Vietnam freight transport report q2 2012

... of any information hereto contained Vietnam Freight Transport Report Q2 2012 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q2 2012 CONTENTS Executive Summary ... international demand for exports would affect Vietnam' s freight transport sector © Business Monitor International Ltd Page Vietnam Freight Transport Report Q2 2012 Vietnam Political SWOT Strengths Weaknesses... International Ltd Page 20 Vietnam Freight Transport Report Q2 2012 Industry Forecast Road Freight Road Freight Continues To Dominate Our forecasts for Vietnam' s road freight sector suggest further

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All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

TRANSPORT REPORT Q2 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: February 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Freight Transport SWOT 7

Vietnam Political SWOT 8

Vietnam Economic SWOT 9

Vietnam Business Environment SWOT 10

Industry Trends And Developments 11

Maritime 11

Rail 12

Market Overview 14

Global Oil Products Price Outlook 16

Industry Forecast 21

Road Freight 21

Table: Road Freight, 2009-2016 21

Rail Freight 21

Table: Rail Freight, 2009-2016 21

Air Freight 22

Table : Air Freight, 2009-2016 22

Maritime And Inland Waterways 22

Table: Maritime Freight - Throughput, 2009-2016 ('000 tonnes and % change y-o-y) 22

Table: Inland Waterway Freight, 2009-2016 23

Trade 24

Table: Trade Overview, 2009-2016 24

Table: Key Trade Indicators, 2007-2016 (US$mn and % change y-o-y) 25

Table: Vietnam's Main Import Partners, 2002-2009 (US$mn) 26

Table: Vietnam's Main Export Partners, 2002-2009 (US$mn) 26

Political Outlook 27

Domestic Politics 27

Long-Term Politics 28

Macroeconomic Outlook 31

Table: Vietnam – Economic Activity, 2011-2016 32

Company Profiles 33

Vietnam Airlines Cargo 33

Vinatrans 35

Vietnam Petroleum Transport Company (VIPCO) 37

Vietnam National Shipping Lines (Vinalines) 38

Country Snapshot: Vietnam Demographic Data 40

Section 1: Population 40

Table: Demographic Indicators, 2005-2030 40

Table: Rural/Urban Breakdown, 2005-2030 41

Section 2: Education And Healthcare 41

Table: Education, 2002-2005 41

Table: Vital Statistics, 2005-2030 41

Section 3: Labour Market And Spending Power 42

Table: Employment Indicators, 1999-2004 42

Table: Consumer Expenditure, 2000-2012 (US$) 42

BMI Methodology 43

How We Generate Our Industry Forecasts 43

Transport Industry 43

Sources 44

Executive Summary

Vietnam's freight transport sector appears to be going from strength to strength, following the dominated 2009, with growth in the medium term expected to be very healthy across the board Leading the way in terms of average annual growth will be the road sub-sector, which is set to average 7.14% year-on-year (y-o-y) growth over our forecast period, to 2016 In second place will be air freight, with 6.23% growth predicted, with the port sector in third place with 6.03% Inland waterways and rail freight will both also enjoy healthy average increases between 2012 and 2016, of 5.73% and 5.33% respectively

recession-However, we caution that in order for the country to fully realise its potential, there must be an onus placed on investment over the mid and long term, otherwise Vietnam could suffer from overcapacity Aside from this, the country's existing infrastructure is sadly lacking and needs a considerable financial injection

With the macroeconomic picture across the globe looking bleak for 2012, Vietnam's main export partners, the US, China and Japan, are all set to suffer slowdowns during 2012, which could go on to pose some serious headaches for Vietnam

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 8.45%

Key Industry Trends

Van Phong Port To Resume Work In 2012 At Best

Vietnam National Shipping Lines (Vinalines) signed a deal with Netherlands-based Rotterdam Port to

construct the US$3.6bn Van Phong port, it was reported in October 2011 We believe that the

international sea port project is likely to resume construction in 2012 at the earliest, given the need for further negotiations with Rotterdam Port, Vinalines' lack of financing and the unresolved disputes with previous developers of the projects

Cat Lai Port Denies Any Involvement In Reefer Explosions

Saigon Newport, a container terminal operator at the Vietnamese Port of Cat Lai, denied any

involvement in the faulty repairs or maintenance of reefer containers which resulted in fatal explosions at four ports in Asia and South America in November 2011 Pham Thi Thuy Van, of Saigon

