with Walter Kemmsies
A few years ago the Organization for Economic Cooperation and Development (OECD) estimated the size of the world’s middle class and forecast how it would grow. (The OECD’s middle class forecast, along with the U.S. Census Bureau’s world population estimates, is shown in the corresponding chart.) According to the OECD study, published in 2010, the global middle class should be 75 percent larger in 2020 compared to 2010 and by 2030 164 percent larger.
It is not clear from a logistics point of view that it will be possible to nearly double the number of people who have a middle class standard of living. There will certainly be a lot more freight moving around the world, if these forecasts prove to be correct. However, given the externalities such as congestion resulting from meeting the demands of the current size of the global middle class, one has to wonder if the OECD forecasts can be achieved. That will depend primarily on the global freight movement industry.
OECD, U.S. Census Bureau
As the U.K. manufacturers’ association EEF pointed out in a report released last July, the growth of the global middle class in the last 20 years has strained the capacity of raw material-producing industries. Europe has analyzed the issue of security of supply in the last few decades as it has become increasingly dependent on production from politically unstable regions, such as Eastern Europe, and concluded that it needs to diversify its sources. During this same period, metals, petroleum and agricultural commodity prices have increased 600 percent.
Natural gas prices are currently 65 percent higher in the United States compared to late 1999, significantly underperforming in terms of other commodities’ prices. However, this is traceable to technological improvements in extracting oil from shale reserves. Until recently, natural gas purchasing agreements indexed the price to be paid to that of oil prices, which allowed both parties to hedge price risk using oil futures contracts that had high daily trading volumes and were therefore very liquid. Due to the increase in supply in the United States, natural gas contracts are no longer linked to oil prices. European and Asian consumers still have contracts linking natural gas to oil prices, and therefore pay more than U.S. consumers do. However, as natural gas becomes a globally traded commodity, likely driven by increased U.S. exports, Asian and European consumers should be able to disconnect the price they pay from that of petroleum.
The issue for natural gas is freight movement infrastructure, both on the export/liquefaction side, as well as the import/regasification end. This also applies to other raw materials such as agriculture. As discussed in this column a year ago, the Mississippi River system needs significant investment to overcome operational issues identified in a report published in 2011 by the United Soybean Board. The Mississippi has been losing share of U.S. grain exports, but remains very important for both international and domestic freight movement. The United States, however, is not alone in this regard. Brazil is the largest supplier of soy to China, but the cost of trucking this commodity from the inland Cerrado region to ports in the south of the country and the long voyage around Africa is expensive. It has been reported in the press that if Brazil develops inland waterway ports and improves highways leading to the Amazon River its costs could fall by about a third. This would not bode well for U.S. exports.
Larger bulk and container vessels can lower costs, if ports are able to handle them. Hence, dredging is required and inland connectivity must be improved. Getting this right would bring the OECD forecasts one step closer to being realistic, which would generate a healthy return on the infrastructure investments. In the absence of these investments, the global economic outlook would be extremely grim—low growth and inflation. Increasing the global middle class from 1.8 billion to 4.9 billion people is the ultimate global logistics challenge and the freight movement industry needs all the help it can get.
Kemmsies is chief economist at Moffatt & Nichol, an infrastructure engineering firm. He can be reached at (212) 768-7454, or email at email@example.com.
This column was published in the September 2014 issue of American Shipper.