European Industrial & Logistics: A long-term view

In this paper, the first of a series of white papers on Europe’s industrial
and logistics markets, we take a look at the broad macroeconomic trends that we
expect to impact the market over the next decade, and beyond. With the key
emerging markets, China and India, set to take a larger stake in the global
economy as we move forward, it is expected that their trade with Europe will
increase. We take a look at where this increased trade is likely to enter and
exit the continent in the future. We also look at the economic growth story in
Eastern Europe, from both a production and consumption perspective, reviewing
the likely demands that increased economic activity will place on its existing
infrastructure, and the key role that infrastructure development has to play in
enabling forecast growth to be achieved. Turkey occupies a strategic position
between Europe and Asia, and potentially has a key role to play in facilitating
trade between the two. We take a view on the form that this is likely to take.
Meanwhile, from an internal infrastructure perspective, developing
infrastructure in Eastern Europe will play a key role in linking it more
closely with Western European and global economies, and enabling very positive
expectations of economic growth to be achieved. We assess the current and
future state of Poland’s motorway network alongside other key transport
corridors. Finally, we name a few key markets which we believe have the
potential to emerge as new logistics hubs, whilst also identifying existing
hubs with the potential for further notable growth.

GROWING TRADE WITH ASIA WILL DRIVE NEW SUPPLY CHAINS AND INFRASTRUCTURE

At present, the dominant trade route into and out of Europe is via ports in
the Le Havre – Hamburg range. These ports feed the dominant European core,
whilst activity in the more peripheral Mediterranean ports is small in
comparison. However, a continual shift in world trading patterns is likely to
exert a significant impact on Europe’s logistics infrastructure going forward.
As China and India’s share of world output is set to increase markedly over the
next decade, this implies increased trade between themselves and Europe,
relative to the more traditional trading route between the US and Europe Given
pressure to lower both business and environmental costs in supply chains, we
expect an increased push for additional trade with Asia to begin to flow
increasingly through Europe’s southern entry points. This will be both via the
Suez Canal sea route and the rail link via Istanbul. This, coupled with
increasing economic and manufacturing growth in Eastern Europe and the region’s
further integration into global supply chains, will continue to spur the
necessary infrastructure investment. These are, however, all concurrent
factors. A let up in planned infrastructure improvements and port capacity in
Eastern Europe, will, of course, act as a constraint on trade and economic
growth.

IN EUROPE NEW CENTRES OF CONSUMPTION AND PRODUCTION ARE EMERGING

Looking first at Figure 3, we can see the absolute increases in consumer
spending expected across Europe from 2011 to 2020. What immediately stands out
is Poland’s presence in the big league, with overall consumer spending in the
economy trumping that of much of established Europe, with the exception of
France and the UK. What is also noteworthy is the strong showing of both the
Czech Republic and Romania. Both are expected to report increases above that of
much larger Western European economies. This growth in consumer spending will
drive an increased need to direct goods to these locations. What is also key,
is the fact that the increased size of these markets will make direct supply
chains more scalable and cost efficient, and help to drive their national
logistics markets. Low wage rates, strong transport links with Germany and
central Europe, and independent, floating currencies will prove key in driving
manufacturing growth in Eastern Europe in the short to medium-term. In the
longer-term better linkages to global supply chains will help to sustain growth
– providing the improvements in infrastructure continue. Overall, the largest
growth in manufacturing activity in Europe will be in Germany and Poland, whose
economies will remain entwined. Manufacturing growth in the Czech Republic and
Romania will be ahead of forecast increases in Austria, France, Spain and
Sweden, further signifying the shift of manufacturing east.

