obsolete, leading to low productivity. The average productivity of a Vietnamese port is only 2,500 tonnes/m per wharf, or 40-50% of productivity of other ports in the region. Though a series of new port investments are expected to see conditions gradually improve during the next few years, for the time-being the quality of Vietnam's port infrastructure is judged to be poor and was ranked 99 out of 133 nations by the WEF. © Business Monitor International Ltd Page 11 Vietnam Freight Transport Report Q4 2010 Industry Trends And Developments Multi-Modal/Logistics In June, DHL Supply Chain, a division of global express and logistics company DHL Express (DHL), announced it was planning to spend more than US$1.5mn on the construction a new distribution centre in the province of Binh Duong. The facility will include a total area of 60,000 m2, which is scheduled to be developed in three phases. The distribution centre will also include a custom-built multi-user warehouse covering an area of 15,000 m2. The construction work was started in March 2010 and is scheduled to be completed before Q410. The announcement foolows new that DHL Express's Vietnamese subsidiary DHL-VNPT Express registered a 30% year-on-year (y-o-y) surge in parcel volumes in Q110. DHL is expecting continuous increases in logistics trade in the coming months in Vietnam and is working towards reducing carbon emissions by nearly 14%. Road In June, Vietnam opened a newly constructed bridge, which will provide connection between the Cat Lai Port and Hanoi Highway in Ho Chi Minh City's District Two. The construction work of the three-lane bridge got completed three months ahead of schedule. The bridge is 413.7m long and 12.5m wide and is part of a city project to broaden inter-provincial Road 25B that connects the bridge to the port. The bridge was funded by the Ho Chi Minh City Infrastructure Investment and was constructed by Civil Engineering Construction Corporation No 1 (Cienco 1). The new bridge is aimed at reducing traffic congestion on the road, which is used by thousands of container trucks every day to reach to the port. The port now receives a total of 12,000 trucks on a daily basis. In the same month, Damco, the logistics division of Denmark-based shipping group AP Moller Maersk, announced the introduction of a new cross-border trucking service linking Thailand, Cambodia and Vietnam. The company believes the service will allow it to capture a share of growing trilateral trade volumes between the three countries by providing a faster and more cost-efficient alternative to existing sea and air freight services. Damco has been building its presence in the South-East Asian market, and in 2009 opened a new transportation hub in Thailand's Samrong district. BMI believes intra-Asian trade will become a progressively more important source of revenue for international freight transport operators over the next few years. © Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q4 2010 With demand in Europe and North America expected to remain sluggish, China, Japan and other major Asian exporters are expected to look increasingly to their own backyards for growth, encouraged by the young demographics of many developing Asian states. China, in particular, is keen to foster ties with its neighbours, and, in January 2010, signed a free trade agreement (FTA) with the ASEAN-5 (Malaysia, Singapore, the Philippines, Thailand and Indonesia) and Brunei, creating the world's third-largest trade bloc. The agreement eliminates tariffs on 90% of goods traded between the countries and China. Four other states, Laos, Cambodia, Vietnam and Myanmar, are on course to merge with the bloc in 2015. South-East Asia also offers considerable potential as a re-export base. With domestic income levels steadily rising, Chinese companies have been quick to make use of Vietnam's low labour costs, and many firms have started to outsource production to the country. French construction company VINCI Construction Grands Projects and Vietnamese infrastructure concessionaire De Ca Investment JSC signed a memorandum of understanding (MoU) for the US$600mn Ca Pass tunnel and road project in Vietnam. The project will widen a 9km-long stretch of road, build a new 11km-long stretch including two tunnels (5.5km and 350m), and build three bridges with a total length of 1.26km and 4km of approach roads. The deals follows Vietnam's Prime Minister Nguyen Tan Dung approval of VND350trn (US$18.09bn) for the construction and development of the road system in the country in March 2010. The funds were approved under a national development scheme of 2020 and long term plan until 2030. The plans include development of a North-South road with a total length of 3,262km, construction of seven roads in the north with a total length of 1,099km, construction of three routes with total length of 264km in central and highland areas, and development of seven routes with a total length of 984km in south area. Air In July Kuwait-based logistics company Agility revealed plans to relocate its operations to a new modern facility in Ho Chi Minh City, Vietnam, which is located near to the Tan Son Nhat International Airport. The new office will cover an area of 550m2 and will serve as the company's headquarters for Vietnam and Indochina operations. The logistics company currently operates three offices in Vietnam in Danang, Hanoi and Vung Tau with a staff of more than 120 employees. It can be seen as part of the company's strategy to enhance its presence in rapidly growing emerging markets in Southeast Asia. © Business Monitor International Ltd Page 13 Vietnam Freight Transport Report Q4 2010 Rail In June BMI reported on the decision by the Vietnamese National Assembly not to endorse the plan for the construction of a north-south high-speed railway which we view as a positive and encouraging move. Since the project was first announced, BMI expressed concerns regarding the prohibitive price tag, which prompted further concerns about the possible knock-on effects on the entire infrastructure sector from the misallocation of resources this project could create. Given the hurdles to its realisation, we did not take it into account in BMI's Vietnam railway infrastructure forecasts, a move justified by the