Special Economic Zones

Article published on March 05, 2016 in Parag Khanna and reproduced by courtesy of Parag Khanna

Special Economic Zones (SEZs) are the most rapidly spreading kind of city, having catapulted exports and growth from Mauritius and the Dominican Republic to Shenzhen and Dubai -- and now across Africa. Today more than 4000 SEZs dot the planet, a major indication of our transition towards the "supply chain world" explored in Connectography.

See more maps from Connectography and order the book here.

Author: Parag Khanna / Publisher: SCMO

Passenger numbers to double over the next 20 years

Article published on December 2014 in Legal Eye and reproduced by courtesy of Stephenson Harwood

The International Air Transport Association (IATA) released its first ever 20 year global passenger growth forecast in October 2014, which predicts annual passenger numbers will grow from 3.3 billion this year to 7.3 billion in 2034.

The Global Passenger Forecast Report, put together by the new IATA Passenger Forecasting Service, working in association with Tourism Economics, analyses airline passenger flows across 4,000 country pairs for the next 20 years, using three key demand drivers: living standards, projected population and demographics, and price and availability.

The Report forecasts that China will overtake the US as the world’s largest air passenger market by 2030, and that by 2034, the five fastest increasing markets, in terms of additional passengers per year, will be China, the US, India, Indonesia and Brazil. Eight of the ten fastest growing markets in percentage terms will be in Africa, and the highest growth in terms of country pairs is predicted to be in Asia and South America, reflecting economic and demographic growth in those markets.

The Report highlights the fact that meeting the forecast growth in global air passenger numbers, which represents a 4.1% average annual rate of growth, will require government policies that support the economic benefits that such increased levels of air connectivity will make possible.

Tony Tyler, IATA’s Director General and CEO, said the following:

“Airlines can only fly where there is infrastructure to accommodate them. People can only fly as long as ticket taxes don’t price them out of their seats. And air connectivity can only thrive when nations open their skies and their markets. It’s a virtuous circle. Growing connectivity stimulates economies, and healthy economies demand connectivity.”

Tyler points out that at present, aviation helps sustain 58 million jobs and US$2.4 trillion in economic activity, and that in 20 years time, IATA has projected that aviation will support over 105 million jobs and US$6 trillion in GDP.

IATA’s forecasts for the 10 largest air passenger markets (defined by traffic to from and within) for the next 20 years:

  • The US will remain the largest air passenger market until around 2030, when it will drop to number 2 behind China;
  • India will grow from being the 9th largest market to the 3rd, overtaking the UK around 2031, which will fall to 4th place;
  • Japan will decline from the 4th largest market to the 6th largest by 2033, reflecting a declining and ageing population;
  • Germany and Spain will decline from 5th and 6th positions to be the 8th and 7th largest markets, France will fall from 7th to 10th position and Italy will fall out of the top ten largest markets completely in or around 2019;
  • Brazil will rise from the 10th largest market in 2014 to the 5th largest by 2034; and
  • Indonesia will enter the top ten around 2020 and will attain 6th place by 2029.

The Report recognises that air travel has an environmental impact, and states that in 2009 the industry agreed three targets so as to ensure that aviation plays its part in ensuring a sustainable future:

  • 1.5% annual fuel efficiency improvement by 2020;
  • Capping net emissions through carbon-neutral growth from 2020;
  • A 50% cut in net emissions by 2050, compared to 2005.

In the same week that the Global Forecast Report was published, IATA released the results of its quarterly Business Confidence Survey of CFOs and heads of cargo, which forecasts growth across the airline industry over the next year. Management of airlines are predicting largely positive profit expectations for 2015, notwithstanding some downside risks associated with the weaknesses in the Eurozone economic recovery, the Russia-Ukraine crisis, and some knock on effects from the Ebola crisis.

Eight of the ten fastest growing markets in percentage terms will be in Africa

Author: Paul Phillips (Partner, Head of aviation litigation and regulation with Stephenson Harwood) / Publisher: SCMO


The Panama Canal: a brief history

Reproduced from Smits, K. (2013). Cross Culture Work: Practices of Collaboration in the Panama Canal Expansion Program. Delft: Next Generation Infrastructures Foundation by courtesy of Karen Smits

Panama. Bordering with Costa Rica and Colombia, Panama connects Central America with South America (see Picture 1). Due to the geographic location of the Isthmus of Panama, the country has long been coveted as a place where the Atlantic and Pacific oceans should meet, and, with the Panama Canal, they finally do.

Before starting this blog series about cross-cultural collaboration in projects, for which I will use examples from the Panama Canal Expansion Program, I’d like to give you a brief insight into the history of the waterway.

Picture 1: Think Panama - Source: Flickr

Picture 1: Think Panama - Source: Flickr

History of the Panama Canal

In 1513, when Vasco Nuñez de Balboa discovered the Southern Sea (later known as the Pacific Ocean) and realized how close this ocean is to the Atlantic Ocean, the history of the Panama Canal began. From that moment onwards there had been talks about a shortcut through Central America, but it required certain advances in engineering, among other things, to actually construct this alternate route.

Three hundred years later discussions about where a canal ought to go developed into a choice between Nicaragua and Panama. While the debate continued, Colombia allowed a group of entrepreneurs from the United States of America to build a railroad across their province Panama. After their experiences in Panama, however, the railroad builders argued for another location for the canal as, for them,

“Panama was the worst place possible to send men to build anything” [1]

Despite these experiences, an international congress that convened in Paris in May 1879 voted for a sea level canal in Panama. Known as ‘The Great Engineer’, the world-famous Suez Canal engineer Ferdinand de Lesseps took command of the initiative to build a sea level canal in Panama.

The French Attempt

The work in Panama was an immensely larger and more baffling task than Lesseps had performed at the Suez Canal [1]. Different than in Egypt, the climate in Panama was not only hot but with humidity reaching 98 percent at times, suffocating. While digging at Suez had been through a flat level dessert, in Panama the workers encountered mostly hard rock and clay.

Another important difference between Egypt and Panama was the rainfall, in Suez it rained about nine inches a year, while rainfall in Panama was measured in feet ; ten feet or more on the Caribbean slope and five to six feet in Panama City [1]. Due to the heavy rainfall, digging proved to be much more difficult in Panama, and the threat of diseases was very high. Panama appeared to be the most difficult place to construct a canal: the canal builders had to deal with thick jungles full of snakes, mosquitoes that carried malaria or yellow fever, deep swamps, and a heavy mountain range [2].

De Lesseps and his crew spent eight and a half years fighting against the jungle, a battle they lost. An earthquake, fires, floods, the continuous epidemic of yellow fever, a huge amount of corruption and, on top of this, insufficient funds and unfortunate engineering decisions converged into a tragic ending of the French attempt [1-3]. In 1889, De Lessep’s venture fell: more than a billion francs -about US$287 million- had been spent, accidents and diseases had claimed twenty thousand lives and the project organization Compangie Universelle du Canal Interocéanique de Panama went bankrupt [1, 3].

A lesson learned from the French undertaking was that the construction of a canal went beyond the capacity of any purely private enterprise, it had to be a national undertaking, and the United States of America appeared to be the one nation ready to mount such and effort [1].

The American Victory

When Theodore Roosevelt became the President of the United States of Americain 1901, he was determined that a canal was the vital, indispensable path to a global future for the United States [1, 4]. For both commercial as well as military vessels it would significantly improve shipping time, lower shipping costs, and avoid passing through the often-dangerous weather at the tip of South America.

Furthermore, a two-ocean navy would not be necessary when the two coasts would be connected. A canal would demonstrate American power to the world and enhance the nation’s identity as a supreme authority [3]. Despite intensive lobbying and heavy discussions about where this canal had to be built, in Nicaragua or Panama, President Roosevelt finally decided it had to be Panama [1, 3].

There was just one obstacle: Panama was a small province of Colombia and the Colombian constitution prohibited any sovereignty to give away any part of the country, which is exactly what Roosevelt had in mind. He was lucky though. A group of Panamanian elites had plotted a revolution for years, and they were eager to receive United States’ protection to support Panama’s independence [3]. On November 3rd, 1903, a coup gave birth to the Republic of Panama.

Soon after this bloodless revolution Panama and the United States signed the Hay-Bunau-Varilla treaty. This agreement evoked a whirlwind of controversy as it gave astonishing rights to the United States, while it eliminated any independence of the Republic of Panama [1, 3]. The treaty granted the United States effective sovereignty over the ‘Canal Zone’, a ten-mile wide swath that stretched clear across the isthmus and cut the country in two. It gave the United States the right to purchase or control any land or building regarded necessary for the construction of the canal and allowed the United States to intervene anywhere in the republic to restore public order “in case the Republic of Panama should not be, in the judgment of the United States, able to maintain such order” [3]. Later, this treaty became a contentious diplomatic issue between Panama and the United States.

Picture 2: National Museum of American History - Source: Flickr

Picture 2: National Museum of American History - Source: Flickr

The Panama Canal construction project attracted people from all over the world. It promised the return of prosperity surpassing the French era and there was no doubt it would be completed [1].

Labor agents targeted the Caribbean islands for workers and attracted at least twenty thousand Barbadians and an almost equal amount of West Indians to travel to Panama and sign a contract with the government of the United States [3]. Although the project drew mostly migrants from this region, thousands of others from Mexico, Costa Rica, Colombia, Peru, India, China and Europe also packed their suitcases for the Canal Zone. Even higher numbers of people from the United States were attracted by the prestigious job for the federal government, the adventure and good payment.

Under supervision of army doctor Colonel William Gorgas doctors and sanitary inspectors fought yellow fever and malaria; all streets in Panama were cleaned, pools were drained and waterways oiled to get rid of the disease-carrying mosquitos [2]. As conditions in the isthmus improved, after 1906, more American women packed their bags for Panama so they might work as nurses, secretaries or provide a home for their husbands [3]. Acting as a global magnet, the canal project drew families away from their home countries and set in motion extensive changes concerning migration, labor supply and the allocation of economic wealth and social status.

The construction of the Panama Canal officially took ten years, from May 1904 to August 1914, and overlapped with the tenure of three chief engineers. The first engineer, named John Wallace, only stayed on for the first chaotic year in the isthmus. John Stevens, the second engineer, played a key contribution by pleading for a lock rather than a sea-level canal. He remained on the job for two years. The final engineer, George Washington Goethals, oversaw most of the construction of the Panama Canal and stayed on the job until completion of the project [1-3].

With newer and bigger machinery, like the steam shovel, an enormous international workforce and a solution to fight malaria and yellow fever, the United States constructed the Panama Canal with its three locks (one 1-chamber and one 2-chamber lock at the Pacific side and one 3-chamber lock at the Atlantic side): Gatún, Pedro Miguel and Miraflores, each named after the village where it was built [5]. The design and construction of the locks was the most spectacular aspect of the project [3]. An artificial lake, Gatun Lake, was created so that ships could pass the canal at 26 meters above sea level, through the narrow Gaillard Cut.

