Vietnam freight transport report q4 2010

... International Ltd Page Vietnam Freight Transport Report Q4 2010 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2010 Executive Summary Vietnam' s freight transport sector... of any information hereto contained Vietnam Freight Transport Report Q4 2010 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2010 CONTENTS Executive Summary ... Office of Vietnam © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q4 2010 Maritime Freight Vietnam' s port sector continues to outperform other sub-divisions of freight

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FREIGHT TRANSPORT REPORT Q4 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2010

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Freight Transport Industry SWOT 7

Vietnam Political SWOT 8

Vietnam Economic SWOT 8

Vietnam Business Environment SWOT 9

Market Overview 10

Industry Trends And Developments 12

Multi-Modal/Logistics 12

Road 12

Air 13

Rail 14

Maritime 14

Global Oil Products Price Outlook 17

Table: Oil Product Price Data And Forecasts, 2010 (US$/bbl) 18

Table: Oil Product Price Data And Forecasts, 2007-2014 (US$/bbl) 19

Industry Forecast 20

Air Freight 20

Table: Air Freight, 2007-2014 20

Maritime Freight 21

Table: Maritime Freight, 2007-2014 (throughput, ‘000 tonnes) 21

Table: Inland Waterway Freight, 2007-2014 21

Rail Freight 22

Table: Rail Freight, 2007-2014 22

Road Freight 22

Table: Road Freight, 2007-2014 22

Trade Overview 23

Table: Trade Overview, 2007-2014 23

Table: Key Trade Idicators 24

Table: Vietnam’s Main Import Partners, 2002-2008 (US$mn) 25

Table: Vietnam’s Main Export Partners, 2002-2008 (US$mn) 25

Company Profiles 26

Vietnam Airlines 26

Doan Xa Port 28

Vietnam Petroleum Transport Jsc (VIPCO) 30

BMI Methodology 31

How We Generate Our Industry Forecasts 31

Transport Industry 31

Executive Summary

Vietnam's freight transport sector continues to develop in line with the country's growing consumer base and strengthening trade links with markets both in Asia and further afield The country's growing

recognition as a region trade hub has attracted foreign freight transport operators to the market and in

June Damco, the logistics division of Denmark-based shipping group AP Moller Maersk, announced the

introduction of a new cross-border trucking service linking Vietnam with Thailand and Cambodia Damco has been building its presence in the South-East Asian market, and in 2009 opened a new

transportation hub in Thailand's Samrong district

Vietnam's favourable demographics have caught the attention of China, Japan and other major Asian exporters who are looking increasingly to their own backyards for growth opportunities China, in

particular, is keen to foster ties with its neighbours, and this year signed a free trade agreement (FTA) with the ASEAN-5 (Malaysia, Singapore, the Philippines, Thailand and Indonesia) and Brunei, creating the world's third-largest trade bloc The agreement eliminates tariffs on 90% of goods traded between the countries and China Four other states, Laos, Cambodia, Vietnam and Myanmar, are on course to merge with the bloc in 2015

Vietnam's ability to capitalise on new trade opportunities will depend on the provision of new freight transport infrastructure The government is securing investment to help develop the country's transport network with roads one of the main areas targeted In June Vietnam opened a newly constructed bridge, which will provide connection between the Cat Lai Port and Hanoi Highway in Ho Chi Minh City's District Two The construction work of the three-lane bridge got completed three months ahead of

schedule The bridge is 413.7m long and 12.5m wide and is part of a city project to broaden

inter-provincial Road 25B that connects the bridge to the port In 2011 we see continued growth in freight carried by road with volumes carried rising by 6.62% to 28.62 billion tonne-km (bntkm) following this year's expected 4.8% increase

The expansion of Vietnam's rail freight sector is expected to continue, despite the recent decision of the Vietnamese National Assembly not to endorse the plan for the construction of a north-south high-speed railway In 2011, Rail freight volumes, forecast to enjoy a partial recovery of 3.3% in 2010 are expected

to grow at an accelerated rate, increasing by 4.6% to 4.09bntkm

Airfreight volumes should follow a similar pattern, growing by 4.7% in 2011 to 294.03bntkm following

on from a predicted 3.3% increase in volumes this year

port Saigon New Port (SNP) finds is expected to experience a 7.5% growth in throughput in 2011 when it will handle 21.84mn tonnes This is a slight gain on this year's growth rate when we expect the facility to

be handling 20.33mn tonnes - a y-o-y increase of 6.2% The Port of Da Nang (PDN), a smaller facility in central Vietnam, growth is expected to continue to post weaker growth than SNP, with tonnage volumes forecast to increase by 2.8% y-o-y to 2.69mn tonnes This year the port is expected to report growth of 2.3%

