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... International Page 33 Vietnam Freight Transport Report Q3 2013 Road Dominates Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013f) Source: General Statistics Office of Vietnam Vietnam's... Vietnam further into the camp of Asian nations with close relations with the US © Business Monitor International Page Vietnam Freight Transport Report Q3 2013 SWOT Freight Transport Vietnam Freight. .. Business Monitor International Page 10 Vietnam Freight Transport Report Q3 2013 Vietnam Freight Transport Industry SWOT - Continued ■ Growing international interest in Vietnam as a growth market within
Q3 2013 www.businessmonitor.com VIETNAM FREIGHT TRANSPORT REPORT INCLUDES 10-YEAR FORECASTS TO 2022 ISSN 1750-5364 Published by:Business Monitor International Vietnam Freight Transport Report Q3 2013 INCLUDES 10-YEAR FORECASTS TO 2022 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: April 2013 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 © 2013 Business Monitor International All rights reserved. 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Vietnam Freight Transport Report Q3 2013 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................. 10 Freight Transport .................................................................................................................................... 10 Political ................................................................................................................................................. 12 Economic ............................................................................................................................................... 13 Business Environment .............................................................................................................................. 14 Industry Forecast .............................................................................................................. 15 Road Freight ......................................................................................................................................... 18 Table: Road Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Inland Waterways .................................................................................................................................. 20 Table: Inland Waterway Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Rail Freight .......................................................................................................................................... 22 Table: Vietnam Transport Network Length (km) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Table: Rail Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Air Freight ............................................................................................................................................ 23 Table: Air Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Maritime Freight ................................................................................................................................... 25 Table: Maritime Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Trade ................................................................................................................................................... 27 Table: Trade Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Table: Key Trade Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Table: TOP IMPORT DESTINATIONS, 2004-2011, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table: TOP EXPORT DESTINATIONS, 2004-2011, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Market Overview ............................................................................................................... 30 Industry Trends And Developments ................................................................................ 37 Maritime .............................................................................................................................................. Multimodal ........................................................................................................................................... Rail ..................................................................................................................................................... Air ...................................................................................................................................................... 37 39 40 40 Company Profile ................................................................................................................ 41 Vietnam Airlines Cargo ............................................................................................................................ 41 Vietnam Petroleum Transport Company (VIPCO) .......................................................................................... 43 Vietnam National Shipping Lines (Vinalines) ................................................................................................ 45 Regional Overview ............................................................................................................ 48 Political Outlook ..................................................................................................................................... 48 Domestic Politics .................................................................................................................................. 48 © Business Monitor International Page 4 Vietnam Freight Transport Report Q3 2013 Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Long-Term Political Outlook .................................................................................................................... 50 Global Industry Overview .................................................................................................. 54 Global Oil Product Price Outlook ............................................................................................................... 54 Methodology ......................................................................................................................................... 54 Crude Price Forecasts ............................................................................................................................ 55 Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Early Rally Turns Into Run-Off ................................................................................................................. 55 Table: BMI's Refined Products Forecasts, US$/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Supply: Refining Capacity Expansion Sets Tone ........................................................................................... Naphtha: Global Economic Outlook Weighs On Prices ................................................................................. Gasoline And Gasoil/Diesel: The Green Effect ............................................................................................. Jet Fuel: Freight Continues Slump ............................................................................................................ 60 64 65 66 Table: Total Air Freight & Passenger Volumes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Bunker Fuels: Efficiency Takes Hit On Demand ........................................................................................... 67 Macroeconomic Forecasts ............................................................................................... 69 Economic Analysis ................................................................................................................................... 69 Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Demographic Forecast ..................................................................................................... 73 Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Methodology ...................................................................................................................... 77 Transport Industry ................................................................................................................................. 78 Sources ................................................................................................................................................ 78 © Business Monitor International Page 5 Vietnam Freight Transport Report Q3 2013 BMI Industry View Vietnam's real GDP growth accelerated from 5.1% year-on-year (y-o-y) in Q312 to 5.4% in Q412, reinforcing our view that the economy is poised for a robust recovery in H113. Also, Vietnam's trade surplus expanded in February 2013, amid a sharp decline in imports. Exports surpassed imports by US $900mn in February, after a revised US$776mn in January, according to preliminary figures released by the General Statistics Office. Imports fell to US$6.6bn in February from a revised US$10.7bn in January, while exports slipped to US$7.5bn from a revised US$11.5bn over the same period. Over the past two years, Vietnam's infrastructure sector has largely been off the radar among foreign investors, meaning that the country's freight industry has perhaps had cause to feel a little neglected. This is despite numerous project opportunities cropping up. Latest estimates from the Vietnam Ministry of Planning indicate that Vietnam needs around US$160bn being made available for infrastructure development between 2013 and 2020. The lack of a comprehensive PPP framework, decade-low economic activity and slowdown in project financing from European banks due to the European sovereign-debt crisis have exposed deep fault-lines in the country's business environment for infrastructure. These frailties include excessive investment in certain infrastructure segments (ie, roads, cement), slow land clearances, poor planning, high levels of corruption and a weak regulatory environment. Although these business environment issues are far from resolved, we believe that improving economic conditions and a willingness by the Vietnamese government to resolve some of the underlying drivers for these frailties are improving the investment climate for infrastructure and, by extension, the Vietnamese freight industry. © Business Monitor International Page 7 Vietnam Freight Transport Report Q3 2013 Headline Industry Data ■ 2013 rail freight tonnage is set to increase by 4.12% to 7.29mn tonnes. ■ 2013 air freight tonnage is forecast to rise by 13.64% to 203,080 tonnes. ■ Tonnage handled at the Port of Ho Chi Minh City in 2013 is forecast to grow 7.56%, whereas tonnage handled at the Port of Da Nang is forecast to increase 4.26%. ■ 2013 road freight tonnage is forecast to grow by 11.7% to 820.5mn tonnes. ■ 2013 total trade is forecast to rise by 5.60%. Key Industry Trends Global Economic Pick Up To Support Ho Chi Minh Port Growth - Annual tonnage throughput growth at the Port of Ho Chi Minh is set to come in at a healthy 7.56% in 2013, to reach 38.75mn tonnes, down slightly on the previous year's estimated y-o-y increase of 7.71%. Container throughput is predicted to perform even better, forecast as it is to reach growth of 8.22% in 2013, almost twice as fast as our estimated 2012 expansion rate of 4.35%. This will see container throughput reaching 3.22mn TEUs. This faster rate of growth is in keeping with our macroeconomic outlook on Vietnam, where we forecast that real GDP growth will accelerate from 5.0% in 2012 to 7.0% in 2013. Logwin Reports Growth In Eastern China-Vietnam Trade Lane - Germany-based freight company Logwin has seen growth on its Eastern China to Vietnam trade lane across a range of industries, including IT hardware and garments, in 2012, reported JOC at the end of February 2013. The company's managing director for the Far East region Tomas Sonntag said the growth has turned the Eastern China to Vietnam route into 'one of the larger trade lanes in intra-Asia for Logwin'. Vietnamese Rail Line Will Cost US$2bn - The president of Russian Railways (RZD), Vladimir Yakunin, 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. © Business Monitor International Page 8 Vietnam Freight Transport Report Q3 2013 Key Risks To Outlook A proposal for Japan-based Nexco Central Company to become an investor of the upgraded Phap VanCau Gie highway project in Vietnam has been submitted by the Ministry of Transport, it was reported in April 2013. Nexco will become an investor in the project under a build-operate-transfer (BOT) contract. The decision to select Nexco instead of Vietnam's Hai Chau Group took six months, the ministry stated. If the proposal is accepted by the government, then the Phap Van- Cau Gie project will become the first foreign-invested highway project in the country. The proposal calls for upgrading the current 30km stretch into an expressway with four lanes. The project will attract a total investment capital of VND1.5trn (US $71.4mn), with the construction is expected to be concluded within one year. Meanwhile, work on the north-south high-speed railway project in Vietnam should be delayed with the focus shifted to upgrading the current north-south track, according to a proposal by state-owned Transport Engineering Design Inc (TEDI). Additionally, the speed of the north-south high-speed train should be slowed down to 150-200km an hour from more than 200km an hour, TEDI added. The time frame for the development of the trans-Asia railway should be reconsidered along with the rail lines connected to seaports, industrial zones and tourist sites, TEDI mentioned. These were the major adjustments recommended by TEDI as a consultant to the Ministry of Transport for Vietnam railway transport development strategy for 2020, with a vision to 2050. In terms of political risk over the medium term, 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. © Business Monitor International Page 9 Vietnam Freight Transport Report Q3 2013 SWOT Freight Transport Vietnam Freight Transport Industry SWOT 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 2017. ■ 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. 