recent announcement. The US$56bn project has been rejected by the National Assembly, following weeks of debate, which divided the ruling party. According to a report by the Financial Times (FT), of the 493 members of the National Assembly, only 209 voted for the project, highlighting the opposition to it. The hefty cost and potential to inflate Vietnam's foreign debt in the coming years were the main grounds for opposition The decision follows the World Bank's refusal to support the project, which was announcement in June. Lead economist with the World Bank's Development Research Group, Martin Rama, was cited by Vietnamese newspaper VN Express, saying that the World Bank is not likely to participate in the project. This is an indication that the project will do little to address economic development issues. On the contrary, critics of the high-speed railway (including some from within the government), have noted that the debt burden, which the project would create, will be felt for many generations to come. Maritime One of the most interesting recent trends affecting Vietnam's maritime sector has been growing trade integration with the US. In June, Mitsui OSK Line (MOL) launched a new container shipping service calling at the port of Jacksonville (Jaxport) in Florida in partnership with compatriot K-Line that will link the facility to the Vietnamese port of Cai Mep as well as other Asian terminal. The service will comprise a weekly sailing by a 5,500 20-foot equivalent unit (TEU) vessel. Meanwhile, In July the US and Vietnam signed a memorandum of understanding (MoU) that will see containers destined for the US scanned for nuclear materials before they disembark. BMI believes that this is evidence of the continued American drive to tackle what it feels is its Achilles' heel, with the belief that the country's port sector could be a route for a potential terrorist attack. We think that Vietnam had little choice but to sign the MoU, given the increasing importance of US trade to the country. © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q4 2010 The agreement was signed by the US and Vietnam on July 2 and paves the way for the US Department of Energy's National Nuclear Security Administration (NNSA) to work with Vietnamese ministries to install radiation-detection equipment in Vietnamese ports. The agency will provide, install, maintain and train Vietnamese staff in the operation of container scanners. Kenneth Baker, NNSA's principal assistant deputy administrator for NNSA's Office of Defense Nuclear Nonproliferation stated in the agency's press release: 'Our partnership with Vietnam will greatly strengthen our capability to prevent nuclear and radiological smuggling through the maritime system in a key, strategic region of the world. We appreciate Vietnam's efforts and commitment to keeping these dangerous materials out of the hands of terrorists, smugglers and proliferators.' The MoU between the two countries is part of a wider US programme that ultimately aims to scan 100% of US-bound containers at foreign ports on the basis that they constitute a potential threat to national security. Increasingly wary of asymmetric attacks on its own soil since 9/11, this is part of a raft of legislation passed in recent years that aims to prevent another such attack. In July 2007 the US government passed a bill requiring foreign ports to have scanning procedures for USbound cargo in place within the next five years. BMI has noted that these plans have met with some dissent, however, and have been labelled by Christopher Koch, president and CEO of the World Shipping Council, in an address to the US Senate Committee on Commerce, Science and Transportation as 'unworkable'. We believe that these extra security measures have the potential to cause significant delays and congestion in ports. Given how import an export partner the US has become for Vietnam, it is unlikely that the South-East Asian nation could have done anything but sign the agreement. The two countries signed a bilateral trade agreement in 2001, and since 2002 the value of Vietnamese exports to the US has grown by more than five times. Vietnamese exports to the US are now worth 50% more than the country's second-placed export partner, Japan. In a separate development, the government of Vietnam is reportedly considering revising the scope and scale of the Cai Mep-Thi Vai Port, including the level of official development assistance (ODA) it will receive from Japan for it. The Saigon Times cited a press statement by the government's website announcing that the Transport Ministry is going to review which parts of the project need to be adjusted (presumably in terms of cost and scale), to fit the latest regulations and policies, though the report does not mention which regulations in particular. The ODA with Japan was agreed in 2004, but construction has faced several delays mainly due to soaring raw material prices, which keeps pushing up the cost of construction. © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q4 2010 When construction began in October 2008, overall construction cost was estimated at US$700mn, financed via state and ODA funds. The project is already in the construction phase and due to be completed in 2012. Since it is solely being funded by the ODA and the state budget, it is likely that the government will seek to increase ODA allocations and ease the cost burden on the state budget. A more disappointing development during Q310 was the ongoing demise of Vietnamese state shipbuilder Vietnam Shipbuilding Industry Group (Vinashin) which, in July was forced to hand over control of its Dung Quat to PetroVietnam as part of a forced restructuring effort following a government inquiry into the company's affairs. Vinashin has reported debts of US$4.3bn, and, as part of the restructuring process, will be forced to offload a number of assets, including Dung Quat shipyard, to state energy company PetroVietnam and national shipping line Vinalines. The blame for the company's financial problems has been pinned on Vinashin's secretary, Pham Than Binh, who is among several employees expected to be disciplined for 'irresponsible' use of state capital. During 2005-2006 Binh and other leading employees reportedly failed to