In recent years, Vietnam has enjoyed strong export led growth but as the internal market gathers pace we expect overall trade growth to ease down In real terms, exports and imports combined were growing at more than 20% per annum earlier this decade, but in the global downturn of 2009 they contracted by 14.5% In 2011, we expect total trade to grow by 6.2% y-o-y in real term, building on this year's projected 5.4% increase Imports are expected to grow by 6% with exports increasing by 6.5%

SWOT Analysis

Vietnam Freight Transport Industry SWOT

Strengths ƒ Strong growth rate coupled with geography (long country stretching for thousands of

kilometres on a north-south axis) creates need for long-distance freight haulage

ƒ Recovery at ports in 2010 is expected to continue over the mid-term

ƒ Location on the South China Sea gives the country access to main inter-Asian shipping routes, as well as access to developing land transport links with ASEAN countries, allowing it scope to develop trade logistics

Weaknesses ƒ Generally poor roads Despite new highway construction, only 13.5% of road network

is considered in good condition, 26% has two or more lanes and 29% is tarred

ƒ Traditionally low investment in rail; although attempts are being made to rectify this, the potential of rail for cost-effective bulk freight is being underutilised

ƒ Decades of under-investment have left the country with a port infrastructure system ranked 99th out of 133 countries by World Economic Forum Competitiveness Report

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

stock of lorries used by road haulage companies

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

ƒ Opening of deepwater container terminal in 2009 set up better shipping links to US

Threats ƒ Potential 'stop-go' in economic gowth as the government may be forced to tighten

monetary and fiscal policy in response to overheating

ƒ State-owned freight companies may be unprepared to compete as the doors are gradually opened for international companies to enter the Vietnamese market

Vietnam Political SWOT

Strengths ƒ The Communist Party appears committed to market-oriented reforms, although

specific economic policies will undoubtedly be discussed at the 2011 National Congress The one-party system is generally conducive to short-term political stability

ƒ Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ƒ Corruption among government officials poses a hreat to legitimacy Communist Party

ƒ Increasing (albeit limited) public dissatisfaction with leadership's control over dissent

Opportunities ƒ The government recognises the threat that 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

Threats ƒ The slowdown in growth in 2009 and 2010 is 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 due to Beijing's assertive stance over disputed islands in South China Sea and domestic criticism of large Chinese investment into a bauxite mining project in central highlands, which could cause 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 7.6% annually between 2000 and 2009

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 20% in 2004

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

the economy vulnerable as the global economy continues to suffer in 2010 The fiscal picture is clouded by considerable 'off-the-books' spending

ƒ Heavily managed and weak dong reduces incentives to improve quality of exports, and also serves to keep import costs high, thus 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 Government will, despite current macroeconomic woes, continue to move forward with market reforms, including privatisations and liberalising banking sector

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population to rise 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 hitherto

upbeat view of Vietnam If the government focuses on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability

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, low-cost workforce has made the country attractive to foreign investors

ƒ Vietnam's location (proximity to China and South East Asia) and 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 Vietnam is one of the world's most corrupt countries Its score in Transparency International's 2009 Corruption Perceptions Index was 2.7

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

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

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 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

Market Overview

In January 2007, Vietnam officially joined the World Trade Organisation (WTO), an event seen as an important milestone in the country's closer integration into the global economy WTO membership has helped boost Vietnam's international trade and develop its freight transport capabilities

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 There are over 1,050 enterprises registered

in the road transport business, which include 16 state-owned enterprises (SOEs), 233 limited liability companies, 350 private companies and 450 joint stock companies Very few foreign-invested companies are present

Most road transport companies are of small or medium size, and each company, on average, owns about

50 vehicles In addition, tens of thousands of individual household businesses exist that operate

informally in the road freight sector, and are thus difficult to account for and monitor

Vietnam has a national road network of some 222,179km Of this, only 42,167km, or 19%, is paved In addition, recent surveys indicate that approximately 40% of the network is in poor to very poor condition and will require substantial investment even to reach a maintainable condition The quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be poor and was ranked 102 out

