Vietnam freight transport report q1 2012

... of any information hereto contained Vietnam Freight Transport Report Q1 2012 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q1 2012 CONTENTS Executive Summary ... International Ltd Page Vietnam Freight Transport Report Q1 2012 SWOT Analysis Vietnam Freight Transport SWOT Strengths ƒ ƒ ƒ Weaknesses ƒ ƒ ƒ Opportunities ƒ ƒ ƒ Threats ƒ ƒ ƒ Vietnam' s strong domestic... Ltd Page 11 Vietnam Freight Transport Report Q1 2012 We believe that this expansion in Vietnam' s port capacity is crucial to the country's economic growth as the transportation of freight through

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FREIGHT TRANSPORT REPORT Q1 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Survey & Forecasts Series

Published by: Business Monitor International

Copy deadline: November 2011

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Freight Transport SWOT 7

Vietnam Political SWOT 7

Vietnam Economic SWOT 8

Vietnam Business Environment SWOT 9

Industry Trends And Developments 10

Maritime 10

Intermodal And Logistics 12

Market Overview 14

Global Oil Products Price Outlook 17

Industry Forecast 20

Road Freight 20

Table: Road Freight, 2008-2016 20

Rail Freight 20

Table: Rail Freight 20

Air Freight 21

Table: Air Freight 21

Maritime And Inland Waterways 21

Table: Maritime Freight - Throughput, 2008-2016 ('000 tonnes) 22

Table: Inland Waterway Freight 22

Trade 22

Table: Trade Overview 22

Table: Key Trade Indicators, 2008-2016 (US$mn and % change y-o-y) 23

Table: Main Import Partners, 2002-2009 (US$MN) 24

Table: Main Export Partners, 2002-2009 (US$MN) 24

Political Outlook 25

Foreign Policy 25

Domestic Politics 27

Long-Term Political Outlook 28

Macroeconomic Outlook 31

Table: Vietnam – Macroeconomic Activity, 2009-2015 32

Company Profiles 34

Vietnam Airlines Cargo 34

Vinatrans 36

Vietnam National Shipping Lines (Vinalines) 38

Vietnam Petroleum Transport Company (VIPCO) 40

Country Snapshot: Vietnam Demographic Data 41

Section 1: Population 41

Table: Demographic Indicators, 2005-2030 41

Table: Rural/Urban Breakdown, 2005-2030 42

Section 2: Education And Healthcare 42

Table: Education, 2002-2005 42

Table: Vital Statistics, 2005-2030 42

Table: Employment Indicators, 1999-2004 43

Table: Consumer Expenditure, 2000-2012 (US$) 43

BMI Methodology 44

How We Generate Our Industry Forecasts 44

Transport Industry 44

Sources 45

Executive Summary

Vietnam's freight transport sector is set to continue its steady growth trajectory over the medium term with the spectre of overcapacity a looming threat on the horizon The required pace of expansion

continues to pose a problem due to the state of infrastructure in the country and we caution that

investment is needed if Vietnam is to fulfil its potential

In terms of year-on-year (y-o-y) tonnage growth, the Port of Ho Chi Minh City is set to lead the way in

2012, with a healthy increase of 7.96% forecast, while air, road and rail are all expected to perform solidly in 2012 and to 2016

There are some dark clouds hovering on the horizon, however BMI believes that the recent rise in

Vietnamese sovereign credit default swaps suggests that investors are pricing in growing risks of a sovereign debt default We believe that deteriorating global economic headwinds and rising debt

servicing costs are among the key reasons behind growing pessimism over the government's credit worthiness Although the latest rate hike could put further downward pressure on growth and raise debt servicing costs in the near term, we are positive that higher interest rates will help attract more foreign capital into the country

Headline Industry Data

ƒ 2012 rail freight tonnage is set to increase by 5.29% to 8.62mn tonnes

ƒ 2012 air freight tonnage is forecast to rise by 5.72% to 206,960 tonnes

ƒ Tonnage handled at the Port of Ho Chi Minh City in 2012 is forecast to grow 7.96% in 2012, whereas tonnage handled at the Port of Da Nang is forecast to increase 3.08%

