Vietnam freight transport report q4 2011

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VIETNAM FREIGHT TRANSPORT REPORT Q4 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Survey & Forecasts Series

Published by: Business Monitor International

Copy deadline: August 2011

CONTENTS

CONTENTS 3

Executive Summary 5

Headline Industry Data 5

Key Industry Trends 5

SWOT Analysis 7

Vietnam Freight Transport Industry SWOT 7

Vietnam Political SWOT 8

Vietnam Economic SWOT 9

Vietnam Business Environment SWOT 10

Industry Trends and Developments 11

Air 11

Maritime 11

Intermodal and Logistics 14

Market Overview 16

Global Oil Products Price Outlook 18

Table: Oil Product Price Assumptions, 2011 (Us$/Bbl) 19

Table: Oil Product Price Forecasts, 2011-2015 (Us$/Bbl) 21

Industry Forecast 22

Macroeconomic Outlook 22

Road Freight 22

Table: Road Freight, 2008-2015 22

Rail Freight 23

Table: Rail Freight, 2008-2015 23

Air Freight 23

Table: Air Freight, 2008-2015 23

Maritime and Inland Waterways 24

Table: Maritime Freight - Throughput, 2008-2015 ('000 tonnes) 24

Table: Inland Waterway Freight, 2008-2015 25

Trade 25

Table: Trade Overview, 2008-2015 25

Table: Key Trade Indicators, 2008-2015 26

Table: Vietnam's Main Import Partners, 2002-2009 (US$mn) 27

Table: Vietnam's Main Export Partners, 2002-2009 (US$mn) 27

Political Outlook 28

Foreign Policy 28

Domestic Politics 29

Long-Term Political Outlook 31

Macroeconomics Outlook 34

Table: Vietnam - Economic Activity, 2008-2015 36

Company Profiles 37

Vietnam Airlines Cargo 37

Vinatrans 39

Vietnam National Shipping Lines (Vinalines) 41

BMI Methodology 44

How We Generate Our Industry Forecasts 44

Transport Industry 44

Sources 45

Executive Summary

We have maintained our forecast for Vietnam's freight transport sector in 2011 and see this sector

performing well over the mid-term to 2015 Our overall view has two major components: a background of high single-digit economic growth on the one hand (albeit at a slower rate than in 2010), while on the other hand there are and some disparities in the pace of expansion of freight capacity by transport mode

The pace of expansion is detrimentally affected by the infrastructure in the country, highlighted by the fact that construction work on the Van Phong International Port has been stalled indefinitely and that BMI believes Vietnam's ports need to begin accommodating mega vessels to maximise opportunities

In terms of year-on-year (y-o-y) growth, road freight will lead the way in Vietnam in

2011 recording a growth rate of 6.88%, equating to 36.84bn tonnes per kilometre (bntkm) Rail freight carried will grow 4.72%, although officials admit that this sector is plagued by insufficient track and signalling The air freight sector will also perform well this year, recording 5.3% growth in tonnage carried, more than double the rate achieved in 2010 Inland waterways will see 4.34% growth in 2011 in terms of tonnage carried, down slightly on last year

Headline Industry Data

ƒ Rail freight carried will increase by 4.72% in 2011 to 3.89bn tonnes/km

ƒ Air freight tonnage will grow by 5.3% this year to 147,910 tonnes

ƒ The real value of total trade will rise by 11.3% this year, with exports gaining 11.0%, behind import growth of 11.6%

ƒ Total volume handled at the Port of Ho Chi Minh City will rise 7.45% to 33.45mn tonnes in

2011, while volumes at the Port of Da Nang will rise 2.76% to 3.39mn tonnes

Key Industry Trends

Air France-KLM Cargo's Asia Expansion Strategy Flying High - In June 2011, Air France-KLM Cargo

established a new connection between Vietnam and France, underlining the fact that airfreight links between Vietnam and Europe are increasing - a phenomenon we also note in the shipping sector

Van Phong Port Suspension Highlights Weakness In Business Environment - Work at the US$3.6bn Van

Phong International Port in the southern central province of Khanh Hoa has been suspended with no indication of a resumption date due to, we believe, the escalating cost of capital in Vietnam, the lack of proper planning for projects which lead to slow execution, and the lack of regulatory maturity in the country's business environment