133 nations surveyed in the WEF 2010 Global Competitiveness Report

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

established by law in April 2003 as a state corporation operating railway transport and related services The government has announced plans to separate the management of rail infrastructure from passenger and cargo services Vietnam's rail network totals 2,600km (excluding sidings) The network is mixed-gauge, comprising 2,169km of 1.000m gauge and 178km of 1.435m gauge The network has 1,790 bridges totalling 45km and 11.5km of tunnels The principal axis is Hanoi-Ho Chi Minh City (1,726km) Other lines emanating from Hanoi are to Hai Phong (102km), Lao Cai (296km) and Dong Dang (162km) Railway infrastructure in Vietnam was ranked 58 out of 114 by the WEF

There are two principal airlines operating in Vietnam: Vietnam Airlines and Pacific Airlines Both are

majority state owned, although Australia's Qantas is now a minority shareholder in Pacific Airlines The government has announced plans to build the country's largest airport at Long Thanh in the southern province of Dong Nai, at an estimated cost of US$8bn The authorities also plan to expand Noi Bai International airport in Hanoi The three major airports handling freight are located at Ho Chi Minh City, Hanoi and Da Nang, each of which have international connecting flights Minor airports such as Cat Bi at

Haiphong are generally used for domestic flights to the three larger hubs In 2010, Vietnam's air transport infrastructure was ranked 84/ 133 nations by the WEF

UNCTAD shipping fleet statistics indicate that by the end of 2007, Vietnam had 387 commerical vessels with a total capacity of 3.14mn DWT and ranked 28th out of 162 countries around the world (but fourth

in ASEAN after Singapore, Malaysia and Thailand) The average vessel size is 2,650DWT

Vietnam's fleet structure lacks specialised container vessels, bulk cargo ships, large oil and liquefied petroleum gas (LPG) tankers Multi-function ships and bulk cargo ships account for 87% in number and 63% in tonnage, and container ships account for only 2.2% in number and 9% in tonnage The largest local operator is the Vietnam National Shipping Lines (Vinalines)

Vietnam's dense river and canal network provides the country with a highly developed inland waterway system This is the second-largest sub-sector involved in domestic cargo transport, accounting for 25-30%

of total transport volumes Currently, the inland waterway transport sub-sector is managed by two state corporations affiliated to the Ministry of Transport, one SOE affiliated to the Vietnam Inland Waterway Authority, and some enterprises managed by other ministries, operating in support of the power

generation, cement and paper industries In addition, there are about 230 co-operatives and hundreds of inland waterway transport enterprises in the country

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

distribution Most big ports are located far inside 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 from and to ports, due to traffic congestion Except for several new ports or upgraded ports, most ports have been operating for many years, lack investment and are seriously degraded

The loading and unloading equipment in some ports is obsolete, leading to low productivity The average productivity of a Vietnamese port is only 2,500 tonnes/m per wharf, or 40-50% of productivity of other ports in the region

Though a series of new port investments are expected to see conditions gradually improve during the next few years, for the time-being the quality of Vietnam's port infrastructure is judged to be poor and was ranked 99 out of 133 nations by the WEF

Industry Trends And Developments

Multi-Modal/Logistics

In June, DHL Supply Chain, a division of global express and logistics company DHL Express (DHL),

announced it was planning to spend more than US$1.5mn on the construction a new distribution centre in the province of Binh Duong

The facility will include a total area of 60,000 m2, which is scheduled to be developed in three phases The distribution centre will also include a custom-built multi-user warehouse covering an area of 15,000 m2 The construction work was started in March 2010 and is scheduled to be completed before Q410

The announcement foolows new that DHL Express's Vietnamese subsidiary DHL-VNPT Express

registered a 30% year-on-year (y-o-y) surge in parcel volumes in Q110 DHL is expecting continuous increases in logistics trade in the coming months in Vietnam and is working towards reducing carbon emissions by nearly 14%

Road

In June, Vietnam opened a newly constructed bridge, which will provide connection between the Cat Lai Port and Hanoi Highway in Ho Chi Minh City's District Two The construction work of the three-lane bridge got completed three months ahead of schedule The bridge is 413.7m long and 12.5m wide and is part of a city project to broaden inter-provincial Road 25B that connects the bridge to the port

The bridge was funded by the Ho Chi Minh City Infrastructure Investment and was constructed by Civil Engineering Construction Corporation No 1 (Cienco 1) The new bridge is aimed at reducing traffic congestion on the road, which is used by thousands of container trucks every day to reach to the port The port now receives a total of 12,000 trucks on a daily basis