ƒ 2012 road freight tonnage is forecast to grow by 6.97%

ƒ 2012 total trade is forecast to rise by 7.25%

Key Industry Trends

Ho Chi Minh Faces Overcapacity And Infrastructure Concerns

Vietnam's port sector has seemingly become a victim of its own success as rapid growth has seen the

country's underdeveloped port sector struggle to keep pace with increasing volumes of trade BMI

believes this pressure could ease somewhat in 2012 as global economic headwinds continue to act as a dampener on external demand for Vietnamese exports

Upgrade For Mekong Delta Ports Crucial To Economic Growth

The Vietnamese government announced major plans in September 2011 to boost the combined port

capacity in the Mekong Delta provinces from 15.7mn tonnes in 2010 to 28mn tonnes in 2020 BMI

welcomes such an investment, as we have long held the view that Vietnam's port sector requires

considerable investment if it is to handle a projected increase in trade, as mentioned above

Kerry Logistics Invests In Vietnam

Hong Kong-based Kerry Logistics announced in September 2011 that it is set to open a new logistics

centre in Hanoi, Vietnam The centre will be located on the road to the main port of Haiphong, providing the company with excellent access to one of Vietnam's major logistics hubs The 10,000 square metre facility is expected to complete the company's plan to offer a high level of coverage for all the industrial centres in Vietnam, reports Eye for Transport

Key Risks To Outlook

On the upside, Vietnamese state-owned port operator Vietnam National Shipping Lines (Vinalines) signed a contract in October 2011 with Japan-based Molyto (a joint venture between three Japanese companies: Mitsui O.S.K Lines, Nippon Yusen Kabushiki Kaisha and Itochu) to construct two berths

at the Lach Hyuen port in Northern Vietnam BMI notes that it is mainly Japanese companies that are

developing Vietnam's northern deep sea ports

We have long highlighted the importance of foreign investment in Vietnam's port infrastructure due to its implications for the country's economic growth While the southern port of Ho Chi Minh is facing the prospect of overcapacity, there remains a significant demand for deep-water port capacity in the northern parts of Vietnam

This is because the country is looking to develop deep-water ports in key regions, allowing goods to be shipped directly to their destination markets instead of transshipping through Singapore, Malaysia and South Korea The Lach Hyuen port is located just 100km east of Vietnam's capital Hanoi, and is expected

to eventually replace the nearby Hai Phong port - currently the largest port in the northern region of Vietnam The Hai Phong port is reaching capacity and does not have adequate infrastructure to handle some of the larger container ships The Lach Hyuen port expansion will be implemented to address this deficit

On the other hand, downside risks exist in Vietnam's port sector, due to the rapid growth in the country's port volumes and subsequent concerns that have been raised over the possibility of overcapacity at the

Port of Ho Chi Minh Additionally, there is some sense of déjà vu in the global infrastructure space

Valuations are falling, credit is drying up, demand risk is rising and investors are avoiding risk; factors seem to be aligning for a repeat of the fall of 2009 While we see several red flags in the infrastructure finance market, we do not believe that the market will come to a standstill

SWOT Analysis

Vietnam Freight Transport SWOT

Strengths ƒ Vietnam's strong domestic growth rate coupled with its geography: it stretches for

thousands of kilometres on a north-south axis, creating a need for long-distance freight haulage

ƒ Recovery of the nation's ports in 2010 is expected to continue over the mid-term to

2016

ƒ Vietnam's location on the South China Sea gives the country access to the main Asian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics

inter-Weaknesses ƒ The generally poor state of the road network Despite new highway construction, only

13.5% of the network is considered to be in good condition Just 26% of the network has two or more lanes and only 29% is tarred

ƒ Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underutilised

ƒ Decades of under-investment have left the country with a port infrastructure system that is poor by international standards Overcapacity is therefore a growing problem