The costs of the project had been more than four times what constructing Suez Canal had cost and were enormous for those days; no other construction effort in the history of the United States paid such a price in dollar or in human life [1]. This project took more than 5.000 human lives and totaled $352.000.000 in expenditures, which, taken together with the French expenditure summed up to a cost of $639.000.000 [1]. Six months ahead of schedule, and with a final price that was actually $23.000.000 below what was estimated in 1907, the construction of the Panama Canal was finished [1].

In 1914, nearly 34 years after the first shovel hit the ground, its gates opened for the first vessels to pass [1-3]. This moment was a symbol to Americans, and to the rest of the world, letting them know that the United States had firmly established itself as the most powerful nation on earth.

Ownership of the Canal

After August 15, 1914, when the canal was officially inaugurated with the passage of steamship Ancón (see picture 3), the supervision of the waterway remained under American administration. The opening ceremony celebrated America’s triumph and the capstone project characterizing Panama. It also signaled the beginning of an almost 100-year relationship between Panama and the United States, ranging from intervention and repression to reconciliation and cooperation [6]. Although Panamanians initially embraced the canal construction and hoped to benefit from the American effort, their resentment grew over the years as the promised fruits of the alliance proved sour [3].

Picture 3: William Friar - Source: Flickr

Picture 3: William Friar - Source: Flickr

In the decades after the opening of the waterway, tensions between Panama and the United States were often stormy and colored by deep conflicts and violence. Fostered by racial differences, notions of honor, respectability and civilization, the relationship between the countries and their citizens was highly problematic [3]. Frequently, the United States sent troops into the country to suppress protests and, on the other side, the Panamanian police aggressively stood up against canal employees [6]. These frictions illustrated the complex and tense relationship between Panamanians and Americans.

Elite Panamanians perceived the presence of the United States and the canal as necessary, expecting it to be a path to modernity and civilization, yet instead of welfare, the project brought Americans who behaved disorderly and uncivilized [3]. More and more Panamanians claimed a revision of the original terms of the Hay-Bunau-Varilla treaty, and the steady growth of dissatisfaction and frustration, as it reached its limit, was made known in numerous uprisings and demonstrations [3, 6, 7].

Following the riots in 1964, Panama gained sympathy from around the world for more authority over the canal, which became a turning point in the relations between the United States and Panama [3]. Negotiations between the two countries took until 1977, when a new treaty about the Panama Canal was signed. Agreed by Panama’s President Omar Torrijos and U.S. President Jimmy Carter, new treaties promised an end to the United States controlling the waterway, declared the permanent right of the United States to defend the neutrality of the canal, but prohibited the United States from interference in internal affairs in the Republic of Panama [3, 6, 8]. Particularly, the first treaty mandated the elimination of the Canal Zone as of October 1, 1979, and agreed that the United States would run the administration of the canal until December 31, 1999 [3, 6].

Significant changes were implemented: a new organization, the Panama Canal Commission, was established, with a board of five American and four Panamanians members, and as of 1990, a Panamanian would fill the position of Administrator. Furthermore, the treaty called for more skilled Panamanians, as they would gradually play a greater role in the organization, and it prescribed that Panama would receive a higher amount of canal revenue [6]. The second treaty set out the Canal’s permanent neutrality and both countries’ right to defend it [6, 7]. Hence, much of what constituted the special relationship between the United States and Panama no longer existed after 1999, and for the first time in 158 years (since the construction of the railroad), the American military was absent in Panama [9].

At the end of the 1980s, after nine years of dictatorship under military governor Manuel Noriega and despite the agreements, the United States invaded Panama. President George H.W. Bush had realized he could not control Noriega, which seemed problematic now that, following the Torrijos-Carter Treaties, the countries were moving towards a joint administration of the canal [3]. After large and bloody attacks on Panama City, Noriega surrendered on January 3, 1990 [6]. Immediately after the invasion, President Bush declared that he aimed at safeguarding the American citizens in Panama, combating drug trafficking, protecting the integrity of the treaties and the Panama Canal, as the waterway was still under protection of the United States [3, 6].

Panama’s road to recovery began. By means of close cooperation and extensive planning among American and Panamanian members of the Panama Canal Commission, working as one team with one mission, the countries worked towards a “seamless transition” of the canal [9]. In the years towards the transition date, strong criticism regarding Panama’s capability to run the organization of the canal was put forward in American media. Indicating doubt about the local ability it was said that the Panamanians would “dance on the canal’s waters during carnival” and were “never able to run the organization successfully” (Fieldnotes, July 2009).

Disregarding such critiques, the United States and Panama intensively collaborated to handover the canal to Panama. At the end of this process, more than seventy percent of all professionals and managers were Panamanian, as the government of Panama had made provisions for some Americans and other foreign nationals to stay employed with the canal [9]. The canal’s Administrator has been a Panamanian since 1990 and he continued in this role under the new Panama Canal Authority (ACP).

On December 31, 1999, ownership of the Panama Canal was officially transferred from the United States to Panama. A festive public ceremony was held at the Administration Building to mark the start of a new era for the waterway. From this date onwards, the ACP became exclusively in charge of the operation, administration, management, maintenance, protection and innovation of the Panama Canal.

The autonomous agency of the government of Panama oversees the Canal’s activities and services related to legal and constitutional regulations in force so that the Canal may operate in a secure, continued, efficient and profitable manner [8]. Meanwhile, the United States remains in close relation with Panama. Their collaboration is nowadays characterized by extensive counter-narcotic cooperation, support to promote Panama’s economic, political and social development, and plans for a bilateral free trade agreement [10].


  1. 1.    McCullough, D., The Path Between the Seas: The Creation of the Panama Canal, 1870-19141977, New York: Simon and Schuster.
  2. 2.    Parker, M., Panama Fever: The epic story of the building of the Panama Canal2009, New York: Anchor Books.
  3. 3.    Greene, J., The Canal Builders: Making American's empire at the Panama Canal2009, New York: Penguin Books.
  4. 4.    Ives, S., TV Documentary on the Panama Canal, in American Experience2010, PBS: USA.
  5. 5.    Del R. Martínez, M., Canal locks: boat lifters, in The Panama Post2009: Panama.
  6. 6.    Harding, R.C., The history of Panama2006, Westport: Greenwood Press.
  7. 7.    Llacer, F.J.M., Panama Canal Management. Marine Policy, 2005. 29: p. 25-37.
  8. 8.    ACP. Autoridad del Canal de Panamá. 2009March 2009]; Available from: http://www.pancanal.com.
  9. 9.    Gillespie Jr., C.A., et al., Panama Canal Transition: The Final Implementation, 1999, The Atlantic Counsil of the United States: Washington, D.C.
  10. 10.    Sullivan, M.P., Panama: Political and Economic Conditions and U.S. Relations, 2011, Congressional Research Service.

Author: Karen Smits / Publisher: SCMO

What Hong Kong must do to stay competitive in the maritime sector code

Hong Kong’s maritime industry extends significantly beyond the purely physical movement of cargo at ports.  Steeped in a rich history of international trade, it is home to a vibrant community of shipowners, shipmanagers and number of other maritime service providers along the value chain. Hong Kong’s International Maritime Centre (IMC) is also a major contributor to direct economic output as well as to other sectors of the economy – particularly import/export, wholesale and retail trades.

But, as we have witnessed, neighbouring cities have made substantial developments in their maritime hubs and this has and continues to pose a threat to Hong Kong’s vital IMC.   Most notably, Singapore and Shanghai have enhanced their service offer and have been very aggressive in contesting for and attracting maritime companies throughout the past decade.

To compete and expand its IMC, Hong Kong needs to take wise decisions and appropriate actions which focus on both supply and demand.  A critical mass of commercial principals (such as shipowners, ship management companies etc.) must be sustained in order to generate sufficient demand for services, while comprehensive support must be available to supply their needs.

But – how do we get there?

BMT recently completed a study on behalf of the Hong Kong Transport and Housing Bureau (HKTHB), which – combining rigorous analysis with stakeholder participation – set to define achievable objectives for enhancing Hong Kong’s IMC.  A well-planned development roadmap would enable Hong Kong to retain a sizable maritime service cluster, and remain the place from which maritime services are sought by the local and international shipping industry.

Careful attention has been paid to understanding the constraints and opportunities facing Hong Kong, both from industry and government perspectives. In particular, implementation issues have received careful attention during the formulation of recommendations.

Let’s look at the broad strokes of this study through a series of diagrams and charts:



Current Position vs Where we want to be (and can be, realistically)

Opportunities & Threats….

Hong Kong's “contestable” maritime cluster and service areas are weakening. If no action is taken, there will be a negative impact on Hong Kong's strengths and competitiveness…

Creating the Strategy: Structured approach, clearly defined goals

Revisiting the Target Scenario

  • Local: many commercial principals - ship managers, owners, operators and traders; enhance high value-added services - ship finance, insurance, law and arbitration.
  • Regional / National: the preferred location of global (and in particular Mainland) commercial principals sourcing intermediary services.
  • Global: differentiate as ‘springboard’ that facilitates Mainland shipping companies to operate internationally, and foreign companies to expand into the Mainland market.

A Roadmap to get there

BMT put forth a total of 24 recommended initiatives under 4 themes; relating to policy and people issues. Read more on the recommendations on this link.

Author: Richard Colwill - BMT Asia Pacific / Publisher: SCMO

China’s Infrastructure Made Alibaba’s IPO Possible

Article published on September 25, 2015 in Quartz and reproduced by courtesy of Parag Khanna

Alibaba’s recent IPO and early market capitalization of US$230 billion brought repeated reminders that its value has catapulted ahead of that of Amazon. and eBay combined. What has allowed the Chinese e-commerce giant to grow so massively is the confluence of urbanization, infrastructure investment and digital connectivity, together providing the foundation for an efficient network across hundreds of first-, second- and third-tier cities.

Over the past decade, both of us have traveled extensively in all corners of China and witnessed this “next China” emerging. Visiting China’s next urban tier scattered about the country reveals the flaws in the Western economic critique of China. While prominent economists continue to deride China’s over-investment in infrastructure, it is precisely what makes rags to riches stories like Alibaba possible. As the World Bank demonstrated in a report published in 2013, high-speed rail, for example, has been a crucial factor in promoting geographic and thus social mobility in the aftermath of the financial crisis when many export-dependent jobs suddenly evaporated.

One should think of China not as a monolithic empire but a lattice of cities whose increasingly dense ties follow Metcalfe’s Law: the value of a network increases exponentially as the number of connections grows. Alibaba’s investors certainly see it that way.