Vietnam Needs To Dig Deeper To Accommodate Mega Vessels - The projected increase in trade will

require Vietnam's ports to undertake considerable investment going forward BMI believes that despite recent large-scale foreign investment in the sector, further spending on port modernisation is needed if Vietnam is to take full advantage of increasing trade and a particularly pressing issue, in the age of

increasingly large container vessels, is port depth

Key Risks to Outlook

On the downside, although Vietnam's real GDP growth figure came in slightly better than expected at 5.7% y-o-y in Q211, we expect economic activity to continue to moderate in H211, and we see this as a positive sign that government efforts to iron out macroeconomic imbalances in the economy remain on track Despite incipient evidence of a narrowing trade deficit, we warn that global economic headwinds remain a downside risk to external demand Accordingly, we are projecting real GDP growth to remain subdued at 6.3% for 2011 (below the government's target of 6.5%), but we remain optimistic that we could see a pickup in growth towards 7.2% in 2012

SWOT Analysis

Vietnam Freight Transport Industry SWOT

Strengths ƒ Vietnam's strong domestic growth rate coupled with its geography: a long country

stretching for thousands of kilometres on a north-south axis creates a need for distance freight haulage.

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

2015.

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 road network is considered to be in good condition, only 26% has two or more lanes and only 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 under-utilised

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

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 can't 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 effect 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 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 within the one-party 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 widescale 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 20% in 2004

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 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 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 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 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 place 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 knowhow

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

Air

Air France-KLM Cargo's Asia Expansion Strategy Flying High

Air France-KLM Cargo continued its Asia expansion drive by launching a new connection between

Vietnam and France in June 2011 Airfreight links between Vietnam and Europe are increasing - a

phenomenon we also note in the shipping sector - with ports of call in Vietnam becoming a regular occurrence on Asia-Europe routes

Air France-KLM Cargo will operate a twice-weekly freighter flight between Paris and Hanoi from June

12 2011 Boeing 777 Freighters will operate on the route The new route marks a continuation of Air France-KLM Cargo's Asia-focused strategy Earlier this year the company launched a thrice-weekly service to Phnom Penh in Cambodia via Bangkok and a thrice-weekly service connecting Amsterdam with China's Xiamen The Hanoi connection marks Air France-KLM Cargo's second Vietnam freighter route, with the air carrier already offering thrice-weekly flights from Paris to Ho Chi Minh City

The company's interest in linking France and Vietnam is understandable Trade levels between the states have increased by 151.8% in 1999-2009 French exports to Vietnam even weathered the global decline in

2009, increasing by 4.2% year-on-year (y-o-y)

BMI notes a trend of airfreight operators launching links between Vietnam and Europe, which in our

view is connected to Vietnam's development into the factory of Asia In March 2011 Jade Cargo launched

an airfreight link between Vietnam and Amsterdam Lufthansa Cargo has been operating a Frankfurt Hanoi freighter flight for two years and Vietnam Airlines is looking into linking Hanoi with Paris,

Moscow and Frankfurt from late June 2011

The increase in routes to Vietnam is great news for the country's airfreight volumes, and indicates that

BMI's predications are on course to be realised We project that Vietnam's airfreight levels will increase

by 5.25% y-o-y in 2011 to 147,910mn tonnes Over the mid term (2011-2015), we project air cargo levels

to increase by 33.5% to 187,560 tonnes

The trend of increasing connection between Vietnam and Europe is not confined to the airfreight sector

BMI has been highlighting the growing inclusion of Vietnamese ports on Asia-Europe container services,

as the country takes on a greater role in global trade

Maritime

Van Phong Port Suspension Highlights Weakness In Business Environment

Construction work on the US$3.6bn Van Phong International Port in Vietnam's southern central province

of Khanh Hoa has been suspended with no indication of a resumption date BMI believes this delay is due

to the escalating cost of capital in Vietnam, the lack of proper planning for projects which lead to slow execution, and the lack of regulatory maturity in the country's business environment