Opportunities ƒ The beginnings of local commercial vehicle production, which will help improve the

stock of lorries used by road haulage companies

ƒ Chinese investment could bring about much needed improvements in the rail sector

ƒ Growing international interest in Vietnam as a growth market within the box shipping sector

Threats ƒ Vietnam risks losing out to neighbouring countries if it is unable to develop its

infrastructure to keep up with the pace of demand

ƒ Vietnam is vulnerable to any slowdown in Chinese investment

ƒ A drop in international demand for exports would negatively affect Vietnam's freight transport sector

Vietnam Political SWOT

Strengths ƒ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The party system is generally conducive to short-term political stability

one-ƒ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ƒ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

ƒ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent

Opportunities ƒ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

ƒ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances in the system

Threats ƒ Macroeconomic instabilities in 2010 and 2011 are likely to weigh on public acceptance

of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule

ƒ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably be unsustainable

ƒ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage

Vietnam Economic SWOT

Strengths ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.2% annually between 2000 and 2010

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 12.0% in 2009

Weaknesses ƒ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving

the economy vulnerable to global economic uncertainties in 2011 The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw

ƒ The heavily-managed and weak dong currency reduces incentives to improve quality

of exports, and also keeps import costs high, contributing to inflationary pressures

Opportunities ƒ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

ƒ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s

Threats ƒ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country

attractive to foreign investors

ƒ Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia, and beyond

Weaknesses ƒ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world

ƒ Vietnam remains one of the world's most corrupt countries Its score in Transparency International's 2010 Corruption Perceptions Index was 2.7, placing it in 22nd in the Asia-Pacific region

Opportunities ƒ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-tech skills and know-how

ƒ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector This should offer foreign investors new entry points

Threats ƒ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

ƒ Labour unrest remains a lingering threat A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period

Industry Trends And Developments

Maritime

Ho Chi Minh Faces Overcapacity And Infrastructure Concerns

Short Term: Overcapacity Fears Present Downside Risk

Throughput at Vietnamese ports has grown dramatically in recent years as the country has sought to position itself as 'the factory of Asia' Rapid growth has seen the country's underdeveloped port sector

struggle to keep pace with increasing volumes of trade BMI believes this pressure could ease somewhat

in 2012 as global economic headwinds continue to act as a dampener on external demand for Vietnamese exports

This presents downside risk for production activity in the manufacturing sector and other export-based

industries While BMI forecasts real GDP growth of 6.5% in 2012 - up from an estimated 6% growth in

2011 - we expect year-on-year (y-o-y) growth in Ho Chi Ming Port's container throughput to slow to 5% in 2012 to 3.1mn twenty-foot equivalent units (TEUs), down from the double-digit growth we saw in the years prior to 2011 We expect total tonnage growth of 8% at the port, to 36mn tonnes

We caution that there are downside risks to our forecasts The rapid growth in Vietnam's port volumes has attracted ample international investment in port terminals, and concerns are now being raised about the possibility of overcapacity at Ho Chi Minh In 2006, international terminal operators secured stakes in nine terminals at the port after the government invited foreign investment, believing that rising throughput volumes would be quickly soaked up by increasing capacity

Five of the nine planned terminals are currently in operation in the Cai Mep area However, they are working well below capacity, according to Alphaliner With additional new facilities due to come online

within the next two years, BMI believes this is a considerable cause for concern

The situation is causing particular concern for companies that have facilities due to come online in the

near future SSIT, a joint venture (JV) between Saigon Port, SSA International Holdings-Vietnam and Vinalines is due to open in 2011 The terminal will have a handling capacity of 1.2mn TEUs and the

ability to receive ships of up to 8,000TEUs John Cushing, general director of international container services at SSIT, said: 'Whenever we look at this much development - and it is unusual anywhere to see

so many new terminal operations being built in a region at the same time - it always brings up the

question: Are you building to overcapacity?'