heed the advice of observers who warned that Vietnam was investing too much in its shipbuilding industry. Though Vinashin was successful in winning new-build orders from overseas during 2005-2007, holding 166 shipbuilding contracts at the start of 2008, it was hit hard by the global financial crisis, which led to its losing up to US$6bn in orders. A lack of adequate supervision has also been cited as one of the reasons behind Vinashin's mismanagement, with the company reportedly having been under no obligation to report its activities to the Ministry of Transport or the government. Vietnam's nascent shipbuilding industry has enjoyed some success in recent years as cheap labour and manufacturing costs have helped yards to challenge more established nations for orders from Europe and other markets. According to the Japan Shipbuilders' association, Vietnam's share of global new-build orders grew from just 0.1% in 2002 to 1.6% in 2008. BMI's suspicions surrounding Vinashin's financial stability began in July 2009 when we reported the company had been forced to delay the delivery of three aframax oil tankers because of a funding shortfall. At a time when more seasoned shipbuilding powers, including Japan and South Korea, were investigating plans to downsize their shipyard capacity because of the effects of the global economic downturn, the lack of a similar response from Vietnamese authorities was worrying. © Business Monitor International Ltd Page 16 Vietnam Freight Transport Report Q4 2010 Global Oil Products Price Outlook Stuck In Low Gear There is no sign that the US gasoline season is going to be the salvation of the global oil products market. There has been more activity on the part of US motorists but the demand trend remains relatively weak. With product values tracking crude and pump prices remaining lower than expected, it is still possible that a late upturn in consumption will deliver a decent result. Also, if improved equity market sentiment feeds through to oil then product prices are likely to stage a summer rally. Refiners continue to be faced with an uncertain outlook as crude could start to move higher while demand trends appear fragile. Overall, margins have been a little better than feared in recent months but there is no confidence that downstream profitability can be maintained at an acceptable level. Plant introductions in Asia and the Middle East are not helping, while changes to the pricing systems in countries such as China and India could have a major impact on fuels markets. Given the generous stocks of distillates and gasoline, there is little risk of supply shortages in Q310, unless US hurricane activity causes problems for Gulf Coast refiners. The US Energy Information Administration (EIA) forecasts that regular-grade gasoline retail prices will average US$2.80 per gallon during the summer driving season, up from US$2.44/gallon in the equivalent period in 2009. This is a more benign scenario than previously projected, although the nearly 15% increase will no doubt anger most motorists and dampen enthusiasm for long journeys. Projected regular‐grade gasoline retail prices rise from an average US$2.35/gallon in 2009 to an average US$2.77 in 2010 and to US$2.90 in 2011. On‐highway diesel fuel retail prices, which averaged US$2.46/gallon in 2009, are forecast by the EIA to average US$2.98 in 2010 and US$3.13 in 2011. US refining margins widened in June 2010, with those on the Gulf Coast more mixed than those realised on the West Coast. All light crude cracking margins in the Gulf Coast improved, but margins for heavier crudes processed in more complex refineries narrowed. Refining margins for West Texas Intermediate (WTI) on the Gulf Coast fell by about eight cents to US$7.10 per barrel (bbl) in June. West Coast margins were supported by stronger crack spreads for light products, particularly gasoline. In North West Europe and the Mediterranean, June 2010 refining economics generally deteriorated compared with earlier months. Wider differentials for gasoil/diesel and jet fuel/kerosene were more than offset by lower crack spreads for other products. However, margins for Brent crude in Rotterdam widened to US$3.83/bbl in June. In Singapore, relative changes in feedstock values allowed Dubai margins to © Business Monitor International Ltd Page 17 Vietnam Freight Transport Report Q4 2010 widen, while Tapis margins contracted. Refining margins for Dubai crude oil in Singapore were around US$3.97/bbl in June. Revised Forecasts BMI estimates that in Q210 the global wholesale price for premium unleaded gasoline was US$87.95/bbl, compared with US$87.61 in Q110. Gasoline prices were up by 26% y-o-y from US$69.89 in Q209. For the whole of 2010, the BMI assumption for gasoline is an average US$95.45/bbl, with the price expecting to peak in August at more than US$105/bbl. The overall y-o-y rise in 2010 gasoline prices is forecast at 36%. Gasoil averaged US$89.27/bbl in Q210, based on a composite global price. This was a y-o-y rise of almost 37%. For 2010 as a whole we forecast is for an average price of US$93.23/bbl, probably peaking in December 2010 at more than US$109/bbl. The full-year outturn represents a 35% increase from 2009. Table: Oil Product Price Data And Forecasts, 2010 (US$/bbl) Gasoline Q110 Q210e Q310f Q410f 2010f Rotterdam Premium Unleaded 87.78 89.20 100.21 107.52 96.18 NY Harbour Unleaded 86.59 87.15 101.15 111.34 96.56 Singapore Premium Unleaded 88.45 87.48 97.86 100.62 93.6 Global average 87.61 87.95 99.74 106.49 95.45 Rotterdam 83.77 89.07 95.16 106.03 93.51 Mediterranean 83.81 89.28 94.39 105.42 93.22 Singapore 84.77 89.45 95.40 102.16 92.95 Global average 84.12 89.27 94.98 104.54 93.23 Rotterdam 86.01 90.85 97.41 109.27 95.88 NY Harbour 87.90 90.39 100.34 114.42 98.26 Singapore 85.20 89.86 95.73 103.41 93.55 Global average 86.37 90.37 97.83 109.03 95.90 Gasoil Jet/kerosene e/f = estimate/forecast. Source: BMI Jet prices averaged US$90.37/bbl in Q210, using the composite for New York, Singapore and Rotterdam. The y-o-y increase was just over 35%, with jet lagging behind the gain in gasoil prices. Quarter-on- © Business Monitor International Ltd Page 18 Vietnam Freight Transport Report Q4 2010 quarter, the increase was just 4.6% from Q110. For 2010, the