PastPast TheThe WorstWorst PointPoint

Northeast Trade and Transportation Conference 2011

March 23, 2011

Dr. Walter Kemmsies, Chief EconomistMoffatt & Nichol

ENRTop100company, founded in1945inLongBeach,California

Moffatt & Nichol BackgroundMoffatt & Nichol Background

Offices:US,Guam,Canada,Europe,MiddleEast,LatinAmericaandthePacificRim

More than500Employees

M&Ncombinestheexpertiseoftechnicalandcommercialspecialistsgainedover65yearsofplanningandengineeringexperienceonover6,000projects: Coastal engineering Coastalengineering Portandwatersideconstruction(marinas) Terminaldesignforalltypesoffreightandpassengermovement Surface transportation connectivity Surfacetransportationconnectivity Railroadsandcapacityexpansion Paygohighwayimprovements Strategic development plans Strategicdevelopmentplans Economicanalysesofinvestment/privatization IndependentMarketConsultant Environmental issues/emission modeling

AmericanSocietyofCivilEngineersJohnG.Moffatt FrankE.NicholEnvironmentalissues/emissionmodeling

HarborandCoastalEngineeringAward

Main PointsMain Points Past the worst point but not the best point of the cyclePast the worst point but not the best point of the cycle

Exports help the US but this must become a virtuous cycle 4 lost years for healthy segments of the economy, longer for those exposed to real estate Japan outlook downgraded near term upgraded medium termJapan outlook downgraded near term, upgraded medium term Middle East instability so far prompts modest downgrades to global outlook

Too early to give the all clear signal due to policymaker reactions Too early to give the all clear signal due to policymaker reactions Raw material and transportation cost increases are compressing profit margins Quantitative Easing: will too much money chase too few goods?

Need a lot of investment in capacity and infrastructure to offset inflation pressures Need a lot of investment in capacity and infrastructure to offset inflation pressures Not yet clear which industries will lead this cycle

Structural problems and opportunities will define the next decade Twin deficits more exports Food shortages more agriculture and equipment exports Global energy crunch more forest product and equipment exports China needs to normalize - develop a consumer market

World Economy StrainsTo Recover Without The USWorld Economy StrainsTo Recover Without The USUS Consumer Spending and Global Real GDP Growth p g

8%

10%

2%

4%

6%

2%

0%

1

9

8

0

1

9

8

1

1

9

8

2

1

9

8

3

1

9

8

4

1

9

8

5

1

9

8

6

1

9

8

7

1

9

8

8

1

9

8

9

1

9

9

0

1

9

9

1

1

9

9

2

1

9

9

3

1

9

9

4

1

9

9

5

1

9

9

6

1

9

9

7

1

9

9

8

1

9

9

9

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

2

0

0

8

2

0

0

9

2

0

1

0

2

0

1

1

8%

6%

4%

The US accounts for 25% of World GDP US consumers account for 70% of US GDP, or 17.5% of World GDP

8%

WorldGDP USConsumer

US consumers account for 70% of US GDP, or 17.5% of World GDP

Low Consumer Sentiment Isnt SurprisingLow Consumer Sentiment Isnt SurprisingConsumer Sentiment and Unemployment Indexes

250

300Consumer Sentiment and Unemployment Indexes

150

200

100

0

50

9

7

8

9

7

9

9

8

0

9

8

1

9

8

2

9

8

3

9

8

4

9

8

5

9

8

6

9

8

7

9

8

8

9

8

9

9

9

0

9

9

1

9

9

2

9

9

3

9

9

4

9

9

5

9

9

6

9

9

7

9

9

8

9

9

9

0

0

0

0

0

1

0

0

2

0

0

3

0

0

4

0

0

5

0

0

6

0

0

7

0

0

8

0

0

9

0

1

0

0

1

1

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

2

0

2

0

2

0

2

0

2

0

2

0

2

0

2

0

2

0

2

0

2

0

2

0

Recession ConsumerConfidenceIndex Unemployed

Significant rise in employment would improve consumer sentiment Companies have been focused on cost control not expansion

Private Sector Has Led Employment RecoveryPrivate Sector Has Led Employment RecoveryChanges In Employment Levels in 2010 By Sector

1000

1150

1300

Private

AccumulatedPayrolls inthousands

+1 35 million

00

550

700

850Total

Federal

+1.35million

+1.12million

50

100

250

400 Federal

State

500

350

200

50

Local250thousand

J

a

n

2

0

1

0

F

e

b

2

0

1

0

M

a

r

2

0

1

0

A

p

r

2

0

1

0

M

a

y

2

0

1

0

J

u

n

2

0

1

0

J

u

l

2

0

1

0

A

u

g

2

0

1

0

S

e

p

2

0

1

0

O

c

t

2

0

1

0

N

o

v

2

0

1

0

D

e

c

2

0

1

0

J

a

n

2

0

1

1

F

e

b

2

0

1

1

Private sector efforts were offset by public sector cutting 222K jobs in 2010 Private sector efforts were offset by public sector cutting 222K jobs in 2010