TURKEY HAS A KEY ROLE IN GROWING SEA AND RAIL FREIGHT BETWEEN EUROPE AND ASIA

Sitting as it does on the “silk road” between Europe and Asia, Turkey is set
to play a key role in facilitating trade between the two continents and helping
that trade to be cost effective and environmentally friendly. In the first
instance the development of large “hub” ports, with deep-water facilities, at
Candarli (Izmir) and Mersin, will enable the largest container ships (10,000+
TEU) to dock and their goods transhipped via smaller vessels to key entry
points such as the North Adriatic ports of Koper and Trieste, for example, or
even the Black Sea ports. The development of larger ports in the North Adriatic
and on the Black Sea, and the improvement of their links with the rest of
Europe, will be key in making the argument against ships sailing past Gibraltar
towards the main northern ports. Additionally, Turkey’s rail links to the
Middle East, Iran and Pakistan will allow goods to pass into Europe through
both the Istanbul rail connection and the Black Sea ports. The links between
Istanbul and Europe have been developed as part of CREAM, an EU funded project
established to improve the overall operating conditions for rail freight
services along a corridor running from the North Sea ports to Turkey and
Greece. It came to an end in 2010 having achieved its objectives. The rail
routes also intersect key European rail and road corridors in Budapest,
Ljubljana, Salzburg and Vienna, allowing access to markets in Central and
Eastern Europe. Significant investment is continuing in Turkey’s internal rail
network, with the 2023 development plan including an additional 14,336 km of
extra track, of which 10,000 km allows for high speed rail. This will support
the growth of overland links between Europe and the Middle East.

WITH EASTERN EUROPE FORECAST TO SEE STRONG ECONOMIC GROWTH, THE PRESSURE IS ON
FOR THE INFRASTRUCTURE TO HELP MAKE THIS HAPPEN

The large increases in the scale of consumption and production in Eastern
Europe that we expect to see in the next decade and beyond, will begin to exert
increasing pressure on supply chains. Logistics activity around the major
ports, such as Hamburg, will gradually become less optimal compared to options
such as shipping straight to Tricity or using transhipment hubs in the Eastern
Mediterranean to feed the ports in the North Adriatic. Capacity expansion plans
of these ‘emerging’ ports alongside a concurrent improvement in road and rail
links will further advance their deployment as growing logistics centres,
provided that planned investments are seen through. The proposed future
expansion of the North Adriatic (NAPA) ports will increase container capacity
to some six million TEU by 2020, helping to drive goods through this location
into Europe. Improving rail links will help to drive freight between the NAPA
ports and Europe. However, there are constraints to rail capacity, so the
continual development of future rail corridors will be key. Equally, developing
road links from this location, especially those linking the area to Poland,
will be vital. A number of key links in the Polish road network are still to be
completed to motorway standard – namely the A1 and A4 motorways improving links
with Germany. Improved transport links running from the north Adriatic to Upper
Silesia, central Poland and Tricity will also prove key in bringing the Baltic
States into play. Investment in port capacity and deep-water facilities,
alongside road improvements will provide Tricity with the opportunity to emerge
as a major container hub in keeping with Poland’s growing economic status. Lodz
has the opportunity to emerge as a key distribution hub of Poland given its
central position, while growth will also focus on Wroclaw and Upper Silesia to
support large population concentrations.

CONCLUDING COMMENTS

In this paper we have briefly touched upon some of the key macroeconomic
factors that will drive change in Europe’s logistics markets over the next
decade and beyond. The notable factors being internally increased economic
scale in Eastern Europe, and externally increased scale in Asia – with the two
combining to drive new supply routes and infrastructure requirements. Alongside
this, we have looked at how parallel infrastructure development, often under
the auspices of the EU, is likely to shape future supply chains. This is
providing it continues on its current trajectory, considering the current
uncertainty hanging over the eurozone. However, it is important to note that
much of the scheduled development is set to be funded through the EU budget,
which is yet to come under great pressure. Hence current economic concerns are
not likely to severely impact infrastructure development in the short to
medium-term. In a following series of papers, we will look more closely at the
impact these changes will have on specific markets, such as Poland. We will
also focus on specific infrastructure issues, such as the development of larger
container ships and the demands they are placing on ports and their hinterland
services. Most importantly, we will look at some key future hubs and expected
trends in investment, development and leasing.

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