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. © Business Monitor International Page 10 Vietnam Freight Transport Report Q3 2013 Vietnam Freight Transport Industry SWOT - Continued ■ 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. 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 2013 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 in 2012 are likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. ■ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. ■ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage. © Business Monitor International Page 12 Vietnam Freight Transport Report Q3 2013 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 14.0% in 2010. Weaknesses ■ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to global economic uncertainties in 2012. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. ■ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. Opportunities ■ WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. ■ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. ■ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s. 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 2013 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 2013 Industry Forecast Vietnam's freight transport sector will benefit from the uptick in domestic growth and the growth outlook of its two main trade partners, the USA and China, which will drive export growth. Vietnam's logistics sector has been developing to keep up with the country's increasing role as Asia's factory, especially in the manufacturing of clothing and shoes. Vietnam's connections to its key export partners has been improving over the past three years, with the country now boasting direct container line services to the US and Europe. Vietnam's economic growth is picking up. While the country's economy continued to expand at a reasonable rate of 5% in 2012, this year marked the second year in which Vietnam's real GDP slowed. In 2013, BMI forecasts the country's economic expansion to get back on its growth trajectory with Vietnam's real GDP projected to grow by 6.27%. Economic Growth Getting Back On Course Vietnam Real GDP growth, % change 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 2013 The country's medium-term growth will place even more pressure on the country's logistics sector with Vietnam's economy forecast to expand quicker over the next four years, with an average growth of 7% predicted between 2013-2017 compared with an average annual growth of 5.9% between 2008-2012. To keep pace with this growth Vietnam will continue to 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 have 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 trade 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. We project US economic growth to expand by 2.1% in 2013. Over the medium term (2013-2017) we forecast the US economy to expand by an average 2.4% per annum. © Business Monitor International Page 16 Vietnam Freight Transport Report Q3 2013 China And The US To Drive Export Growth LHC: Vietnam's Main Export Partners By % 2011. RHC: China and US Real GDP growth, % change yo-y *2012 data is a BMI estimate. f = BMI forecast. Source: CIA World Factbook, National Bureau of Statistics, BEA 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, estimated at 7.5% in 2013 and 6.4% over the medium term. 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%. © Business Monitor International Page 17 Vietnam Freight Transport Report Q3 2013 Playing A Major Role In China's Coal Supply Chain China Coal Imports By Partner 2012 (tonnes) Source: China Custom BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class, as the country starts to import more from abroad. Road Freight Road Dominates And Offers Best Links Into China Despite its low standing in road infrastructure, with the Global Economic Forum ranking Vietnam's roads at 123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logistics needs are primarily met by road. In 2013, we predict that road freight volumes in Vietnam will account for 89% freight carried in the country. © Business Monitor International Page 18 Vietnam Freight Transport Report Q3 2013 Road Reliant Vietnam Freight Mode Breakdown By Market Share 2013 Source: BMI We forecast that growth in road freight volume will strengthen in 2013 in line with the pickup in Vietnam's economic recovery and the stronger export outlook for the country. We project road freight volumes to increase by 11.7%, up from an estimated 10.6% in 2012, to reach 820.5mn tonnes in 2013. Over the medium term, we forecast road freight volume growth will average 11.7% per annum reaching a projected 1.3bn tonnes in 2017. There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road freight expertise expand in Vietnam. Recently, both FedEx and DHL have been expanding their role in Vietnam. While some companies are breaking into Vietnam by developing their own operations in the country, others are getting a head start by acquiring and joining up with domestic freight operators. This is the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group. © Business Monitor International Page 19 Vietnam Freight Transport Report Q3 2013 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 2010 2011 2012 2013f 2014f 2015f 2016f 2017f Road freight, '000 tonnes 587,014 663,913 734,578 820,523 918,165 1,027,427 1,145,581 1,275,032 - % change y-o-y 14.29 13.1 10.64 11.7 11.9 11.9 11.5 11.3 Road freight, mn tonnes/km 36,179 40,231 38,563 41,279 44,079 47,029 50,118 53,310 - % change y-o-y 14.54 11.2 -4.15 7.04 6.78 6.69 6.57 6.37 f = BMI forecast. Source: General Statistics Office of Vietnam Inland Waterways Play A Major Role; Mekong Offers Trade Links With Neighbours Vietnam's inland waterways play a considerable role in the country's freight transport sector making it the second-largest freight transport mode in the country. In 2013, we estimate that 463.4mn tonnes of freight will be carried by the nation's waterways, a year-on-year (y-o-y) growth of 5.3%. In terms of total freight transport projections for Vietnam in 2013, we calculate that inland waterways will account for 10.1%. © Business Monitor International Page 20 Vietnam Freight Transport Report Q3 2013 Mekong Offers Trade Connections Map of the Mekong River Source: BMI The country's inland waterways stretch for 17,702km, of which 5,000km is navigable for vessels with a draught of up to 1.8m. Vietnam'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. © Business Monitor International Page 21 Vietnam Freight Transport Report Q3 2013 Table: Inland Waterway Freight 2010 2011 2012 2013f 2014f 2015f 2016f 2017f Inland waterway freight, '000 tonnes 144,227.00 157,207.40 155,161.90 163,414.44 171,920.31 180,883.46 190,267.77 199,964.10 - % change y-o-y Inland waterway freight, mn tonnes/ km* - % change y-o-y 4.73 9.00 -1.30 5.32 5.21 5.21 5.19 5.10 31,679.00 36,620.90 36,792.60 38,731.92 40,730.78 42,837.09 45,042.37 47,320.98 1.37 15.60 0.47 5.27 5.16 5.17 5.15 5.06 *2012 data is an estimate. f = BMI 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 forecast Vietnam's rail freight volumes to account for just 0.8% of the total with the country's rail network transporting just 7.3mn tonnes of freight. Although like the other freight modes, we expect volumes to increase in line with Vietnam's economic growth outlook, rail freight volumes (while forecast to grow by 18% over the next five years) will only be handling 8.3mn tonnes in 2017; this is still way below that which we forecast for the nation's other main freight modes, road and inland waterways. There are two key factors that we believe have held back Vietnam's rail freight development and will continue to do so. Table: Vietnam Transport Network Length (km) Vietnam Transport Network Road Railway Inland Waterway Length (km) 180,549 km 17,702 km 2,632 km Source: CIA World Factbook © Business Monitor International Page 22 Vietnam Freight Transport Report Q3 2013 The first is the quality of Vietnam's railway infrastructure. The Global Economic Formula gives Vietnam's rail infrastructure a low ranking, placing it 71st globally out of 123 countries measured. This ranking places it 12th out of its 13 Asian peers. A major problem for Vietnam's rail freight development is the relative shortness of the country's rail network. Vietnam's railway lines extend for just 2,632km; this compares with the country's 180,549km network of roads and 17,702km 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 2010 Rail freight, '000 tonnes - % change y-o-y Rail freight, mn tonnes/km - % change y-o-y 2014f 2015f 2016f 2017f 7,861.50 7,234.10 7,003.50 7,292.04 7,519.58 7,759.34 8,010.37 8,269.75 3.12 3.19 3.24 3.24 3,960.90 4,098.50 4,024.60 4,217.78 4,457.13 4,709.35 4,973.43 5,246.28 5.66 5.61 5.49 -4.68 2.49 2011 -7.98 3.47 2012 -3.19 -1.80 2013f 4.12 4.80 5.67 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. As intra-Asia air freight routes develop, Vietnam is becoming better connected with air freight routes internationally. The © Business Monitor International Page 23 Vietnam Freight Transport Report Q3 2013 key sectors that are demanding air freight as a transport option, include consumer electronics and pharmaceuticals. In line with Vietnam's economic growth and the projected pick up in international air freight, BMI forecasts the country's air freight volume growth to strengthen in 2013. We forecast Vietnam's air freight volumes to increase by 13.6% to reach 203,080 tonnes in 2013 a full recovery on the 10.3% decline recorded in 2012. Over the medium term (2013-2017), we forecast Vietnam's air freight levels to grow on average per annum by 7.4% and by 42.3% over the full period to reach 254,360 tonnes. There are upside risks to these forecasts stemming from the continued interest of international air freight operators in Vietnam. Throughout 2012, Vietnam's Ho Chi Minh City airport became better connected with more air freight routes and BMI expects this trend to continue in 2013 and beyond. Taking Off Vietnam Air Freight, '000 tonnes e/f= BMI estimate/ forecast. Source: General Statistics Office of Vietnam BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes. In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi Minh City. © Business Monitor International Page 24 Vietnam Freight Transport Report Q3 2013 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 Air freight, '000 tonnes - % change y-o-y Air freight, mn tonnes/km - % change y-o-y 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 190.10 199.20 178.70 203.08 215.20 227.82 240.87 254.36 36.17 4.79 -10.29 13.64 5.97 5.87 5.73 5.60 426.80 449.00 480.90 509.05 538.06 568.63 600.64 633.71 34.81 5.20 7.10 5.85 5.70 5.68 5.63 5.51 f = BMI forecast. Source: General Statistics Office of Vietnam Maritime Freight Box Role To Continue Expanding 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. It is in the container shipping sector that Vietnam has seen the most development, a trend which is expected to continue. As Vietnam has become the factory of Asia, with an emphasis on the development of clothing © Business Monitor International Page 25 Vietnam Freight Transport Report Q3 2013 and shoe exports, the country's ports and shipping links have had to keep up. As mentioned, considerable investment was ploughed into Vietnam's container terminal sector over the past five years, with international players participating. This investment is now starting to yield results, with