Newport's marketing department, said neither the port nor the terminal operator should be blamed for the explosions, as the maintenance and servicing of the reefers is handled either by third party vendors, or by the shipping lines' own vendors

New Vietnamese Container Rail Service Provides Upside Risk To Forecasts

The Vietnamese press reported at the end of 2011 that the Vietnam Railway Corporation

(VRC) was seeking to introduce a container train service connecting the Port of Hai Phong with Hanoi and Lao Cai Province, with rail freight volumes set to increase as a result The new service could also reduce the number of lorries on Vietnam's roads, potentially leading to a drop in road haulage in the South East Asian country

Key Risks To Outlook

There should be no doubt that Vietnam's biggest obstacle will be overcapacity, and how the country plans

to traverse this will be the difference between fulfilling potential or fading into the wilderness behind regional competitors With demand for Vietnamese freight high, the offshoot is of course being able to cater for this demand If provisions are made to combat overcapacity, then this will undoubtedly provide risks to the upside in terms of our mid and long term forecasts

On the downside, Vietnam is certainly not immune to the stubborn global economic headwinds that threaten to blow many an economy of course in 2012 Despite the Vietnamese government's attempts to reduce the country's persistent budget deficit, we expect to see a cooling of the economy over the coming quarters, with real GDP growth slipping slightly from 5.9% last year to 5.8% With most other economies set to suffer far worse than Vietnam in 2012, including key export partners, the freight sector may well take a hit in 2012 as the belt tightening commences

SWOT Analysis

Vietnam Freight Transport SWOT

Strengths ƒ Strong domestic growth rate

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

long-ƒ Recovery of ports in 2010 is expected to continue over the medium term to 2016

ƒ Location on the South China Sea gives the country access to the main inter-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

Weaknesses ƒ 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 underused

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 Beginnings of local commercial vehicle production 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 in box shipping sector

Threats ƒ 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 Drop in international demand for exports would 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 one-party system is generally conducive to short-term political stability

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

Communist Party

ƒ Increasing (albeit limited) public dissatisfaction with 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 Has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system

Threats ƒ Macroeconomic instabilities in 2012 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 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 One of the fastest-growing economies in Asia in recent years, with GDP growth

averaging 7.1% annually between 2000 and 2011

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 9.5% in 2010

Weaknesses ƒ Substantial trade, current account and fiscal deficits, leaving the economy vulnerable

to global economic uncertainties in 2012 The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw

ƒ The heavily-managed and weak 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 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 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 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 Remains one of the world's most corrupt countries According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries

Opportunities ƒ Increasingly attracting investment from key Asian economies, such as Japan, South

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

ƒ 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 US 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

Van Phong Port To Resume Work In 2012 At Earliest

The troubled Van Phong port project was finally beginning to see some light at the end of the tunnel at

the end of October 2011, with project investor Vietnam National Shipping Lines (Vinalines) signing a deal with Netherlands-based Rotterdam Port to construct the US$3.6bn international sea port BMI

believes that the project will likely resume construction at the earliest in 2012, given the need for further negotiations with Rotterdam Port, Vinalines' lack of financing and the unresolved disputes with previous developers

Construction started at the port, in the southern central province of Khanh Hoa, in October 2009

However, works were suspended by Vinalines in June 2011 due to liquidity problems and design

disputes with the project contractor, South Korea-based SK Engineering & Construction (SK E&C), and the project designer, Vietnam-based Portcoast

Although the Rotterdam Port's participation could see the Van Phong project get back on track by

providing expertise and financing, we believe that there is still much scope for further delays to the project

Firstly, Rotterdam Port still needs to send representatives to Vietnam to conduct further negotiations with Vinalines regarding the scope of its participation in the project Secondly, Vinalines' liquidity disputes with the existing developers remain unresolved Vinalines plans to revise the design of the Van Phong port through one of its subsidiaries, a move that will inevitably lead to a delay in the resumption of construction works, but is still contractually obligated to pay Portcoast VND20bn for work done on the previous design

Lastly, current monetary conditions in Vietnam are not conducive for Vinalines to borrow domestically The policy rate in Vietnam rose to 15% in early October, its highest level over the past five years This could delay payments to previous developers and the purchase of new materials for the revised project The change in design for the Van Phong port is expected to void up to VND675bn of investments

previously made in the port project, inflating its overall cost Not only is the advance paid to SK E&C contractually forfeited, certain materials and parts purchased or manufactured for the project must be replaced