The Van Phong port project, which is primarily constructed by state-owned Vietnam National Shipping Lines (Vinalines), was suspended because of a reassessment of the geological conditions at the project

site Initial explorative drilling did not sufficiently study the site's geology, resulting in inconsistencies in pile design during the construction phase According to Tran Huu Chieu, deputy general director of Vinalines, there are only 114 steel columns driven in the project site - 6% of the total number of columns needed - and many of them are higher than the required five to eight metres

At present, Vinalines has asked the project designer - a joint venture (JV) between Japan-based Nippon Koei and Vietnam-based Portcoast - to conduct the reassessment and resolve the issue However, Chieu

added that the Portcoast is delaying the revision for the project because Vinalines refused to pay an advance to Portcoast

In addition to the geological reassessment, Vinalines has been ordered by the Ministry of Transport to report on the project delay and identify the responsible parties The port will only resume construction once the government has made a decision, which is likely to be based on the report and the outcome of the geological study

BMI believes that there are three reasons for the project's current predicament Firstly, based on media

reports, it appears that Vinalines is suggesting that the delay in revising the project is due to the designer -

ie, Portcoast However, according to Portcoast, the company believes that the height of the steel columns

is not a major problem, as the excess length can be sawed off

Whether or not there is a delay in payment or a demand for an advance, we believe that Vinalines'

unwillingness to provide capital could be because of the escalating cost of financing infrastructure

projects in Vietnam According to Reuters, lending rates for businesses in Vietnam are as high as 22-27%, the highest since 2008 This has made it exceedingly costly for large-scale projects to raise capital, which has led to potential delays in project implementation

Secondly, we believe that this exposure to the current high cost of financing is a result of a lack of proper planning for the Van Phong project Since the start of construction in October 2009, the design for the port project has seen constant changes The port was originally designed to handle container ships of 6,000 twenty-foot equivalent units (TEU), but this changed to 8,000TEU The current plan for the project

is now 9,000TEU, but Vinalines has received government approval to change the port design to handle 12,000TEU and 15,000TEU container ships This lack of proper planning appears to be a systematic problem in Vietnam's business environment According to a Khanh Hoa People's Committee report, the Van Phong Economic Zone, which the port is expected to service, has attracted 101 projects, but only 16

of these projects have come into full operation

Lastly, we believe that there is a lack of regulatory maturity in Vietnam's business environment This error at the feasibility study stage highlights a lack of checks and balances to even ensure that large-scale projects - the Van Phong port is estimated to cost US$3.6bn - are scrutinised carefully before

implementation It further reinforces our view that Vietnam is one of the more risky markets in the Asia Pacific region for infrastructure investment, due to its weak legal framework

Regardless of the outcome, we believe that this delay is a negative signal to investors and highlights the greater risks involved when investing in Vietnam's infrastructure as compared with other countries in the Asia Pacific region

BMI's business environment ratings show that risks in Vietnam's infrastructure sector are higher than the

regional average, where a lower score indicates greater risks Furthermore, given the scale of the Van Phong project, this could have a negative impact on Vietnam's economy given the importance of

sustained investment into Vietnam's port infrastructure towards economic growth (see 'Japanese

Investment In Lach Hyuen Port Highlights Sector's Importance', April 6 2011)

Vietnam Needs to Dig Deeper to Accommodate Mega Vessels

BMI maintains the view that Vietnam's ports need considerable investment if they are to handle a

projected increase in trade Despite recent large-scale foreign investment in the sector, further spending

on port modernisation is needed if Vietnam is to take full advantage of increasing trade A particularly pressing issue, in the age of increasingly large container vessels, is port depth 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 14m is required for non-tide restricted access for vessels with capacity of up to 8,000TEUs

Many of Vietnam's ports have depths of just 12m To remedy this Vietnam is to develop more 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 Cai Mep and Ben Dinh port complexes in the southern province of Ba Ria-Vung Tau in the next five years In mid-March 2011 the country's first deep-water container port, Tan Cang Cai Mep, in Ba Ria-Vung Tau, was commissioned, allowing direct shipments of goods to US and Europe and cutting journey times by between seven and 10 days

Malcolm Gregory, Cai Mep International Terminal (CMIT)'s chief commercial officer, concurs with our view that vessel sizes have been increasing at a rate that has outpaced even recent port developments He told delegates at the Fourth Annual Vietnam Ports and Logistics Conference that 'sufficient access

channel depth will be one of the primary determining factors of which facilities cater to which segments

of Vietnam's container trade' He said: 'long-haul transpacific and Europe trades will continue to

migrate to the new deepwater terminals as newer, larger vessels come into service, so there is a very real need for capacity and capability expansion.'