Vietnam now directly connected to the key demand market of the US (in 2009) and Europe (in 2010). Getting Better Connected UNCTADstat Liner Connectivity Index For Asia 2004 and 2012 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 2012, it had jumped up the rankings to eighth 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 2013, we expect container volumes to increase by 8% and over the medium term by an annual average of 7%. For more information on data and analysis of Vietnam's shipping sector, please see BMI's Vietnam Shipping Report. © Business Monitor International Page 26 Vietnam Freight Transport Report Q3 2013 Table: Maritime Freight 2010 Port of Ho Chi Minh City (Saigon New) throughput, tonnes '000 2011 2012 2013f 2014f 2015f 2016f 2017f 31,132.00 33,450.71 36,029.40 38,753.08 41,430.13 44,146.40 46,892.52 49,658.39 - % change y-o-y Port of Da Nang throughput, tonnes '000 62.65 7.45 7.71 7.56 6.91 6.56 6.22 5.90 3,303.04 3,868.00 3,987.31 4,157.17 4,326.77 4,498.86 4,672.84 4,848.07 5.46 17.10 3.08 4.26 4.08 3.98 3.87 3.75 - % change y-o-y f = BMI forecast. Source: Port authorities Trade Table: Trade Overview Real 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f Imports, real growth, % y-o-y 14.71 2.94 6.15 4.90 4.50 4.40 4.30 4.20 Exports, real growth, % y-o-y 15.41 11.42 5.10 6.30 6.10 5.80 5.50 5.20 Total trade, real growth, % y-o-y 15.06 7.18 5.63 5.60 5.30 5.10 4.90 4.70 Imports, US$bn 90.97 111.96 128.52 143.39 161.12 179.08 198.37 218.12 - % change y-o-y 24.14 23.08 14.79 11.57 12.36 11.15 10.77 9.96 Exports, US$bn 80.32 106.79 121.37 137.22 156.54 176.33 197.57 219.33 - % change y-o-y 26.22 32.95 13.65 13.06 14.08 12.64 12.04 11.01 Total trade, US$bn 171.29 218.75 249.88 280.61 317.66 355.42 395.94 437.44 - % change y-o-y 25.10 27.71 14.23 12.30 13.20 11.89 11.40 10.48 Nominal e/f = BMI estimate/forecast. Source: BMI, General Statistics Office of Vietnam Table: Key Trade Indicators Agricultural raw materials Imports, US$mn - % change y-o-y Exports, US$mn © Business Monitor International 2010 2011 2012e 2013f 2014f 2015f 2,666.48 3,757.13 4,280.78 4,850.28 5,544.38 6,255.22 28.31 40.90 13.94 13.30 14.31 12.82 3,436.62 3,384.43 3,924.66 4,410.05 4,988.46 5,574.71 Page 27 Vietnam Freight Transport Report Q3 2013 Key Trade Indicators - Continued Agricultural raw materials 2010 2011 2012e 2013f 2014f 2015f 116.99 -1.52 15.96 12.37 13.12 11.75 Exports, US$mn 594.33 799.66 917.74 1,046.15 1,202.66 1,362.94 - % change y-o-y 44.06 34.55 14.77 13.99 14.96 13.33 3,300.36 4,355.31 5,053.86 5,681.51 6,429.43 7,187.49 19.18 31.96 16.04 12.42 13.16 11.79 1,622.95 2,017.64 2,345.12 2,701.27 3,135.35 3,579.88 202.25 24.32 16.23 15.19 16.07 14.18 60,547.73 74,599.18 85,660.38 95,598.87 107,441.83 119,445.38 17.80 23.21 14.83 11.60 12.39 11.17 40,806.05 54,653.96 62,461.33 70,952.36 81,301.09 91,899.33 21.60 33.94 14.29 13.59 14.59 13.04 59,531.45 73,249.80 84,068.09 93,788.32 105,371.19 117,111.14 24.09 23.04 14.77 11.56 12.35 11.14 11,085.59 17,192.02 19,449.77 21,905.22 24,897.88 27,962.69 30.31 55.08 13.13 12.62 13.66 12.31 9,659.44 14,034.64 16,177.29 18,102.46 20,396.55 22,721.74 28.84 45.29 15.27 11.90 12.67 11.40 - % change y-o-y Ores and metals Imports, US$mn - % change y-o-y Iron and steel Exports, US$mn - % change y-o-y Imports, US$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 e/f = BMI estimate/forecast. Source: BMI, UNCTAD Table: TOP IMPORT DESTINATIONS, 2004-2011, US$mn 2004 2005 2006 2007 2008 2009 2010 2011 China, Mainland, US$mn 4,595 5,900 7,391 12,710 15,974 16,441 20,019 24,594 China, Mainland, US$mn, % of total 14.37 16.05 16.46 20.25 19.79 23.50 24.01 23.53 Korea, Republic Of, US$mn 3,359 3,594 3,908 5,340 7,255 6,976 9,761 13,176 Korea, Republic Of, US$mn, % of total 10.51 9.78 8.71 8.51 8.99 9.97 11.71 12.61 Japan, US$mn 3,553 4,074 4,702 6,189 8,240 7,468 9,016 10,400 © Business Monitor International Page 28 Vietnam Freight Transport Report Q3 2013 TOP IMPORT DESTINATIONS, 2004-2011, US$mn - Continued Japan, US$mn, % of total 11.11 11.08 10.47 9.86 10.21 10.68 10.82 9.95 Singapore, US$mn 3,618 4,482 6,274 7,614 9,378 4,248 4,101 6,391 Singapore, US$mn, % of total 11.32 12.19 13.98 12.13 11.62 6.07 4.92 6.11 Thailand, US$mn 1,859 2,374 3,034 3,744 4,906 4,514 5,602 6,384 5.81 6.46 6.76 5.97 6.08 6.45 6.72 6.11 31,969 36,761 44,891 62,765 80,714 69,949 83,365 104,510 53.28 55.69 56.49 56.80 56.75 56.75 58.24 58.36 Thailand, US$mn, % of total TOTAL % from top 5 trade partners Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report Table: TOP EXPORT DESTINATIONS, 2004-2011, US$mn 2004 2005 2006 2007 2008 2009 2010 2011 United States, US$mn 5,025 5,924 7,845 10,105 11,887 11,356 14,238 16,928 United States, US$mn, % of total 18.97 18.26 19.70 20.81 18.96 19.85 20.39 18.23 China, Mainland, US$mn 2,899 3,228 3,243 3,646 4,850 4,909 7,309 11,125 China, Mainland, US$mn, % of total 10.95 9.95 8.14 7.51 7.74 8.58 10.47 11.98 Japan, US$mn 3,542 4,340 5,240 6,090 8,468 6,292 7,728 10,781 Japan, US$mn, % of total 13.37 13.38 13.16 12.54 13.51 11.00 11.07 11.61 Korea, Republic Of, US$mn 608 664 843 1,243 1,794 2,065 3,092 4,715 Korea, Republic Of, US$mn, % of total 2.30 2.05 2.12 2.56 2.86 3.61 4.43 5.08 1,065 1,086 1,445 1,855 2,073 1,885 2,373 3,367 4.02 3.35 3.63 3.82 3.31 3.30 3.40 3.62 26,485 32,447 39,826 48,561 62,685 57,196 69,820 92,881 49.78 47.11 46.85 47.33 46.45 46.42 49.82 50.56 Germany, US$mn Germany, US$mn, % of total TOTAL % from top 5 trade partners Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report © Business Monitor International Page 29 Vietnam Freight Transport Report Q3 2013 Market Overview Exports Provide Downside Risk Net exports remain the biggest downside risk to our outlook for the Vietnamese economy although we expect external demand to pick up as we head into H113, providing a glimmer of hope for the country's freight industry. Vietnam has been recording an average monthly trade surplus of US$172mn since June 2012 (resulting in a year-to-date surplus of US$77mn) and see the case for a substantial pickup in external demand on the back of a rebound in regional growth over the coming month. However, we believe that China's structural imbalances will return in H213, becoming a drag on regional growth. Accordingly, we still expect exports to expand at a moderate pace of 6.5% in 2013. Furthermore, the SBV's aggressive monetary easing cycle in 2012 has yet to achieve the desired effect of reaccelerating credit growth, as investor confidence remains depressed by uncertainties over the outlook for exports and the build up of bad debt in the banking sector. As the accompanying chart shows, credit growth has slowed from 9.4% year-on-year (y-o-y) in November to 8.9% as of December. Despite our view that credit conditions should continue to improve over the coming months, we expect credit growth to remain historically subdued at 11.0% for the full year, underpinning our benign outlook for inflation. Macroeconomic Fundamentals Continue To Improve We foresee a more stable economic environment in Vietnam over the coming years, brought upon by a decisive shift in the government's focus towards policies aimed at maintaining price stability and ongoing efforts to further address macroeconomic imbalances in the economy. In this respect, the government has made significant progress in recent years, by tightening monetary policy aggressively in 2011 to cool the overheating economy. The resulting decline in domestic demand eventually led to a slowdown in imports and has helped to reverse the country's stubborn trade deficits into sustained monthly surpluses since June 2012. Latest figures showed that the trade surplus has widened from an average monthly surplus of just US $1.3bn in 2012 to US$7.8bn in January. Initial estimates published by the General Statistics Office (GSO) also suggest a larger trade surplus of around US$9.0bn in February. Secondly, the Vietnamese government has taken a more aggressive stance with regards to speeding up economic reforms in 2012, and we expect this trend to remain in play in 2013 and beyond. Prime Minister Nguyen Tan Dung approved a master plan in February to further restructure the economy, strengthen oversight of the banking system and establish a roadmap to clean up state-owned enterprises (SOEs). The © Business Monitor International Page 30 Vietnam Freight Transport Report Q3 2013 plan is expected to be implemented by June. We are optimistic that reforms to strengthen regulatory oversight of the banking system will help to improve the quality of credit and reinstall confidence in the banking sector. Investors have been staying on the sidelines and are keeping a close eye on the government's plan to establish a new debt management agency that is expected to consolidate non-performing loans from ailing banks. Progress on this front is encouraging, with the government unveiling plans to launch the debt management agency within a matter of weeks. Such reforms will play a crucial role in attracting greater foreign direct investment (FDI) into Vietnam over the coming quarters, and should complement renewed efforts by the government to speed up privatisation of state-owned enterprises (SOEs) to allow the private sector to assume a greater role in driving economic growth going forward. It is widely expected that at least seven SOEs will launch initial public offerings (IPOs) in 2013 and another 20 more SOEs could be listed by the end of the year if the response is favourable. Healthy Medium Term Beckons Vietnam GDP Year-On-Year Growth 9 8 7 6 5 2016f 2017f 2015f 2014f 2013f 2011 2012 2009 2010 2008 2006 2007 2004 2005 2003 2001 2002 2000 4 Source: Asian Development Bank, General Statistics Office The economic headwinds that hit the US and the eurozone in 2012 should continue to act as a dampener on external demand throughout 2013 to some extent, especially in the case of the US, which is by some © Business Monitor International Page 31 Vietnam Freight Transport Report Q3 2013 distance Vietnam's top export partner. In addition, another of Vietnam's largest export partners, China, is set to see a GDP growth cool in 2013, as is Japan. This suggests that production activity in the manufacturing sector and other export-based industries could face difficulties, with a negative effect on the freight transport industry expected as a result. The US economy's pace of growth is set to slow over the next 10 years to a long-term rate of 2.4% as deleveraging from a massive credit binge takes its toll. Nonetheless, BMI believes that the US is going to remain the world's greatest economic power over our 10-year forecast period to 2022 and beyond. It must be borne in mind that if the US sneezes, then figuratively, Vietnam catches a cold. This is true in the freight industry as a slowing in external demand will have a detrimental effect. Over the longer term, imports will be boosted by Vietnam's young population, as younger populations are generally more supportive of private consumption. The country has a population of 90.7mn, according to estimates for 2013 by BMI, 60% of which is under 35. We forecast that the population will be 94.1mn by 2017, with 57% under 35, and will rise to 97.7mn by 2022. Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo. Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally. © Business Monitor International Page 32 Vietnam Freight Transport Report Q3 2013 Investment Needed Across The Board Vietnam Transport Infrastructure Rankings * Rail infrastructure is measured out of 123. Source: Global Economic Forums Competitiveness Index Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's World Factbook. BMI believes the sector requires substantial investment as the quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142 countries surveyed in its Global Competitiveness Report 2011-2012. Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC), established in April 2003 as a state corporation operating railway transport and related services. Vietnam's rail network totals 2,632km. The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and 527km of 1.435m gauge. Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved. This total puts the country in a poor 97th place in comparison with other countries. © Business Monitor International Page 33 Vietnam Freight Transport Report Q3 2013 Road Dominates Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013f) Source: General Statistics Office of Vietnam Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion. BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep International Terminal (CMIT) since it opened in March 2011 as an important driver of growth. In addition to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011. Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks © Business Monitor International Page 34 Vietnam Freight Transport Report Q3 2013 111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Quality of Port Infrastructure. As such, APMT's commitment to improving CMIT's facilities is an important step both for the terminal and the country's shipping sector as a whole. The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger vessels to access the facility. BMI notes that these works are badly needed, as we are seeing a growing trend for shipping lines to order larger container vessels. The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping sector. State-owned shipbuilder Vinashin was bailed out in 2010 when its US$4.5bn debt threatened to bring down the entire Vietnamese economy. Widespread investment in the country's infrastructure is necessary if Vietnam is to compete with regional peers. Investment And Development Outlook The Vietnamese transport sector requires vast levels of investment. The majority of infrastructure investment in Vietnam over the next 10 years will be in the transport sphere, accounting for 65% by the end of 2021. Vietnam still suffers from a significant deficit in transportation infrastructure, and we believe the Vietnamese government will continue to develop this sector over the medium term. This is reflected in our forecast for transport infrastructure industry value, which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016. According to our key infrastructure projects database, there are US$171bn worth of infrastructure projects planned or currently under way in Vietnam's transport sector. One of the most expensive of these is a US $3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs per year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. The air freight sector will undoubtedly benefit from the planned construction work on a new passenger terminal at Long Thanh international airport. Costing an estimated US$6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. 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 © Business Monitor International Page 35 Vietnam Freight Transport Report Q3 2013 international service centres. The airport, which was approved in 2011 at a cost of US$6.74bn, will be the country's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year after becoming operational in 2020. © Business Monitor International Page 36 Vietnam Freight Transport Report Q3 2013 Industry Trends And Developments Maritime Global Economic Pick Up To Support Ho Chi Minh Port Growth Year-on-year (y-o-y) tonnage throughput growth at the Port of Ho Chi Minh is set to come in at a healthy 7.56% in 2013, to reach 38.75mn tonnes, which is slightly down on 2012's estimated y-o-y increase of 7.71%. Container throughput is predicted to perform even better, forecast as it is to reach growth of 8.22% in 2013, almost twice as fast as our estimated 2012 expansion rate of 4.35%. This will see container throughput reaching 3.22mn TEUs. This faster rate of growth is in keeping with our macroeconomic outlook on Vietnam, where we forecast that real GDP growth will accelerate from 5.0% in 2012 to 7.0% in 2013. This ties in with what we are seeing in the global economy; the US and China are Vietnam's two biggest trade partners. These two markets are essential for throughput at Vietnamese ports as the South East Asian country is rapidly becoming the workshop of Asia as the labour market is cheaper than that in China. As such its container-handling facilities are in demand for finished products to be exported through them. We are more optimistic with regards to economic growth in both China and the US in the coming year; we have recently revised up our China growth forecast for 2013 from 7.1% to 7.5%, and our US growth forecast as been bumped up to 2.3% following the successful avoidance of the fiscal cliff. It is not only the macro picture that is supporting growth at Ho Chi Minh, but also investment in new facilities at the port complex, centred around the premier commercial centre of southern Vietnam. Despite a slow start amid the bleak macroeconomic fundamentals affecting the eurozone, China and the US, there are signs that Cai Mep International Terminal (CMIT) is beginning to outperform, placing upside risk on our forecasts for the Port of Ho Chi Minh City as a result. We believe that Cai Mep's positive throughput growth outlook for 2012 is in large part attributable to APM Terminal (APMT)'s operation of the terminal over the year, as the company has poured in investment and attracted new clients operating on key trade routes. APMT's presence should support continued growth at the port over the medium term (2013-2017) as it continues to improve the port's facilities and attract shipping lines keen to capitalise on Vietnam's positive macroeconomic outlook. Despite being operational for just a year, CMIT likely handled close to 600,000TEUs in 2012. © Business Monitor International Page 37 Vietnam Freight Transport Report Q3 2013 Medium Term: Impressive Growth BeckonsImpressive growth will be the order of the day for the Port of Ho Chi Minh City over the medium term to 2017. Tonnage throughput will average 6.6% to reach just under 50mn tonnes by the end of the forecast period - 49.66mn tonnes in 2017. Box throughput, meanwhile, is also set to remain healthy, averaging 7.0% over our forecast period, which will see throughput reaching 4.51mn TEUs by the end of 2017. BMI highlights the substantial investments APMT has made in CMIT since it opened in March 2011 as an important driver of growth and believes this will continue to be the case. BMI highlights that the Port of Ho Chi Minh previously only played a role as a feeder port, relying on the transhipment of containers through one of Asia's larger, better equipped ports such as Singapore. Exposure to these routes is in large part attributable to the port's ability to handle ultra-large container ships, which are becoming the standard for shipping containers on Asia-Europe trade routes. This was demonstrated in December 2011, when CMA CGM's 13,820TEU Laperouse docked at the terminal. We believe CMIT's proven capacity for handling these vessels marked an important step for the terminal and will be a key driver of growth over the medium term. With real GDP forecast to grow at an average annual rate of 7.1% over the medium term and nominal GDP per capita set to increase almost twice as fast, at 13.0% annually, a key driver of this growth will be the country's booming export sector, providing a boost to the country's shipping sector, especially the Port of Ho Chi Minh City. Long Term: Infrastructure Improvements NeededCapacity issues at the Port of Ho Chi Minh are expected to dog Vietnam in both the short and long term, although Cai Mep provides sizeable opportunities. The solution to this disruptive problem will not just be a small matter of capacity expansion. BMI suggests that the country must also put money into landside supply chain, such as road and rail networks. These developments are particularly vital if Vietnam is to achieve its aim of enabling Ho Chi Minh to handle larger container vessels so that it can ship goods directly to destination markets. Growth Potential In The New Factory Of Asia Vietnam's shipping transport sector will benefit from the uptick in domestic growth and the steady growth outlook of its two main trade partners, the USA and China, which will drive export growth. Vietnam's logistics sector has been developing to keep up with the country's increasing role as Asia's factory, especially in the manufacturing of clothing and shoes. Vietnam's connections to its key export partners has © Business Monitor International Page 38 Vietnam Freight Transport Report Q3 2013 been improving over the past three years, with the country now boasting direct container line services to the US and Europe. Vietnam's economic growth is picking up. While the country's economy is expected to expand at a reasonable rate of 5% in 2012, this year marked the second year in which Vietnam's real GDP slowed. In 2013, BMI forecasts the country's economic expansion to get back on its growth trajectory with Vietnam's real GDP projected to grow by 6.95%. The country's medium-term growth will place even more pressure on the country's logistics sector with Vietnam's economy forecast to expand quicker over the next four years, with an average growth of 7% predicted between 2013-2017 compared with an average annual growth of 5.9% between 2008-2012. To keep pace with this growth Vietnam will continue to 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 have 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 trade 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. Multimodal Logwin Reports Growth In Eastern China-Vietnam Trade Lane Germany-based freight company Logwin has enjoyed growth on its Eastern China to Vietnam trade lane across a range of industries in 2012, reported JOC at the end of February 2013. The company's managing director for the Far East region, Tomas Sonntag, said the industries that have seen growth include IT hardware and garments, and this growth has turned the Eastern China to Vietnam route into 'one of the larger trade lanes in intra-Asia for Logwin'. 'This is even more remarkable when you consider that four years ago volumes on this same trade lane were negligible. Manufacturers now actively look at leveraging the lower land and labour costs in Vietnam while maintaining their core operations in the Shanghai area,' he added. © Business Monitor International Page 39 Vietnam Freight Transport Report Q3 2013 Rail Vietnamese Rail Line Will Cost US$2bn 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. Air Cargolux Flies 747-8 Service To Vietnam Luxembourg-based airline Cargolux Airlines International has confirmed that it has successfully conducted its first 747-8 freighter revenue flight to Hanoi, Vietnam, according to Transport Weekly. The Boeing landed at 18:45 local time on March 17 2013, arriving at the Noi Bai International Airport. The airport, the biggest in Vietnam's north, is the 76th network in Cargolux's network to receive the Boeing 747-8 craft equipment. Richard Forson, interim president and chief executive officer at Cargolux, explained: 'The added third flight, as well as the subsequent introduction of the advanced 747-8F with higher payload and improved economics, underlines the commercial importance of Vietnam for us.' Meanwhile, Cargolux Chairman Paul Helminger said: 'I believe the Cargolux business model has proved its worth. We will maintain and optimise this model by further strengthening its three pillars - high load factors, good yields and high daily aircraft utilisation - on which Cargolux has usually been able to achieve above-industry results.' In other international link up news, it has been announced at the end of January 2013 that Finnair is to open new cargo routes to Hanoi from the summer with the company's managing director explaining that the move is part of Finnair's strategy to 'double its Asian turnover by 2010'. © Business Monitor International Page 40 Vietnam Freight Transport Report Q3 2013 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. 