However, we believe Vietnam's adverse monetary conditions could lessen going into 2012, as the

softening global conditions and aggressive monetary tightening policy initiated by the Vietnamese

government could spur a faster decline in inflation, increasing the likelihood of domestic interest rates being cut in early 2012 Vinalines could therefore raise the required funds in 2012 to pay all outstanding bills for the Van Phong port project

The Van Phong port may not be in demand over the short term, due to the current conditions in Vietnam's port sector South Vietnam's chief sea port, the Port of Ho Chi Minh, is facing the prospect of

overcapacity; its five newest terminals are all working well below capacity, according to Alphaliner Therefore, it is possible that even if the Van Phong port was completed on schedule (2015), near-term trading volumes may not justify the cost of its construction as it may not have reached its handling target

of 0.71mn TEUs per annum

Cat Lai Port Denies Any Involvement In Reefer Explosions

Saigon Newport, a container terminal operator at the Vietnamese Port of Cat Lai, denied any

involvement in the faulty repairs or maintenance of reefer containers which resulted in fatal explosions at four ports in Asia and South America in November 2011 Pham Thi Thuy Van, of Saigon

Newport's marketing department, said neither the port nor the terminal operator should be blamed for the explosions, as the maintenance and servicing of the reefers is handled either by third party vendors, or by the shipping lines' own vendors

Between April and October 2011, four refrigerated containers - which are predominantly used to transport fresh food such as seafood - exploded in Brazil, China and Vietnam, with the result being that three port workers lost their lives More than 1,000 reefers were consequently taken out of service and stevedores at the US ports of Oakland and Seattle refused to unload containers from Vietnam

According to a preliminary investigation carried out by Denmark's Maersk Line, contaminated gas in the

cooling units of the containers was the likely cause of the explosions Vietnamese officials were

scheduled to begin their own investigation on November 11 2011 Meanwhile, the port has implemented stricter handling procedures, updating the certification of its technicians and approving its processes and procedures with the shipping lines calling at the terminal

Rail

New Vietnamese Container Rail Service Provides Upside Risk To Forecasts

BMI believes that rail freight volumes in Vietnam will rise following the launch of a new container train

in the country in November 2011 The new service could also reduce the number of lorries on Vietnam's roads, potentially leading to a drop in road haulage in the southeast Asian country

According to reports in the Vietnamese press, the Vietnam Railway Corporation (VRC) is looking to

introduce a container train service connecting the port of Hai Phong with Hanoi and Lao Cai Province

The maritime facility is one of the largest in Vietnam Located in the north of the country, it has grown rapidly over the past decade In 2000, Hai Phong handled 7.65mn tonnes of cargo and 218,856 twenty-foot equivalent units (TEUs) By 2010, this had risen to 15.68mn tonnes and 953,646 TEUs, growth of 104.9% and 335.7% respectively This growth is expected to continue, with the port estimating it will have handled 1.2mn TEUs by the end of 2011, a further growth of 25.8%

Hai Phong is the only port in Vietnam currently connected to the national rail network Once up and running, the container service will provide links from the port to Lao Cai, Yen Vien, Gia Lam and Hanoi said VRC, having completed a survey of loading capabilities Each train to and from the port will carry 32 TEUs: 10 carriages will carry TEUs, and six will be loaded with forty-foot equivalent units (FEUs) If just 10% of the container throughput at the port was carried by rail, the traffic on National Highway 5 would

be reduced by around 200 vehicle trips

BMI notes that VRC's proposal provides upside risk to our rail freight forecasts Volumes carried on

Vietnam's rail network saw four consecutive years of decline from 2007 to 2010, falling from 9.05mn tonnes to 7.81mn tonnes In 2011, we forecast that volumes will return to growth, rising 4.8% to 8.19mn tonnes From 2012 to 2016 we project annual growth to average 5.3% per annum, rising to 10.62mn tonnes at the end of our forecast period, exceeding levels achieved prior to the slump The new container service could see these growth rates exceeded

Equally, the upside risk to our rail freight forecasts is matched by downside risk to our road freight

volumes in Vietnam Over the same 2012-2016 forecast period, BMI anticipates growth in road haulage

to average 5.6% per annum If the container service takes off, however, and more volumes are moved off the roads and onto rail (which is both greener and reduces congestion on roads), our outlook could be affected