Currently, according to research by McKinsey, 600 urban centers represent 60% of the world’s GDP. By 2025, 100 of the world’s top 600 economic cities are projected to be in China. While this is proportionate to China’s share of the world population, the urban base means a significantly accelerated capacity for economic growth, which occurs much faster in cities — and particularly in connected cities. Importantly, China has 200 cities with a population of at least one million, the minimum population required for sustained economic diversification.

Given China’s massive urbanization campaign, there is much more still to build. Yet visiting China’s thriving interior second-tier cities reminds of how quickly the image of China as the world’s factory floor is being superseded. While millions of poor migrants still sweat long hours on assembly lines producing cheap goods, new industries in the technology and services sectors are rapidly replacing traditional manufacturing as the driver of employment and wage growth. Just think of PC-maker Lenovo and telecoms giant Huawei.

It has surprised many foreigners that China’s new vanguard of global companies are not even based in Beijing or Shanghai. Alibaba was founded and remains headquartered in Hangzhou, while Tencent (which operates the popular WeChat messaging service) is based in Shenzhen, as is Huawei. SunTech Power, the world’s largest solar panel producer, is located in Wuxi, which has become a hub for China’s renewable energy industry.

Companies fall into a spectrum in their dealings with China. Some are already deeply embedded, with significant product development, manufacturing, and sales in China — examples include Siemens, Hewlett-Packard, Coca-Cola and others. Some are limiting their exposure to China and seeking alternative production centers. Taiwan’s FoxConn, for example, is building new assembly plants for iPads and other electronics in Indonesia and even the US (but aims to staff them with robots, not humans). A very large swath of multinationals, however, is just now in the research phase about where to build (or build out) their footprint on the mainland. For these companies, a whole new urban geographic vocabulary awaits.

Indeed, even as net foreign investment into China decreases as multinationals seek lower-wage production elsewhere in Asia, multinationals are also flocking into China to expand sales into the emerging urban middle class. Expats moving to China to promote exports and sales will increasingly find themselves, in addition to the aforementioned cities, living in Tianjin, Guangzhou, Chongqing, Nanjing, Wuhan, Shenyang, Suzhou, Foshan, Dalian and other currently second-tier urban centers whose populations and economic gravity are steadily rising on the back of multi-industry cluster strategies.

These cities have also launched intensive campaigns to attract domestic and foreign talent. While Shanghai has no trouble recruiting the best and brightest, Foshan, a manufacturing hub in southern Guangdong province, has just hired five foreigners to work in the government exclusively on luring fresh FDI and residents. Bear in mind that as China’s industry cleans up, southern China will get a fresh look. Fuzhou, for example, in Fujian province, is the ancestral home of many overseas Chinese diaspora in Southeast Asia looking for a foothold back on the mainland, and is also ranked one of the most livable cities in China.

Upon his election as the new Indian prime minister, Narendra Modi immediately announced plans to construct 100 new cities from mixed-use developments to special economic zones to stimulate Indian urbanization, job creation and growth. If America was home to the “consumer of last resort” in the twentieth century, in the twenty-first century it will be urban Asia whose consumption propels world economic growth.

Authors: Parag Khanna and JT Singh / Publisher: SCMO




Supply Chain Global Governance

Article published in The Economist Management Blog | September 16, 2013 and reproduced by courtesy of Parag Khanna

Could corporations replace national governments?

Five years since the collapse of Lehman Brothers, the post-financial crisis world has played out quite differently from the dominant narrative of the immediate aftermath. Then it was predicted that globalization could rapidly unravel, export-led emerging markets would slump, and the private sector would be massively re-regulated. Instead, cross-border trade and investment have exceeded 2007 levels, emerging market growth has been robust, and corporations have proven quite nimble in limiting overly onerous regulation.

Still, the world economy is fragile and expectations are high—from governments, the public (“the 99%”), and a growing chorus of shareholders—that companies play a role commensurate with their resources and influence to advance agendas ranging from environmental sustainability to reducing income inequality. The debate has moved beyond clichés about “the market” being necessary to solve all problems towards a more sophisticated approach that I call “supply chain global governance.” This combines the “do no harm” mantras around limiting operational externalities with a proactive strategy to leverage supply chains wherever possible to improve standards and quality of life. I believe that this regime-based approach is likely to replace “corporate social responsibility” in the coming years.

Some of the world’s largest firms have taken notable steps in the direction of progressive supply chain governance. Walmart, the world’s largest retailer, has partnered with the Environmental Defense Fund (EDF) to reduce emissions across its vast footprint of warehouses, distribution centers, and outlets. In May this year it blacklisted almost 250 Bangladeshi factories after the tragic building collapse in Dhaka, sending ripples throughout the garment industry. Apple has worked with the Fair Labor Association (FLA) to identify dozens of improvements in worker safety and other areas now being implemented in Foxconn factories in China. DHL works closely with customs officials in dozens of countries to smooth customs processing, bringing efficiency gains that alone can boost global GDP by 5 percent according to a recent study by Bain Capital.

While examples from the Fortune 100 are numerous, within those same ranks many questions remain such as how this approach differs across public and private firms, and how it will (or will not) scale across state-owned enterprises and SMEs—particularly from the developing world. Some emerging market companies like Petrobras and Vale, both of Brazil, have established solid track records in the sustainability arena, but more opaque Chinese SOEs are far further behind the curve.

Then there is the deeper challenge of the incredible complexity of supply chains themselves. The European horsemeat scandal, the tainted New Zealand baby formula in China, and the BP Deep Water Horizon oilrig in the Gulf of Mexico are just several of the major supply chain crises in recent memory. These complex meta-national structures therefore require far more scrutiny and analysis even as we come to rely on them as tools of delivering public goods.

Still, corporations and their supply chains are already critical players in global governance. The highest body in commercial arbitration, for example, is the privately run International Chamber of Commerce (ICC) based in Paris, which simultaneously helps craft collective business positions on international policy issues such as WTO trade negotiations. A nascent effort has begun to apply international humanitarian laws to business actors. The UN Voluntary Principles seek to regulate the activities of corporations operating in zones of conflict. While on the surface this appears to be an example of states strengthening their leverage over corporations, it should instead be viewed as a mutually beneficial process: firms are intimately involved in crafting the regulations, for which the UN is a repository, but its ultimate effectiveness ultimately hinges on the participating companies themselves.

Over the past several years I’ve been involved in the U.S. National Intelligence Council’s Global Trends 2030 process that earlier this year published a major report titled “Alternative Worlds.” It includes a very plausible scenario titled “Non-State World” in which urbanization, technological advance, and capital accumulation accelerate the rise of private players that bend rules to maximize their productive power, particularly through the creation of special economic zones within and across national borders. As the scenario describes this trend, “It is as if the central government acknowledges its own inability to forge reforms and then subcontracts out responsibility to a second party. In these enclaves, the very laws, including taxation, are set by somebody from the outside. Many believe that outside parties have a better chance of getting the economies in these designated areas up and going, eventually setting an example for the rest of the country.”

My only quibble with this fine analysis is that it describes the world of 2013, not 2030. Supply chains, like globalization itself, are a complex system that is a whole greater than the sum of its parts. They are already integral to global governance. Corporate leaders must get accustomed to being CEOs, diplomats and statesmen at the same time.

Author: Parag Khanna / Publisher: SCMO

Transport Weekly

Published on 15 March 2013 in "I am an Analyst" and reproduced by courtesy of Charles de Trenck

BDI 880 +6%: The BPIY continues at rebound levels of mid-12 and is up about 3% on the week (slope of rebound is slowing), with long term concerns on China coal and ore inventories remaining.  Reference ore prices came off quite a bit this week. Comments going around recently were that China is not going to buy ore at recent peaks. Moreover steel inventories are pretty chunky even if ore levels are down … A question would be the new run rate needed for inventories, which does not have to be at previous averages, and given lower growth trajectory for China…. Keeping a quick track on the dollar index, it is up about 3.6% YTD. Strong dollar is usually negative for shipping/commodities… only that shipping is so down at this point I would not hold this relationship key, except for its general impact to the commodities world… TANKERS behaving better… some are cautioning to keep an eye out for news on Suez Canal and Egypt

Investment stance: Gold shares still getting killed. I have stayed long dollar long US, but most things I have held that are China-related has been weak, ex anti-pollution themes. My health, anti-pollution focus brings me to flagging [XXXX] and how fast (after being ignored since IPO) it has gotten on the map. Macro wise (like GLNG after the Japan earthquake), it makes sense to look for names that can play the theme on China Cleanup. For me it has been Platinum. But I think clean engines… clean-up equipment companies all fit into a China eco-friendly theme that will be around for a very long time


My approach has remained the same throughout – be conservative in a highly volatile sector.  

Shipping, Logistics, Ports for me have always been about staying in tune with the pulse of world trade. On the whole, I don’t pay attention to WTO statements, national GDP data, senior management statements, rate hike announcements, etc. I believe in running real time series and cross-referencing what their inter-relationships are saying.

When is a correlation important? When could it breakdown? What is the raw volume data looking like? What time of the year is it? What’s our visibility like right now? Where is the value? In what currency or value marker terms? I have believed gold has been a more true marker of value and that it has shown US equities in general to be in the cheaper range, while not discounting the need to own some gold long term to defend against central bank fiat currencies gone wild. At the same time I have seen value in holding more dollars than other FX in recent months even if I always believe we should have a diverse holding of currencies and commodities.

My main support from oversold levels in the last few years has been certain areas of the US property market.

When it comes to shares I have stayed away from focusing on individual stocks “in and of themselves” and preferred to recommend making our own ETFs. Even in a weak market for shipping there has been a way to get exposure. I need companies with track records, reasonable managements and reputations, liquidity, market leadership, defensive exposure to liabilities (despite the Fed, Central Banks and commercial banks (up until 2008-09) telling the whole world to gear up on mind-numbingly low interest rates. I believe currently in long term ETF bundles for:

  • Energy/infrastructure: Canada, coal, oil…companies oversold and unloved and generally trading at lower ends of multiples, whether Warren likes them or not…
  • Shipping/Logistics/Traders: Market leaders and from levels that were relatively low long term. There are a few good leaders in Europe in this space. There are a couple in the US, and a few in Asia. For corporate governance/ethical reasons, I try to stay away from some companies with bad names (and abusing common sense such as in Ethanol…)
  • US Consumer/healthcare: Without supporting big pharma overall, I have looked for defensive yield, good management. I have traded around positions in some of the big heavyweights of US retail/discounters
  • Health: For a double dose and core concentration, I am increasing where and when I can clean living focus companies. There are not many listed and they trade at premiums. I have learned that sugar based consumer product and beverage companies are the biggest sells out there. America will have to change!
  • Tech: I see this as consumer, and I have looked for bellwethers on sell-offs     

China Rebar Inventories…

Source: Bloomberg   Note: Shanghai steel inventories higher in recent weeks but way below ‘10. BUT checkout Wuhan at 100% over ‘10 levels!