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 belly holds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). © Business Monitor International Page 41 Vietnam Freight Transport Report Q3 2013 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. Financial Data 2011/12 - Not available at the time of writing. Latest Activity Latest Activity Vietnam Airlines Increases Flight Frequency To GatwickVietnam Airlines has increased the frequency of its flights to Gatwick Airport, London, it was announced in April 2013. Another flight is to be added by the airline to Ho Chi Minh City, while Korean Air also reinstated flights to the London airport, highlighting the growth potential between Asia and the UK. Vietnam Airlines confirmed that it is to introduce a fifth weekly service from Gatwick, increasing its Ho Chi Minh City route to three flights a week from a previous two. Vietnam Airlines will also continue to serve Hanoi twice a week. New Route Launched For Vietnam AirlinesAt 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. © Business Monitor International Page 42 Vietnam Freight Transport Report Q3 2013 Vietnam Petroleum Transport Company (VIPCO) SWOT Analysis Strengths ■ 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. Threats ■ Vietnam's reliance on imported refined products is decreasing as the country brings online more refining capacity, which could negatively affect VIPCO. In the longer term, Vietnam's refining capacity could allow the state to export. Company Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime transport for petroleum products. The company has a diversified portfolio, including units that support its product tanker fleet - such as its port operations and freight forwarding services. It is also engaged in real estate. Strategy VIPCO has developed a fleet of six product tankers with a total capacity of 176,111 deadweight tonnes (DWT). The fleet is relatively young with an average age of 16 years. VIPCO has a fleet expansion strategy in place and is prepared to invest either in newbuilds or purchasing tankers under the age of 10 years. The company plans to boost its fleet to 200,000DWT. The majority of VIPCO's tanker fleet (60%) is employed to meet the transport needs of the Vietnam National Petroleum Corporation (Petrolimex). The remaining 40% is charted to other consignees. Via its connection with Petrolimex, the company is able to cater for Vietnam's oil sector. While Vietnam has estimated oil reserves of 4.6bn barrels, it imports refined products. The company's shipping unit is complemented by its petrochemical terminal's sector. Financial Data 2012 © Business Monitor International Page 43 Vietnam Freight Transport Report Q3 2013 N/A 2011 For the final quarter of 2011, VIPCO registered a drop in net income to VDN8bn, down from VDN51.7bn a year previously. Meanwhile, in mid-February 2012, the company saw its share price fall 2.2% to VND4,500. For the first half ended June 2011, the company reported a net profit of VND38.66bn (US$1.88mn), which represents a 121% year-on-year (y-o-y) increase. Revenues rose 36% y-o-y to VND943.12bn during this period, while six-month earnings per share were VND647, compared with less than half of that for the corresponding period of 2010. Latest Activity Petrolimex Launches New Subsidiary The board of directors of Vietnam National Petroleum Group (Petrolimex) made an announcement in February 2013 that a new wholly-owned subsidiary was to be established called PG Tanker. Headquartered in Hanoi, the subsidiary forms part of Petrolimex's restructuring plans and it will become the parent corporation to other subsidiary companies, including VIPCO, VITACO, PTS Hai Phong and Cua Cam Port. © Business Monitor International Page 44 Vietnam Freight Transport Report Q3 2013 Vietnam National Shipping Lines (Vinalines) SWOT Analysis Strengths Weaknesses ■ Diversified fleet operating in dry bulk, container and oil transport. ■ Largest commercial shipping line in Vietnam. ■ Vietnam does not play a role on the major Asia-Europe routes, despite developing as a direct port of call on these routes. ■ The US$3.6bn Van Phong International Port project, primarily constructed by stateowned Vinalines, was suspended in June 2011 following a reassessment of the geological conditions at the project site. ■ Vietnamese shipping company Vinalines is currently US$2.1bn in debt, reported Reuters in June 2012. ■ Vinalines' heavy exposure to Vietnam's domestic transport sector, which has been performing well recently, indicates that the firm's struggles go beyond the troubles facing the global industry. 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. © Business Monitor International Page 45 Vietnam Freight Transport Report Q3 2013 SWOT Analysis - Continued ■ Vietnamese police issued an arrest warrant for the former chairman due to the scandal rocking the debt-mired company. Duong Chi Dung has been accused of deliberately mismanaging Vinalines during his tenure. ■ Vinalines has been stung by the poor performance of the three container terminals it has joint venture interests in. Company Overview Vinalines is Vietnam's largest commercial shipping line. Established in 1996, it caters for domestic trade in Vietnam and offers intra-Asia services. The company also has a port operating division that is the largest in Vietnam, controlling and managing ports in Quang Ninh, Hai Phong, Da Nang, Ho Chi Minh and Can Tho. Strategy Vinalines' 14 shipping companies operate a diverse fleet, dominated by dry bulk vessels but also boasting container ships, oil and product oil vessels. According to the company's website, Vinalines' fleet consisted of 128 vessels. The line is looking to expand, with a plan centred on increasing the proportion of specialised vessels such as box ships or oil tankers. In order to achieve this, the line was seeking to spend US$2bn on ordering new ships from Vietnamese yards seeking state funding for the plan. Vinalines has in fact ended up expanding its fleet quicker than intended, with the shipping line taking on 36 vessels from the debt laden Vietnamese shipbuilder Vinashin in July 2010. Vinaline's chairman, Duong Chi Dung, said at the time that up to two-thirds of the acquired vessels could not be used as they failed to meet technical requirements. He estimated that the company would need to spend US$26mn to repair the vessels and purchase insurance cover. Dung added that the company expected some financial aid from the government for the project. Vinalines services the trade needs of Vietnam's domestic shipping market, but also has exposure to the intra-Asia trade lane after joining forces with NYK in December 2010 to launch a Thailand-Vietnam-Singapore (TVS) service. Vinalines provides a 1,100 twentyfoot equivalent unit (TEU) vessel for the service. BMI believes that Vinalines' presence on the intra-Asia trade route will increase, with major lines looking to expand into the route and the company well placed to enter partnerships with them. Vinalines is also increasing its contacts in the container sector, partnering with a number of the majors on container terminal projects in Vietnam. According to Port Strategy, Vietnam is of increasing interest in East Asia, due to the fact that it is focusing on becoming better connected with both short and long haul © Business Monitor International Page 46 Vietnam Freight Transport Report Q3 2013 destinations. Providing the bedrock to this strategy are the new terminals constructed in the Cai Mep area. Financial Data 2013 Vinalines is bracing itself for a full-year loss of VND2.1trn (US$101mn) already as the company continues to perform abysmally following 2012's reported loss of VND2.44trn. The company's CEO, Nguyen Canh Viet, said: 'There are few transporting contracts amid these crisis times, while several partners refused to clear their payment on time, despite the cheap fares.' 2012 Vinalines announced a VND1,439bn (US$69.2mn) loss during the first half of 2012, which is around double the losses incurred for the corresponding period a year previous. The loss was attributed to a 'perfect storm of liquidity and jobs woes', according to Vinalines director Nguyen Canh Viet, reported by Vietnam Investment Review. 2011 Vinalines recorded a VND62.15bn (US$3mn) profit for 2011, despite posting a loss of VND660bn (US$32mn) in H111 - the first time this has ever occurred in the company's 15 years of operations. The results came as a surprise to analysts who were expecting the company to suffer from the sinking of the bulker Vinalines Queen. In 2011, Vinalines shipped 36.8mn tonnes of cargo, which was a 1% annual increase on 2010. Latest Activity Government Asks Vinalines To Quit Port Project Vinalines has been 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. Vinalines Launched Country's Second Largest Carrier 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 and according to a company statement, at the launching ceremony, Nguyen Van Cong, Deputy Minister of the Ministry of Transport, said: 'In the situation of difficulties faced by the ship building industry, the construction and operation of Vosco Sunrise by Vietnamese corporations with help improve the image of and create confidence in the Vietnam Ship building Industry.' © Business Monitor International Page 47 Vietnam Freight Transport Report Q3 2013 Regional Overview Political Outlook Domestic Politics CPV To Face More Pressure For Democratic Reforms BMI View: The Communist Party of Vietnam (CPV) is facing an uphill task in defending its authoritarian system of government amid growing pressure for democratic reforms. While pressure from international rights groups has failed to deter the CPV from clamping down on anti-government demonstrations in the past, we expect the CPV to soften its stance as the country seeks to pursue closer economic ties with its considerably more democratic trade partners going forward. The rising number of political dissidents who were detained and given lengthy prison sentences in Vietnam in recent months, is a reflection of an increasingly strained political system that is under growing pressure for democratic reforms, in our view. For now, we see little indication that the ruling Communist Party of Vietnam (CPV) will relax its stance on defending the country's single-party system of government. However, we expect the government to face growing pressure to allow for democratic reforms as the adoption rate of the internet and social media increases over the coming years. Rights Groups Criticise Clampdown Efforts by the CPV to clampdown on political activists have been widely documented and criticised by international rights groups over the years. In a recent report published by the Human Rights Watch (HRW), the international rights group criticised the Vietnamese government for systematically suppressing the freedom of expression, and for harshly prosecuting those who question government policies, expose corrupt officials, and demand for democratic reforms. Nonetheless, external pressure has so far achieved little in deterring the government from escalating its clampdown on anti-government demonstrations and materials on the internet. Social-networking websites, which are widely used by political activists to organise and share information, have been constantly monitored and in some cases completely blocked by the government. Meanwhile, the government appears intent on escalating the crackdown after unveiling a draft Decree on the Management, Provision, and Use of Internet Services and Information on the Network. The new decree will outlaw internet content deemed to oppose the government or be contrary to national security, reveal state secrets, or © Business Monitor International Page 48 Vietnam Freight Transport Report Q3 2013 fuel anti-government activities. Although such measures have worked in the past to silence discontent among the public, we believe that the government will ultimately fight a losing battle with an increasingly interconnected population over the coming years. An Increasingly Difficult Balancing Act Furthermore, the country's ambitions to grow its economic footprint in the region, having gained membership status in the World Trade Organisation and the Association of Southeast Asian Nations (ASEAN), implies that the Vietnamese government will face increasing pressure to be answerable to the international community. Indeed, the surge in the number of politically-motivated arrests made by the CPV in 2012, is already straining bilateral relations with the US - Washington delayed its annual human-rights dialog with Vietnam in late 2012 and has repeatedly urged Hanoi to allow for political debate and to free political prisoners. We believe that the CPV will find the act of balancing between defending its authoritarian system of government and pursuing closer economic ties with its considerably more democratic trade partners (mainly the US, EU and ASEAN), to be an increasingly difficult task going forward. We see a compelling case for the CPV to soften its stance on its political ideologies in exchange for closer economic ties with its trading partners. However, we caution that should the CPV decide to escalate efforts to clampdown on political dissent - which is likely to mean giving security forces greater powers to suppress political demonstrations by force - it would risk provoking widespread public unrest and potential sanctions by the international community. Table: Vietnam Political Overview System of Government Single-Party Socialist Republic Head of State President Truong Tan Sang (serving first five-year term) Head of Government Prime Minister Nguyen Tan Dung (serving second five-year term) Last Election Parliamentary - May 2011 Presidential - July 2011 Composition Of Current Government Communist Party of Vietnam Key Figures The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nguyen Phu Trong, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung, and Minister of Public Security Tran Dai Quang. © Business Monitor International Page 49 Vietnam Freight Transport Report Q3 2013 Vietnam Political Overview - Continued Other Key Posts National Assembly Chariman - Nguyen Sinh Hung, Minister of National Defence - Phung Quang Thanh, Minister of Planning and Investment - Bui Quang Vinh, Vice President - Nguyen Thi Doan, Central Bank Governor - Nguyen Van Binh. 