In the same month, Damco, the logistics division of Denmark-based shipping group AP Moller Maersk, announced the introduction of a new cross-border trucking service linking Thailand, Cambodia and Vietnam The company believes the service will allow it to capture a share of growing trilateral trade volumes between the three countries by providing a faster and more cost-efficient alternative to existing sea and air freight services

Damco has been building its presence in the South-East Asian market, and in 2009 opened a new

transportation hub in Thailand's Samrong district BMI believes intra-Asian trade will become a

progressively more important source of revenue for international freight transport operators over the next few years

With demand in Europe and North America expected to remain sluggish, China, Japan and other major Asian exporters are expected to look increasingly to their own backyards for growth, encouraged by the young demographics of many developing Asian states China, in particular, is keen to foster ties with its neighbours, and, in January 2010, signed a free trade agreement (FTA) with the ASEAN-5 (Malaysia, Singapore, the Philippines, Thailand and Indonesia) and Brunei, creating the world's third-largest trade bloc

The agreement eliminates tariffs on 90% of goods traded between the countries and China Four other states, Laos, Cambodia, Vietnam and Myanmar, are on course to merge with the bloc in 2015

South-East Asia also offers considerable potential as a re-export base With domestic income levels steadily rising, Chinese companies have been quick to make use of Vietnam's low labour costs, and many firms have started to outsource production to the country

French construction company VINCI Construction Grands Projects and Vietnamese infrastructure concessionaire De Ca Investment JSC signed a memorandum of understanding (MoU) for the

US$600mn Ca Pass tunnel and road project in Vietnam The project will widen a 9km-long stretch of road, build a new 11km-long stretch including two tunnels (5.5km and 350m), and build three bridges with a total length of 1.26km and 4km of approach roads

The deals follows Vietnam's Prime Minister Nguyen Tan Dung approval of VND350trn (US$18.09bn) for the construction and development of the road system in the country in March 2010 The funds were approved under a national development scheme of 2020 and long term plan until 2030

The plans include development of a North-South road with a total length of 3,262km, construction of seven roads in the north with a total length of 1,099km, construction of three routes with total length of 264km in central and highland areas, and development of seven routes with a total length of 984km in south area

Air

In July Kuwait-based logistics company Agility revealed plans to relocate its operations to a new modern

facility in Ho Chi Minh City, Vietnam, which is located near to the Tan Son Nhat International Airport The new office will cover an area of 550m2 and will serve as the company's headquarters for Vietnam and Indochina operations

The logistics company currently operates three offices in Vietnam in Danang, Hanoi and Vung Tau with a

Rail

In June BMI reported on the decision by the Vietnamese National Assembly not to endorse the plan for

the construction of a north-south high-speed railway which we view as a positive and encouraging move

Since the project was first announced, BMI expressed concerns regarding the prohibitive price tag, which

prompted further concerns about the possible knock-on effects on the entire infrastructure sector from the misallocation of resources this project could create Given the hurdles to its realisation, we did not take it

into account in BMI's Vietnam railway infrastructure forecasts, a move justified by the recent

announcement

The US$56bn project has been rejected by the National Assembly, following weeks of debate, which divided the ruling party According to a report by the Financial Times (FT), of the 493 members of the National Assembly, only 209 voted for the project, highlighting the opposition to it The hefty cost and potential to inflate Vietnam's foreign debt in the coming years were the main grounds for opposition

The decision follows the World Bank's refusal to support the project, which was announcement in June Lead economist with the World Bank's Development Research Group, Martin Rama, was cited by

Vietnamese newspaper VN Express, saying that the World Bank is not likely to participate in the project

This is an indication that the project will do little to address economic development issues On the

contrary, critics of the high-speed railway (including some from within the government), have noted that the debt burden, which the project would create, will be felt for many generations to come

Maritime

One of the most interesting recent trends affecting Vietnam's maritime sector has been growing trade

integration with the US In June, Mitsui OSK Line (MOL) launched a new container shipping service

calling at the port of Jacksonville (Jaxport) in Florida in partnership with compatriot K-Line that will link the facility to the Vietnamese port of Cai Mep as well as other Asian terminal The service will comprise

a weekly sailing by a 5,500 20-foot equivalent unit (TEU) vessel

Meanwhile, In July the US and Vietnam signed a memorandum of understanding (MoU) that will see containers destined for the US scanned for nuclear materials before they disembark BMI believes that this is evidence of the continued American drive to tackle what it feels is its Achilles' heel, with the belief that the country's port sector could be a route for a potential terrorist attack We think that Vietnam had little choice but to sign the MoU, given the increasing importance of US trade to the country

