LOGISTICS REPORT: Agility Emerging Markets Index 2016

posted on 4th April 2018

Supply-chain executives’ concerns include China’s economic deceleration and oil price fluctuations, but the Agility/Ti Logistics Index highlights rising potential in India, UAE, Nigeria, Egypt, and post-sanctions Iran

Quite simply, 2015 was a poor year for ‘emerging market’ trade on the whole. For 2012 to 2014, import and export volume growth averaged 4.7% and 4.2%, respectively, with relatively little variation above or below those marks. In 2015, year-on-year growth rates have clearly fallen short of these figures, even dipping into negative territory in the second and third quarters of the year.

So, given the anaemic trade numbers in 2015, is there reason to worry about the long-term future of emerging market trade? Yes and no. The latest set of IMF forecasts predicts that emerging market import and export volume growth in 2016 will be 4.3% and 4.6% respectively, and that both will rise and hover around 5% from 2017-2020 – essentially, a return to something like the moderate growth figures of 2012-2014. From 1990-2008, though, emerging markets were regularly recording trade volume growth rates in the range of 5-10%, sometimes higher. For the next five years at least, growth rates like that seem a long way off.

Supply-chain expectations

Supply-chain executives expect to see stronger emerging-market growth in 2016 compared to last year, despite an array of concerns ranging from further weakening of Chinese economic growth, fluctuations in oil prices, and the possibility that the US economy could weaken.

Indeed, the year ahead is expected to bring with it newfound uncertainty and complexity in emerging markets, but according to the Agility Emerging Markets Logistics Index 2016, supply chain executives are optimistic about emerging market performance in the year ahead. Following the turbulence of 2015, some 59% expect emerging markets to show their resilience and record stronger growth this year.

These results come from a new survey of more than 1,100 global logistics and supply-chain executives and form a central part of the Index. Jointly published by Transport Intelligence (Ti) and forwarding and logistics group Agility, the Index is now established as an industry benchmark in its 7th year and provides a snapshot of logistics industry experiences and expectations as well as a ranking of the world’s 45 most-promising emerging logistics markets.

A large majority of the industry executives polled (61%) are unclear on the direction of the world economy or indicate they expect more turbulence. Global economic prospects in 2016 remain heavily dependent on the United States, in the view of industry executives, and after oil prices and Chinese economic vitality, respondents said the most significant drivers of the global economy will be the strength of the dollar and the health of the US economy. But most (59.4%) feel the IMF was “about right” in forecasting 4.7% growth for emerging markets in 2016.

Economic growth rates are again, by far, the leading choice as the “key driver” that makes a country an important emerging market (30%). Foreign direct investment was picked as the 2nd most significant driver and growing trade volumes were 3rd. At the bottom of a 12-item list were the ability to be a near-sourcing market, lack of corruption, and strong security.

Supply-chain professionals see corruption as the biggest problem associated with doing business in emerging markets, even though they don’t consider “lack of corruption” to be a key driver that makes a country an important emerging market. This suggests that industry professionals understand that they will encounter corruption in emerging markets and have strategies to deal with it.

India’s potential

For the first time, supply chain professionals see India as the emerging markets country with “the most potential to grow” as a logistics market over the next five years. India edged out China, which was seen as the market with the most mid-term potential in past surveys. Brazil held its place at number 3.

However, China is set to remain the leading emerging market in 2016 – by a large margin. Nevertheless, with China’s economic growth slowing below the unprecedented growth rates of the last 25 years, ‘economic shocks’ replaced ‘natural disasters’ as the most significant supply-chain risk in Asia Pacific, reflecting concern about the effect of a slowing Chinese economy and the potential for a ripple effect in the region.

China’s slowdown has also had a staggering effect on logistics service providers’ plans for the world’s second-largest market; some 77% of those surveyed indicated they either already have or will adjust their plans for the Chinese market if its economic troubles do not ease. More than one fifth (21.8%) see a need to adjust their entire approach to emerging markets as a result of the turbulence in China.