Market Overview

Vietnam's real GDP growth figure came in at 6.1% year-on-year (y-o-y) in Q311, in line with our view that monetary tightening by the State Bank of Vietnam (SBV) and a reduction in public spending would continue to be a drag on growth over the coming quarters Meanwhile, downside risks to our outlook on external demand - a sputtering economic recovery in the US, sovereign debt concerns in the eurozone and

a potential hard landing in China - have escalated significantly in recent months Consequently, we have downgraded our real GDP growth forecast from 6.3% to 6.0% for 2011 to reflect a deteriorating

economic environment that we expect to persist over the coming months Looking into 2012, we believe Vietnam's real GDP growth will remain subdued by historical standards at 6.5% as weak economic momentum spills over into H112

Domestically, we expect to see welfare subsidies rise as cooling external demand translates into higher unemployment for the manufacturing sector Furthermore, we expect tax revenue growth to slow

significantly as a result of cooling private sector income growth

Retail sales have moderated considerably since November 2010, when the 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

Road Freight Remains The Dominant Force

Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% 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 countries 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

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 currently under way, 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 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs per year The project is currently suspended, however, due to an ongoing review of geological conditions at the site

The air freight sector will undoubtedly benefit from the planned construction work on a new passenger terminal at Long Thanh international airport Costing an estimated US$6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year A tender for investment consultancy work was under development as of December 2011

Global Oil Products Price Outlook

Lower Fuels Prices To Help Weather Global Headwinds

BMI View: BMI’s latest refined fuels forecast indicates there will be a fall in prices between 2012 and

2016, with the sharpest falls taking place over 2012 and 2014 On one hand, cheaper fuels will certainly help many struggling industries (such as aviation, land freight and petrochemicals) in the coming years, with North American consumers set to profit less from this expected decline relative to other regions On the other, lower demand and falling prices imply that many refiners will continue to struggle, particularly

in Europe and the US north east However, we still see room for growth for refiners in some emerging countries and in some parts of the US

Fall In Prices Across The Board

Oil Products Price Forecasts, 2012-2016 (US$/bbl)

f = forecast; bbl = barrel Source: BMI

When we last published our global oil products outlook, in October 2011, oil prices were on a downward trend because of a recovery in output Libyan oil was fast coming back onstream, reaching nearly 1mn barrels a day (b/d), according to our latest estimates, and other disruptions around the world were

receding, though some of them were expected to spill over into 2012

Although we expected a supply deficit in 2012, particularly in the first half of the year, rising production, particularly from unconventional projects in the Americas, was expected to ease the tension between supply and demand The ongoing European debt crisis and slower than expected growth in the US had dampened our consumption outlook

However, recent developments in the market have highlighted some significant upside risks Volatility is likely to remain high, as suggested by continued Iranian and US sabre rattling in the Strait of Hormuz, which could have resulted in a US$5-US$15 per barrel (bbl) premium at current prices Furthermore, unless demand contracts in an unprecedented fashion, a clear price floor has been established due to the cost of developing the capital-intensive projects from which much of 2012’s stabilising volumes are expected to be drawn

First Steps To Recovery For Refiners

With regard to downstream operators, BMI sees three main geographic blocks emerging: North America,

emerging markets and Europe

In the US, although higher feedstock prices have caused many refineries to close in the north east, cheap domestic crudes in the Midwest, the Rockies and on the Gulf Coast have generated very high margins Furthermore, rising gasoline margins, compounded by growing diesel export volumes to booming Latin American markets, offer substantial opportunities for growth, particularly in the Gulf Coast region

In emerging markets, high crude prices have forced many governments to revise their fuel subsidies Although we still expect many refiners to incur losses in 2012, as they will still be expected to perform their ‘national duty’ by providing cheap energy to fuel growth, their prospects are clearly improving India, Iran, Nigeria, Indonesia and China, among others, have all liberalised prices or are expected to This offers growth opportunities not only for domestic operators but also, in some cases, for foreign operators

In Europe the outlook is bleaker, with many plants shutting Neighbouring emerging markets, rather than offering prospects for export, are a source of competition, as Russia, the Middle East and North Africa enjoy cheap feedstock and are constantly increasing capacity and standards Consequently, operators willing to approach the European market would be better advised to invest in neighbouring oil-rich countries, particularly in the Middle East, as these countries also have access to booming Asian markets

