Estonia Freight Transport Report 2013

BMI View: Steady Growth

We have trimmed back our GDP growth projections for Estonia in 2012 and 2013, to reflect the ongoingtroubles of the Eurozone. BMI now expects the economy to grow by 2.4% in 2012 and 3.0% in 2013:

both these numbers are a few decimals of a percentage point lower than our earlier projections. However,we are confident that the medium-term outlook is good, based on the resilience of consumer demand, thecountry's low debt ratios, and its trade links to northern Europe and the Scandinavian economies. Weexpect total foreign trade (imports + exports) to grow by a healthy 6.1% in 2013.

For the freight industry the outlook is for a moderate improvement in activity levels in 2013, reflectingthe slightly faster rate of growth in the economy as a whole, and a a degree of stabilisation after thesignificant loss of Russian transit business in 2012 (the 'Ust-Luga effect explained below).

Headline Industry Data

2013 air freight tonnage throughput forecast to increase 8.8% to 21,380 tonnes.

2013 road freight tonnage throughput forecast to rise 3.8% to 35.02mn tonnes.

Rail freight tonnage throughput projected to grow by 2.5% in 2013 to reach 50.1mn tonnes.

Total trade (imports plus exports) in real terms is set to grow 6.1% in 2013.

The Port of Tallinn will see gross tonnage growth increase 1.3% to 31.04mn tonnes in 2013.

Key Industry Trends

Can Estonia's Small Airline Survive?

Possibly not, say its neighbours. With small national airlines struggling to remain financially viable,discussions have begun on the possibility of creating a single regional airline and postal deliverycompany. Initial contacts involved officials from Estonia, Lithuania, and Latvia. 'Latvian and Estoniannational airlines have been suffering great losses the last few years and the prospects of these companiesare very uncertain. A study performed by the ministry of transport and communications has shown that insmall markets such as those of the Baltic countries, success can only be expected for a joint airline of thethree countries', said Lithuanian's transport minister Eligijus Masiulis. Masiulis urged discussions with hisLatvian and Estonian opposite numbers to see if the creation of a joint company would be justified.

Masiulis was certain that joint cooperation of two government companies, with the Estonian post servicepossibly joining as well, would 'strengthen the position of our companies in competition with the parcelcompanies of other countries, and would help increase the quality of service. It would be easier for a jointcompany to enter the international market, as well'.

Competition From Russia's Ust-Luga Continues To Bite

Bulk cargo volume at the various facilities controlled by Port of Tallinn fell by 19% year-on-year (y-o-y)to reach 20.2mn tonnes in the first eight months of 2012, the authorities said. Chief commercial officerErik Ringmaa said the fall was due to growing competition from Russia's new port of Ust-Luga, which isbeing used as an outlet for oil and petroleum products previously shipped through Estonia. In fact, liquidcargo shipped through the Port of Tallinn fell by 27% y-o-y to 13.3mn tonnes over the first eight months.

Ringmaa noted that investments currently being made in the port's Muuga Terminal would contribute tolonger-term diversification of cargo types. Containers handled by the port, meanwhile, rose by 22% overthe first eight months of 2012 to reach 155,595 TEUs.

Railways Also Suffer Transit Slump

The Estonian rail system has also suffered from the slump in Russian transit freight demand in 2012, withbulk cargo volume down in the 10-15% range in the first seven to eight months of the year. However,BMI believes that volumes will pick up again in 2013 as the situation stabilises and diversification effortsbegin to pay off. Rail tanker business took the biggest hit, but we believe the container rail businessoutlook is positive. A sign of the times, perhaps was the decision by Japanese carmaker Mitsubishi toselect the Port of Tallinn as a 'strategic partner' for shipping auto components and supplies to its new plantin Kaluga, Russia. Mitsubishi is determined to triple its vehicle output in Russia and has decided to shipcomponents to Russia via the Baltics.

Key Risks To Outlook

While Estonia has to date come through the eurozone turbulence, and enjoys a strong fiscal position, anyintensification of the crisis could hit the country's foreign trade and domestic growth rates, leading to adownturn in freight demand. There is also a local political risk factor: complicated bilateral relations withRussia, which could have an adverse impact on the significant transit trade flows between the twocountries. Bilateral relations hit an all-time low in 2007, but have improved significantly since. However,there are still a number of flashpoints, and there is a risk that they could impact on the still-importanttransit trade between the two countries.