Source: Bloomberg  
Note: Shanghai steel inventories higher in recent weeks but way below ‘10. BUT checkout Wuhan at 100% over ‘10 levels!

What happens to a stock when it’s got the right theme (note the share volumes out of nowhere)

Source: Bloomberg

Source: Bloomberg


Data for Asia-Europe remains weak, with 2012 at about -4% (always getting revised…)...Hopefully 2013 can be better, but issues such as how weak the Euro is against the dollar and Italian and other crises could have positive or negative impacts.  My view has been that the dollar is in steady rebound mode. If the dollar continues higher this could make Asia a little less competitive if Asia currencies tend to gravitate around dollar strength. On the flipside and to a less impactful degree for the Asia trade, this could help this could eventually help Europe export more.  In the Transpac, although 2012 growth was not negative, the 2% type growth from Asia to the US was lower than 3-5% growth many of us had expected several months back. … Interestingly, US inventories were reported to be higher. LB and LA ports reported better Feb container port data with LA +17.0% and LB +36.6%. CMA is key driver of LB growth.

Asia Outbound Current Pattern (we’ve been relatively flat in big picture for some time now)


Source: Charles de Trenck Note: 4Q12 picture not complete/still seeing revisions… 1Q13 needs March data to see proper direction given Chinese New Year interuptions

Source: Charles de Trenck
Note: 4Q12 picture not complete/still seeing revisions… 1Q13 needs March data to see proper direction given Chinese New Year interuptions

Question: How often do we get a jump like this in inventories?
(as we had in US this week…is it cause sales about to jump more? Or will volumes have to slow a little more?)


Source: Bloomberg

Source: Bloomberg

APL shelves the 53footers: Launched in November 2007, APL's custom-strengthened 53ft ocean capable containers are to be retired from the carrier's South China to Los Angeles service due to poor returns. “The economics just didn't work,” according to APL Americas' CEO, Gene Seroka.  53ft containers are basic to US domestic transportation. The 53 footers have about 60% more capacity than 40 footers Until APL's launch of the hybrids, standard 53ft containers were not strong enough for ocean voyages.

APM Terminals to operate Turkish terminal:  APMT (Maersk) will build and operate the Aegean Gateway Terminal under a 28-year concession, with a $400m and in a phase I 1.5m TEU facility for mid-15 start. Bulk will also be part of operations. The port lies in the petrochemical complex of Petkim in Nemrut Bay, close to Izmir, the second-largest industrial city in Turkey. The initial 1.5m TEU capacity at the new container terminal is about 50% more than the current city port of Izmir at about 700,000 TEU a year. With a depth alongside of 10 m, Alsancak can handle vessels no larger than 2,500 TEU.

CSCL takes a share in APM (Maersk) Belgium terminal: CSCL is taking 24% in Zeebrugge from APM Terminals. The 2-berth terminal handles about 380,000TEU but capacity is for 1m TEU. SIPG has 25% as well. APM soldfor EUR27.2min 2010 the 25% stake.

SITC 94$m in 2012: I wasn’t too happy about the timing of the IPO, though my level of concern was never at the level of Rongsheng or HPH in terms of lack of compunction from company and bankers on IPO process/timing. Another issue was the positioning of the company’s image. That aside profit seemed to please in 2012.  SITC said revenues rose to $1.2bn in 2012 from $1.1bn the year before and given about +15% in volumes. SITC’s revenues from China fell from $489m in 2011 to $439m in 2012. S Korea revenues more than doubledto $131m. Japan was + 2% to $428m. Japan is known for being a killer trade with SITC being a main culprit. In addition China- Japan relations will hold back growth here. SITC’s capacity for the year 2012 amounted to 1.8m TEU, up from 1.5m in 2011, it said. It also expanded its land-based logistics business, revenue climbing to $739.6m, from $673.6m in 2011.

RCL still in red….Horizon still in red: I neglected to mention RCL of Thailand posted a $62.7m loss for 2012. I notice shares rebounded in last couple of days though…Horizon Lines over in the US (that little carrier we spent some time a few years ago flagging for some excesses from Beltway Bandit types over in Washington DC) also reported its 2012 loss at $46.1 m.

Container bonds: China Shipping Group issued, according to reports, two batches of short-term notes worth about Rmb3.5bn ($562.9m) to fund container manufacturing and shipbuilding. Gee, didn’t CSCL just sell a whole bunch of containers to book some needed disposal gains. My head is spinning. The first tranche of the Rmb2.5bn paper, due in six months, pays an interest rate of 3.85%.  The paper is jointly underwritten by China Development Bank and China Everbright Bank. Rmb700m of the new credit will “replenish the working capital of China Shipping Industry.”


Diana disappoints: Diana reported 4Q12 net income of $5m against $20m for the same period last year. Judging by the share reaction investors were not happy. It certainly has been a tough market out there. Vessel operating expenses were +30% (daily vessel op ex +6.8% to $7,128/day) against operational stats showing utilization in 4Q12 at 96.3% against 4Q11 at 99.2% 30 vessels end-12against 24 vessels end-11. TCEs were $17,681 in 4Q12 against $25,714 4Q11.

Also see http://seekingalpha.com/article/1274661-diana-shipping-s-ceo-discusses-q4-2012-results-earnings-call-transcript?part=single

Speaking of Bulk, and rebounds….It is interesting to see Precious Shipping enjoying a little of a rebound

Source: Bloomberg

Source: Bloomberg

Is gold price fixing investigation next? According to the Guardian and the WSJ, the London financial sector isbracing for another official investigation into alleged price-fixing following reports that a US regulator is considering launching an inquiry into the City's gold and silver markets. The Commodity Futures Trading Commission is discussing whether the daily setting of gold and silver prices in London is open to manipulation. The CFTC is examining whether prices are derived sufficiently transparently. The system of setting gold prices in London is unusual and involves a twice-daily teleconference involving five banks – Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Société Générale – while silver is set by the latter three. The price fixings are then used to determine prices worldwide….


See comments on Beijing and China pollution front page and China sections….
The cost of compliance – sometimes out of reach: Lloyd’s List makes a good point that new environmental regulations coming into play over coming ears will see owners forced to instal ballast water technologies, and possibly seek to purchase exhaust gas scrubbers and take other fuel efficiency measures… But they may not be able to get the funding to do it! AP Moller Maersk expects rule compliance will cost the shipping industry $20bn a year. ..  Newbuilding loans often come with clauses, or covenants, that dictate vessels must remain fully compliant with all maritime regulations. Owners that struggle with rule compliance, such as the pending ballast water convention, could find banks use this to foreclose on loans rather than provide more capital. …

BNSF to test LNG locomotives: BNSF, a subsidiary of Berkshire Hathaway, is said to be the second-biggest user of diesel in the country, after the US Navy. And now it is working on with the two principal locomotive manufacturers, GE and EMD, under Caterpillar, to develop natural gas engine technology that will be used in a pilot LNG locomotive program. The WSJ ran a big story on BNSF this week. This follows stories back in January raising questions about BNSF monopoly in the Bakkenfields and proposed pipelines debates, in other words the Keystone XL pipeline…

One of Warren’s better investments in recent years
(with some behind the scenes questions on market “influence and pipelines….market dominance issues)


Source: Reuters

Source: Reuters


Scorpio more share sales: Scorpio continues to raise funds from investors with a further 29m shares tranche of its common stock at $8.10 per share, a discount of 35 cents. Shares again reacted well post placement. The move aims to raise $235m to fund its acquisitions war chest, to pay for further acquisitions and provide working capital, as well as for general corporate purposes.

DSME going into Jackups: DSME is aiming to build up jackps, to take share away from Keppel and Sembcorp Marine that have about a 70% market share. … The need to diversify and be flexible is paramount given a lackluster pipeline for ships over coming years.

STX OSV to stay listed…: This has been one of the most unexciting takeovers in recent memory. Shares were at lows and they remain at lows. Meanwhile Fincantieri which failed to get much more than 4.9% shares in OSV to add to its 50.7%, will rename STX OSV as Vard

COSCO….oh COSCO, when will you learn

My mother would have said… “COSCO, you couldn’t organize yourself out of a paper bag if you wanted to…”

Months after saying it had some re-organization ideas planned to avert issues such as the Shanghai Stock Exchange placing trading limits on it due to potentially running into a third year of losses, COSCO Holdings ( H and A shares) this week came up with a plan to sell its 100% COSCO Logistics division back to COSCO Beijing. But Bloomberg later in the week quoted that over $4bn could be raised! The timing would be awful, and one might wonder what the company would look like after selling $4bn in assets!

Planned sale of COSCO Logistics with recurring earnings power $100+m range, with long term upside: …Here we go again. This is the division that was injected into COSCO Pacific (49%) to boost assets before IPO of COSCO Holdings, while also earning extra fees for senior directors. Then the 50% was sold back to COSCO Holdings...and now it may get sold back to Parent.  COSCO had bought the other 51% from its parent in 2007 prior to its Shanghai IPO. …Not only is this is a poor band aid, it is also a look-see into a history of asset shuffling.

Event (WSJ summary) HK— China COSCO Holdings plans to sell its logistic unit to its state-controlled parent, China Ocean Shipping (Group) Co., as part of the Chinese shipping giant's efforts to improve its financial results in 2013 and prevent a possible delisting from the Shanghai Stock Exchange.

Initial thoughts (Tuesday): It is not any one transaction, but in the pattern that the full picture of the COSCO Logistics drama can be seen.

Original COSCO Holdings IPO process and valuations… a few long term questions on GROUP as whole here:

  • Asset transfers back and forth
  • COSCO Logistics continuous transfers between divisions
  • Wei Jiafu role
  • Add ship asset timing gaffes – the big ones on the ships at wrong prices
  • Bulk division massive underperformance (and check those fees please)
  • Accountant issues… PWC as accountant for life

COSCO Logistics follow on thoughts (Wednesday)

….COSCO Holdings dropped a fair amount (about -5%) on the back of its nonsensical logistics unit planned sellback (according to everyone else, check market response) to its parent to book an intended disposal gain to avoid (or partly cover losses against…) Shanghai Stock Exchange chastisement, and due to its guidelines on loss making companies, etc.  As the week wore on it became clearer that more asset sales may be needed, potentially up to over $4bn (??), according to Bloomberg.

….CIMC also fell in with COSCO Holdings as a stake sale was mentioned in press as a potential strategy by parent. By Wednesday it was the turn of COSCO Pacific to sell off at about -4% on early morning trade.