BMI notes that Cai Mep's volumes have been increasing rapidly The port, which was barely dented by

the global downturn, currently has 14 direct calls, up from zero two years ago, with further growth expected as European direct services migrate from transshipment services via Singapore and Malaysia to direct services from Cai Mep

Vietnam's growing importance in the global container shipping sector is shown by the growth in box throughput at the country's ports over the last decade In 2009 (latest available data), total container throughput at the country's ports reached 5.4mn TEUs, up 487% from 919,264TEUs in 1999 Year-on-year (y-o-y) container throughput growth averaged 20% over this period, with the port sector still posting y-o-y volume increases in 2009, despite the global downturn in trade This rapid growth has highlighted the failings in the country's infrastructure

BMI welcomes the government's push for deeper ports as the country's exports continue to increase With

a rating of 3.56 in the World Economic Forum's 2010 Global Competitiveness Report, Vietnam's

infrastructure trails well behind regional leaders Singapore and Hong Kong It comes just ahead of the

Philippines, with a rating of 2.92 BMI expects box throughput to continue its rapid growth, buoyed by a

favourable economic climate In 2009 Vietnam's real GDP continued to grow, despite the downturn, and

in 2010 GDP increased by 6.8% y-o-y BMI predicts continued growth in Vietnam's imports and exports,

averaging 16.2% and 16.5% over our forecast period to 2015

DHL Global Forwarding Rolls Out New LCL Service

In July 2011 DHL Global Forwarding, a division of German logistics company DHL, rolled out its new

direct less-than-container-load (LCL) service between Ho Chi Minh City in Vietnam and Hong Kong The weekly service will be operated by DHL's in-house carrier Danmar Lines, and will cut down on transit time and allow Vietnamese companies to access 12 major trading ports in North America and 11 in North Asia Vietnam is projected to become the fastest growing emerging economy by 2025, with a potential annual growth rate of almost 10%

Intermodal and Logistics

New Warehouse Opens In Binh Duong

In June 2011, Damco strengthened its Vietnamese network with the opening of a new 26,000km2

distribution centre in Binh Duong, some 30km from the capital Ho Chi Minh City Designed to make the most of growing national and international volumes, the facility is strategically located to make the most

of road transport links and it also serves the Cat Lai and Cai Mep ports

Speaking on the development, Narin Phol, country manager for Damco in Vietnam and Cambodia, said: 'With this new facility, our customers will have greater flexibility in managing fluctuations in demand for warehousing The distribution centre will operate as an integrated logistics centre offering multipurpose warehousing, a humidity-controlled environment, access to inland container depots and barge

connectivity

'It is also our vision to develop this facility into an international consolidation hub, linking the Indochina region through our cross-border solutions.'

Market Overview

In January 2007 Vietnam officially joined the 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-backed 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 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 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

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 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 of 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 to and from ports, due to traffic congestion Except for several new or upgraded ports, most have been operating for many years and 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

Vietnam's port infrastructure is poor by international standards The World Economic Forum's 2010 Global Competitiveness Report gives it a score of 3.56, putting it just ahead of the regional

underperformer, the Philippines, which scores 2.92, and well behind regional leaders Singapore and Hong Kong Increasing international interest in Vietnam's port sector on the back of growing intra-Asia trade should help to close the gaps in infrastructure investment

Global Oil Products Price Outlook

After The Party

The oil market has seen few more turbulent periods than the first half of 2011 With the oil price buffeted into the air by the outbreak of military conflict in Libya, and the bulls on the rampage over fears of contagion to the rest of the Middle East, H111 saw oil product prices hitting two-year highs Like any party, however, nagging feelings that such excess was unhealthy kept on recurring, with the signs of demand destruction becoming clear by the end of Q1 As the year wore on, the euphoric optimism about prices began to wear off as demand remained weak, prompting a sudden slip in product prices in early May