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 Main Political Parties 1975. Divisions exist within the party between a younger, more reform-minded faction originating (number of seats in from Southern Vietnam and an older generation, originating from the North, more aligned to parliament) 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 76.9 BMI Structural Political Risk Rating 52.8 Source: BMI Long-Term Political Outlook Key Political Challenges Over The Coming Decade BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US. Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam (CPV)'s monopoly on political power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a more pluralistic society over the coming decade and beyond. Indeed, the CPV's strict control of the media and political opinion is already cracking, with a growing number of internet bloggers becoming increasingly critical of government policy. Challenges And Threats To Stability © Business Monitor International Page 50 Vietnam Freight Transport Report Q3 2013 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. 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, © Business Monitor International Page 51 Vietnam Freight Transport Report Q3 2013 which amounts to more than 10% of GDP, and criticism of a Chinese-financed bauxite mining project in the central highlands. That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respective politburos have decreased tension between them. Nonetheless, we believe Vietnam will seek increasingly close relations with the US - and potentially India and Japan - in the defence sphere, as a hedge against China's rising power in the region. Vietnam's long-term political risk rating of 53.8/100 is weighed down by a score of 27.6 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up three scenarios for Vietnam's political future: Scenarios For Political Change Core Scenario - CPV Turns Into A Technocratic Regime: Our core scenario is for the CPV to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older more traditionally minded party members. However, intermittent periods of harsh repression against pro-democracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best-Case Scenario - Gradual Political Liberalisation: Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held, but where only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan and Japan have shown that even dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. © Business Monitor International Page 52 Vietnam Freight Transport Report Q3 2013 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 53 Vietnam Freight Transport Report Q3 2013 Global Industry Overview Global Oil Product Price Outlook BMI View: Prices of most oil products held steady in the first quarter of 2013, thanks to a rally in crude prices in January and February. However, the rest of the year could see prices fall back as early gains in crude prices start to roll back amidst revived concerns about global economic growth as problems in the eurozone return to the limelight and optimism about US economic growth winds down. Downward pressure on fuel prices will likely persist as competition in the global refining sector heats up, and as the emergence of alternative fuels challenges the stronghold of oil-based fuels in the transport sector. Notwithstanding the downtrend in fuel prices, crude prices in the US$90 - US$100 per barrel range will continue to support oil products prices at historically high levels. Methodology Our refined products forecasts methodology is based on estimating the future spreads between each product - gasoline, gasoil/diesel, naphtha, jet fuel/kerosene, bunker fuel 180 and 380 - and its regional benchmark: WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. In other words, changes in crude prices (and our crude price forecasts) will automatically trigger movements in our forecasts for oil product prices. Our estimates of the spread between crude prices and individual oil products are determined by the following: ■ Supply: This will be affected by changes in regional and global refining capacity. ■ Demand: This is partly a function of our expectations of the trajectory of the global economy. With regard to customers, we have identified the four main markets using the products they each utilise most often: kerosene/jet fuel in the aviation sector, gasoline and diesel for retail users and land freight operators, naphtha in the petrochemicals industry (a gauge for industrial activity) and bunker fuel for the shipping sector. In our outlook for demand we therefore incorporate forecasts and the views of BMI's Shipping, Freight Transport, Autos and Petrochemicals industry analysis, as well as the assumptions and forecasts from BMI's Country Risk analysts, in an effort to incorporate a wide-range of industry data. © Business Monitor International Page 54 Vietnam Freight Transport Report Q3 2013 Crude Price Forecasts In early March we revised our forecast for Brent and WTI for 2013. We now expect Brent to average US $110 per barrel (bbl) and WTI US$93.50/bbl. Our forecast for Dubai, which takes into account the estimated spread between Dubai and Brent as part of its methodology, is US$107/bbl (see BMI's Oil Price Outlook - Forecasts Revised On Early Rally, But Fundamentals To Take Prices Lower , 1 March 2013). Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) 2011 2012 2013f 2014f 2015f 2016f 2017f 111.05 111.68 110.00 105.00 102.50 101.00 99.00 95.05 94.15 93.50 91.00 91.00 92.00 93.00 106.15 108.88 107.00 103.00 100.00 98.00 95.50 Crude Benchmarks Brent WTI Dubai f = forecast. Source: BMI, Bloomberg Early Rally Turns Into Run-Off 2013 opened with a strong rally in prices of all oil products we consider in our forecasts. This is both a function of gains in crude prices (by February 19, Brent and WTI had risen 5.3% and 3.8% since the start of the year) and bullish economic growth sentiments that translated into higher expectations for oil product demand. However, renewed economic fears in the eurozone, as well as sombre economic data from the US and China, have seen this rally unwind for both crude oil and oil products. © Business Monitor International Page 55 Vietnam Freight Transport Report Q3 2013 Crude Rally Loses Steam… Front Month Price Of Brent & WTI, August 2012-Present (US$/bbl) Source: Bloomberg © Business Monitor International Page 56 Vietnam Freight Transport Report Q3 2013 … And Oil Products Follow Suit Prices Of Selected Oil Products In Rotterdam, New York & Singapore Source: Bloomberg © Business Monitor International Page 57 Vietnam Freight Transport Report Q3 2013 We expect oil products prices to even out over the year as economic concerns are likely to linger. Barring any supply shocks to the market caused by the eruption of tensions in the Middle East and in the Korean peninsula, or major refinery outages, fuel demand should remain relatively subdued in 2013. We highlight emerging markets such as China, India, Brazil and Indonesia as significant growth markets, but the effect of this growth will likely be tempered by weak consumption in the developed countries - a product of a slower global economy and increased fuel efficiency. Hence, our short-term forecast for 2013 - which we have revised this quarter - shows a year-on-year (y-o-y) decrease in prices across all products. In the longer term, we expect prices to stay at levels above those in 2010 through to the end of our forecast period in 2017 as a result of high crude prices. Nonetheless, across all products, the uptrend in prices since 2009 appears to have reversed into a downtrend from 2012. This change is particularly pronounced in the bunker fuels market, for both 180 and 380 fuel grades. In addition to a slight fall in crude prices that underpins our fuel price forecast, we also expect crack spreads to narrow due to the following long-term developments: an increase in global refining capacity, whose impact would be especially strong in the Asian market; increased fuel efficiency; and the beginning of a switch to alternative fuels. Although this fall in prices will occur globally, regional discrepancies do exist. As such, broad generalisations should be taken with caution. © Business Monitor International Page 58 Vietnam Freight Transport Report Q3 2013 Table: BMI's Refined Products Forecasts, US$/bbl 2011 2012 2013f 2014f 2015f 2016f 2017f Rotterdam 127.91 130.12 127.87 122.33 119.31 117.31 114.82 New York 128.24 130.74 128.69 121.19 119.19 118.19 115.19 Singapore 125.67 127.01 126.04 120.71 116.47 114.14 111.16 Global Average 127.27 129.29 127.54 121.41 118.33 116.55 113.72 Rotterdam 125.80 128.64 126.09 120.29 117.02 114.80 112.11 New York 124.72 128.24 127.74 120.24 118.24 115.24 112.24 Singapore 126.26 128.08 126.55 122.00 118.00 115.00 112.50 Global Average 125.59 128.32 126.79 120.84 117.75 115.01 112.28 Rotterdam 114.47 120.77 118.44 112.88 109.86 107.87 105.42 New York 119.30 124.79 122.78 115.28 113.28 112.28 111.28 Singapore 119.91 123.41 121.53 116.08 111.77 108.59 105.57 Global Average 117.89 122.99 120.92 114.75 111.64 109.58 107.42 Rotterdam 106.07 106.75 105.15 101.61 101.50 100.10 98.19 Singapore 102.46 102.96 101.68 100.34 97.00 95.30 93.07 Global Average 104.26 104.86 103.42 100.97 99.25 97.70 95.63 Rotterdam 97.27 101.52 94.73 91.26 90.13 89.87 88.98 New York 101.09 104.65 100.31 92.81 90.81 89.81 88.81 Singapore 100.14 101.96 97.32 92.84 90.86 89.77 88.09 99.50 102.71 97.46 92.30 90.60 89.82 88.63 Rotterdam 94.03 97.47 92.13 88.56 85.83 83.87 81.48 New York 97.13 100.29 97.00 89.50 87.50 86.50 85.50 Singapore 98.94 101.08 96.22 91.74 89.96 88.87 87.19 Global Average 96.70 99.61 95.12 89.93 87.76 86.41 84.72 Rotterdam 95.65 99.50 93.43 89.91 87.98 86.87 85.23 New York 99.11 102.47 98.65 91.15 89.15 88.15 87.15 Singapore 99.54 101.52 96.77 92.29 90.41 89.32 87.64 Jet Fuel Gasoil/Diesel Gasoline Naphtha Bunker Fuel 180 Global Average Bunker Fuel 380 Bunker Fuel Average © Business Monitor International Page 59 Vietnam Freight Transport Report Q3 2013 BMI's Refined Products Forecasts, US$/bbl - Continued Global Average 2011 2012 2013f 2014f 2015f 2016f 2017f 98.10 101.16 96.29 91.12 89.18 88.11 86.68 f = forecast. Source: BMI, Bloomberg Consumers will be grateful for falling diesel and gasoline prices over the coming years. Falling prices may delay the rise of alternative fuels, however, including some early movement towards liquefied natural gas (LNG) and biofuels in transportation, which we have seen in the shipping and air freight industries. This could in turn taper the downward trend in fuel prices. Supply: Refining Capacity Expansion Sets Tone An expected increase in global refining capacity should help contain dramatic increases in oil prices. According to our forecasts, based on refinery changes in our downstream database, refining capacity is expected to rise approximately 10% between 2012 and 2017 - which is 1% higher than the growth we project for global oil consumption over the same period. Nonetheless, this expansion alone is insufficient to account for the fall in fuel prices that we expect to see. © Business Monitor International Page 60 Vietnam Freight Transport Report Q3 2013 Expansion Meeting Growth Needs Global Refining Capacity And Oil Consumption, 2010-2017 ('000b/d) e/f = estimate/forecast. Source: EIA, BMI The geography of expansion is highly uneven. Emerging markets in Asia, the Middle East and Africa are building up their capacity. However, developed economies such as Japan and Europe will see more refinery closures, which will in turn negate some of the loosening of the global fuels market that the former should have brought about. Emerging Markets Africa will see the fastest rate of regional refining capacity growth at 30%. However, the most significant growth in absolute volume will come from the Middle East - where Saudi Aramco has at least three large 300,000 barrels per day (b/d) refineries set to come online - and in Asia - where expansions continue apace in China and India, while Indonesia considers at least four large newbuild refinery projects. Meanwhile, Russia's refinery modernisation programme will see its plants continue to serve the market to make up for expected closures in Central Europe. Turkey - the fastest-growing market for oil in Europe - will also see significant refinery expansion. © Business Monitor International Page 61 Vietnam Freight Transport Report Q3 2013 Supporting Domestic Needs With Internal Expansion Refining Capacity Of Emerging Markets, 2010-2017 ('000b/d) Selected CEE = Russia, Azerbaijan, Turkey; f = forecast. Source: EIA, BMI This means that most of these markets are prepared to meet an expected increase in local fuel demand and will have spare capacity for export. This is particularly so for the Middle East and Russia. Even China, which is set to overtake the US as the world's