Scenario-based planning is a better approach than the more common practice of extrapolating from past trends, and planning increasingly expensive capital improvements based on anticipated capacity requirements that may not pan out. Given that so many factors that can change the structure of the world economy are happening simultaneously, this may be the only rational way to make investment decisions these days.
Economic forecasts are much maligned, but this is due to misinterpretation of what’s implied in the forecast. In a simple world with little government intervention and few technological disruptions, market-based forecasts are generally quite accurate. However, we do not live in such an environment. Unanticipated policies and technological development will throw off any forecast.
There is also the issue of tipping points. Often times what works on a small scale does not work on a large scale. This is why manufacturing migrated to an assembly line operation, which gave birth to the Industrial Revolution. Likewise, containerization of cargo was an inevitable result of the growth in trade demand. These may be thought of as technological innovations, but it may be better to think of them as proven means of dealing with the need for scale economies.
The world economy measured in terms of real GDP has grown substantially in the last few decades and there are abundant signs of tipping points. This can be seen in energy data. In 1965 the world consumed almost 11 billion barrels per year; in 2011 this had increased to slightly more than 32 billion barrels. Not only has consumption grown but it has also become more diffuse. In 2008 relatively underdeveloped economies consumed more oil than the mature industrialized nations, including Europe, North America, Japan, Australia and New Zealand combined, for the first time in history. The difference in consumption between these two groups is growing. Similar trends are also evident in a range of consumer goods from automobiles to food.
This growth in consumption and production, as well as the changing geographic distribution of these activities, is having a significant impact on freight movement patterns. Transportation infrastructure is similarly impacted. When it is inadequate for the task at hand, prices can become very volatile. To some extent this has been the case in the oil industry. For most of its history the production and distribution system was oriented towards pumping oil in countries that had too much and shipping it to developed economies that had too little. As demand grew faster in emerging market economies, production increased, but the global distribution system did not seem able to adapt very quickly. Oil prices rose in response.
Transportation infrastructure is often directly impacted by these changes and is usually the first real leading indicator of how these trends will unfold. Unfortunately for analysts and decision-makers, these changes in the size and distribution of economic activities have to be identified well in advance. However, no one has that ability and historical data is usually of little if any value in this regard. The best approach is to monitor prices of goods to anticipate tipping points, government policy agendas and emerging technologies to anticipate how freight movement trends might unfold over the next several years. These can be used to describe a number of high probability scenarios.
Within this framework, here is a list of emerging trends that could have large impacts on the freight movement industry:
- Technological advances in production such as fracking are positioning the United States to become a net exporter of oil. The corresponding increase in natural gas production has lowered its price to the point where a BTU of diesel is seven- to eight-times the cost of a BTU of natural gas. Similarly a BTU of oil was very close to the cost of a BTU of natural gas and is more than four-times higher. Given tighter emission regulations and lower per-ton-mile costs for natural gas-fueled vehicles relative to diesel, trucks are shifting to natural gas as a fuel. As more powerful natural gas fueled locomotives are developed, trains will also be able to switch fuels. Ocean carriers also seem interested — the first natural gas fueled container vessel order was placed in December 2012.
- Lower natural gas prices have lowered the cost of plastic feedstock in North America relative to Asia and Europe. Given the declining difference between Mexican and Chinese manufacturing wages, and the importance of plastic in manufacturing, total production costs are driving faster manufacturing growth in Mexico than in China. It is cheaper to ship raw materials to Mexico from the United States and finished goods back to the United States.
- High commodity prices and low container freight rates are prompting commodities that are usually shipped in bulkers to containers. At high prices importers prefer to receive smaller shipments to reduce inventory carrying costs and better manage losses to spoilage. This trend is also supported by infrastructure investments in emerging market ports, which have prioritized container terminals.
- A disruptive technology that impacts manufacturing is emerging. Automation and 3-D printing are reducing the incentives to offshore manufacturing from companies that have low borrowing costs and high labor costs. As these technologies become more widely adopted it is likely that low-value goods, like plastic utensils, will no longer be imported from low labor cost economies. Eventually the same thing could happen to higher value goods.
There are other trends that are likely to impact transportation infrastructure, but for now this is more than enough to ponder. Decision-makers need to develop a list of key trends, monitor them and develop a short list of likely scenarios. This activity is keeping many of them and their advisors very busy these days.
Kemmsies is chief economist at Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or by e-mail.