Diesel Prices To Offer Relief To Land Freight

Diesel prices are largely expected to follow a downward trend over 2012-2016, with most of this

correction taking place in 2012-2014 We see global prices, an average of the Singapore and Rotterdam benchmarks, falling by nearly 6.20% in this period, as opposed to 0.91% in 2014-2016 For many land freight companies this will be a source of relief as current global headwinds are likely to hurt most

operators, particularly those in developed markets This also implies that beyond 2014 growth will have

to come from rising revenue rather than fuel savings If freight volumes fail to pick up, cost savings will have to be made in other departments

In terms of geography, prices are expected to fall by approximately 1.80% for both the Singapore and Rotterdam benchmarks over the forecast period This is likely to give a disproportionate advantage to emerging Asian and African road freight operators, where the economic headwinds are unlikely to

destroy demand as significantly as they will in Europe

Diesel Prices Die Down

Gasoil/Diesel Prices, 2006-2016 (US$/bbl)

f = BMI forecast Source: BMI, Bloomberg

A Gentler Fall In Gasoline Prices

Gasoline prices will follow the same downward trend as diesel and most of the correction in prices (-4.68%) will take place in 2012-2014, with only a minor 0.74% fall in 2014-2016 However, as the overall fall in prices will be smaller than the fall in diesel prices, gasoline markets, such as the US, will enjoy smaller returns from any correction, a trend that will be exacerbated by geographical discrepancies

between gasoline benchmarks BMI sees the US gasoline benchmark falling by just 0.51% in 2012-2016,

compared to 1.75% and 1.78% in Europe and Asia respectively

Cheaper Kerosene To Benefit Latin America And Middle East

Kerosene will offer some relief to the troubled air freight market With weak consumer sentiment

dampening demand for air freight because of the economic woes in Europe and North America, Asian exports are also set to take a hit However, falling kerosene prices should offer some relief to margins,

particularly in Europe and Asia Outperforming air freight markets, such as the Middle East and Latin

America, will both experience higher demand and lower costs, thereby boosting margins

US Unleaded Gasoline Leads The Way

Gasoline Prices, 2006-2016 (US$/bbl)

f = BMI forecast Source: BMI, Bloomberg

Jet Fuel Price Landing

Jet/Kerosene Prices, 2006-2016 (US$/bbl)

f = BMI forecast Source: BMI, Bloomberg

Naphtha To Boost Middle East Petrochemicals

Falling naphtha prices will do little to save the ailing Western petrochemicals markets The European and North American petrochemicals industries have mostly followed the lead of the refining industry Much like the downstream segment, an ailing European petrochemicals industry implies that Middle Eastern operators could strengthen their presence on the continent Middle Eastern operators will not only benefit from better market conditions, they will also enjoy lower feedstock costs as the fall in naphtha prices will

be sharpest in Asia (where refined fuels prices are indexed to the Dubai Fateh)

Mix ‘n’ Match

Naphtha Prices, 2006-2016 (US$/bbl)

f = BMI forecast Source: BMI, Bloomberg

While there will be a sharp fall in refined fuels prices in 2012, cheaper costs are only likely to help most companies weather the crisis rather than avoid it As for refiners, lower demand and lower prices will continue to hurt margins, though we see room for growth in some emerging countries and in some parts

of the US

Industry Forecast

Road Freight

Road Freight Continues To Dominate

Our forecasts for Vietnam's road freight sector suggest further strong growth over the medium term For

2012 we expect y-o-y growth of 6.97%, up from an estimated 6.47% in 2011 In terms of medium-term

annual growth, BMI sees an average of 7.14% to reach 846.83mn tonnes

Table: Road Freight, 2009-2016

Rail Recovers

The rail freight sector will safely put the twin contractions of 2009 and 2010 out of sight with 2012 and beyond set to reflect 2011's steady growth pattern For 2012 we expect growth of 5.29%, with the average annual growth over the forecast period just beating this figure, at 5.33%, to reach 10.61mn tonnes in

2016, up from 2012's forecast 8.62mn tonnes

Air Freight

Growth Steady, But Work To Be Done

In common with the sectors mentioned above, Vietnam's air freight sector will enjoy steady growth rates over the medium term We see an annual average of 6.23% over our forecast period, with tonnage

throughput increasing from 206,960 tonnes in 2012 to 264,780 tonnes by the end of 2016 In 2012 BMI

forecasts y-o-y growth of 5.72%, up slightly on 2011's 5.25% However, the Vietnamese air freight sector

is by far the country's smallest in terms of annual tonnage throughput

Table : Air Freight, 2009-2016

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam

Maritime And Inland Waterways

Table: Maritime Freight - Throughput, 2009-2016 ('000 tonnes and % change y-o-y)