annual level is forecast to be US$95.90/bbl, compared with US$70.66/bbl in 2009. In 2009, naphtha was a surprisingly robust performer among the major refined products, gaining 92% between January and December. In Q210, naphtha averaged US$76.80, compared with US$78.30/bbl in Q110 and US$54.70 in Q209. The 2010 average naphtha price is put by BMI at US$83.53/bbl, up 41% from 2009. Thanks to the stirring of petrochemicals demand in Asia, naphtha looks set to be the star performer in 2010. Looking further ahead, we forecast gasoline prices rising further to US$97.75/bbl in 2011 and stabilising around US$103.50 from 2012. Gasoil is expected to climb to US$95.48 in 2011, reaching a plateau of just over US$101 from 2012. The price of jet is forecast to average US$98.21/bbl in 2011 before levelling out at just under US$104 from 2012. Table: Oil Product Price Data And Forecasts, 2007-2014 (US$/bbl) Gasoline 2007 2008 2009 2010f 2011f 2012f 2013f 2014f Rotterdam Premium Unleaded 75.75 100.12 70.60 96.18 98.50 104.29 104.29 104.29 NY Harbour Unleaded 78.75 102.54 69.70 96.56 98.89 104.71 104.71 104.71 Singapore Premium Unleaded 74.98 102.64 70.21 93.60 95.86 101.50 101.50 101.50 Global average 76.49 101.77 70.17 95.45 97.75 103.50 103.50 103.50 Rotterdam 77.02 122.62 68.74 93.51 95.76 101.40 101.40 101.40 Mediterranean 77.69 121.75 69.13 93.22 95.47 101.09 101.09 101.09 Singapore 77.03 119.53 69.01 92.95 95.19 100.79 100.79 100.79 Global average 77.24 121.3 68.96 93.23 95.48 101.09 101.09 101.09 Rotterdam 81.13 126.61 70.81 95.88 98.20 103.97 103.97 103.97 NY Harbour 82.48 127.13 71.18 98.26 100.63 106.55 106.55 106.55 Singapore 79.17 121.11 69.99 93.55 95.81 101.44 101.44 101.44 Global average 80.93 124.95 70.66 95.90 98.21 103.99 103.99 103.99 Gasoil Jet/kerosene f = BMI forecast. Source: International Energy Agency (historical data), BMI © Business Monitor International Ltd Page 19 Vietnam Freight Transport Report Q4 2010 Industry Forecast Vietnam's economic outperformance relative to many of its regional peers continues to support the growth of the country's trade and freight transport sectors. Following the recent decision taken by the State Bank of Vietnam not to raise interests, BMI has recently decided to revise our real GDP forecast for Vietnam upwards from 4.4% to 6.0% for 2010. However, with the economy at a growing risk of overheating, we believe the Bank is likely to succumb to pressure to raise rates in early 2011 with the effect of lowering the rate of growth to 5.5% next year. Over the medium-term, BMI nevertheless forecast the rate of economic expansion to remain high, providing a stable platform for the freight transport sector and for trade. We are forecasting average annual growth of 6.3% between 2011 and 2014. The macro downside is the danger of policy 'stop-go' and political risk in advance of the 11th National Congress of the Communist Party, due to be held in January 2011. Air Freight The outlook for Vietnam's air freight sector is encouraging. In 2011 we forecast airfreight tonne-km (tkm) volumes to grow by a healthy 4.7% y-o-y to 294.03mntkm, up from an expected 3.3% increase this year. In tonnage terms, next year's growth is projected at 5.1% (compared with 3.7% this year) with a total of 131,730 tonnes being flown. We expect growth to consolidate over our mid-term (2011-2014) forecast period where we see an average annual increase of 5.2% in tkm terms and 5.6% in tonnage terms. In 2014 we project 343.74mntkm being flown and 156.15mn tonnes being carried. Table: Air Freight, 2007-2014 Air freight, ‘000 tonnes – % change y-o-y Air freight, mn tonnes/km – % change y-o-y 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 129.60 129.70 120.90 125.32 131.73 139.11 147.33 156.15 7.28 0.08 -6.78 3.65 5.12 5.60 5.91 5.98 279.90 290.00 271.98 280.96 294.03 309.06 325.79 343.74 3.90 3.61 -6.21 3.30 4.65 5.11 5.42 5.51 e/f = estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q4 2010 Maritime Freight Vietnam's port sector continues to outperform other sub-divisions of freight due to extensive funding for new facilities from both the public and private sectors. In 2011, Saigon New Port (SNP) will continue to build on this year's recovery in tonnage throughput when total handling volumes are expected to show and increased of 6.2% over the full-year. The port is forecast to register a 7.5% growth next year and to handle 21.84mn tonnes of cargo. Growth is expected to accelerate thereafter with an annual average increase of 8% projected between 2011 and 2014. At the port of Da Nang, the growth trend, though steady, is forecast to be less impressive, owing to the port's distance from Vietnam's main industrial and most important trade regions. In 2011 total throughput at Da Nang is expected to increase 2.8% y-o-y to 2.69mn tonnes, a marginal improvement on 2009’s 2.3%. Mid-term growth should be slightly higher on average, at about 3% y-o-y in 2011-2014. In 2014 we forecast SNP and Da Nang to be handling 27.69mn and 2.97mn tonnes. Table: Maritime Freight, 2007-2014 (throughput, ‘000 tonnes) Port of Ho Chi Minh City (Saigon New) – % change y-o-y Port of Da Nang – % change y-o-y 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 25,600.0 20,180.0 19,140.0 20,329.6 21,843.7 23,581.4 25,564.5 27,691.8 28.00 -21.17 -5.15 6.22 7.45 7.96 8.41 8.32 2,736.94 2,742.26 2,556.42 2,615.48 2,687.72 2,770.63 2,865.24 2,966.73 15.43 0.19 -6.78 2.31 2.76 3.08 3.41 3.54 e/f = estimate/forecast. Source: Port authorities Table: Inland Waterway Freight, 2007-2014 Inland waterway freight, ‘000 tonnes – % change y-o-y Inland waterway freight, mn tonnes/km – % change y-o-y 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 135,283 137,177 128,189 132,905 139,767 147,659 156,447 165,871 10.00 1.40 -6.55 3.68 5.16 5.65 5.95 6.02 22,235.6 22,680.3 21,500.9 22,097.8 22,966.1 23,964.8 25,076.8 26,269.5 18.00 2.00 -5.20 2.78 3.93 4.35 4.64 4.76 e/f = estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q4 2010 Rail Freight After some volatility in the period up to and during the global economic downturn, we believe Vietnam's rail freight sector is now on a steady path. In 2011 Freight carried will grow by 4.6% to 4.09bntkm, a notable expansion on 2010's expected 3.3% increase. Total tonnage volumes