US US Retail Sales Recovering Retail Sales Recovering -- Inventories LagInventories LagRetail Sales, Inventory and Inventory-to-Sales Ratio

1 5

1.75

2

600

700

1

1.25

1.5

400

500

/

S

a

l

e

s

R

a

t

i

o

l

l

i

o

n

s

0.5

0.75

200

300

I

n

v

e

n

t

o

r

y

/

$

B

i

l

0

0.25

0

100

9

2

9

3

9

4

9

5

9

6

9

7

9

8

9

9

0

0

0

1

0

2

0

3

0

4

0

5

0

6

0

7

0

8

0

9

1

0

1

1

1

2

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

1

2

0

1

2

0

1

Inventory RetailSales Inventory/SalesRatio (rightaxis)

Retail sales are recovering above pre-recession levels around May 2011C ti i t b ild l h i l d l i Cautious inventory rebuild supply chains are longer and less responsive

Home Home PricesPrices Still Still CorrectingCorrectingUS Home Prices and Consumer Price Index

200

250

150

100

0

50

0 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

1

9

9

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

0

2

0

1

2

0

1

FHFAHomePriceIndex CPI

Increases in home sales has been accompanied by falling prices Mortgage default rates still at peak levels indicates no recovery yet

Industry Is Recovering From A Steep DropIndustry Is Recovering From A Steep DropIndustrial Production and Capacity Utilization

100

120

85

90

95

60

80

75

80

20

40

60

65

70

0

20

50

55

a

n

6

7

o

v

6

8

e

p

7

0

u

l

7

2

a

y

7

4

a

r

7

6

a

n

7

8

o

v

7

9

e

p

8

1

u

l

8

3

a

y

8

5

a

r

8

7

a

n

8

9

o

v

9

0

e

p

9

2

u

l

9

4

a

y

9

6

a

r

9

8

a

n

0

0

o

v

0

1

e

p

0

3

u

l

0

5

a

y

0

7

a

r

0

9

a

n

1

1

Production rebound since 2009-Q2 not enough to reach pre-recession levels

J

a

N

o

S

e

J

u

M

a

M

a

J

a

N

o

S

e

J

u

M

a

M

a

J

a

N

o

S

e

J

u

M

a

M

a

J

a

N

o

S

e

J

u

M

a

M

a

J

a

CapacityUtilization (leftaxis) IndustrialProduction (rightaxis)

No surprise that companies are cautious about employment and investment

Source: Federal Reserve, Moffatt & Nichol

US US International Container Trade Trends International Container Trade Trends Monthly TEU Volumes 12 Largest US Ports

3,000,000

3,500,000

+14.2%'10 vs '09

2,000,000

2,500,00010vs09

+10.7%

1,000,000

1,500,000'10vs'09

+15.2%'10vs'09

5 2%

0

500,000

+5.2%'10vs'09

+27.1%'10vs'09

0

D

e

c

0

5

M

a

r

0

6

J

u

n

0

6

S

e

p

0

6

D

e

c

0

6

M

a

r

0

7

J

u

n

0

7

S

e

p

0

7

D

e

c

0

7

M

a

r

0

8

J

u

n

0

8

S

e

p

0

8

D

e

c

0

8

M

a

r

0

9

J

u

n

0

9

S

e

p

0

9

D

e

c

0

9

M

a

r

1

0

J

u

n

1

0

S

e

p

1

0

D

e

c

1

0

M

a

r

1

1

J

u

n

1

1

S

e

p

1

1

D

e

c

1

1

Index Total TotalLoaded Exports Empties

Imported and empty containers led growth in 2010 Exports were surprisingly flat, some likely shifted to bulk

US US NonNon--fuelfuel Export Trends Export Trends Non-fuel Exports By Weight By Type Of Vessel

295

317

294

331

300

350MillionsofMetric Tons

235247 247

263

211220

207

235

200

250

178187 182

191

207

150

200

56 6065

7284

9687

97

50

100

0

2003 2004 2005 2006 2007 2008 2009 2010

Total Containerized NotContainerized

Bulk began shifting into containers in 2007, some shifted back in 2010 Exports grew 12.7% in 2010, containerized 13.4% and other 11.1%

Positive Outlook for Positive Outlook for thethe AmericasAmericas ......Annual Real GDP Growth Rates

7%

8%

9%

5%

6%

7%

WCSA

2%

3%

4%WCSA

Caribbean

CentAmerica

ECSA

NAmerica

1%

0%

1%

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

2

0

0

8

2

0

0

9

2

0

1

0

2

0

1

1

2

0

1

2

2

0

1

3

2

0

1

4

2

0

1

5

2

0

1

6

2

0

1

7

2

0

1

8

2

0

1

9

2

0

2

0

3%

2%

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Except for Argentina and Venezuela the outlook is for robust growth Except for Argentina and Venezuela, the outlook is for robust growth in Latin America