The fluctuating fortunes of emerging markets are also revealed in the data-driven portion of the Index, which ranks markets based on their economic size and growth, business environment, and domestic infrastructure as well as connectivity with other regional and global markets. Overall, the Index illustrates an emerging market’s attractiveness to the whole spectrum of logistics service providers as well as to major retailers, shippers and manufacturers.

While China remains the leading emerging market by a large margin in 2016, a Middle Eastern country was again ranked in 2nd position, but 2016 sees UAE replace Saudi Arabia in the slot behind China.

Reform agenda

Indeed, among the top 10 emerging markets, the countries taking steps to diversify and enact economic and business reform – UAE (2nd), India (3rd) and Malaysia (4th) – leapfrogged the commodity-dependent economies of Saudi Arabia (5th), Brazil (6th) and Indonesia (7th), all of which slid three spots.

UAE’s rise was driven by its top rankings in both the market compatibility measure, which assesses the attractiveness of a market’s business environment, and the market connectivity measure, which gauges infrastructure and the access offered to both regional and global markets. Indeed, the UAE has by far the best business climate among the emerging markets, and the best ‘connectedness’ – which is why it ranks as the world’s 2nd most promising emerging market, even though its economy is dwarfed by that of China (25 times larger), India (five times larger), and Brazil (six times larger).

Progress under Narendra Modi helped India’s rise in the rankings, propelled by an initial round of economic reforms and a surging economy, respondents indicated. But while optimistic, logistics professionals also remain cautious about India. Nearly 42% said India needs more structural reform to sustain its current growth and more than 21% said the country needed more than economic reform if it is to unlock its potential.

Beyond the top 10

Elsewhere in the Index, Nigeria (17th) and Egypt (22nd) both climbed 10 spots, some of the biggest gains seen by any country in seven years of rankings. Nigeria’s rise was powered by updated economic performance measures that revealed the true potential of the market, while Egypt’s return to relative stability following the Arab Spring is increasing confidence in its economy and business environment.

Logistics executives are also intrigued by Iran’s emergence from international isolation and anticipate opportunity and growth with the phased lifting of most economic sanctions. In the 2016 survey, Iran moves up 12 spots (from 27th to 15th), as a potential major logistics market over the next five years. Iran also leapt from 35th to 16th among markets for potential investment over the next five years.

Air freight trade lanes
In this section, 2015 air freight volume data will be analysed for trade lanes involving emerging markets and the EU and US (based on the first three quarters of 2015 – the most-recent data available for the report).

Although there are obviously many factors at work, one important overall trend in 2015 is the influence of exchange-rate movements. The average monthly value of the euro between January-September 2015, compared to the same period in 2014, was 9.6% lower. Conversely, the dollar was 11.2% higher, making imports more expensive for the euro area but cheaper for the US; and the opposite is true for exports. Over the previous few years, such movement in currencies had not really been a factor, with the value of the dollar and euro relatively constant from 2010 until the start of 2014.

Consistent with the above exchange-rate factors, EU air (and sea) import growth rates from emerging markets in 2015 generally fell well short of US growth figures, while EU export growth rates to emerging markets exceeded US figures.

Air exports to emerging markets: Fertiliser growth spurt!

On the whole, emerging market air exports from the EU grew very strongly in 2015, whereas US origin air freight stagnated. On aggregate, the 90 trade lanes going from the EU/US to the 45 emerging markets saw tonnage growth of 10.3% (estimated) in 2015, with EU trade lane growth of 16.5% offsetting an estimated decline of 1.6% for US trade lanes.

Indeed, the nine fastest-growing air lanes in 2015 involve EU origins. The top five were: EU-Indonesia (up 72.8% – driven almost exclusively by fertiliser imports, which have increased from virtually zero in 2014, to 14,000 tonnes for January- August 2015); EU-Peru (up 61.6%); EU-Ethiopia (up 58.6%); EU-Thailand (up 52.9%); and EU-Malaysia (up 42.1%). EU fertiliser exports seem to be responsible for strong growth in a number of other trade lanes, EU-Ethiopia (with volumes of electronics also growing quickly), EU-Malaysia, and EU-Thailand – where exports recovered to 2013 levels after volumes severely contracted in 2014.