meanwhile will rise by 5.6% to 7.43mn tonnes, up from 4% this year. Looking to the mid-term, BMI is forecasting average annual growth of 5.2% and 6.2% in tkm and total tonnage terms respectively with relatively minimal standard deviation from year to year. By 2014, Vietnam's rail freight network is expected to be carrying 8.95mn tonnes and travelling 4.78bntkm. Table: Rail Freight, 2007-2014 Rail freight, ‘000 tonnes – % change y-o-y Rail freight, mn tonnes/km – % change y-o-y 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 9,050.00 8,426.90 6,769.01 7,041.51 7,437.93 7,893.85 8,401.53 8,946.00 -1.13 -6.89 -19.67 4.03 5.63 6.13 6.43 6.48 3,882.50 4,027.60 3,783.57 3,907.83 4,088.61 4,296.52 4,528.04 4,776.33 12.65 3.74 -6.06 3.28 4.63 5.09 5.39 5.48 e/f = estimate/forecast. Source: General Statistics Office of Vietnam Road Freight Road haulage is also well placed to profit from Vietnam's upturn in economic activity and trade. Next year, the sector is expected to register a 6.6% growth in tkm terms with 28.62bntkm expected to be travelled. This is almost a 2% rise on 2010's growth rate which is expected to come in at 4.8% y-o-y. In tonnage terms, BMI forecasts volumes to grow by 6.1% in 2011 to 45.07mn tonnes, after this year's projected 4.4% increase. Over the mid-term, growth is expected to average 7.2% and 6.6% y-o-y respectively. Table: Road Freight, 2007-2014 Road freight, ‘000 tonnes – % change y-o-y Road freight, mn tonnes/ km – % change y-o-y 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 403,362 443,294 406,894 424,740 450,702 480,560 513,809 549,466 19.12 9.90 -8.21 4.39 6.11 6.62 6.92 6.94 24,646.9 28,023.5 25,622.4 26,844.8 28,623.1 30,668.2 32,945.6 35,388.0 20.01 13.70 -8.57 4.77 6.62 7.15 7.43 7.41 Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q4 2010 Trade Overview Vietnam is well placed to take advantage of increasing intra-Asia trade as well as improved trade integration with Western markets such as the US, factors which lead us to look favourably towards the next few years, particularly from an export perspective, though a return to the pre-downturn boom period is unlikely. In 2011 we see total trade growing broadly in-line with economic output, rising by 6.2% y-o-y in real terms and with imports and exports expected to increase by 6% and 6.5% respectively. This is a slight increase on 2010 when total trade growth is expected to come in at around 5.4% y-o-y. In value terms, imports will increase by 9.9% next year to US$81.5bn while exports should rise 10.4% to US$68.6bn. Over the mid-term we see total trade growth averaging 6.8% per annum in the four tears to 2014 with imports and exports growing by 6.4% and 7.4% y-o-y respectively. Vietnam's principal export commodities are crude oil and manufactured goods. The country's main imports are machinery and equipment. Vietnam's main export partners are the US, Japan, Australia, China and Germany. The country's main sources for imports are China, Singapore, Japan, South Korea and Thailand. Vietnam's geographic position on the South China Sea allows the country access to the main transpacific and intra-Asian shipping routes, enabling the country to meet its trading needs. Table: Trade Overview, 2007-2014 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f Imports, real growth, % y-o-y 28.32 11.92 -14.00 4.00 6.00 6.50 6.50 6.50 Exports, real growth, % y-o-y 15.58 10.85 -15.00 7.00 6.50 7.00 8.00 8.00 Total Trade, real growth, % y-o-y 22.11 11.42 -14.46 5.37 6.23 6.73 7.20 7.20 Imports, US$bn 65.99 85.21 71.73 74.15 81.48 91.24 104.56 119.19 – % change y-o-y 38.52 29.14 -15.82 3.37 9.89 11.98 14.59 13.99 Exports, US$bn 54.71 70.33 58.56 62.16 68.61 77.17 89.62 103.54 – % change y-o-y 21.97 28.57 -16.74 6.15 10.37 12.48 16.13 15.53 120.69 155.55 130.29 136.32 150.09 168.41 194.18 222.73 30.49 28.88 -16.23 4.62 10.11 12.20 15.30 14.70 Total trade, US$bn – % change y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 23 Vietnam Freight Transport Report Q4 2010 Table: Key Trade Idicators 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f 1,856.85 2,416.63 1,686.66 1,865.36 2,117.93 2,340.19 2,663.44 3,024.91 14.63 30.15 -30.21 10.60 13.54 10.49 13.81 13.57 1,941.22 2,415.93 1,679.96 1,733.19 1,894.43 2,109.07 2,401.93 2,723.77 13.16 24.45 -30.46 3.17 9.30 11.33 13.89 13.40 Exports, US$mn 374.58 553.33 434.16 449.31 489.17 555.80 652.70 761.06 – % change y-o-y 36.82 47.72 -21.54 3.49 8.87 13.62 17.43 16.60 2,654.19 2,824.71 2,230.20 2,314.49 2,569.83 2,909.74 3,373.52 3,883.18 41.81 6.42 -21.05 3.78 11.03 13.23 15.94 15.11 Exports, US$mn 519.10 411.02 324.28 344.09 379.54 426.61 495.06 571.61 – % change y-o-y 63.96 -20.82 -21.10 6.11 10.30 12.40 16.05 15.46 5,808.50 4,946.04 3,894.54 4,010.40 4,361.34 4,828.53 5,465.98 6,166.47 69.05 -14.85 -21.26 2.97 8.75 10.71 13.20 12.82 26,416.4 32,534.8 26,281.0 27,769.0 30,432.0 33,967.6 39,109.5 44,859.7 29.75 23.16 -19.22 5.66 9.59 11.62 15.14 14.70 43,862.3 54,527.3 46,486.5 48,023.5 52,679.6 58,877.8 67,334.8 76,628.3 47.33 24.31 -14.75 3.31 9.70 11.77 14.36 13.80 10,061.0 14,833.7 8,158.38 11,233.7 12,357.4 13,849.2 16,018.8 18,445.1 3.62 47.44 -45.00 37.70 10.00 12.07 15.67 15.15 8,744.21 13,811.1 6,821.14 9,432.53 10,286.0 11,522.8 12,915.8 14,446.6 30.53 57.95 -50.61 38.28 9.05 12.02 12.09 11.85 Agricultural raw materials Exports, US$mn – % change y-o-y Imports, US$mn – % change y-o-y Ores and metals Imports, US$mn – % change y-o-y Iron and steel Imports, US$mn – % change y-o-y Manufactured goods Exports, US$mn – % change y-o-y Imports, US$mn – % change y-o-y Fuel Exports, US$mn – % change y-o-y Imports, US$mn – % change y-o-y Source: BMI © Business Monitor International Ltd Page 24 Vietnam Freight Transport Report Q4 2010 Table: Vietnam’s Main Import Partners, 2002-2008 (US$mn) 2002 2003 2004 2005 2006 2007 2008 Mainland China 2158.84 3138.55 4595.10 5899.70 7391.30 12502.00 17592.90 Singapore 2533.49 2875.82 3618.40 4482.30 6273.90 7608.60 9617.87 Japan 2504.65 2982.06 3552.60 4074.10 4702.10 6177.70 8614.94 South Korea 2279.60 2625.44 3359.40 3594.10 3908.40 5334.00 6089.65 955.24 1282.19 1858.60 2374.10 3034.40 3737.20 5458.74 Thailand Source: IMF's Direction of Trade Statistics Table: Vietnam’s Main Export Partners, 2002-2008 (US$mn) 2002 2003 2004 