... and Asia... and AsiaAnnual Real GDP Growth Rates

7%

9%

5%SAsia

NAsia

1%

3%SEAsia

Mediterranean

NAmerica

NEurope

3%

1%

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

2

0

0

8

2

0

0

9

2

0

1

0

2

0

1

1

2

0

1

2

2

0

1

3

2

0

1

4

2

0

1

5

2

0

1

6

2

0

1

7

2

0

1

8

2

0

1

9

2

0

2

0

5%

Except for developed economies, the outlook is for robust growthp p g Forecasts for Japan need to be trimmed in the near term, raised in the

medium term

What Are Commodity Prices Telling Us? What Are Commodity Prices Telling Us? Commodity Prices Indexed To 100 in Dec 2000

500

600

Copper

400

Copper

Oil

200

300

Corn

100 NatGas

0

D

e

c

0

0

J

u

l

0

1

F

e

b

0

2

S

e

p

0

2

A

p

r

0

3

N

o

v

0

3

J

u

n

0

4

J

a

n

0

5

A

u

g

0

5

M

a

r

0

6

O

c

t

0

6

M

a

y

0

7

D

e

c

0

7

J

u

l

0

8

F

e

b

0

9

S

e

p

0

9

A

p

r

1

0

N

o

v

1

0

J

u

n

1

1

Since the middle of the last decade commodity prices have soaredSince the middle of the last decade commodity prices have soared Not speculation but supply-demand balance and infrastructure

Source:UNILO,BusinessMonitor,Moffatt&Nichol

Oil Consumption Trends 1965 Oil Consumption Trends 1965 -- 2009 2009 Crude Oil Consumption

$100

$120

80

90

100

$60

$80

50

60

70

B

a

r

r

e

l

s

P

e

r

D

a

y

$40

20

30

40

M

i

l

l

i

o

n

s

o

f

B

$0

$20

0

10

20

6

5

6

8

7

1

7

4

7

7

8

0

8

3

8

6

8

9

9

2

9

5

9

8

0

1

0

4

0

7

1

0

8 million barrels of crude oil were consumed daily in 2010Si 2008 E i M k t il th D l d E i

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

1

9

2

0

2

0

2

0

2

0

DevelopedEconomies EmergingMarkets World WTIAnnualAverage(rightaxis)

Since 2008 Emerging Markets consume more oil than Developed Economies

Source:UNILO,BusinessMonitor,Moffatt&Nichol

Unsustainable Trade Deficit Unsustainable Trade Deficit US Trade Balance Components: 1992 -2010

$0

$20Billions

p

$20

$01

9

9

2

1

9

9

2

1

9

9

3

1

9

9

4

1

9

9

5

1

9

9

6

1

9

9

7

1

9

9

7

1

9

9

8

1

9

9

9

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

2

0

0

7

2

0

0

8

2

0

0

9

2

0

1

0

2

0

1

1

45% of the trade deficit is due to

$40

due to petroleum imports

$60

$80

GoodsBalance ServicesBalance

Including oil, the goods deficit is 4.8x the services surplus, excluding oil it is 2.75x Deficit is due to demographics containerization trade policies and Deficit is due to demographics, containerization, trade policies and

communication/information processing technology Increased import dependency is unavoidable the US needs to export more

Source: US Census Bureau

US US ExportExport Candidates Candidates Relative to faster growing Emerging Markets, the US hasRelative to faster growing Emerging Markets, the US has

A lower cost of capital, but a higher cost of labor Relative abundance of scare resources such as water More advanced biotechnology More reliable quality control and surveillance of complianceMore reliable quality control and surveillance of compliance

Bulk commodities and specialized capital goods (project cargo) fit the profile of US comparative advantages

Strong Emerging Market demand for bulk is expected to continue as these economies continue to grow and develop

Grains and oilseeds Meat Meat Coal

Strong energy demand from Emerging Markets means strong forest product demand wood pellets in particularproduct demand wood pellets in particular

Strong bulk demand also means strong demand for capital equipment energy, construction, agricultural

Proportion of Population Above 55 Years of Age

The Worlds Population Is AgingThe Worlds Population Is Aging

50%

60%

Japan

Europe

40%

p

China

Canada

US

20%

30% Brazil

Mexico

India

10%

0%

1990 2000 2010 2020 2030 2040 2050

What will this booming consumer segment do next? g g

Chinas Currency Policy Is A Global Economic RiskChinas Currency Policy Is A Global Economic Risk

8

9

Exchange Rates Between US$, Chinese Yuan and Brazilian Real

6

7YuanPerDollar

4

5

YuanPerReal

1

2

3

RealPerDollar

0

1

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

2

0

0

8

2

0

0

9

2

0

1

0

Summing Up...

R i di l dRecovery is proceeding as plannedSustained World economic recovery depends on the US

Too early to give the all clear signal risk of policy errorsy g g p yFiscal and monetary stimulus help but create new risks

Long term clouded by structural issues that will drive the next cycleLong term clouded by structural issues that will drive the next cycle

Thank you for your attention

Walter KemmsiesMoffatt & NicholNew York+1 212 768 7454wkemmsies@moffattnichol.com