Peru Freight Transport Report Q4 2012

BMI maintains its broadly positive view on Peru's freight transport sector. We believe Peru's strongdomestic demand story will continue in 2012, although an anticipated drag from net exports means westick to our below consensus 4.8% real GDP growth forecast. We caution however, that significantexternal risks to the economy means we cannot rule out a more pronounced slowdown in growth on theback of weaker global demand for the country's minerals and moderating global commodity prices. Theexpected slowdown in the Chinese economy will drag on the country's exports, puttingsome downside pressure on volumes, particularly for ports and railways that handle drybulk.

Headline Industry Data

We expect growth of 4.3% in total tonnage throughput at the Port of Callao, to 19.3mn tonnes.

We predict air freight volume to increase 7.2%, to 263,000 tonnes in 2012.

We expect rail freight carried (volume x distance) to grow 5.0%, to 1.3bn tonnes-km in 2012.

Key Industry Trends

Lan-Tam Merger Could See Bright Future Ahead

After nearly two years of clearing regulatory hurdles, LAN and TAM merged to form Latam Airlines onJune 22. The new airline is the biggest carrier in Latin America and the largest in the world in terms ofmarket capitalisation. BMI believes the airline will be well placed to take advantage of growing volumesin the region.

Criticism Of Muelle Norte, Paita Port Concessions

The vice president of Peru's congress, Manuel Merino, has called for the cancellation of the concessioncontracts for Callao port's Muelle Norte terminal and Paita port following claims of alleged flaws in thetender processes. The country's private investment promotion agency, ProInversión, awarded theconcession for Callao's Muelle Norte terminal to Dutch-based port operator APM Terminals in April2011, while local concessionaire Terminales Portuarios Euroandinos (TPE) has operated Paita port sinceSeptember 2009.

US$150mn Investment In Mineral Conveyor In Puerto Callao

The construction of a US$150mn conveyor belt to transport iron ore from mining areas to the port ofCallao will be completed in September 2013. The project being carried out by Callao TransportadoraConsortium (CTC) formed by the companies Impala, Perubar, Chinalco, El Brocal and Santa SofiaPorts.Key Risks To Outlook

Upside risks come from the fact that increased private consumption could possibly lead to greater demandfor imports. We expect consumption to benefit from President Ollanta Humala's economic policies.

Humala's new economic plan does not include increasing taxes on consumers. In fact, Humala will seekto reduce VAT in the coming years, supporting consumer demand.

The recent free trade agreement (FTA) agreed between Peru and Japan and the associated abolition ofimport tariffs on goods travelling between the two countries should increase trade flows between the two.Downside risks come in the form of a possible slowdown in Chinese demand, which would hit shipmentsof copper and other raw materials from Peru.