Medium Term: Upside Potential From Dredging Project

Over the medium term we forecast average annual real GDP growth of 7.2% for Vietnam In line with this, we expect steady growth in the country's port throughput to continue, although not in the double-digit figures seen previously We forecast average annual growth of 8.3% in total tonnage to reach 49mn tonnes by 2016, and average annual growth in container throughput of 6.6% to reach 4mn TEUs

Upside potential to our forecasts is presented by the Vietnamese government's plans to deepen the port's draught, allowing larger vessels to access the facility Recognising the need to cater for bigger vessels, Vietnam's prime minister has directed the country's ministry of transport and its Maritime Administration

to focus on developing deep water ports A channel depth of about 14 metres (m) is required for non-tide restricted access for vessels with capacity of up to 8,000TEUs

Vietnam is to develop further deep water ports to allow the country to ship goods directly to destination markets instead of transshipping through Singapore, Malaysia and South Korea Priority will be given to the Lach Huyen port complex in the northern city of Hai Phong, and to the Cai Mep and Ben Dinh port complexes over the next five years

Long Term: Infrastructure Improvements Needed

As previously stated, capacity at the port of Ho Chi Minh has expanded to the level that we are now concerned about overcapacity at the facility However, capacity expansion alone is not enough to equip

Ho Chi Minh to handle growing volumes of trade We also need to see investment in landside supply chains, such as road and rail networks These developments are particularly vital if Vietnam is to achieve its aim of enabling Ho Chi Minh to handle larger container vessels so that it can ship goods directly to destination markets

Upgrade For Mekong Delta Ports Crucial To Economic Growth

The Vietnamese government announced major plans in September 2011 to boost the combined port

capacity in the Mekong Delta provinces from 15.7mn tonnes in 2010 to 28mn tonnes in 2020 BMI

welcomes such an investment, as we have long held the view that Vietnam's port sector requires

considerable investment if it is to handle a projected increase in trade

According to the government's proposals, the expansion in capacity would focus on river ports and seaports located on the Tien and Hau rivers - the main tributaries of the Mekong River

In the Tien River basin, the improvements will focus on: the Cao Lanh-Sa Dec port in Dong Thap

province, the My Tho port in the Tien Giang province, the Vinh Thai port in the Vinh Long province and the Ham Luong port in the Ben Tre province

In the Hau River basin, the upgrades will involve: the Cai Cui, Tra Noc and Can Tho ports in the city of Can Tho; the My Thoi port in the An Giang province; the Dai Ngai port in the Soc Trang province; and the Tra Cu port in the Tra Vinh province The upgrades will enable these ports to accommodate vessels with a capacity of 5,000 deadweight tonnes (DWT) or, in some ports, up to 10,000DWT

Furthermore, new sea ports will be constructed in the Ca Mau peninsula and in the Gulf of Thailand They include the Nam Can seaport in the Ca Mau province as well as the Hon Chong, Bai No, and Binh Tri ports in the Kien Giang province These ports, once completed, will also be able to receive vessels

of between 5,000DWT and 10,000DWT

We believe that this expansion in Vietnam's port capacity is crucial to the country's economic growth as the transportation of freight through inland waterways accounts for a sizeable portion - 25-30% - of total domestic cargo transport Vietnam's waterway system is one of the largest in relation to its land area in the world: according to data from the World Bank, Vietnam has around 41,000km of natural waterways

Waterways are also crucial to Vietnam's export output, as they are an important means of transport for heavy goods including: coal, rice, sand, stone and gravel This is especially true for the Mekong delta provinces, which is one of the leading rice growing regions in Vietnam and the world A lack of adequate port facilities in the region would definitely have a negative impact on Vietnam's agricultural exports, a key component in the country's economy As such we welcome the government's plan and have taken it into account in our forecasts; real growth in the value of Vietnam's ports, harbours and waterways

infrastructure averages 8.3% per annum between 2011 and 2015

Intra-Asia Road Route To Enhance Shippers' Operations

It was announced in August 2011 that southeast Asia is to be linked to China through a new intra-Asia

route built by Panalpina, in a bid to improve transit times for regional shippers The countries

connected by the route would be Vietnam, Laos, Thailand, Malaysia and Singapore

It is hoped that the new service will provide a better alternative to costly air freight or the much slower ocean freight, as well as offering a more eco-friendly option to both of these modes The new freight solution will cater for full-truck-load (FTL) and less-than-truck-load (LTL) shipments

