Will Soaring Transportation Costs Reverse Globalization?

Jeff Rubin Chief Economist & Chief Strategist CIBC World Markets Inc
Teleconference August 21, 2008
1

Transport Costs Highly Sensitive to Oil Prices

Distribution of Operating C ost* 100% 80%
210 250 Transport C osts vs. Oil Prices Index 2002=100 $ 210 170 130 170 90 130 90 50 10
WTI @$150 WTI @$200
94 98 02 06

60% 40% 20% 0%

01 05 0 $1 5 nt $2 0 0 ur re

Fuel

Other

TI

TI

90

Transport prices (L) Oil prices (R)

* Avg of all transport modes

Source: RMT, CIBCWM

Total Costs of Transporting a 40 Container From Shanghai to US East Coast

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
00 05 C urrent WTI @$150 WTI @$200
3

Inland Transport Shipping

World Exports as a Share of Global GDP: Highly Sensitive to Oil Prices

Rate of Change
Avg WTI* =$15.6

1960-73

1974-86

=$50.9

1987-02 % -20 0 20 40 60 80

=$27.5

* today's prices
4

Trade Diversion During the OPEC Oil Shocks

0.45 0.40 0.35 0.30 0.25 66 68 70 72 74 76 78 80 82 84 86 88
From Europe and Asia (L) From Latin America & C aribbean (R)
5

Share of non-energy US imports

Share of US imports

0.20

0.15

0.10

0.05

US Steel Producers Now Have a Cost Advantage Over China

Avg cost of producing and shipping one ton of hot-rolled steel sheet 800 700 600 500 400 300 200 China
Raw material, energy & labor
Source: IRST, AISI, JP Morgan, CIBCWM

US
Transport to US
6

Chinas Steel Exports to US Fall While US Steel Production Rises

C hina's Steel Exports to the US 70 60 50 40 30 20 10 0 -10 -20 -30 -40 y/y % chg

US Steel Production 10 8 6 4 2 0 -2 -4 -6 y/y % chg

Ju l A - 07 ug S -07 ep O 07 ct N - 07 ov D -07 ec Ja 07 nFe 08 bM 08 ar -0 8

Source: US Census Bureau, CIBCWM

Ju l A -07 ug S -07 ep O 07 ct N -0 ov 7 D -07 ec Ja 07 n Fe -08 b M -08 ar -0 8

7

Elevated Freight Rates Are Already Impacting Chinas Trade with US

Freight-Intenstive Exports to US 40 35 30 25 20 15 10 5 0 -5
Transport costs fixed at 2004 level

y/y % chg

Growth in Non-Energy Exports ($Bn) 2004-2007 219 Estimated ex ports "loss" due to higher transport 169

Source: US Census Bureau, CIBCWM

ec -0 Fe 6 b0 Ap 7 r0 Ju 7 n0 Au 7 g07 O ct D 07 ec -0 7

ct -

Actual

06

Relative Shipping Costs to the US East Coast : Mexico versus China

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
00 05 @ $1 W 50 TI @ $2 00 nt ur re

C ost of shipping a 40' container to US East C oast ($)

Savings by Switching from C hina to Mexico 12,000 10,000 8,000 6,000 4,000 2,000 0
04 00 $1 50 TI @ $2 00 ur re nt

16 14 12 10 8 6 4 2 0

TI @

From Mexico

From C hina

Per 40' C ontainer (L) Tariff equivalent (R)

9

TI

Mexicos Non-Energy Exports to the US

180 160 140 120 100 80 60 00 01 02 03 04 05 06 07 Freight-intensive goods that compete directly with C hina Others
Source: US Census Bureau, CIBCWM
10

Index 2000=100