As to CIMC – I would not off the bat agree that it should start a new business in ship leasing, as per recent reports, since it has no core competence there. … and especially as it is competing against its partial parent, COSCO, …the other being China Merchants….  But if it is going to get cheap money from China Inc, and for container ships mostly built in China, and aim for economy of scale as it appears to be aiming for. …Perhaps there will be a role for it as ship lessor down the road. It is certainly too early to tell now. But as such I am fascinated to see what happens next on this front. Who knows – maybe COSCO will do a sale-charterback of some selected ships to vehicles such as CIMC – and at some point where CIMC could be more independent of COSCO (and that be a good thing).  Who knows?  As observers we need to see if CIMC becomes a ship lessor of scale, and if it gets the portfolio management thing…
As to COSCO Pacific – there was a 1 day delayed effect and selling started on Wednesday rather than Tuesday for the parent, potentially in response to the messed up strategy of the various parents. Who knows…

I continue to ask for mainstream press to take a proper look at the COSCO Group of companies. Even the easy pieces such as the crazy sale of logistics back to Beijing parent can still not be covered in any great depth. The SCMP put one small paragraph on it on day 1, followed by a Bloomberg story on day 2. The WSJ tried to do a better job. But there is still no understanding of the process and failures of the Logistics division, which was first pre COSCO Holdings IPO injected into COSCO Pacific at 49%, etc (I have explained this process before*) ...This division and stakes in it have been transferred back and forth with investors at times paying money for it. Now it is taken away from investors. For all we know the Beijing parent may sell it back to investors again later in another IPO!

For its own merits and failures, one forwarder had this to say about COSCO Logistics upon hearing of its intended sale back to parent:….

“Cosco Logistics? What is it? Sell what? Over the years Cosco has spawned logistics companies like Kenwa, who "jumped ship" joined CSCL as a slot charter semi NVOCC and changed their name to Rich Shipping. Cosco Air had one if the first A licenses for air freight. But had no sales offices anywhere in the world and went from being one of the only master loaders to being one of the only ones not moving any significant cargo. This is an organization that wasted the good years and ends up without a clue.”

*At first the logistics division was an internet concept back in ’99 – ‘00, running off the back of B2B relationships of the Group’s back end, along with legacy businesses accorded COSCO and other China state companies, legacies such as running off printers trade documents for a fee, as well as other captive China business. Ironically this was foisted onto investors first by Sinotrans Logistics, again at wrong valuations (because China was going to have to phase it out, and this was not properly explained to investors by bankers, while syndicate rules by bankers limited what analysts could say in deal research, for instance…). COSCO Logistics got the tail end of this. As COSCO Logistics grew, and as logistics in China grew by leaps and bounds with COSCO underperforming some of this BUT still growing, COSCO got higher valuations for injecting its stake at first in COSCO Pacific, on its way to playing a shell game for investors managed by investment banking franchises that won the COSCO Holdings mandate from COSCO leaders such as Wei Jiafu. What Weijiafu wanted was a big IPO for COSCO Holdings…one which raised lots of money for a company that had been fattened up – so they injected a COSCO Logistics stake first into COSCO Pacific. … Later on COSCO Pacific would sell its COSCO Logistics 49% stake to COSCO Holdings – and now COSCO Holdings is selling its larger COSCO Logistics stake back to its parent.   … WHAT DID SHAREHOLDERS GET FOR THIS 10 YEAR HISTORY OF COSCO LOGISTICS? ….

As George Clooney said in one of his films on CBS News early days newscaster Edward Murrow….Goodnight and GoodLuck (http://www.youtube.com/watch?v=kCaBCdJWOyM)

Anyone who isn’t confused really doesn’t understand the situation.
— Edward R. Murrow

CHARTS OF THE MONTH … Check out the number of buy ratings here (also look at Sing MRT vs HK MTR)    
SMRT Snapshot of broker ratings


Source: Bloomberg

Source: Bloomberg

No love lost for Singapore’s mass transit after it mishaps

Source: Bloomberg

Source: Bloomberg


Pollution in China remains one of my key themes. I believe China’s leadership will be defined by what it does here, given that many local and some senior leaders openly allowed for decades the dumping of inordinate waste and unchecked wasteful production all over China. 10 years ago my main complaint was allowing for economic growth to be above what was necessary while allowing antiquated steel, coal, etc capacity to run alongside newer, cleaner production facilities. The list of mistakes is long. China needs to go into full reverse on this.

A couple of years ago, my friends at Environmental Services (Eisal) flagged China Everbright International as being on the right theme, though others have raised concerns on cash flow which must be examined long term….

Taicang strong growth…: Taicang terminal reported a total container 4.01m TEU throughput in 2012, or +39%. So farYTD Taicang is about +18% for Jan-Feb. Suzhou port has focused on Taicang for several years, now with MTL (51%) and COSCO Pacific (39%) as ownershttp://www.tac-gateway.com/eng/index.jsp

Ningbo Port planning Rmb 1bndomestic bond issue: A three-year bond, underwritten by Bank of China International, is the second tranche of a Rmb2bn quota approved by China’s securities regulator in 2010. Ningbo Portraised the first Rmb1bn in April 2012 at a fixed interest rate of 4.7% per annum. Rates of the new issuance will be decided after bookrunning is complete, Ningbo Port said in an exchange filing. …. SIPG.bonds: SIPG will sell 3bn RMB in one-year bonds, according to a statement on the Shanghai Clearing House’s website on 5 March.

Qingdao Port ore terminal:  Qingdao Group has started the operation of its new 400k ton iron ore terminal at Dongjiakou port, SinoShip and others reported. This is one of the largest iron ore terminals in the world with annual capacity of 40 m tons.  Dongjiakou becomes the first Chinese port that could officially have the technical capacity to receive Valemaxes.

Iron Ore: As of March 8, combined iron ore inventories at 30 major Chinese ports declined by 2.98m tons from a week ago to 66.54mtons, the lowest level since mid-January 2010 according to data from mysteel.com. Iron ore stocks decreased to 77.75 m tons at 34 Chinese ports compared with the previous week,  according to the China Securities Journal…. See the steel inventory charts. This has been expected and is a continuing trend. One reason given is that ore prices are on high side and buying would only come in at lower price points. One additional thought, as seen with US oil inventories a few years ago, is with industry deceleration comes a need to seek normalization around new averages as the old averages get thrown out the window.
From Caixin



Author: Charles de Trenck / Publisher: SCMO

The new Silk Road is made of iron — and stretches from Scotland to Singapore

Article published on September 28, 2012 in Quartz and reproduced by courtesy of Parag Khanna

At some point in the next 200 million years, according to Yale University scientists, the North American and Eurasian tectonic plates will collide at the North Pole. When they are eventually joined by Africa, the singular super-continent will re-emerge, reminiscent of the Pangea that existed hundreds of millions of years ago.

Until that time, however, the vast oceans that separate North America from the western and eastern halves of Eurasia will continue to have a major impact on the evolution of geopolitics. The pace of globalization has altered our perceptions of space and time:
Communications technology inspires many to proclaim the “death of distance.” Yet a contrary narrative is also emerging, one in which America’s distance from Eurasia places it on the wrong side of the world from the “cockpit of history,” a rapidly integrating Eurasian super-continent that is shaping its own future independently of the Western Hemisphere and the U.S. And the technology that is driving this epochal transformation is one of the most traditional: railways.

Earlier this month, China announced plans to invest an additional $140 billion into 25 new rail projects across the country as part of its massive stimulus campaign aimed at creating jobs and modernizing national infrastructure. China lays more than 5,000 miles of new railway track each year domestically (and by 2020 should have more high-speed rail than the rest of the world combined), and is sponsoring the modernization or deployment of new rail lines across Eurasia towards Europe as well, which has long led the world in mass transit with 24 of 27 countries featuring high-speed rail already. By comparison, the U.S. has failed to muster even the modest $50 billion proposed by President Barack Obama for rail projects. The resulting portrait is appears bleak: while America licks its wounds at home, Chinese blood is pumping through Eurasian veins as the more populous and important hemisphere unites into an organic whole.

Compressing geography

“There lies within the breast of every Englishman an inborn love of railways,” wrote Christopher Portway in Corner Seat, one of several chronicles of his intrepid but cursed Cold War period rail adventures across the clash, and the romance, of civilizations that is the world’s largest landmass. For many, rail travel is still stuck in Portway’s era of the Orient Express. Cultural foibles at customs and border clearing frustrations often plague trips south or east of Poland. Portway constantly haggled for transit visas at checkpoints of countries that spontaneously took on anti-Western moods like Syria and Albania. He made colorful use of the Cold War labels of “pink” for Yugoslavia and “red” for Bulgaria to capture their degrees of unfriendliness.

British adventurism and ambition have clearly suffered since the collapse of the Empire. Whereas railways helped the British Empire
penetrate into the heart of Africa and Asia, by the 1990s London newspapers were waging a fierce debate as to whether Britain or France would benefit more from the Eurostar train linking the two former global powers.

Today, rather than Britain steaming out into the world as it did when it led the Industrial Revolution, China is now steaming its way to Britain more quickly than anyone seems to realize. This westward movement is the unfinished business of the Industrial Revolution—and the reversal of its outcome. History can be turned on its head so quickly. Or corrected, depending on your perspective.

Rail is indeed the 19th century’s preferred mode of transport, but is getting major technology upgrades that give it renewed significance in the 21st. First, the export of Europe and Japan’s high-speed rail systems to China is eventually making cross-Eurasian rail travel more than the romantic overland equivalent of a transatlantic cruise. With state-subsidized rail industries and plenty of short-haul business travelers, Europe and China combined have invested more than $200 billion in high-speed rail in 2009 alone; in Italy, even a private conglomerate, NTV, is running high-speed rail traversing the country.

The oil-rich Gulf Cooperation Council (GCC) monarchies are planning a high-speed rail along the Persian Gulf. Worldwide, private rail expenditure is expected to reach $500 billion by 2020. China has only 413 airports to America’s 5,200, but has more than 8,000 kms of high-speed rail, and laying thousands more kilometers of track every year. Under the radar, private American rail operators have spent $23 billion on rail upgrades—but all for freight rather than passenger transit.

Second, Eurasian rail is finally entering the Information Age, getting its equivalent of the IATA or AMADEUS systems which allow for seamless booking across airlines. Silver Rail Technologies, a transatlantic startup, is harmonizing rail carriers and their ticketing networks beyond the Franco-British Euro-star and Benalux Thalys trains to reach eastward to Russia and beyond. Today, boarding the Eurostar train at St. Pancras station in London is very much like boarding a plane:check-in, passport control, security X-rays, customs, and “landing cards”—except you never leave the ground, and in fact go under it, crossing one of the narrowest and most strategically contested waterways in European history, the Straits of Dover. The “Chunnel” opening between the U.K. and France was thus as important a symbol of European unity post-World War II as the euro currency (which the U.K. cleverly did not join).

Traveling from Scotland to Singapore (or reverse) by train seems like a gap-year backpacker’s itinerary, or just another endless carefree rite of passage for any Australian. It is undoubtedly the Holy Grail of rail travel: a seamless connection across the furthest distance that could conceivably be traveled on a single rail track.