2005 2006 2007 2008 United States 2,453.15 3,939.56 5,024.80 5,924.00 7,845.10 10,089.10 12,594.10 Japan 2,436.96 2,908.60 3,542.10 4,340.30 5,240.10 6,069.80 8,264.30 Australia 1,328.33 1,420.86 1,884.70 2,722.80 3,744.70 3,556.90 4,466.29 Mainland China 1,518.33 1,883.12 2,899.10 3,228.10 3,242.80 3,356.70 4,174.25 729.03 854.71 1,064.70 1,085.50 1,445.30 1,855.10 2,714.70 Germany Source: IMF's Direction of Trade Statistics © Business Monitor International Ltd Page 25 Vietnam Freight Transport Report Q4 2010 Company Profiles Vietnam Airlines Strengths ƒ The national carrier in a high-growth country set in a high-growth region, with rising living standards set to boost demand for air travel at a proportionately greater rate than GDP growth. Weaknesses ƒ To maintain market share in a dynamic but toughly competitive market, the company must gain professional skills and expertise, and a flow of new investment, at an accelerated rate. Any slippage is likely to have an immediate negative impact on margins. Opportunities ƒ Developing the regional passenger market in Asia is Vietnam Airlines' main opportunity, with cargo business as a second revenue stream. Threats ƒ The main threat is regulatory - that the government will open up the industry at a faster pace, not giving the airline the necessary time to prepare for competition with private sector start-ups or established foreign carriers. Company Overview Vietnam Airlines was established as a state-owned airline in 1989 and merged with a number of service companies in 1996 to give it its present form. The government's stated goal is to further integrate the company into the global market and establish itself as a regional player. Vietnam's national carrier operates 64 routes to 20 domestic and 24 international destinations. Its fleet of 50 modern aircraft have carried more than 9mn passengers. In 2006, it was officially accepted as a full member of the International Air Transport Association. The Vietnamese carrier provides passenger air services to 25 destinations in 15 countries including many in South-East Asia, Australia, Russia, France, Germany and the US. The company has a number of codeshare operations with foreign companies, in particular the February 2004 agreement with Air France to share 11 non-stop scheduled flights between Ho Chi Minh City and Paris. Vietnam Airlines' cargo operations serve 20 destinations in Asia, the Middle East, Australia and Europe, with partner networks serving other destinations. The cargo division operates a JV with Singapore Airport Terminal Service - Tan Son Nhat Cargo Services - that has an annual cargo throughput of 100,000 tonnes. Financial Performance The national flag carrier Vietnam Airlines expected to see a total revenue of VND32trn (US$1.78bn) in 2010, up 30% against in 2009 in the context of the global economic recovery, Asia Pulse news agency said. To realise the turnover, the carrier estimated that it would have to transport more than 11mn passengers in 2010. This year's positive targets are based on its good performance last year which was in marked contrast to many airlines globally facing bankruptcy, losses and laying-off of staff. The carrier notched up VND24.5trn (US$1.36bn) in turnover last year with the company netting a profit of VND150bn (US$8.3mn). The results mainly stemmed from its focus on the © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q4 2010 domestic market. It opened a series of new routes last year, including Ha Noi-Can Tho, Ha Noi-Quy Nhon, HCM City-Dong Hoi, Ha Noi-Tuy Hoa, and Ha Noi-Pleiku. Vietnam Airlines transported about 9.3mn passengers last year, a 6.6% increase from last year, with Vietnamese clients accounting for up to nearly 6.2mn, a y-o-y increase of 17.6%. It also handled around 131,220 tonnes of cargo, up 2.3% from last year. Of the total, 87,000 tonnes of cargo was transported on domestic routes, a rise of nearly 13%. The carrier also reported a seat occupancy rate of roughly 74% for both local and international flights. To raise net profits, Vietnam Airlines implemented a wide range of solutions to cut fees, thus saving more than VND400bn (US$22.2mn) last year, by economising fuel and rescheduling flights, it said. The airline took full advantage of the global economic crisis to negotiate with partners to buy and lease more new planes to improve its fleets and remodel infrastructure to capitalise on opportunities that have opened with the recovery of the local and international economy. Besides success in the domestic market, Vietnam Airlines saw certain achievements overseas. The airline also co-operated with the Cambodia Government to jointly operate National Cambodia Angkor Air from July 2009, as well opening the Ha Noi-Fukuoka route last October. It also took over from Japan Airlines the Ha Noi-Kansai route in January 2010 with five flights a week. Latest Activity In July Vietnam Airlines revealed it had selected International Aero Engines (IAE) for an order for V2500 engines which will be used to power the carrier's fleet of 36 Airbus A321 aircraft. The aircraft, which are on order, are expected to be delivered to the company from 2011. Pratt and Whitney and Rolls Royce, which are major stakeholders in IAE, were expected to earn about US$235 and US$240 respectively from the order. Prior Activity In June, Vietnam Airlines became a member of the SkyTeam Alliance joining other major Asian airlines Korean Air and China Southern Airlines, as well as Eastern Airlines which is expected to join the alliance by mid-2011. The CEO of US carrier Delta Air Lines (which is the core member of the alliance) Richard Anderson said: 'The addition of Vietnam's leading airline to SkyTeam positions our alliance as the fastest growing in Asia and builds on the planned addition of China Eastern.' SkyTeam is reportedly in negotiations with 12 other airlines with two more carriers expected to be made members of the alliance by the end of 2010. © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q4 2010 Doan Xa Port Strengths ƒ Given Vietnam's strong growth record in recent years and the country's sharply increasing foreign trade, the port sector is expected to remain broadly profitable. Weaknesses ƒ Global trade can fluctuate and, as seen with the 2009 recession, fall