Andreas Wolff, Panalpina's area trade lane development manager for intra-Asia, explained: 'The service covers a number of major cities in western China such as Chengdu and Chongqing, where the entire market still struggles to find adequate capacity for air and ocean transport Our trucking solution will come in very handy here.'

District Manager of the Yangtze and Bohai Bay at Panalpina, Stefan Gustafsson, said: 'All trucks are equipped with GPS devices, and CCTV systems are installed inside each container to survey the cargo, ensuring highest security standards Considering that it is still a relatively fresh and new way for high-end transportation, we will further tailor the service to the customer and market requirements.'

Intermodal And Logistics

Gemadept Predicts 2012 Rise In Fees

In September 2011, Vietnam's biggest listed freight company, Gemadept, predicted that local cargo rates

will rise as smaller firms drop out of the market According to the Business Times, the firm expects rates changes to begin affecting the industry from mid-2012, as rival companies who have lowered

their charges fail to survive The issue is part of a wider malaise, as smaller firms struggle with higher fuel costs, overcapacity and lower demands from the US and EU

Kerry Logistics Invests In Vietnam

Hong Kong-based Kerry Logistics announced in September 2011 that it is set to open a new logistics

centre in Hanoi, Vietnam The centre will be located on the road to the main port of Haiphong, providing the company with excellent access to one of Vietnam's major logistics hubs The 10,000 square metre facility is expected to complete the company's plan to offer a high level of coverage for all the industrial centres in Vietnam, reports Eye for Transport

Robert Tan, managing director of the South Asia region at Kerry Logistics, said: 'We have invested in developing a national logistics network in Vietnam during the last few years and the new Hanoi facility completes our coverage of the key industrial areas in North, South and Central Vietnam.'

Market Overview

Slightly Slower Growth In 2011

We remain optimistic that we could see a pickup in GDP growth to reach 6.5% in 2012, after estimated growth of 6% in 2011 Leading indicators suggest that economic activity should continue to moderate, and we see this as a positive sign that government efforts to iron out the country's macroeconomic

imbalances remain on track Prevailing economic headwinds in the US and Eurozone should continue to act as a dampener on external demand This in turn suggests that production activity in the manufacturing sector and other export-based industries could face difficulties, with negative effects for the freight transport industry

Retail sales have moderated considerably since November 2010, when the State Bank of Vietnam (SBV) initiated its monetary tightening cycle Retail sales growth slowed from 32.5% in November 2010 to 22.6% in June 2011, indicating that the measures have dampened private consumption growth

Nonetheless, retail sales remain at double-digit growth rates, indicating that private consumption growth remains resilient This supports our view that private consumption would remain resilient on the back of robust labour market conditions and rising wages in Vietnam, boding well for containerised imports However, public spending cuts and a subdued outlook on gross fixed capital formation (GFCF)

growth due to high lending rates would lead to continued moderation in domestic demand throughout the year

Underperforming

Port And Road Infrastructure Rankings

Source: World Economic Forum

Road Freight Remains Dominant

Road transport is the most advanced in terms of freight sector privatisation and is the dominant mode for

freight, with a market share of around 60% of domestic cargo Few foreign companies are present in the market, and there are many small, family owned road freight companies operating informally

Vietnam has a national road network of 171,392km BMI believes the sector requires substantial

investment The quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142 nations surveyed in its Global Competitiveness Report 2011-2012

Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC),

established in April 2003 as a state corporation operating railway transport and related services

Vietnam's rail network totals 2,347km.The network is of mixed-gauge, comprising 2,169km of 1.000m gauge and 178km of 1.435m gauge Railway infrastructure in Vietnam was ranked 101 out of 123 by the WEF

Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km This is the second largest sub-sector involved in domestic cargo transport,

accounting for 25-30% of total transport volumes

Investment Flowing

Top Five Vietnam Transport Infrastructure Projects

Source: BMI

Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient

distribution Most large ports are located on rivers, like Hai Phong and Ho Chi Minh City, with limited

depth at the entrance Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion

Vietnam's port infrastructure is poor by international standards The WEF's 2011 Global Competitiveness Report ranks it 111th out of 142 countries, placing it 12th in the region, just one place ahead of the

Philippines, the regional underperformer

Investment And Development Outlook

According to our key infrastructure projects database, there are US$171bn worth of infrastructure projects planned, or underway, in Vietnam's transport sector One of the most expensive of these is a US$3.6bn plan to build the Van Phong International Entrepot The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9000 TEUs and the capacity to handle 0.5mn TEUs per year The project is currently suspended due to an ongoing review of geological conditions at the site

Global Oil Products Price Outlook

Refined Products Price Outlook

BMI View: In line with our longer-term crude price forecasts, we see refined products' prices easing

through to 2015 Gasoline (a composite of Rotterdam, New York and Singapore) is set to fall from US$110.47/bbl in 2012 to US$105.41/bbl at the end of the forecast period We see declines of 1.25% and 6.1% in the prices of jet kerosene and gasoil/diesel over the same period The smallest relative product price decrease is for naphtha, which we see falling from US$107.12/bbl to US$100.53/bbl

Since our last global oil products outlook, the irrational exuberance that gripped the oil market in H111 has given way to pessimism Brent crude had fallen below US$100/bbl in trading on October 4 2011 – a level not breached since January Supply considerations that were paramount in traders' minds earlier in the year began to fade as unrest in the Middle East and North Africa (MENA) failed to disrupt oil

production from the Persian Gulf states Upward pressure on light, sweet grades began to ease following the winding-down of the Libyan civil war, as well as the restart of production from a number of North Sea fields The OPEC Basket price fell from a July average of around US$111/bbl to less than

US$108/bbl in September, and October looks set to be significantly lower still

One Track Mind?

US Gasoline and Diesel Prices (US$/gallon)

Source: EIA

The 2011 summer driving season in the US was a disappointment Although WTI prices dissociated from Brent and fell significantly in Q311, US East Coast products' prices are more closely linked to Brent The sharp rise in international crude prices that started in late 2010 and continued through May 2011 fed

through to pump prices, leading almost invariably to demand destruction In H111, according to US Department of Energy data, US gasoline consumption averaged 180,000 barrels per day (b/d) (or 2%) lower year-on-year (y-o-y), while data for July and August showed a 1.6% y-o-y decline in consumption Poor macroeconomic sentiment in the US, marked by weak hiring and sluggish growth, also acted as a dampener

Fears of a second global economic slowdown have led many to cut expectations for oil consumption The IEA, in its September 2011 oil market report, said that it was slashing its forecast for 2011 and 2012 global oil demand by 200,000b/d and 400,000b/d respectively It did so after revising its GDP growth rate expectations for North America and Europe IEA preliminary data from July 2011 showed a 1.3% fall in total product consumption across the OECD, with the sharpest drop in Europe (Germany, France, Italy, Spain and the UK) Among non-OECD economies, however, demand for oil products is holding up, with IEA July 2011 preliminary data showing a 3.8% y-o-y rise in product demand Chinese oil demand has begun moderating, although it has yet to fall

in July Our jet-kerosene forecasts for the year see a big drop for New York Harbour and a slight

appreciation for Singapore

In line with our longer-term crude price forecasts, we see refined product prices easing through to 2015 Gasoline (a composite of Rotterdam, New York and Singapore) is set to fall from US$110.47/bbl in 2012

to US$105.41/bbl at the end of the forecast period We see declines of 1.25% and 6.1% in the prices of jet kerosene and gasoil/diesel over the same period The smallest relative product price decrease is for naphtha, which we see falling from US$107.12/bbl to US$100.53/bbl

