1. Freight Productivity Impacts of Natural and Man-Made Disasters Paul Bingham Managing Director, Global Commerce and Transportation IHS Global Insight Talking Freight Seminar July 21, 2010 FHWA Talking Freight Seminar

2. Copyright © 2010 IHS Global Insight. All Rights Reserved. 2 Freight Productivity Matters in the Economy U.S. economic growth is predicated on continued freight productivity While, the importance of freight to the economy increases, the relative importance of components of U.S. freight transportation vary Example: the relative importance of NAFTA surface freight to the U.S. economy has diminished in comparison with the importance of Asian seaborne containerized freight Transportation of lighter weight, higher value products carried in trucks and containers continues to outpace growth in bulk commodities, increasing the relative importance of higher service freight in the U.S. Efforts to benefit from economies of scale through use of larger ships and trains reduces the number of potential alternative terminals/routes quickly available in case of interruptions from disasters Consequently disruptions from disasters can potentially be more significant to the U.S. economy over time

3. Copyright © 2010 IHS Global Insight. All Rights Reserved. 3 Transportation and Logistics Costs are a Significant Portion of U.S. GDP, Even in Decline Source: Council of Supply Chain Management Professionals, 2010 (Percent of Gross Domestic Product)

4. Copyright © 2010 IHS Global Insight. All Rights Reserved. 4 (Percent of 2009 Total U.S. Logistics Costs) Transportation Is Most of Total U.S. Logistics Costs Source: Council of Supply Chain Management Professionals, 2010

5. Copyright © 2010 IHS Global Insight. All Rights Reserved. 5 Disaster Factors Affecting Freight Productivity Anticipation Disasters that can be anticipated, even by hours / days (e.g. a storm) may have lost productivity costs reduced by advanced action Duration Interruption impacts are a non-linear function of time. Initial costs of most few-hour disruptions are very low followed by substantially escalating impacts from days to a week to several months after which the overall system will adjust and further impacts will increase at diminishing rates Seasonality Interruption in Peak Season (e.g. October) has greater impact than one of same length and scope in Slow Season (e.g. February) Economic Geographic Scope Interruption impacts increase with share of system capacity affected These factors are obviously interrelated Fundamental to size of freight productivity impacts are:

6. Copyright © 2010 IHS Global Insight. All Rights Reserved. 6 Disaster Interruptions have both ‘Direct’ and ‘Indirect’ Impacts on the U.S. Economy Direct - the lost economic activity of the freight system due to a disruption measured as the lost employment of freight personnel and the depreciated value of any damaged / destroyed goods and freight assets Indirect impacts include: Lost revenue and employment of associated industries such as transport service suppliers and other parts of the transportation network – associated air, ocean carriers, rail freight, and trucking Any lost output and employment from disrupted U.S. trade The indirect impact on output and employment in other industries caused by the first-round indirect impacts on transport users Economy-wide impacts on prices, consumer spending, and real Gross Domestic Product (GDP)

7. Copyright © 2010 IHS Global Insight. All Rights Reserved. 7 Consequences Anticipated from Extended Interruption to Existing Freight Network From diversion and/or lower productivity, the velocity of supply chains will be slower, raising total delivered costs. Cost increases pressure retailers and other shippers to re-align sourcing for cost minimization, including shifting between country- of-origin for supply, and/or product substitution Revisions to supply chains will in general be gradual as many of the investments and resources already committed are not easy to change overnight; change happens progressively over time. Increased costs will be mostly passed through to customers, reducing spending on other goods and ultimately reducing economic performance through changes in consumption.

8. Copyright © 2010 IHS Global Insight. All Rights Reserved. 8 Estimating Freight Productivity Impacts of Disasters on the Economy Estimating productivity impacts of disasters requires Considering the extent to which the impacted activity represents a permanent economic loss to the economy (e.g. from less efficient / less reliable / more costly operations) Quantifying the extent to which losses can be recovered by: (1) the advancement / delay of shipment dates in anticipation of a disaster interruption, (2) alternative routing to lessen the effects on shippers, and (3) accelerated production following the end of the interruption Advance planning can help facilitate these loss-minimizing steps

9. Copyright © 2010 IHS Global Insight. All Rights Reserved. 9 Example Estimate of Economic Impact of Three Interruption Scenarios for U.S. West Coast Ports Interruption Duration5-Day10-Day20-Day FTE Jobs Lost - 155,000- 162,000- 364,000 Personal Income- $0.6 Billion- $1.2 Billion-$7.3 Billion U.S. Real GDP < - $1 Billion- $2.1 Billion- $15.6 Billion (3 sample duration interruptions in Q1 of U.S. West Coast container ports) Source: IHS Global Insight; Note: FTE is Full Time Equivalent job

10. Copyright © 2010 IHS Global Insight. All Rights Reserved. 10 Infrastructure and Logistics Can Amplify or Reduce Consequences of Disasters for Freight Freight System Nodes (e.g. terminals, ports) and Links (e.g. highways) Reserve capacity limitations, either operational and physical Freight Transportation Infrastructure Geographic concentration of freight corridors and terminals Lack of slack capacity (safety stock of throughput service capacity) Trucking networks can be more dynamic than fixed rail networks; both face capacity limitations, especially in the short run Degree of uniqueness of trucking and rail operating practices is correlated with the costs for substitutes Air and maritime often have no close substitutes economically available, especially in the short run Lean logistics practices Using freight equipment and terminal storage as warehousing

11. Copyright © 2010 IHS Global Insight. All Rights Reserved. 11 Summary Disaster Impacts on Freight Productivity Freight gateways and corridors serving supply chains are critically important to performance of the U.S. economy The nature of a disaster interruption is critical to estimating its cost Disaster interruptions for freight have the potential for significant permanent impacts on the economy within just a few weeks duration, though short-duration interruption costs may be small Underlying capacity and existing productivity challenges may amplify impacts of any interruption or help mitigate them Planning can help reduce economic cost of disaster interruptions

12. Thank you! Paul Bingham Managing Director, Global Commerce and Transportation paul.bingham@ihsglobalinsight.com 626.538.4283