Insights - September 2016 - 5

EXPO's FREIGHTCAST to Address Maritime Issues The 2016 Intermodal FREIGHTCAST session, EXPO's annual in-depth review of the industry's recent performance, future prospects and key trends, will bring together a panel of expert analysts moderated by Peter Tirschwell of IHS. The session will commence the educational programming on Monday, Sept. 19. In advance, Brandon Oglenski, director, senior equity analyst at Barclays, and one of the featured FREIGHTCAST speakers, has provided his thoughts on several key maritime themes to Intermodal Insights. Insights: What is your read regarding import and export volumes for the rest of this year and why? Oglenski: Global trade has been challenged the past two years by soft economic expansion and currency fluctuations. Consumer spending remains robust in the U.S. and is expanding in developed Europe; however, services rather than physical goods appear to be driving consumption growth. North American imported volume in 2016 is so far tracking up 1 percent and exports are only marginally improved. Inventory levels are high but sequentially lower in recent months, suggesting U.S. import demand heading into 2017 could begin to better match retail sales growth which has been tracking closer to 4 percent this year (ex-autos and fuel). Given the strength in the U.S. dollar relative to other global currencies, we expect U.S. export activity to continue underperforming import volumes. Insights: Maritime capacity is up, rates are down - if and when do you see this trend rebalancing? Oglenski: Global ocean container markets have been challenged for several years, both a function of recent softer demand and a steady increase in large vessel capacity. The container shipping industry's focus on lowering unit costs by operating ever larger vessels has led to compounding annual supply growth nearing 10 percent for the past decade, vastly exceeding demand expansion which has remained much closer to global GDP of around 5 percent during the same time period. Recent vessel orders have slowed and capacity growth in 2017 is expected to be up modestly, which should help to stabilize the currently weak freight rates realized by the carriers. However, given a decade of oversupply, we think vessel deliveries need to remain subdued for several years in order to positively align demand with capacity and allow freight rates to reach sustainable levels for the industry. Insights: Is there room for more mergers among ocean carriers? What is the overall impact of the realignment of alliances? Oglenski: Given recent industry consolidation, carrier alliances have gone through a significant shakeup. We estimate that roughly 75 percent of current industry containership capacity is operating in one of the four major carrier alliances, which are expected to reorganize into three by April of next year. While the alliances do not function as pure joint ventures - antitrust concerns limit the ability to set pricing, the sharing of vessel capacity and schedules does provide some benefit to the industry. Through alliance marketing access, individual carriers are able to compete for traffic with competitive schedule offerings in multiple markets without having to deploy dedicated vessels for each sailing. We expect the industry will likely expand the future use of alliances to help control capacity and ultimately seek sustainable freight rates. Insights: What impact do you expect the Panama Canal expansion to have on the U.S. Gulf and East Coast intermodal markets? Oglenski: The expanded Panama Canal enables a lower cost and faster all-water service from Asia to the U.S. east coast. We estimate that 5-10 percent of Asia to west coast U.S. port traffic could switch to the all water routing, utilizing lower cost large vessel economics via the expanded canal as opposed to faster, but higher cost railroad intermodal service to inland destinations. However, given significant west coast port delays in 2015, we suspect many large shippers may have already diverted a material share of their volume to the eastern destinations via ocean service through the Suez Canal. Further complicating the analysis is the arrival of mega containerships - 18,000 TEU plus, which have already exceeded the size limits of the new Panama Canal. These vessels have significantly greater capacity than is required for local west coast markets, requiring some inland and eastern bound U.S. traffic to reach sustainable utilization. Nonetheless, we expect to see the new Panama Canal incrementally win some share from current west coast sailings and potentially have a larger impact on all water routes to the east coast via the Suez Canal. September 2016 | Intermodal Insights 5

Table of Contents for the Digital Edition of Insights - September 2016