New Assumptions

Oil Products Price Forecast, US$/bbl

Source: BMI

Industry Forecast

Road Freight

Steady Growth On Horizon

We are once again maintaining our forecasts for road haulage over our forecast period to 2016 Steady growth is projected, with 2012 set to see similar year-on-year (y-o-y) tonnage growth as that of 2011 (6.97% compared to 6.47% respectively) This equates to 599.86mn tonnes of road freight handled in

2011, a figure which will rise to 641.69mn tonnes in 2012 Over the mid term to 2016, we predict average annual tonnage growth in this sector to come in at 7.14%, whereas tonnes-km growth will follow a similar trend, averaging 7.50%

Table: Road Freight, 2008-2016

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Road freight, '000 tonnes

455,898.40

494,649.80

563,406.12

599,863.21

641,689.03

688,531.87

738,564.31

789,140.46

846,819.22

Rail Freight Growth Remains On Track

Rail freight is set to continue its steady recovery from the contractions of recent years We estimate that rail freight tonnage grew by 4.83% y-o-y in 2011, and project this to rise by 5.29% in 2012 to 8.62mn tonnes In 2012-2016 we forecast average annual tonnage growth of 5.33% to 10.61mn tonnes, while tonnes-km will enjoy a slightly stronger average growth of 5.64% to 5.12mn tonnes-km

Air Freight

Growth To Stay Healthy Over Medium Term

In terms of air cargo volume, BMI forecasts annual growth of 5.72% to 206,960 tonnes in 2012, up from

195,760 tonnes in 2011 Over our forecast period to 2016, we expect tonnage growth to average 6.23% a year For freight carried (volume x distance), we expect growth of 5.34% in 2012 to 543.79mn tonnes-

km, compared with 2011's 4.88% growth and 2010's double digit increase of 55.46% Over the mid term,

we forecast average annual growth of 5.87%

Table: Air Freight

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Air freight, '000 tonnes 131.40 139.60 186.00 195.76 206.96 219.51 232.90 248.23 264.79

- % change y-o-y

1.39 6.24 33.24 5.25 5.72 6.06 6.10 6.58 6.67 Air freight, mn tonnes/km 295.60 316.60 492.20 516.23 543.79 574.66 607.63 643.02 686.44

- % change y-o-y 5.61 7.10 55.46 4.88 5.34 5.68 5.74 5.82 6.75

f = BMI forecast Source: General Statistics Office of Vietnam

Maritime And Inland Waterways

Ho Chi Minh City Leads The Way In Terms Of Tonnage

At the Port of Ho Chi Minh City, we expect container throughput to grow by 5% in 2012 to 3.1mn twenty-foot equivalent units (TEUs), a slowdown from double-digit growth in the years prior to 2011 We expect total tonnage growth of 8% at the port, to reach 36mn tonnes

Meanwhile, our growth forecasts for Da Nang reflect our moderating view for Vietnamese growth We expect the port's container throughput growth to drop from double to single digits, achieving 7.6% growth

in 2012 to 102,775.74TEUs In terms of total tonnage, we expect growth of 3% to reach 3.5mn tonnes

Meanwhile, inland waterways will see y-o-y growth of 5.11% to 155.96mn tonnes in 2012, a figure which will break the 196mn barrier in 2016

Table: Maritime Freight - Throughput, 2008-2016 ('000 tonnes)

f = BMI forecast; * Saigon New Source: Port authorities

Table: Inland Waterway Freight

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Inland waterway freight,

'000 tonnes

133,028.00

135,688.40

142,201.44

148,378.09

155,960.44

164,659.38

174,401.76

184,807.51

196,024.58

- % change y-o-y -1.67 2.00 4.80 4.34 5.11 5.58 5.92 5.97 6.07 Inland waterway freight,

Table: Trade Overview

2008 2009e 2010e 2011e 2012f 2013f 2014f 2013f 2016f Real

Imports, real growth, %