The agreement was signed by the US and Vietnam on July 2 and paves the way for the US Department of Energy's National Nuclear Security Administration (NNSA) to work with Vietnamese ministries to install radiation-detection equipment in Vietnamese ports The agency will provide, install, maintain and train Vietnamese staff in the operation of container scanners

Kenneth Baker, NNSA's principal assistant deputy administrator for NNSA's Office of Defense Nuclear Nonproliferation stated in the agency's press release: 'Our partnership with Vietnam will greatly

strengthen our capability to prevent nuclear and radiological smuggling through the maritime system in a key, strategic region of the world We appreciate Vietnam's efforts and commitment to keeping these dangerous materials out of the hands of terrorists, smugglers and proliferators.'

The MoU between the two countries is part of a wider US programme that ultimately aims to scan 100%

of US-bound containers at foreign ports on the basis that they constitute a potential threat to national security Increasingly wary of asymmetric attacks on its own soil since 9/11, this is part of a raft of legislation passed in recent years that aims to prevent another such attack

In July 2007 the US government passed a bill requiring foreign ports to have scanning procedures for

US-bound cargo in place within the next five years BMI has noted that these plans have met with some

dissent, however, and have been labelled by Christopher Koch, president and CEO of the World Shipping Council, in an address to the US Senate Committee on Commerce, Science and Transportation as

'unworkable' We believe that these extra security measures have the potential to cause significant delays and congestion in ports

Given how import an export partner the US has become for Vietnam, it is unlikely that the South-East Asian nation could have done anything but sign the agreement The two countries signed a bilateral trade agreement in 2001, and since 2002 the value of Vietnamese exports to the US has grown by more than five times Vietnamese exports to the US are now worth 50% more than the country's second-placed export partner, Japan

In a separate development, the government of Vietnam is reportedly considering revising the scope and scale of the Cai Mep-Thi Vai Port, including the level of official development assistance (ODA) it will receive from Japan for it

The Saigon Times cited a press statement by the government's website announcing that the Transport Ministry is going to review which parts of the project need to be adjusted (presumably in terms of cost and scale), to fit the latest regulations and policies, though the report does not mention which regulations

When construction began in October 2008, overall construction cost was estimated at US$700mn,

financed via state and ODA funds The project is already in the construction phase and due to be

completed in 2012 Since it is solely being funded by the ODA and the state budget, it is likely that the government will seek to increase ODA allocations and ease the cost burden on the state budget

A more disappointing development during Q310 was the ongoing demise of Vietnamese state shipbuilder

Vietnam Shipbuilding Industry Group (Vinashin) which, in July was forced to hand over control of its Dung Quat to PetroVietnam as part of a forced restructuring effort following a government inquiry into

the company's affairs Vinashin has reported debts of US$4.3bn, and, as part of the restructuring process, will be forced to offload a number of assets, including Dung Quat shipyard, to state energy company PetroVietnam and national shipping line Vinalines

The blame for the company's financial problems has been pinned on Vinashin's secretary, Pham Than Binh, who is among several employees expected to be disciplined for 'irresponsible' use of state capital During 2005-2006 Binh and other leading employees reportedly failed to heed the advice of observers who warned that Vietnam was investing too much in its shipbuilding industry

Though Vinashin was successful in winning new-build orders from overseas during 2005-2007, holding

166 shipbuilding contracts at the start of 2008, it was hit hard by the global financial crisis, which led to its losing up to US$6bn in orders A lack of adequate supervision has also been cited as one of the reasons behind Vinashin's mismanagement, with the company reportedly having been under no obligation to report its activities to the Ministry of Transport or the government

Vietnam's nascent shipbuilding industry has enjoyed some success in recent years as cheap labour and manufacturing costs have helped yards to challenge more established nations for orders from Europe and other markets According to the Japan Shipbuilders' association, Vietnam's share of global new-build orders grew from just 0.1% in 2002 to 1.6% in 2008

BMI's suspicions surrounding Vinashin's financial stability began in July 2009 when we reported the

company had been forced to delay the delivery of three aframax oil tankers because of a funding shortfall

At a time when more seasoned shipbuilding powers, including Japan and South Korea, were investigating plans to downsize their shipyard capacity because of the effects of the global economic downturn, the lack of a similar response from Vietnamese authorities was worrying