Lightening Doesn't Strike Twice

Singapore Oil Product Prices, August 2004-August 2011 (US$/bbl)

Source: Bloomberg

These first signs of a hangover emerging were crystallised by the International Energy Agency (IEA)'s May 2011 Oil Market Report, in which the Paris-based club slashed its oil consumption forecasts due to weak economic data and the persistent high prices At the time, end-user prices in IEA member states had risen for the fifth successive month Year-on-year (y-o-y), gasoline prices were up 35% while diesel had risen by 40% Heating oil and low-sulphur fuel oil had climbed by 40% and 41% respectively Month-on-month prices also soared, with Germany witnessing the biggest increase in gasoline prices of 12% and the UK's diesel prices growing by 6.2%

US gasoline prices also rose steadily throughout the early part of 2011, from US$109.83 per barrel (bbl)

in January to US$140/bbl in April Prices were supported by lower inventories and refining outages which reduced supply, while gasoline imports from Europe fell as European refiners cut volumes on

sustained high Brent crude prices Prices were also supported by a build-up in demand towards the start of the peak summer driving season, starting at the end of May Despite a slight retreat from the peak of around US$170/bbl, these prices have proved too high for many motorists, with clear signs of demand destruction emerging during driving season

Table: Oil Product Price Assumptions, 2011 (Us$/Bbl)

Gasoline

Rotterdam Premium Unleaded 110.58 130.33 123.11 103.83

NY Harbour Unleaded 115.13 129.96 119.35 115.37Singapore Premium Unleaded 113.06 127.40 119.88 108.01Global average 112.92 129.23 120.78 109.07

Jet/kerosene

Rotterdam 122.09 134.76 127.57 108.97

NY Harbour 123.89 135.91 122.28 107.61Singapore 120.66 133.23 123.80 110.97Global average 122.21 134.63 124.55 109.19

Gasoil/diesel

Rotterdam 117.13 129.87 122.04 102.46Singapore 118.69 133.23 128.51 107.46Global average 117.91 131.55 125.27 104.96

Naphtha

Rotterdam 100.15 112.76 113.70 98.50Singapore 104.67 111.86 106.28 95.38Global average 102.41 112.31 109.99 96.94

e/f = estimate/forecast Source: BMI

Motorists were not the only oil product consumers unhappy with the higher prices of H111 Year-on-year air freight traffic growth slowed throughout the first half of 2011, turning negative in May on weak demand in Asia, Africa, and most OECD countries The International Air Transport Association (IATA) estimates that fuel had already increased from 13% of airline operating costs in 2001 to 30% by 2010 With European jet/kerosene prices in Rotterdam averaging US$140/bbl in April, further pain was piled on the airline industry, although the sharp drop off in May prices brought some relief

At present, the EIA is forecasting an increase in regular-grade gasoline retail prices from US$2.78 per gallon in 2010 to US$3.60 in 2011 (+29%), with a further increase to US$3.67 in 2012 On-highway

US$3.95 in 2012 As well as the impact of sustained high crude oil prices on these price projections, the EIA also expects refining margins to widen in 2011, from US$0.34/gallon on gasoline in 2010 to

US$0.47/gallon in 2011, with diesel margins rising from US$0.38/gallon to US$0.44/gallon

Revised Forecasts

During Q211, BMI estimates that the global wholesale price for premium unleaded gasoline was

US$129.23/bbl This compares with US$112.92 in the previous quarter of 2011

Gasoline prices in Q211 were up 16.4% from US$87.95/bbl in the equivalent period of 2010 For Q311,

we are currently assuming a global unleaded price of US$120.78/bbl, representing a 6.5% drop from the

estimated Q2 level and a y-o-y rise of 42.2% For the whole of 2011, the BMI calculation for gasoline is

an average US$116.19/bbl The overall y-o-y rise in 2011 gasoline prices is put at 31.5%

Still Uncomfortable Levels

Product Price Forecasts, Q111-Q411 (US$/bbl)

e/f = estimate/forecast Historical data source: IEA; forecasts: BMI

Gasoil in Q211 averaged an estimated US$131.55/bbl, based on a BMI-calculated composite global

price This represents a y-o-y rise of 46.6% over Q210 For 2011 as a whole we are currently assuming a global gasoil price of US$121.34/bbl, based on weaker prices in H211 counteracting the bullish trend earlier in the year The full-year outturn nevertheless represents a 35.8% increase on 2010 levels