in absolute terms, exposing Doan Xa to cyclical downturns. Opportunities ƒ Haiphong's strategic location means Doan Xa can benefit from growing trade with China (it is close to Hong Kong, Macau, Kunming and Guangzhou). It also can act as an eastern port for Myanamar and Laos. Threats ƒ The port handles frozen foodstuffs and so is at risk of a loss of business during health scares such as the H1N1 'swine flu' scare of April/May 2009. Company Overview Doan Xa Port Joint Stock Company (DPX) is a Vietnam-based port operation company in Hai Phong. It mainly manages operations at Doan Xa Port, and provides port services, including loading/discharging cargo, warehousing, inland transportation and shipping agency. The company also offers minor supporting services, such as customs declaration, the wholesaling of handling machinery, and construction and maintenance of marine infrastructure. The company is an affiliate of Vietnam National Shipping Lines (Vinalines). Financial Performance In June DPX reported its financial results for the first five months of 2010, registering a pretax profit for the period of VND 27.7bn (US$1.45mn), a year-on-year (y-o-y) increase of 29%. The company revenues grew by 20% y-o-y to VND69.3bn (US$3.6mn), equivalent to 57% of its full-year target. DPX is targeting a pre-tax profit of VND45bn (US$4.2bn) in 2010 and total revenues of VND120bn (US$6.3bn). DXP made a net profit of VND61.12bn (US$3.2bn)in 2009 on revenues of VND151.88bn (US$8bn). Latest Activity DXP is one of several Vietnamese port operators which stand to benefit from a new infrastructure credit initiative agreed in June. The contract, which targets high priority infrastructure projects in Vietnam, is worth US$500mn. The cooperation framework set out between the two banks is a clear acknowledgement of the investment opportunities that exist in Vietnam, both for US infrastructure firms and for other infrastructure-dependent businesses. The expressed aim of the contract is to support Vietnam's socio-economic development, as well as to enhance cooperation between the two countries in trade and investment. The credit provided would be used to invest in infrastructure development projects with an emphasis on improving transportation and communication networks for projects undertaken by US companies. One of the most active US players operating in Vietnam is power generator AES, a company which, however, has exhibited higher appetite for risk in its ventrures, hence was amongst the first to venture in Vietnam's market. With the US guarantees in place creating a safety net, we anticipate other US companies to follow. © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q4 2010 Prior Activity In March, DXP affiliate Vinalines revealed plans to continue its recent fleet expansion programme with the acquisition of 40 new-build vessels. The purchase is likely to depend on the government supporting the programme through the provision of state funding. According to Seatrade Asia, Vinalines is targeting expenditure of US$2bn on new ships, which will be built at Vietnamese yards. The expansion aims to increase the company's fleet from 2.7mn deadweight tonnes (DWT) to 6-7mn DWT by 2015. Vinalines is Vietnam's largest commercial shipping line, comprising, in terms of capacity, about 45% of the country's total fleet. In 2006, the government approved a US$1.8bn expansion programme to expand the company's fleet to 136 ships or 2.6mn tonnes of capacity by 2010 by building and purchasing new vessels. The success of the company's latest expansion programme, however, will depend on its ability to source additional government funding, which, given the country's current economic situation, may prove difficult. While the state has stated its intention to promote the growth of its trade sector, it faces growing pressure to tame public spending in the wake of a rising budget deficit. Strong growth in consumer spending has stoked imports, and the country's trade deficit is estimated by BMI to have reached 13.3% of GDP in 2009. In our view, the government is currently prioritising the development of its infrastructure sector above its shipping fleet, which in terms of size ranks some way below other Asian states. According to an estimate by law firm Dwayne Morris, government expenditure on infrastructure will comprise 11%. © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q4 2010 Vietnam Petroleum Transport Jsc (VIPCO) Strengths ƒ At this stage in its economic development, Vietnam will require rapidly increasing import volumes of oil, gas and certain petrochemicals, as well as extra export capacity. VIPCO is well positioned in a high-growth segment of the shipping market. Weaknesses ƒ The global economic downturn of 2009, accompanied by lower oil prices and sharply lower shipping freight rates, posed a serious challenge to profitability. Opportunities ƒ Tanker rates are expected to perform better dry bulk over the coming months, meaning that Vipco may be well advised to focus on improving market share within its existing segment, rather than diversifying. Threats ƒ Vipco has a privileged position as a subsidiary of the state oil company. Any change to this role for regulatory reasons could therefore be a threat, implying potential loss of secure contracts. Company Overview Vietnam Petroleum Transport Joint Stock Company (Vipco) specialises in marine transportation. It mainly offers marine transportation services, freight forwarding, shipping brokerage, customs clearance and port operation. Other activities include merchandise of petroleum, liquefied gas and petrochemicals; trading supplies and equipment, manning and warehousing; and minor industrial construction. The company has five subsidiaries and one affiliate, and is itself a subsidiary of Vietnam National Petroleum Corporation (PetroVietnam). Financial Performance In 2010, Vipco is aiming for a net profit of VND70bn (US$3.7mn) , a target based on the company earning higher income from seaport and real estate projects, Chairman Nguyen Dao Thinh said at a seminar earlier in March. Vipcois investing in three buildings worth a combined VND800bn (US$41.9mn), a VND3trn (US$157mn) Dinh Vu port complex in Haiphong and a deep-water port worth VND1.4trn (US$73.3mn) to be