largest oil consumer, is on its way to becoming a net fuel exporter owing to a continued increase in its domestic refining capacity. This will loosen some pressure on global supplies and in turn prices, particularly in the Singapore market. Developed Markets Among developed markets, the outlook is brightest for US refiners which are amply supplied by cheaper crude feedstock available in the North American markets, thanks to a production boom in the US and Canada. However, due to fragmentation of the US refined fuels market, where supplies are concentrated in the refining heartlands of the Midwest and Gulf Coast, prices in import-dependent New York (East Coast) are expected to remain elevated and follow international trends. This will create an uneven market with prices that can vary vastly from region to region, to reflect differences in the crude baskets refiners have access to. © Business Monitor International Page 62 Vietnam Freight Transport Report Q3 2013 Lower runs and refinery closures in developed markets outside of the US will be the main factor propping up prices despite capacity expansion in emerging markets. At a time of high crude feedstock prices, crude import-dependent refiners in developed Europe and Japan will see their refining margins pressed. Weaker domestic demand (the cause of which will be further elaborated) also makes them dependent on external markets for support. However, their export competitiveness will be challenged by the smaller scale of their plants relative to newbuild and sophisticated facilities in emerging markets, and cheaper fuel exports coming out from the US Gulf Coast. Struggling Against The New Challengers Refining Capacity In Western Europe & Japan, 2010-2017 ('000b/d) f = forecast. Source: EIA, BMI This is already taking shape. For instance, Platts reports that Japanese refiners will most likely lower their runs in view of weak refining margins. At least three Japanese refineries - Sakaide, Tokuyama and Muroran - will end processing operations in 2014 on the back of a weak domestic market and legislation forcing the rationalisation and modernisation of refining operations. A Bloomberg survey underscores similar woes facing European refiners, showing that executives interviewed expect at least 10 plants in the region to permanently shut down by 2020. © Business Monitor International Page 63 Vietnam Freight Transport Report Q3 2013 Losses in capacity in these traditional refining markets will limit the scale of global refining expansion, such that the global fuel markets will not be oversupplied and significantly force prices down. Slower demand growth - owing to an expected rise in fuel efficiency, tougher environmental rules, rollback of fuel subsidies and alternatives to oil products - explains the extent to which individual oil product prices will fall. Naphtha: Global Economic Outlook Weighs On Prices Weak growth in some of the world's most industrialised economies will affect demand and its effect seems to be particularly pronounced for naphtha. Although the rally between January and February 2013 saw naphtha prices pick up 10.7% on average in Rotterdam and Singapore, the fall in oil products prices across the board thereafter saw naphtha fell 16.9% from its mid-February peak at the time of writing - the greatest decline observed among all oil product grades and above the 12.4% decrease in the price of Brent over the same period. As the fall in oil product prices has been precipitated by renewed growth fears, particularly in the eurozone, it suggests that naphtha - a feedstock for the petrochemicals industry - is especially sensitive to macroeconomics. With the exception of the US, we expect tepid growth in key industrialised countries - growth in the eurozone and Japan is projected to average 1.2% and 1.1% respectively between 2013 and 2017. China's growth is also expected to slow down from an average of 9.2% between 2008 and 2012 to 6.4% between 2013 and 2017. This will keep prices of naphtha subdued. We forecast an average price of US$103.42/bbl for naphtha in 2013 - a 1% fall from 2012 when economic prospects were equally bleak. Over the longer term the fall in crude prices, alongside slow growth in key countries, will see naphtha fall by an average of 1.76% between 2013 and 2017. An exacerbation of the eurozone crisis or economic shocks elsewhere poses downside risk to this forecast. © Business Monitor International Page 64 Vietnam Freight Transport Report Q3 2013 Gasoline And Gasoil/Diesel: The Green Effect Gasoline and gasoil/diesel - key for the land transport sector - will also be affected by a weak global economic outlook. Complicating demand for gasoline and gasoil/diesel are green measures; fuel-efficient vehicles and green legislation limiting emissions will further limit growth in consumption of these fuels in developed countries. Oil-based fuels could also see a growing challenge from alternative power sources such as batteries or natural gas - LNG and compressed natural gas (CNG) - as the preferred choice in the transport sector towards the tail-end of our forecast period, both in emerging and developed markets. For example, Indonesia, the Philippines and Pakistan are pushing their countries towards CNG for transportation, while China has already started a pilot programme to run public buses and taxis on LNG in selected cities. A rollback of fuel subsidies or price controls on fuel - which China has attempted and many emerging countries could enforce under budgetary pressures - would also slow demand growth significantly in these markets. Meanwhile, in the US, major freight player UPS is deploying more gas-powered trucks in its fleet. Other major transport companies could follow suit, given the low price of domestic gas in the US and under a small but growing shift towards green policies. Meanwhile, Volkswagen's Scirocco R-Cup - a car race that will pit cars powered by CNG against each other - could also indicate a growing embrace of gas-powered cars at the household level. The challenge posed by gas to oil-based fuels will likely grow, especially if supported by a further fall in gas prices globally. Our average global gasoline price for 2013 is US$120.92/bbl, compared to an average of US$122.99/bbl in 2012. Over the longer term, we see an average fall of about 2% per annum between 2013 and 2017. The fall is expected to be greatest in Rotterdam, where the fall in gasoline demand is expected to be greatest, followed by Singapore as competition among refiners heats up alongside an expansion of refining capacity in the region. © Business Monitor International Page 65 Vietnam Freight Transport Report Q3 2013 Jet Fuel: Freight Continues Slump We forecast that jet fuel prices will fall steadily through to 2017, in line with our other fuel products forecasts. Between 2013 and 2017, prices are forecast to fall 12% in Singapore, 10.0% in Rotterdam and 10.0% in New York. In terms of freight transport, we forecast European, North American and Asian air freight carriers will continue to be squeezed in 2013, by both the challenging global economic picture and the continued growth of Middle Eastern carriers and their new hubs in the Gulf, having knock-on effects on jet fuel demand. Indeed, the industry's torrid run continues into 2013 with year-to-date (ytd) figures from IATA to the end of February showing a global decline in freight tonne-km (FTK) of 1.2%. The only bright spot remains the Middle East, which posted positive growth amid an otherwise negative sector. The IATA did, however, continue to record an increase in passenger demand going into 2013. At the time of writing, passenger traffic for February 2013 (the most recent data available) saw 3.6% y-o-y growth. Nonetheless, it warned that a decrease in consumer confidence owing to macroeconomic developments will affect this upward trend. Moreover, even at these higher levels load factors were at 77.1%, implying that spare capacity remains. Hence, it will take a significantly large increase in passenger traffic to translate into more flights and jet fuel demand. Thus we see little upside risk of this uplifting the weaker demand we see in the air freight segment and to our short-term jet fuel price forecast. Table: Total Air Freight & Passenger Volumes Feb 2013 vs. Feb 2012 YTD 2013 vs. YTD 2012 RPK (% change y-o-y) FTK (% change y-o-y) RPK (% chg y-o-y) FTK (% chg y-o-y) International 3.6 -6.9 3.6 -1.2 Domestic 3.9 -2.3 2.4 1.2 Total Market 3.7 -6.2 3.1 -0.8 RPK: Revenue-Passenger-Kilometres; FTK: Freight-Tonne-Kilometres. Source: IATA © Business Monitor International Page 66 Vietnam Freight Transport Report Q3 2013 Bunker Fuels: Efficiency Takes Hit On Demand Our global average forecast for bunker fuel (the average of the 180 and 380 grades global price) stands at US$96.29/bbl in 2013, which is down 4.8% from the 2012 average of US$101.16 - the highest average price recorded over the last three years. Of all the oil products, the downtrend in bunker fuel prices looks the most pronounced. 2012 saw a strong downward trend in bunker fuel prices, reversing a strong price rally that had taken off in 2009. End Of The Uptrend Price Of Bunker Fuel 380 (Top Chart) & Bunker Fuel 180 (Bottom Chart), 2008-Present (US$/Metric Tonne) Source: Bloomberg, EIA © Business Monitor International Page 67 Vietnam Freight Transport Report Q3 2013 We have been highlighting two key risks to the global shipping industry, each of which will have a knockon effect on bunker fuels demand. The first is that there is a high risk of global overcapacity, as new ships, and especially container ships, hit the market. In 2013, this issue will be especially true with new megavessel capacity, including Maersk Line's Triple E-Type 18,000 twenty-foot equivalent unit (TEU) vessel, the largest ship to date, coming online. Importantly, these ships are not just larger, but they are actually more fuel-efficient than those currently employed around the globe. Not only will they be able to carry more goods, but they will be able to do so with less fuel, therefore reducing bunker fuels demand. These efficiency trends are also part of a broader push for an overall cleaner shipping industry, as demanded by both governments with forward-leaning environmental policies and major ports themselves. Hong Kong and Los Angeles - two of the largest ports in the world - are demanding that container ships utilise cleaner bunker fuels than today's standards. Furthermore, we have previously highlighted a separate push to increase the utilisation of LNG as a shipping fuel, with several European ports investing in LNG shipping infrastructure to support this new industry. Det Norske Veritas (DNV), a ship classification bureau, estimates that 19-45% of ships will be powered using LNG by 2030. Meanwhile, Maersk Line wants to test biofuels and NYK Line is trialling a solar power-assisted car carrier. We believe that the most likely alternative to bunker fuel will ultimately be LNG. However, this remains a long-term prospect that will only kick in towards the end of our forecast period. Our forecast for a decline in bunker fuel costs will offer shipping companies some short-term relief and take the pressure off their bottom lines in the coming years, although prices will remain elevated by historical standards. As such, we believe that companies will continue to slow steam in an effort to conserve fuel and cut expenditures, as well as embrace the push towards cleaner-burning fuels. All of this is to say that the overall trend for bunker fuels will be that of reduced demand over the medium term. © Business Monitor International Page 68 Vietnam Freight Transport Report Q3 2013 Macroeconomic Forecasts Economic Analysis BMI View: The State Bank of Vietnam's surprise decision to cut its policy rate by 100 basis points from 10.00% to 9.00% suggests that policymakers are under increasing pressure to stimulate economic growth in 2013. We believe that the latest move will help reinforce government efforts to boost private sector investment. Given that money supply growth remains considerably low by historical standards, we believe that the risks of reigniting inflationary pressure remain manageable. The State Bank of Vietnam (SBV) cut its policy rate (refinancing rate) by 100 basis points from 10.00% to 9.00% on December 24 2012, just days before the General Statistics Office published its preliminary estimate for GDP growth to come in slightly weaker than expected at 5.0% for 2012 (compared with Bloomberg consensus of 5.2%). The surprise rate cut came amid growing concerns that mounting bad debt across the banking sector is deterring banks from issuing new loans to businesses, and that this could severely undermine government efforts to reignite economic growth in 2013. From our perspective, the move