Jet prices also saw significant increases in Q211 on the back of higher oil prices, rising from an average

of US$122.21/bbl in Q111 to US$134.63 Prices in Q211 were significantly higher than a year earlier,

increasing by 48.2% BMI is currently forecasting a 2011 average global price of US$119.62

BMI currently expects naphtha to average US$105.41/bbl over the course of 2011, due to a dip back

below US$100/bbl in Q4 After a rapid run up in prices from US$102.41/bbl in Q1 to an estimated US$112.31/bbl in Q2, we see a gradual fall-back to US$109.99 in Q3

Looking further ahead, we see gasoline prices falling to US$109.99/bbl in 2012, before dropping to a more stable level of US$105.48/bbl in 2012 Gasoil prices will recover somewhat from Q411 levels of US$104.96/bbl to average US$112.16/bbl in 2012, with longer-term prices likely to average

US$106.32/bbl Jet/Kerosene should witness a gentler landing, dropping from US$107.79/bbl in 2012 to US$106.99/bbl in 2013, while naphtha should fall from US$105.90/bbl in 2012 to US$100.39/bbl in

Jet/kerosene

Rotterdam 114.27 100.47 105.99 105.99 105.99

NY Harbour 122.42 109.88 107.81 107.81 107.81Singapore 122.17 113.03 107.16 107.16 107.16Global average 119.62 107.79 106.99 106.99 106.99

Gasoil/diesel

Rotterdam 117.88 112.02 106.18 106.18 106.18Singapore 124.80 112.30 106.47 106.47 106.47Global average 121.34 112.16 106.32 106.32 106.32

Naphtha

Rotterdam 106.28 112.44 106.57 106.57 106.57Singapore 104.55 99.36 94.21 94.21 94.21Global average 105.41 105.90 100.39 100.39 100.39

e/f = estimate/forecast Historical data source: IEA; forecasts: BMI

Industry Forecast

Macroeconomic Outlook

Slightly Slower Growth In 2011

The real GDP growth figure for Vietnam came in slightly better than expected at 5.7% year-on-year y) in Q211 However, we expect economic activity to continue to moderate in H211, and we see this as a positive sign that government efforts to iron out macroeconomic imbalances in the economy remain on track Despite incipient evidence of a narrowing trade deficit, we warn that global economic headwinds remain a downside risk to external demand Accordingly, we are projecting real GDP growth to remain subdued at 6.3% for 2011 (below the government's target of 6.5%), but we remain optimistic that we could see a pickup in growth towards 7.2% in 2012

(y-o-As far as political risk is concerned, territorial disputes in the South China Sea between Vietnam and China sparked anti-China demonstrations in Vietnam in June 2011, and we see increasing risks that Hanoi may be pressured to take a tougher stance against Beijing in an attempt to ease public unrest Meanwhile, the lack of a credible third party to facilitate a compromise between both parties in order to agree on a resolution means that bilateral relations should remain heated in the medium term

Road Freight

High Single Digit Growth In the Mid Term

BMI is maintaining its forecasts for road haulage over the medium term, to 2015 The year 2011 will see

slower growth than 12 months previous, at 6.88%, equating to 36.84bn tonnes per kilometre (bntkm) In terms of tonnage, 2011 will see growth of 6.47%, to 599.86mn tonnes, rising to 789.14mn tonnes at the end of our forecast period, in 2015 Road freight growth will continue expanding vigorously, averaging 7.37% a year in the five years to 2015 This rate will exceed the average for GDP growth, a pattern consistent with this stage of Vietnam's industrialisation process

Table: Road Freight, 2008-2015

- % change y-o-y 13.02 8.50 13.90 6.47 6.97 7.30 7.27 6.85Road freight, mn

tonnes/km

27,968.00

30,261.40

34,467.73

36,840.47

39,562.62

42,611.29

45,867.56

49,182.10

- % change y-o-y 13.47 8.20 13.90 6.88 7.39 7.71 7.64 7.23

f = BMI forecast Source: General Statistics Office of Vietnam