But it also marks the ultimate compression of geography, smoothly traversing the world’s largest, most diverse and turbulent landmass. The distance from London to Shanghai is the same as London to San Francisco, and Eurasia boasts most of world’s population. It has always been—and will always be—the going concern of geopolitics. Today Eurasia is being densely knit together through an infrastructural exoskeleton of railways and pipelines: Iron Silk Roads.

Today’s Eurasian railways are connecting East and West at unprecedented speeds. The Harmony Express, currently the world’s fastest train, connects Wuhan and Guangzhou at speeds of 250 mph, so could cover the distance from London to Edinburgh and back in just three hours (today, that journey takes 12 hours). Imagine when China completes negotiations with the 17 countries between itself and Great Britain for a high-speed rail to be completed by 2020. The railway would connect Beijing Central to London St. Pancras in just two to three days. That’s more than twice the distance as from New York to San Francisco in the same amount of time—and likely far greater comfort—than Amtrak.

Over the past decade I’ve made several Eurasian voyages, lengthy journeys that attest to Eurasia’s moniker as the indomitable “world-island.” These include driving across Europe, the Balkans, Turkey and the Caucasus to the Caspian Sea in a beat-up 1990 Volkswagen, in busses across the post-Soviet Turkic Central Asian republics, in a Land Cruiser across all of mountainous (and largely road-less) Tibet and Xinjiang in western China, and driving a hulking, three-ton British Army surplus Land Rover ambulance 11,000 kilometers from London to Mongolia (with the steering wheel on the wrong side). Bumping my head countless times against the roofs of these vehicles, I’ve often thought about how much easier it would be for masses of people to travel by rail than on roads that take much longer to pave and rarely withstand the elements.

And the masses are ready. For 60,000 years, migration has been the face the globalization, facilitated by ever faster transportation and communications technologies. Today, 200 million people are considered expatriates, formally living outside their home countries. Colonialism was a key driver of migrating labor across the British Commonwealth, for example, while voluntary migration brought most of America’s original population across the Atlantic. Recent years have witnessed a further surge of economic migrants not seen since the post-War era. Chinese are wandering inland to new frontier cities for work, Mexicans bypassing America for Canada and even Europe where the currencies are stronger, South Asians to build the new Middle Eastern metropolises of Dubai and Doha—and since the financial crisis, Americans sending their c.v.’s to Shanghai and Singapore hoping for a break (or salvation) in the emerging markets.

As we enter the age of mass commercial rail travel, the movement of people will yet again tip the balance between economic dynamism and depopulated malaise, but also create dislocation in labor markets, social tension, and even political upheaval.

Hail to the rail

China borders more countries than any other nation in the world. Since the Soviet collapse two decades ago, it has diligently sought to settle borders with almost all of its neighbors (except India). In doing so, it has paved the way to literally pave over those borders with roads, railways and pipelines. The long-term consequences amount to nothing less than re-writing international relations for Asia, away from the rigid Western Westphalian system of national sovereignty towards the more traditional pattern of Chinese core-periphery relations that has dominated Asian history since ancient times. The kingdom of Tibet and Uighur Turkic province of Xinjiang (China’s largest state) have already been fully incorporated into the Chinese state. Now the logic applies even to Western allies such as South Korea, and newer partners like Vietnam. Because China doesn’t want war with either Vietnam over the South China Sea or South Korea in the event of a messy North Korean collapse, it is likely to shift course away from the current experimentally aggressive posture back towards the commercial and cultural “smile diplomacy” of the 1990s.

It is ironic that in this age of space-based weapons and cyber-war, rail may still be the most influential tool of geopolitics, as it was
during European empire-building in the 19th century. Indeed, it is rail infrastructure that is the most visible manifestation of China’s western expansion, a five-finger strategy of railways, roads, pipelines, and other supply chains traversing Russia to Europe, Kazakhstan to the Caspian Sea, Kyrgyzstan and Uzbekistan to Turkmenistan, across Afghanistan to Iran, and traversing Pakistan to the port of Gwadar on the Arabian Sea. Here’s our map of this trend (or try this at home: place your right hand in front of you, palm facing forward and thumb down with fingers stretched widely: the back of your hand is China, your pinkie Russia, and your thumb Pakistan.) When Chinese goods flood the streets of Berlin and Paris, and Middle Eastern oil arrives overland to China instead of through the Straits of Malacca, it will be by such traditional geo-strategic design.

The extensiveness and density of these corridors, the harmonization of rail gauges and accelerating speed of trains, the cooperation of customs officials to diminish visa requirements, and the rising demand for Asian goods across fast-growing frontier markets all add up to a sea change in how we think about Eurasia’s various zones and segmentations. China clearly looks at Eurasia holistically—and opportunistically. In the post-modern Chinese world-view: Mongolia is not land of Genghis Khan but “Mine-Golia;” Turkmenistan not an ancient caravan civilization but a gas station. Along the way, giant and non-descript shopping malls like Dubai’s “Dragon Mart” will be the no-frills industrial caravanserai of the 21stcentury, pulling in goods from across Eurasia and selling them wholesale to cost-conscious travelers in both directions.

In the coming decade, each time a Eurasian regime falls or thaws—and they all will, from Moldova and Belarus to Syria and Iran to Uzbekistan and Myanmar—their societies become under-served markets to be flooded with goods, and their geography a strategic passageway for East-West railways. Many places vie for the moniker “where west meets east”: the Ural Mountains, Istanbul, and Dubai, among others. But the compression of Eurasia through infrastructure makes the East-West dynamic less a tangible place than a transition zone.

This process of compression has the power to marginalize current debates about the identity of today’s struggling post-Soviet nations. Today, Ukraine and Belarus appear caught between European and Russian gravities; tomorrow both will be conduits of thriving East-West commerce. Even Russia, still the world’s largest country on the map, will demographically shrink to the size of Turkey with almost its entire population lying west of the Urals. The Cold War joke seems eerily prescient: “There are no disturbances today on the Sino-Finnish border.”

The geographic compression of Eurasia is occurring faster than political institutions can cope. No multilateral organization such as the European Union (EU) or Shanghai Cooperation Organization (SCO) regulates the new Eurasian land bridge whose map of nodes looks more like a subway map in a rendering created by Chor Pharn Lee, a futurist in the office of Singapore’s prime minister.

Within China, a circular network connects Beijing to major city-clusters such as Shanghai/Nanjing in the east, Pearl River Delta in the south, and interior hubs such as Chongqing. Outside China, westward corridors stretch towards Europe, and undersea links connect to Korea’s southern commercial hub of Busan and Japan’s revitalized port of Fukuoka. To the south, Kuala Lumpur would be the penultimate station, just an hour on high-speed rail from the terminus at Singapore, making the island city-state ever more both a land and sea hub.

Market control

One major reason high-speed rail will spread across Eurasia is that China now builds it. Having previously scrapped its “China Star”
venture, China’s Locomotive & Rolling Stock Industry Corporation (LORIC) now competes internationally for high-speed rail contracts and has signed agreements with Turkey while bidding across Russia. Most of the world’s rail equipment is still manufactured by Western heavyweights Bombardier, Siemens, Alstom, and GE. But like other sectors in which intellectual property has been transferred (or stolen), China has hijacked the intellectual property around high-speed rail as well.

Global power, at least from the Asian perspective, is still very much about population size, natural resource endowments and access, and territorial control. But the mechanisms of control have evolved. As the UCLA geopolitical scholar John Agnew explains, power increasingly derives not from fixed or static control over natural resources within bounded territories, but rather through regimes of “market access” that maximize control over the flows of goods, capital and innovations; market-building rather than empire-building. With railways, oil pipelines, underground fiber-optic cables and other technologies moving resources and capital faster than ever, China does not need to conquer colonies the way the Europeans did; it can simply buy them.

China is building new geopolitical “facts on the ground” all over Asia, from deep-water ports in Sri Lanka to signals intelligence stations in Myanmar to coastal special economic zones in North Korea. Wang Menshu of the Chinese Academy of Engineering has drafted the plans for multiple high-speed rail routes emanating from China. A southern route through Indo-China is already under construction by way of refurbishing the rail systems of smaller and poorer states like Cambodia. High-speed and freight rail plans are already in development to link China to Thailand via Vietnam and Laos. Southern Chinese provincial cities like Kunming then become regional hubs for entire sub-regions of Eurasia. As Myanmar thaws, it could become the strategic arbiter of a significant corridor of Sino-Indian trade as the Asian giants vie to maximize gas exports in either direction. Thailand is planning a wide highway to Katanchanaburi on the Myanmar border from which it will connect to a new port called Dawei. The route roughly follows the old River Kwai death railroad. China wants Dawei to connect the short distance overland to Thailand’s big deep water port of Laem Chabang so it can complete avoid importing oil and other goods via the narrow Straits of Malacca. Geography is no barrier for China, only an obstacle to be surmounted with sturdy infrastructure. Even as suspicion of Chinese motivations and tactics is rising from Myanmar to North Korea, no other investor is willing to undertake such massive projects and absorb such huge risk.

In the 20th century, the world looked to America to provide the “public good” of security; protecting freedom of the seas and the flow of oil. In the 21st century it is infrastructure that is the necessary public good, and it is being largely financed by China. Under the umbrella of the Shanghai Cooperation Organization (SCO), China has pledged tens of billions of dollars in infrastructure modernization funds to its poor, post-Soviet neighbors. As we know from Africa, there is no price too high for China to pay, or infrastructure project it will not subsidize, in exchange for access to oil and minerals.

But while the political friction along what could be a kaleidoscopic Orient Express today remains far too intense even for China, hyper-modernizing Russia’s creaking rail system is the easiest, flattest route for China to pursue in compressing its westward march. Mr. Wang refers to Russia simply as the “Northern Route.” From London to Beijing is just over 5,000 miles; London to Singapore about 6,800.

Before Britain ruled its empire on which the sun never set, Russia had become the largest contiguous territorial power since the Mongols, stretching from Eastern Europe to North America (Alaska) by 1866. Railway expansion enabled Tsar Alexander II to invade outer Manchuria in 1868, and leverage Central Asia and Siberia for supplying Russia’s World War I efforts.

A century and a half later, even as Russia’s vascular system of oil and gas arteries and veins is pumping overtime, its skeletal structure is cracking. Gazprom, which by some estimates provides close to half of the federal tax revenue, takes care to keep up what it needs to keep energy flowing, while Moscow neglects the rest in favor of military modernization for a degenerating army. Russia is far too big for itself. Its population is dwindling to that of Turkey’s (but hardly as young or robust) while consolidating in its European sector west of the Urals, while its GDP is scarcely larger than Holland’s. Its status on a map and its dismal reality are the ultimate geopolitical imbalance, one that is being gradually corrected by the combination of a Chinese influx northward across the Amur River, the thawing of Siberia’s permafrost due to climate change which is making the region a major breadbasket, and the wholesale liquidation (pardon the pun) of Russia’s oil, gas—and increasingly water—through multi-billion dollar agreements with China. Russia exists to fuel China and Europe – and increasingly to connect them as China modernizes Russian rail.

