Pakistan Freight Transport Report 2013

We expect to see somewhat muted growth both in 2013 and into the medium term in the Pakistani freightindustry, with the outperformer set to be the country's air freight sector with year-on-year growth of3.62% pencilled in for 2013. This is in keeping with the belief that the global air freight market remainsbuoyant despite the ongoing economic downturn, according to Air Cargo World. Africa has supersededChina as the world's most lucrative air freight market, with the Indian subcontinent also reportingsignificant levels of growth. The global air freight market is, however, being increasingly affected by thesea freight market. Companies often prefer to have their goods transported by sea freight carriers as it isless expensive.

In positive news for the country's maritime sector, International Container Services Inc (ICTSI) hasbought a stake in the Pakistani International Container Terminal as part of its global expansion, it wasannounced in April 2012. BMI believes that this announcement from Philippines-based terminalsoperator ICTSI that it is to buy a 35% stake of a Pakistani container terminal is in keeping with its currentexpansion plans, which have seen the company recently take on new projects in Mexico and Nigeria. Themove could also provide upside to our sedate growth forecast for box throughput at the Port of Karachi.

Headline Industry Data

2013 tonnage throughput at the Port of Karachi is forecast to grow by 1.33% to 42.62mn tonnes.

2013 tonnage throughput growth at the Port of Muhammad Bin Qasim is forecast to increase by 1.44% to 24.37mn tonnes.

2013 air freight tonnage forecast to grow by 3.62% to reach 346,400 tonnes.

2013 rail freight tonnage forecast to increase by 2.50% to hit 6.28mn tonnes.

2013 total trade (real terms) forecast to rise 3.50%.

Key Industry Trends

Upside Risk From Pakistan Rail Grant: Upside risk to our sedate rail freight growth forecast forPakistan presents itself in the form of a US$628,000 grant that has been awarded to private logistics firmPremier Mercantile Services that wants to acquire its own fleet of locomotives. We believe this wouldgreatly benefit the national rail company, which has been struggling to maintain operations due to a lackof equipment.

Qatar Airways, Air France-KLM Cargo To Resume Karachi Services: Qatar-based flag carrierQatar Airways and Air France-KLM Cargo announced in March 2012 that they were to resume theirscheduled freighter services to Karachi, Pakistan. The news came as industrial action threatened cargoclearance operations at the Jinnah International Airport.

Pakistani Deep Water Port Project Runs Aground: We believe that the troubles facing the PakistanDeep Water Container Port (PDWCP) will be frustrating to the Karachi Port Trust (KPT) and containershipping lines looking to use the new container terminal's deeper draught. Due to our relatively mutedoutlook for Pakistani trade growth and ports throughput over our forecast period, as well as the upsidepresented by the new facility, the KPT will want to resolve these issues as quickly as possible.

Key Risks To Outlook

We caution that any material and sustained recovery in the region's export performance is likely to hit aceiling given the still-weak external demand picture these countries are facing. Aside from theirsimilarities in terms of their key exports, Bangladesh, Pakistan, and Sri Lanka share the currentmisfortune of having the troubled EU as their single largest export market (albeit to varying extents).

Our Europe team expects the bloc to register a full-year real GDP contraction of 0.3% this year, withactivity expected to remain relatively weak in 2013 - our current growth projection for the upcoming yearstands at 0.9%. Leading indicators, as seen in the chart below, continue to point to prolonged economicmisery, with the eurozone composite purchasing managers' index and the OECD's composite leadingindicator for the region continuing to hit new multi-year lows.

Politically, Pakistan is at risk of experiencing years of instability and militant activity, but an outrightcollapse of the state is unlikely unless the core province of Punjab becomes ungovernable. Under suchcircumstances, we would not preclude a military coup. Meanwhile, due to its strategic importance,Pakistan's foreign allies will do everything they can to ensure its stability.

We see plenty of room for upside risk in terms of our rail freight growth forecast for Pakistan due to agrant that has been awarded to a private logistics firm that wants to acquire its own fleet oflocomotives. Logistics firm Premier Mercantile Services (PMS) received a US$628,000 grant from theUS Trade & Development Agency in May 2012 to enable the company to launch a feasibility study intoacquiring its own fleet of locomotives. State-run national operator Pakistan Railways (PR) has agreed toallow PMS to carry PR wagons with its own locomotives due to the chronic shortage of pullingequipment.