In fact, out of the top 25 fastest growing emerging market air import trade lanes in 2015, 23 have the EU as their origin, compared to just two for the US (US-Vietnam and US-Kuwait), although US-Philippines (11.1%) and US-China (10.5%) have just missed out, ranking 26th and 27th.

The busiest emerging markets air freight trade lanes originating in the EU or US tend to connect to larger markets in the Index: China, UAE, India, Saudi Arabia, Turkey, Mexico, Brazil and South Africa. In volume terms, China continues to occupy the top two spots. Out of all air freight going from the EU to the 45 emerging markets, China is the recipient of 27.7% of tonnage. For the US, the corresponding figure is 27.9%. EU-China air freight tonnage was expected to remain more than twice as large as US-China tonnage, with the gap widening further in 2015, with EU-China export growth (15.9%) exceeding US-China air export growth (10.5%).

By commodity, EU-China air freight experienced a mixed year. The traditional major commodity groups of machinery & machinery parts (149,000 tonnes in 2014), electronics (99,000 tonnes) and vehicles & vehicle parts (57,000 tonnes) – which together accounted for 51.2% of total air freight tonnage in 2014 –all struggled in 2015. For January-August 2015, volumes for each of these product groups were down by 2.3%, 5.5% and 42% respectively, year-over-year. However, these declines have been more than offset by growth in two sectors where volumes are usually relatively low: dairy products (41,000 tonnes for January-August 2015) and fertilisers (33,000 tonnes).

US-China air freight is dominated by machinery & machinery parts (55,000 tonnes in 2014), electronics (36,000 tonnes), optic, photo, medic and surgical instruments (25,000 tonnes) and plastics & plastic articles (23,000 tonnes), which together comprised almost 50% of air freight in 2014. For January-August 2015, the four groups have all seen positive year-on-year growth of 0.7%, 8.1%, 6.4% and 17% respectively. Other notable climbers include vehicles & vehicle parts (8,000 tonnes) and fruits (7,000 tonnes), with their tonnage rising by 35% and 20% respectively.

Aside from China, a number of other emerging markets in the top 10 are forecast strong import performances.

EU-UAE, EU-Turkey, and EU-Mexico air exports all increased by over 20% for both trade lanes in 2015. For EU-Turkey, the most important product groups of oil & gas products (+26%), machinery & machinery parts (+35%), electronics (+36%) and vehicle & vehicle parts (+77%) all recorded very impressive growth for January-August 2015. For EU-Mexico, machinery & machinery parts (+39.1%) and vehicles & vehicle parts (17.8%) were largely behind higher volumes.

EU-South Africa air exports rose by 16% in 2015, mainly on account of higher machinery & machinery parts imports (+17.8% for January-August), although product groups such as electronics (+12.2%), vehicles & vehicle parts (+29.8%) and pharmaceuticals (+26.4%) are also providing strong impetus.

Brazil loses ground

The obvious loser in 2015 is Brazil, where air imports from the US were predicted to contract by 14.4% in 2015. Its core commodity groups of machinery & machinery parts and electronics, which together represented about 40% of tonnage in 2014, have recorded volume declines of 21.7% and 24.7% respectively for January-August 2015, compared to the same period last year. EU-Brazil air freight was expected to decline by just 1.5% in 2015, with machinery & machinery parts trade propping up overall tonnage. Electronics (-17.3%) and vehicles & vehicle parts (-6.9%) are chief among the suffering sectors.

Air exports from emerging markets

Flowing in the other direction – from emerging markets to the EU and US – the picture was also mixed. In total, it is estimated that the EU and US air freight imports from emerging markets in 2015 were broadly flat compared to 2014, with the EU’s import tonnage expected to decline by 8.9% in 2015, offsetting a US import volume increase of 9.2%.

Out of the 90 trade lanes going from the 45 emerging markets to the EU and the US, the top 10 lanes account for around 72%. China is by far the largest among them, represents around half of emerging market air export tonnage to the US (53%) and EU (49%). For 2015, boosted by the US west-coast ports congestion issues at the start of the year, China-US air exports are expected to show double-digit growth of almost 13%. Conversely, China-EU air freight is expected to contract by 17%. The contrast in performance is so severe that China-US will displace China-EU as the largest global trade in 2015. China-EU air freight tonnage was about 10% larger than China-US tonnage in 2014. In 2015, China-EU tonnage is anticipated to be almost 20% smaller than China-US tonnage.