On CNN International today, you’ll frequently see a commercial for Russian Railways showing a stylized map with a zigzagging rail route linking Western Europe to eastern Russia. The impression given is of a Russian seamlessly traversed for Eurasian business. And it will be – but thanks to China. China’s “Northern Route” is nothing less than an overhaul of the Trans-Siberian railway, whose lore now far surpasses its reality. Portway once wrote, “I was happy to wax eloquent on the subject of the Trans-Siberian Railway, but can find little to praise in the cities it serves.” China’s influx of passengers and consumers will re-invent the hulking over-wraught frontier outputs such as Novosibirsk, while its tourists will surely over-run attractions like Lake Baikal. China wants to resurrect and extend the Baikal-Amur branch of the Trans-Siberian, which borders the 100 million strong Heilongjiang province, to smooth the import of all the aluminum and other metals it is investing in with Russian oligarchs.

As with the modern project of the European Union itself, infrastructure across civilizational boundaries is about boosting trade, creating energy corridors, promoting cultural exchange, and reshaping politics all at the same time. Consider how it used to take six weeks to deliver freight on trucks from Slovenia’s port of Koper to Istanbul due to Balkan checkpoints. Now as each former Yugoslavian republic has Stabilization and Association Agreements (SAA) with the EU, they have been forced to play nice to receive substantial grants for infrastructural renewal from Brussels. Now customs procedures don’t hold up cargo as it covers the distance in less than two days. Another strategic waterway is also about to be tunneled by rail: the Bosporus Straits that divides Istanbul – and with it separate Asia from Europe – will also have an underground rail connection called “Marmaray” (uniting the Turkish words for Marmara Sea and “rail”). Set to begin operations in 2014, it is projected to increase rail traffic in congested Istanbul from 3.6% to over 27%.

Further eastward into the Caucasus, the Baku-Tblisi-Ceyhan pipeline already provides a growing share of Europe’s oil imports from the Caspian Sea to Turkey, and a major EU-funded road and rail project (called “Traceca”) has boosted cooperation among traditional rivals like Georgia and Azerbaijan. This Southern Silk Road, then, is simultaneously an economic development program, political stabilization tool, and vehicle for expanding the EU all at once.

Where pipelines speed the flow of oil and gas, railways often follow. By 2018, the Nabucco pipeline may also be completed, carrying Kurdish, Azeri, and even potentially Iranian gas all the way to Europe. In the other direction, the Iran-Pakistan-India (IPI) and Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipelines will further reduce the isolation of landlocked Central Asia and bring Caspian resources outward to world markets. The crucial state in these schemes – Iran – is one of the world’s top oil and gas suppliers and cannot be isolated forever. Already a freight rail corridor links Istanbul to Islamabad via Iran, carrying $15 billion in goods annually. Eventually, through war or diplomacy, Iran’s resource and demographic energy will be unlocked as well.

America’s isolation

America’s much-touted “pivot” to Asia is not without justification, but it might be without foundation. In other words, America cannot properly engage Asia only across the Pacific; it needs to look across the Atlantic as well. A decade ago, Henry Kissinger warned that, “The U.S., separated from Europe, is geopolitically an island off the shores of Eurasia like nineteenth-century Britain.” As China steams westward across Eurasia, the U.S. needs a unified and expanding European Union to serve as a continental counterweight. Indeed, unless we re-conceive the entire notion of the “West” as a three-pillared zone of Europe, North America, and even South America, the clichés about the indomitable East dominating the Earth will become certain prophecies. Much as a half-century ago when NATO and the EU served as the strategic and political bulwarks against the westward expansion of communism. That task may still be necessary, even though China is communist only in name.

Kissinger’s book was titled Does America Need a Foreign Policy? It does, of course, but that does not mean it has one. Understanding the fundamental importance of global strategy for America is as basic as looking at a globe. America is actually in the wrong time zone. It is the last major power to complete the day, perpetually chasing the rest of the world in time. The late Citibank executive Walter Wriston famously prophesized that, “Time zones are more important than borders.” He meant it as a statement about the power of global markets. But it also says a lot of America’s future position in a world where more people may be traveling across Eurasia by rail than flying across the Atlantic to America.

American scholars use terms like “global disorder” to characterize the post-Cold War, post-9/11 world simply because they refuse to appreciate the order that is in fact emerging before our eyes and being built every day. The more Eurasia organically knits itself together, the more America appears an insular island on the other side of the world from this epochal new order.

So this is what the most important landmass on Earth will look like in a post-American world.

In theory, America’s weakening leverage over Eurasia should mean that rivalries should explode between China, Japan, Korea, Russia, and India. But Asia need not become a chaotic vortex in need of American intervention—which in any case has a recent track record of producing chaotic vortexes. Instead, Asia’s future could be much like its past: the bumpy re-emergence of centuries old Silk Roads. The smoothest paths will be Asian financed railways efficiently ferrying the world’s largest populations of the East across and towards the depopulating zones of the West. In Portway’s day, the trains seemed to run on time everywhere, except in Britain. Under Chinese control, the trains will surely run on time everywhere.

As all of this transpires, America will be fine. Its navy will still be parked off the Pacific Rim, able to bail-out and back-up some allies who get into confrontations with China, while taking a beating in the process. Back home, shale gas will bring down prices at the pump, and if the government can redistribute rents towards infrastructure renewal, the economy will rebound more equitably than either the dot-com or finance booms. And the Western Hemisphere may also unite, a dream as old as that to control the Eurasian heartland. Until the tectonic plates collide again.

Author: Parag Khanna / Publisher: SCMO


Goldilocks: For Mature Audiences Only

Published by Transport Trackers on 20 March 2012 and reproduced by courtesy of Charles de Trenck

  • Global growth is back… or is it?
  • The 90s-00s had seen a 10% rate of containerization
  • In a real sense the Greenspan Illusion 2002-07 was +2-3%
  • Peak distortion was +5%
  • Until the ‘00s acceleration containerization centered around 8%
  • Recently averages have been closer to 5%
  • Our working assumption is long term 7%, short term 4-7%
  • Med-case on vessel supply is normalization by 2016
  • We are at about 1m TEU of capacity marginalized now
  • We also have many quasi-obsolete ships….
  • Obsolescence can be down to wrong size ship
  • Gap between weak and strong is huge (operational and financial)

Figure 1: Mapping Deviations From Long Term Growth, ’95 – ‘ 12E

Source: Transport Trackers

Source: Transport Trackers

Containerization: A New Phase of Lower Growth Since 2008…

Goldilocks… For Mature Audiences Only. We’ve been dying to use this title. Growth has decelerated long term. In essence we are in Year 3 of China’s export story deceleration. And yet, the US is now recovering a little better than expected 6 months and Europe has stabilized a little. A recovery US economy has raised a lot of hopes.  But this is not an ordinary recovery by any stretch. Not in terms of economic activity and neither in terms of container shipping.
The bad news for some time has been there are too many ships. The silver lining is that there are too many of the wrong ships out there. But to get to the silver lining we still need the consolidation of the coming years. Keynesian over-spending has not helped, as it has kept demand artificially higher, which may offer false hope to owners of certain vessel types.

Some vessel owners and operators have pointed out that the average useful life of vessels in coming years could fall to 20 years from 25 years. Of course we are not going to get accountants and owners to recognize this. But effectively there are many ship types that could head to the scrap heaps given small nudges. Many ships in the range of 5,000 – 6,000 TEU could be severely marginalized if they consume too much fuel or are owned by financially weak owners. At the moment, according to Alphaliner and others, we are at about 1m TEU of idled vessel capacity. This is against a standing fleet of about 15.5m TEU according to March 2012 Clarkson data.

Here is what the fleet growth looks like long term. The dotted red line is the long term trend. The bold red line is the actual capacity data. The problem was the bold line exceed the long term trend just as demand decelerated globally – meaning the problem is not fully over unless demand really takes off (and more vessels taken out). We may have strong players come out better, and we may have rebounds. But a full cleaning is still needed.

Figure 2: Container Capacity Growth in TEU, 1994-12E


Sources: Clarksons; Transport Trackers

Sources: Clarksons; Transport Trackers

The problem of too many ships is not going away unless 2012-13 sees a very strong economic recovery leading container demand to jump from 4-7% to above 10%. When we overlay demand onto capacity the problem crystalizes.

Figure 3: Long Term Demand vs Supply… and the big gaps, 1995 – 2012E


Sources: Clarksons; CI; Carriers; Transport Trackers

Sources: Clarksons; CI; Carriers; Transport Trackers

In terms of vessel supply there are too many ships headed for the long-haul trades. We have all known this. However, there is one small positive structuraldevelopment, though there are still too many ships. Recently, most analysts would have said that 10,000+TEU ships were ALL headed for the Asia-Europe trade. But this month MSC deployed a 12,000TEU vessel into the Transpacific, which offers the potential for less ships to flood into the Asia-Europe in this critical 2012-13 period (when there are too many of these ships). However, it is still not expected that there will be a flood of 10,000+ TEU ships flowing into the Transpacific before 2014-16, as most terminals will be able to properly handle these ships.

Nonetheless this is a small positive development.  Back to reality: About 50% of vessels in the orderbook are 10,000+ TEU ships. In terms of the 2012 orderbook, which will still be at least a couple percent above demand there is little that can be done as most ships are close to fully paid. But by 2013-14, we should expect the orderbook to be stretched out into further years. And by 2015-16, we should have been through the difficult period of dealing with marginal tonnage and experience better demand – supply balance. Unless… (play Jaws music here). One significant difference will be the capex gambits will cost more with 10,000+ TEU and 14,000+ TEU ships, narrowing the field of players.

For the immediate future here is a snapshot of the fleet distribution and orderbook, with a focus on seeing (upper pie chart) that there are a lot of 4,000 – 7,500TEU ships (about 40%) in fleet which may have trouble identifying their use, especially if fuel consumption is not good. And then, in the orderbook (lower pie chart), there is a need to focus on about half being 10,000+TEU ships destined for long-hauls.