opened by the end of 2010. Latest Activity In July, Vipco parent company PetroVietnam took delivery of Dung Quat shipyard as part of a restructuring programme being undertaken by Vietnam Shipbuilding Industry Group (Vinashin). Vinashin, a state-owned builder and owner of ships with reported debts of US$4.3bn, is undergoing a forced restructuring following a government inquiry into the company's affairs. As part of the restructuring process, the company will be forced to offload a number of assets to PetroVietnam and national shipping line Vinalines. The blame for the company's financial problems has been pinned on Vinashin's secretary, Pham Than Binh, who is among several employees expected to be disciplined for 'irresponsible' use of state capital. During 2005-2006 Binh and other leading employees reportedly failed to heed the advice of observers who warned that Vietnam was investing too much in its shipbuilding industry. A lack of adequate supervision has also been cited as one of the reasons behind Vinashin's mismanagement, with the company reportedly having been under no obligation to report its activities to the Ministry of Transport or the government. © Business Monitor International Ltd Page 30 Vietnam Freight Transport Report Q4 2010 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part in all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Transport Industry There are a number of principal criteria that drive our forecasts for each transport variable: GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI’s own macroeconomic and demographic forecasts. © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q4 2010 Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ƒ Trends manifested through historical data; ƒ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). Port Traffic Port traffic levels act as a ‘second opinion’ on trade volumes. However, this check needs to be used with caution, as trade values and volumes do not always move over time in the same way. Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ƒ Trends in historical modal split data; ƒ Evidence of government policy favouring one or more modes over others; ƒ Government and or private sector investment plans in specific modes. Sources Sources used in Freight Transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Ltd Page 32 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...].. .Vietnam Freight Transport Report Q4 2010 Market Overview In January 2007, Vietnam officially joined the World Trade Organisation (WTO), an event seen as an important milestone in the country's closer integration into the global economy WTO membership has helped boost Vietnam' s international trade and develop its freight transport capabilities Road transport is the most advanced in terms of freight. .. International Ltd Page 19 Vietnam Freight Transport Report Q4 2010 Industry Forecast Vietnam' s economic outperformance relative to many of its regional peers continues to support the growth of the country's trade and freight transport sectors Following the recent decision taken by the State Bank of Vietnam not to raise interests, BMI has recently decided to revise our real GDP forecast for Vietnam upwards from... Office of Vietnam © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q4 2010 Rail Freight After some volatility in the period up to and during the global economic downturn, we believe Vietnam' s rail freight sector is now on a steady path In 2011 Freight carried will grow by 4.6% to 4.09bntkm, a notable expansion on 2010' s expected 3.3% increase Total tonnage volumes meanwhile... Hanoi The three major airports handling freight are located at Ho Chi Minh City, Hanoi and Da Nang, each of which have international connecting flights Minor airports such as Cat Bi at © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q4 2010 Haiphong are generally used for domestic flights to the three larger hubs In 2010, Vietnam' s air transport infrastructure was ranked 84/... 325.79 343.74 3.90 3.61 -6.21 3.30 4.65 5.11 5.42 5.51 e/f = estimate/forecast Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q4 2010 Maritime Freight Vietnam' s port sector continues to outperform other sub-divisions of freight due to extensive funding for new facilities from both the public and private sectors In 2011, Saigon New... Monitor International Ltd Page 14 Vietnam Freight Transport Report Q4 2010 The agreement was signed by the US and Vietnam on July 2 and paves the way for the US Department of Energy's National Nuclear Security Administration (NNSA) to work with Vietnamese ministries to install radiation-detection equipment in Vietnamese ports The agency will provide, install, maintain and train Vietnamese staff in the operation... on the © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q4 2010 domestic market It opened a series of new routes last year, including Ha Noi-Can Tho, Ha Noi-Quy Nhon, HCM City-Dong Hoi, Ha Noi-Tuy Hoa, and Ha Noi-Pleiku Vietnam Airlines transported about 9.3mn passengers last year, a 6.6% increase from last year, with Vietnamese clients accounting for up to nearly 6.2mn,... growing in Asia and builds on the planned addition of China Eastern.' SkyTeam is reportedly in negotiations with 12 other airlines with two more carriers expected to be made members of the alliance by the end of 2010 © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q4 2010 Doan Xa Port Strengths ƒ Given Vietnam' s strong growth record in recent years and the country's sharply increasing... estimate by law firm Dwayne Morris, government expenditure on infrastructure will comprise 11% © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q4 2010 Vietnam Petroleum Transport Jsc (VIPCO) Strengths ƒ At this stage in its economic development, Vietnam will require rapidly increasing import volumes of oil, gas and certain petrochemicals, as well as extra export capacity VIPCO... supervision has also been cited as one of the reasons behind Vinashin's mismanagement, with the company reportedly having been under no obligation to report its activities to the Ministry of Transport or the government © Business Monitor International Ltd Page 30 Vietnam Freight Transport Report Q4 2010 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using