From January-August 2015, China-EU tonnage of electronics and machinery – by far the two most important product groups – decreased by 26.4% and 21.8% respectively. For China-US freight, electronics and machinery tonnage was up by 12.7% and 6.9% over the same period.

A particularly surprising statistic is that Kenya is the third-largest emerging market air export trade lane by tonnage, exceeding not just its continental competitors such as South Africa and Nigeria, but even the likes of India. Tonnage was predicted to increase by 4.5% in 2015, to over 200,000 tonnes. Two product groups are responsible for almost all of Kenya’s air exports – flowers (72.1% in 2014) and vegetables (24.0% in 2014). For January-August 2015, exports of flowers to the EU increased by 4%, whereas for vegetables the corresponding figure was -2.5%.

Staying with Africa, for Ethiopia-EU air freight – the tenth largest trade lane – the dependency on flowers is even greater (92.1% of exports in 2014). For January-August 2015, exports of flowers were up by 52.8% year-on-year.

The only other trade lane in the top 10 to record very strong growth is Vietnam-US (+39.2% in 2015). This trade lane is dominated by apparel (46.9% of exports in 2014), although footwear (13.4%), machinery & machinery parts (12.8%), and electronics (10.4%) are also important. For January-August 2015, exports of these product groups increased by 63.6%, 73.3%, 9.5% and 98.6%, respectively.

Moving to South America, Colombia-US and Chile-US are reporting declining volumes. Exports of flowers, which account for almost 90% of Colombian air tonnage to the US, fell by 8.5% in January-August 2015, compared to the same period in 2014. Meanwhile, Chile’s exports of fish, which comprised over 75% of its air exports to the US in 2014, declined by 2.5% in January-August 2015. In addition, vegetables exports collapsed by 31.3%. Peru-US air freight, of which about 90% is vegetables, is expected to increase by 7.9% in 2015.

Perhaps the most interesting feature of this top 10 is the absence of Brazil. Brazil-EU air freight is estimated to have contracted by 27.6% in 2015 to around 65,000 tonnes, while Brazil-US air freight is actually forecast growth of 8.5%, to 42,000 tonnes.

Finally, India’s performance in 2015 was mixed. Air freight tonnage to the EU was expected to decline by 6.6%, whereas tonnage to the US is predicted growth of 9.4%. For January-August 2015, pharmaceuticals export tonnage to the US increased by 19.4% year-on-year, to almost 20,000 tonnes, while apparel tonnage grew 12.4%, to almost 23,000 tonnes. Holding this trade lane back was machinery & machinery parts, where tonnage decreased by 8.9% over the same period. For India-EU freight, tonnage of apparel, leather goods, electronics and pharmaceuticals were all down for January-August 2015, compared to the same period in 2014.

Outside the top 10

One relatively large emerging market performing well was Turkey. Turkey-EU air freight tonnage was expected to rise by around 36% in 2015, mainly thanks to higher volumes of chemical products and machinery & machinery parts. Turkey-US air freight is forecast growth of 16%, primarily due to greater exports of apparel, machinery & machinery parts, and fish.

Turkey was one of just five emerging air export markets that appear twice in the top 25 fastest growers, the others being Bangladesh, Ecuador, Philippines and Vietnam. Bangladesh’s exports, dominated by apparel (90%), were up 52% to the US, while for the EU the corresponding figure was 4.2%. Ecuador’s export profile, also almost entirely based on a single product group (flowers), grew 7.3% year-on-year to the US, but just 2.9% to the EU. For the Philippines, air exports to the US developed particularly strongly (15.8% growth forecast for 2015) on the back of electronics and machinery & machinery parts growth. A similar story holds true for freight bound for the EU, albeit growth is predicted to be weaker at just 9.3%.

This article is an edited and adapted extract from the 84-page Agility Emerging Markets Logistics Index 2016 report, courtesy of Transport Intelligence (Ti).

You can find more information here: www.transportintelligence.com/r.php?linkID=1121