Figure 4: Types of Ships in the Fleet (10,000+ TEU at 10%..., but…)


Sources: Alphaliners

Sources: Alphaliners

Figure 5: Types of Ships on Order(…just about half are 10,000+ TEU…so still a problem ‘12-‘13)

Sources: Alphaliners

Sources: Alphaliners

And here is a snapshot by carriers:

Figure 6: World Fleet and Orderbook Distribution in TEU (Jan/Feb 2012)


Sources: CI; Transport Trackers

Sources: CI; Transport Trackers

It is interesting to see that the top 5 and top 10 generally have larger than average ships on order than the world fleet. On average a ship on order has a profile of 7,275TEU per ship – but 3 of 4 13,000 TEU per ship avg size orders for their OB are in the top 10. CMA, Hapag and Hanjin pop up as having the greatest concentrations of big ships on order. This can mean different things of course, without further analysis, but generally speaking it means that their wagers were in the long haul and Asia-Europe trades. So, who will still feel the need to order more? For delivery when? Will they have the patience to wait for 2015-16?

Demand and Rates

Our view was that the negative volume momentum data was running out in 4Q11 and it was a 50-50 shot as to the base would build higher or stay flat. It depended somewhat on equities and how people felt following a long bout of declining demand growth post the big post crisis rebound. Asia-Europe we expected, and still expect, to be a little weaker than the US. 2012 at the moment should see mid-single digit demand growth long haul, coming up from zero growth experienced into end 2011.

Figure 7: Long Haul Container Demand Growth, Jan ’06 – 1H12E


Sources: FEFC; CTS; JOC; Transport Trackers

Sources: FEFC; CTS; JOC; Transport Trackers

For Rates, we agree they have/had to move up, but…. We are in the part coming from the bottom of the cycle where rate increments – “GRIs” – should have some success. However, it is always pretty much about partial, not full implementations. So given that rates in 2011 fell about 9%  across the board while nominal fuel costs rose some 30%, it makes complete sense rates should rebound.

Below is our long term tracking of global rates

Figure 8: Global Average Rates and Long Haul ex-Asia Rates vs Global Demand, in Percent 1980 -2012E


Sources: CI; Carriers;Transport Trackers

Sources: CI; Carriers;Transport Trackers

Rates out of Asia will rebound faster than global rates, as is the usual pattern. But also higher rates are “merely” recouping the lost ground from higher bunker fuel prices. In fact 380 CST bunker is pretty much at record levels above $730/ton, which is where they were in 2008 when WTI was at $140+ versus current $100+. Of course there has been the Cushing oversupply issue. But also this has meant hedging has not been effective. Brent also was still higher in 2008 peaks than current levels. The issue of bunker costs and vessel efficiency is an entire report by itself. But we would emphasize that players with better fuel utilization ships will do better than those operating legacy ships. At the moment we are looking at bunker usage being about 30% more efficient on newer design vessels. If oil prices stay high this will offer an immense advantage to those positioned with more efficient vessels.

Author: Charles de Trenck / Publisher: SCMO

Reality of the New Import Ocean Supply Chain Import Security Filing

Published in 2009 in TranzAct and reproduced by courtesy of Albert Saphir

On January 26, 2010, the Importer Security Filing (ISF) Rule, commonly referred to as 10+2, will become effective. This will change to a mandatory rule with the U.S. Custom Border Protection (CBP) imposing fines.

The ISF ­ 10+2 Rule

On January 26, 2010 the Importer Security Filing (10+2) rule will be mandatory for all imported shipments into the United States. Given the magnitude of fines, potential liabilities and issues associated with imported inventory, it is important to understand the impact that this program can have on your company. We strongly recommend that your company invests in and prepares for this initiative.

Let's take a look at what you can expect. The CBP (U.S. Customs and Border Protection) will commence enforcing this new advanced electronic data requirement as of January 26, 2010 with severe penalties of US$5,000 (up to US$10,000 per ISF) for each for late filing, missing filing, or inaccurate filing. (Keep in mind that you are talking potentially about a filing for each container that you ship.) These penalties will be levied directly on the importer of record and mitigation, reduction of penalty amount is going to be very limited compared to traditional mitigation guidelines and practices of the past when dealing with CBP penalties.

While many shippers are focused on the findings, they are overlooking what may very well be the most punitive part of this program. It may take several months and possibly even a year or more for the CBP to levy their penalties. So if there is a mistake, or inaccurate filing, that could be easily corrected, this error could result in penalties for a tremendous number of containers.

Aside from the huge potential liability and its impact on your financial statements, here is something else that should really grab your attention: The ISF’s do not liquidate, so their risk remains “open” for up to six years as each ISF is secured with a bond which is considered a contract and thus contract law applies. In other words, future ISF penalties could be issued against an importer for ocean imports that happened six years ago (after 1/26/2010 of course), a huge record keeping dilemma! So just imagine a scenario under which CBP finds errors or consistent late filings for recent ISF’s. They could now go back six years and for sure find lots more. And you guessed right: Many more penalties will come your way. It may actually make an IRS audit look like a benevolent experience.

So what are your ISF financial exposures?

Some of you may now be asking just how significant the penalties and fines could be. Let's assume that your company has 1000 ocean shipments on an annual basis.

•    Penalties

If only 5% of them will have a single ISF exception, your annual penalty exposure could be as high as $500,000! And if this happens in later years and CBP deems that you have a material deficiency and elects to go back, the penalties become greater. And this ignores the amount of time your company is going to have to spend pulling down documentation to contest the CBP proceedings.

•    Bond amounts and bond fees

This is a wild card for now, but we are recommending that our customers evaluate their bond coverage. Do you believe your regular continuous bond of US$50,000 or US$100,000 (basically calculated to cover your estimated annual duty liability toward CBP) will suffice in the long run?

Let's go back and look at the import example. Hypothetically, your six-year ISF liability “on paper” is going to be at minimum, many millions of dollars! Do you think your US$100,000 will be sufficient for long? And if we take it one step further, we think many shippers have been lulled into a false sense of complacency. After all, how many penalties have you received for your 1,000 import shipments over the past year? Probably none or very few. What is particularly vexing now is the fact that your specific risk factor for ISF penalties is of course unknown. If we assume the low 5% from above, you are now going to have 50 penalties a year to sort out. Thus the sureties will most likely increase the continuous bond fee/ rate on top of potential higher bond amounts!

•    External ISF filing fees

For better or worse, a lot of companies have outsourced the ISF filing to their customs broker thus resulting in additional fees. The truth is that while these companies could be an ISF self-filer - and would in fact be better off being a self filer, they choose to incur the additional US$25,000 to US$50,000 expense in their annual expense budget.

•    Internal ISF data management cost

If you are a bit intimidated by the rules associated with importing containers, you may be interested to know that many companies do 99% of the work themselves to collect, assemble and validate the data required by their external filer. With the use of a global trade management tool (which accommodates ISF filings almost automatically), they could become self filer's. But we have seen several companies try to do it on their own with a homegrown system that can easily double, triple or even quadruple the above external ISF filing fee estimate and add a substantial burden to the additional internal cost to comply with ISF.

•    Other external ISF cost factors

As previously noted, companies tend to focus on the penalties. What they also need to consider are transit time delays that could disrupt their supply chains and result in additional inventory cost. These delays could be caused by issues such as both onshore and in-transit to absorb issues with delays, demurrage at foreign ports (if you detect an error and do not want to face an ISF penalty), or demurrage and CBP intensive examination costs for those shipments arriving without an ISF on record.

What can you do?

If you've read this far then you know that 2010 will be a year full of new challenges in managing the global supply chain. The good news is that 2010 will also provide unique opportunities for those bold enough to embrace change and think outside the traditional box. And for some companies the ISF issue is a way to implement new ideas, achieve better automation, and actually improve service quality while creating real value for their customers and employees alike.

There are many advantageous ways to reduce:

  •     Your potential financial exposure
  •     Your ISF expenses (an 80% reduction of the aforementioned cost is not impossible)
  •     Risk of disruptions in the supply chain

Overall your company can create a better import process and actually turn the ISF challenge into a competitive advantage.

If you're looking for some inspiration, consider what Crate & Barrel has achieved with their ISF initiative. Crate & Barrel completely redesigned their import ocean supply chain during 2009 due to the new ISF requirement which went into effect on 1/26/2009. While many importers just sat on the sidelines and chose to take a risk by relying on a “Band-Aid” for a quick fix solution, Crate&Barrel took a very different approach to the challenge presented.

They commenced on their visionary and strategic ISF compliance program in late 2008 and achieved great results - considerable cost increase avoidance plus much improved supply chain visibility during 2009 and going forward into 2010. As you look at the data you can understand, this was a challenging assignment: 7,500 annual FEUs (forty foot equivalent containers), over 30 countries of origin, over 600 active import vendors, 3 steamship lines and 12 forwarders/ NVOs. But their willingness to invest in order to improve their import supply chain process and achieve complete compliance with this new CBP mandate has put them far ahead of most other U.S. importers. They are ready for a successful 2010 and beyond.

Experience has proven that if you understand the issues and invest in people, technology and continued process improvement you can be successful. And this is true with the ISF requirement.


ISF self-filing is only best practice out there and must begin with the importer completely analyzing and re-designing their import supply chain around this new requirement to determine what the best choices are. This can include “unified entry filing” (combined ISF and customs entry in one shot) through your customs broker, ISF filing by your foreign freight forwarder/ NVOCC, or even ISF filing by your foreign supplier.

Need one more reason why you should be proactive in addressing the whole area of shipment security? There is another initiative/ challenging regulatory item that shippers will have to plan for in 2010: The TSA “Certified Cargo Screening” (CCSP) program. It requires that as of August 1, 2010, 100% of all air cargo going onto a passenger aircraft needs to be screened at a piece level. This will require major changes for everyone in the air freight supply chain, and it is a big jump from the current 50% screening level. Expect potential lengthy delays as airfreight is queuing for screening and additional cost as this is an unfunded mandate from Congress, and thus all cost must be borne by the user of air freight services.


What information do importers need to file?

Importers must submit eight pieces of data no later than 24 hours before landing:

1. Seller (name/ address)
2. Buyer (name/ address)
3. Importer of Record Number/ FTZ Applicant ID Number (IRS, EIN, SSN, or CBP assigned number)
4. Consignee Number(s) (same as above, plus name/address unless the consignee is also the Importer of Record)
5. Manufacturer (or supplier)
6. Ship to party (name/ address)
7. Country of origin
8. Commodity HTSUS number (to the 6-digit level)

Two additional pieces of data must be submitted no later than 24 hours prior to arrival:

9. Container stuffing location
10. Consolidator (name/ address)

What information do carriers need to file?

Carriers are responsible for providing two final elements:
1. Vessel stow plan (must be submitted no later than 48 hours after the ship’s departure)
2. Container Status Message (CSM) Data (must be submitted within 24 hours of creation or receipt)

What if I don’t have this information or I choose not to file?

If an importer doesn’t file or submits information that is inaccurate, incomplete, or late, CBP may charge US$5,000 per violation. CBP may also withhold the release or transfer of cargo, refuse to grant permits, mark orders as “Do Not Load,” conduct additional cargo inspections, and, in some cases, seize cargo.

Author: Albert Saphir / Publisher: SCMO