also suggests that policymakers are under increasing pressure to adopt more aggressive measures to stimulate economic growth in an attempt to stem the growing number of bankruptcies among small-andmedium enterprises (SMEs) and rising unemployment. This is closely in line with our view that the Vietnamese government's economic agenda will remain skewed towards boosting growth in 2013. © Business Monitor International Page 69 Vietnam Freight Transport Report Q3 2013 Recovery On Track Vietnam - Real GDP, VNDbn (LHS) & % chg y-o-y (RHS) Source: BMI, General Statistics Office We are seeing evidence that credit conditions are beginning to improve and expect demand for private sector credit to pick up gradually in H113. In addition to aggressive monetary policy easing by the SBV, the government has also announced plans to slash corporate income tax rates by two percentage points to 23% in 2013. We believe that lower lending rates and tax incentives will help to reinforce government efforts to attract foreign direct investment and boost private sector investment over the coming quarters. Inflation Still A Manageable Risk International organisations including the World Bank and IMF have warned against easing monetary policy too aggressively, which risks reigniting inflationary pressure. Although we acknowledge these risks, we highlight that the recent rebound in money supply growth remains considerably weak by historical standards. As the accompanying chart shows, prior to periods in which Vietnam experienced very high inflation (2008 and 2011), M2 money supply was expanding at a rate of 33.3% and 46.1% in 2007 and 2010, respectively. This compares with M2 growth that came in at a record low of just 6.0% in 2012 and © Business Monitor International Page 70 Vietnam Freight Transport Report Q3 2013 our forecast for a mild pickup towards 11.0% for 2013, suggesting that inflation is likely to remain manageable at under 7.0% in 2013. Credit Conditions To Improve In 2013 Vietnam - M2 Money Supply, VNDbn (LHS) & % chg y-o-y (RHS) f = BMI forecast. Source: BMI, State Bank of Vietnam We acknowledge that the risk of a potential surge in commodity prices in 2013 - especially food prices, which make up around 40% of the consumer price index basket - could turn out to be a wildcard for policymakers. For now, we believe that overall conditions in Vietnam remain in favour of our forecast for real GDP growth to come in relatively strong at 7.0% in 2013. Expenditure Breakdown Private Consumption: We expect private consumption to grow at a robust pace of 5.6% in 2013. However, we note that the risk of a sustained collapse in exports and further bankruptcies among SMEs could potentially lead to widespread job losses in export-driven sectors. Uncertainties over the outlook for employment could, in turn, prompt households to cut back on spending. © Business Monitor International Page 71 Vietnam Freight Transport Report Q3 2013 Gross Fixed Capital Formation: We foresee a significant pickup in private sector investment growth in 2013. We believe lending rates will gradually ease over the coming months as the effect of recent rate cuts by the SBV begins to kick in. We are also seeing evidence that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to accelerate from 4.3% in 2012 to 5.9% in 2013. Public Spending: We expect total public spending to remain relatively resilient in 2013, expanding at a respectable pace of 5.4%. 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 as we head into H113. Vietnam has been recording an average monthly trade surplus of US$172mn since June 2012 (resulting in a year-to-date surplus of US $77mn) and we see the case for a substantial pickup in external demand on the back of a rebound in regional growth over the coming month. However, we believe that China's structural imbalances will return in H213, becoming a drag on regional growth. Accordingly, we still expect exports to expand at a moderate pace of 6.5% in 2013. Table: Vietnam - Economic Activity 2009 Nominal GDP, VNDbn 2 2010 2011e 2012e 2013f 2014f 2015f 2016f 2017f 1,658,389 1,980,914 2,536,631 2,950,684 3,361,036 3,813,158 4,301,043 4,832,660 5,422,488 Nominal GDP, US$bn 2 93.16 103.53 122.82 141.44 161.59 185.42 211.56 240.43 271.12 Real GDP growth, % change y-o-y 2 5.3 6.8 6.0 5.0 7.0 7.2 7.2 7.0 6.9 1,072 1,178 1,383 1,576 1,782 2,025 2,289 2,577 2,881 86.9 87.8 88.8 89.7 90.7 91.6 92.4 93.3 94.1 Industrial production index, % y-o-y, ave 1,4 6.7 14.1 10.9 7.0 12.0 14.0 13.0 12.0 11.0 Unemployment, % of labour force, eop 4 6.0 4.3 4.5 6.0 4.8 4.7 4.6 4.5 4.4 GDP per capita, US$ 2 Population, mn 3 Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices. Sources: 2 Asian Development Bank, General Statistics Office; 3 World Bank/UN/BMI; 4 General Statistics Office. © Business Monitor International Page 72 Vietnam Freight Transport Report Q3 2013 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 2011, the change in the structure of the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split. Source: World Bank, UN, BMI © Business Monitor International Page 73 Vietnam Freight Transport Report Q3 2013 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2012e 2015f 2020f 67,102 74,008 78,758 83,161 87,848 89,730 92,443 96,355 0-4 years 9,340 9,212 7,002 6,776 7,186 7,186 7,026 6,529 5-9 years 8,685 9,193 9,124 6,921 6,703 6,885 7,143 6,982 10-14 years 7,504 8,604 9,142 9,038 6,844 6,539 6,668 7,104 15-19 years 7,127 7,408 8,535 9,064 8,963 8,161 6,806 6,628 20-24 years 6,492 7,003 7,305 8,420 8,954 9,115 8,892 6,745 25-29 years 5,893 6,361 6,879 7,167 8,284 8,602 8,862 8,803 30-34 years 4,884 5,779 6,250 6,765 7,058 7,475 8,202 8,779 35-39 years 3,965 4,794 5,688 6,163 6,677 6,770 6,991 8,131 40-44 years 2,420 3,884 4,710 5,614 6,086 6,304 6,609 6,925 45-49 years 2,039 2,358 3,802 4,653 5,548 5,761 6,012 6,536 50-54 years 1,933 1,968 2,287 3,739 4,580 4,936 5,449 5,914 55-59 years 1,946 1,843 1,887 2,201 3,617 4,001 4,446 5,305 60-64 years 1,544 1,822 1,737 1,767 2,076 2,573 3,455 4,268 65-69 years 1,283 1,391 1,659 1,582 1,621 1,649 1,927 3,233 70-74 years 919 1,084 1,194 1,439 1,389 1,384 1,438 1,729 1,127 1,305 1,559 1,852 2,264 2,388 2,516 2,743 Total 75+ years f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 74 Vietnam Freight Transport Report Q3 2013 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2012 2015f 2020f 0-4 years 13.92 12.45 8.89 8.15 8.18 8.01 7.60 6.78 5-9 years 12.94 12.42 11.58 8.32 7.63 7.67 7.73 7.25 10-14 years 11.18 11.63 11.61 10.87 7.79 7.29 7.21 7.37 15-19 years 10.62 10.01 10.84 10.90 10.20 9.10 7.36 6.88 20-24 years 9.68 9.46 9.27 10.13 10.19 10.16 9.62 7.00 25-29 years 8.78 8.60 8.73 8.62 9.43 9.59 9.59 9.14 30-34 years 7.28 7.81 7.94 8.14 8.03 8.33 8.87 9.11 35-39 years 5.91 6.48 7.22 7.41 7.60 7.55 7.56 8.44 40-44 years 3.61 5.25 5.98 6.75 6.93 7.03 7.15 7.19 45-49 years 3.04 3.19 4.83 5.59 6.32 6.42 6.50 6.78 50-54 years 2.88 2.66 2.90 4.50 5.21 5.50 5.89 6.14 55-59 years 2.90 2.49 2.40 2.65 4.12 4.46 4.81 5.51 60-64 years 2.30 2.46 2.21 2.12 2.36 2.87 3.74 4.43 65-69 years 1.91 1.88 2.11 1.90 1.85 1.84 2.08 3.36 70-74 years 1.37 1.46 1.52 1.73 1.58 1.54 1.56 1.79 75+ years 1.68 1.76 1.98 2.23 2.58 2.66 2.72 2.85 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 75 Vietnam Freight Transport Report Q3 2013 Table: Vietnam's Key Population Ratios, 1990-2020 Dependent ratio, % of total working age 1 Dependent population, total, '000 2 Active population, % of total 3 Active population, total, '000 4 Youth population, % of total working age 5 Youth population, total, '000 6 1990 1995 2000 2005 2010 2012 2015f 2020f 75.5 71.2 60.5 49.7 42.1 40.9 40.6 41.6 28,859 30,790 29,679 27,609 26,006 26,031 26,717 28,321 57.0 58.4 62.3 66.8 70.4 71.0 71.1 70.6 38,243 43,218 49,079 55,552 61,842 63,699 65,725 68,034 66.8 62.5 51.5 40.9 33.5 32.4 31.7 30.3 25,529 27,009 25,268 22,735 20,732 20,610 20,837 20,615 8.7 8.7 9.0 8.8 8.5 8.5 8.9 11.3 3,330 3,780 4,411 4,874 5,274 5,421 5,881 7,706 Pensionable population, % of total working age 7 Pensionable population, '000 8 f = BMI forecast; 1 0>15 plus 65+, as % of total working age population; 2 0>15 plus 65+; 3 15-64, as % of total population; 4 15-64; 5 0>15, % of total working age population; 6 0>15; 7 65+, % of total working age population; 8 65+. Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2012 2015f 2020f Urban population, % of total 20.3 22.2 24.3 26.4 28.7 29.7 31.2 33.9 Rural population, % of total 79.7 77.8 75.7 73.6 71.3 70.3 68.8 66.1 Urban population, '000 13,438.6 16,201.6 18,865.4 21,940.1 25,212.5 26,649.9 28,842.1 32,664.4 Rural population, '000 52,761.4 56,778.4 58,770.0 61,166.2 62,635.9 63,080.4 63,600.5 63,690.7 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 76 Vietnam Freight Transport Report Q3 2013 Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part of all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. © Business Monitor International Page 77 Vietnam Freight Transport Report Q3 2013 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. Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ■ Trends manifested through historical data; ■ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). Port Traffic Port traffic levels act as a 'second opinion' on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ■ Trends in historical modal split data; ■ Evidence of government policy favouring one or more modes over others; ■ Government and or private sector investment plans in specific modes. Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Page 78 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... total amount of airports in Vietnam with paved runways at 37, with seven unpaved This total puts the country in a poor 97th place in comparison with other countries © Business Monitor International Page 33 Vietnam Freight Transport Report Q3 2013 Road Dominates Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013f) Source: General Statistics Office of Vietnam Vietnam's dense river and... rail freight development and will continue to do so Table: Vietnam Transport Network Length (km) Vietnam Transport Network Road Railway Inland Waterway Length (km) 180,549 km 17,702 km 2,632 km Source: CIA World Factbook © Business Monitor International Page 22 Vietnam Freight Transport Report Q3 2013 The first is the quality of Vietnam' s railway infrastructure The Global Economic Formula gives Vietnam' s... International Page 23 Vietnam Freight Transport Report Q3 2013 key sectors that are demanding air freight as a transport option, include consumer electronics and pharmaceuticals In line with Vietnam' s economic growth and the projected pick up in international air freight, BMI forecasts the country's air freight volume growth to strengthen in 2013 We forecast Vietnam' s air freight volumes to increase... Forum ranking Vietnam' s roads at 123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logistics needs are primarily met by road In 2013, we predict that road freight volumes in Vietnam will account for 89% freight carried in the country © Business Monitor International Page 18 Vietnam Freight Transport Report Q3 2013 Road Reliant Vietnam Freight Mode Breakdown... River, which enables freight connections with Vietnam' s neighbours © Business Monitor International Page 21 Vietnam Freight Transport Report Q3 2013 Table: Inland Waterway Freight 2010 2011 2012 2013f 2014f 2015f 2016f 2017f Inland waterway freight, '000 tonnes 144,227.00 157,207.40 155,161.90 163,414.44 171,920.31 180,883.46 190,267.77 199,964.10 - % change y-o-y Inland waterway freight, mn tonnes/... Monitor International Page 19 Vietnam Freight Transport Report Q3 2013 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.. .Vietnam Freight Transport Report Q3 2013 Vietnam Freight Transport Industry SWOT - Continued ■ 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... Page 24 Vietnam Freight Transport Report Q3 2013 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. .. International Page 31 Vietnam Freight Transport Report Q3 2013 distance Vietnam' s top export partner In addition, another of Vietnam' s largest export partners, China, is set to see a GDP growth cool in 2013, as is Japan This suggests that production activity in the manufacturing sector and other export-based industries could face difficulties, with a negative effect on the freight transport industry expected... boost skills levels could leave Vietnam a second-rate economy for an indefinite period © Business Monitor International Page 14 Vietnam Freight Transport Report Q3 2013 Industry Forecast Vietnam' s freight transport sector will benefit from the uptick in domestic growth and the growth outlook of its two main trade partners, the USA and China, which will drive export growth Vietnam' s logistics sector has