trends & outlook in the dry bulk shipping industry mars 2010

CEFOR

Trends & Outlook in the Dry Bulk Shipping IndustryDr Philip Rogers FICS, FCILTHead of Consultancy ~ ICAP Shipping Ltd Visiting Professor ~ Copenhagen Business School Honorary Professor ~ Plymouth University Oslo 24th March 2010 ICAP Shipping International Limited (ICAP Shipping) 2010.

This information is addressed to ICAP Shipping customers only. While it, and any opinions expressed in it, have been derived from sources believed to be reliable and in good faith they are not to be relied upon as authoritative or taken in substitution for the exercise of your own commercial judgment. This information has no regard to specific investment objectives. Any opinions expressed in it are subject to change without notice and may differ from opinions expressed by other areas of the ICAP group. This information is not, and should not be construed as, an offer or solicitation to sell or buy any product, investment, security or any other financial instrument. ICAP Shipping does not make any representation or warranty, express or implied, as to the accuracy, completeness or correctness of this information. ICAP Shipping does not accept any liability for any loss or damage, howsoever caused, arising from any reliance on any information or views contained in this material. Certain companies in the ICAP Shipping group are authorised and regulated by the Financial Services Authority. For further regulatory information, please see www.icap.com. This information is the intellectual property of ICAP Shipping. ICAP Shipping and the ICAP Shipping logo are trademarks of the ICAP group. All rights reserved. Redistribution is prohibited.

24/03/2010 11:22

CEFOR 24th March 2010

1

CEFOR

Where is the freight market now?Dry Bulk Freight Market Daily Since 198520-May-08, 11,793

12,000 11,000 10,000 9,000

BFI/BDI

Average

4th Jan 1985 = 1,000

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 05-Aug-86, 554 0 05-Dec-08, 663 2,123 01-May-95, 2,352 06-Dec-04, 6,208

1985

1986

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2010

CEFOR

Overview Sharp contraction in trade demand in 2008 led to collapse in freight market This, in turn, impacted world demand for ships and directly to a sharp slowdown in contracting It also left many shipyards in a precarious position worried about payments, future orders and their own credit finance Equally, many shipowners continue to face great uncertainty and financial difficulties Cancellations and slippage of newbuilding orders have become commonplace The whole industry faces a period of difficulty and change

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So, the market collapsed, no surprise, but what were the real causes?

Perhaps not what we first think.

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How did we get here?

The fall in the freight market in mid-2008 did not occur solely because of the economic situation; rather the economic collapse was the final factor that caused an already very serious situation to become even worse Most shipping analysts had warned of a downturn for at least a couple of years prior to mid-2008 due to the growing size of the orderbook It could be argued that many shipowners shared this view but nearly all were caught out by the extent and severity of the fall

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Owners responded to increase in the freight marketBDI & Orderbook8,000 350

On Order7,000

BDI300

6,000

5,000

4,000

3,000

So the freight market gave confidence to shipowners and they responded by ordering more ships but the consequences and legacy will be apparent for the next 20+ years

250

200

150

100 2,000 50

1,000

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

24/03/2010 11:22


6

MDwt.

BDI

CEFOR

Background to the 2008 downturn The potential for a downturn had several roots and had been well documented in the public domain: the extra fleet supply from ships being delivered plus extra bulk carriers from tankers converted to VLOCs a complete absence of scrapping of older (or any) bulk carriers a fall in congestion during 2007 releasing many ships on to the market in 2008 An anticipated slowdown pre-Olympics - in Chinese import demand Up to that point (June 2008) we had seen record volatility so the downturn that month was initially considered normal and simply a market correction but it was, in fact, far more than that So all of the above factors were expected and indeed happened yet the rapidity of the fall still was exceptional as sentiment changed and, in certain sectors, near panic set in24/03/2010 11:22


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Tipping Points

The collapse in the market occurred because of all the previous points but the additional tipping points were: the lack post-Olympics of any discernible recovery in Chinese demand. A recovery was widely expected by the market and when it failed to emerge impacted sentiment very rapidly which, when combined with the traditional August market slumber, left demand at low levels; the fall in commodity prices in China as domestic supplies squeezed the delivered cost of imports so consumers switched increasingly to indigenous sources (e.g., iron ore and coke) which put immediate downward pressure on freight rates as not so many cargoes were needed however the ships to carry these cargoes still existed

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Production pre-Olympics continued relentlesslyChina Iron Ore Production and Iron Ore Imports90,000 80,000 70,000 60,000

Production increases as demand slows result: price collapse

1,000 tonnes

50,000 40,000 30,000 20,000 10,000 0 Jan-0824/03/2010 11:22

Ore Imports Chinese Domestic Iron Ore Production

Apr-08

Jul-08CEFOR 24th March 2010

Oct-089

CEFOR

Fall in demand triggered slide in Chinese domestic prices$/tonne 225 200 175 150 125 100 75 50 25 0 Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 1024/03/2010 11:22

C3 - Brazil-China freight Brazil FOB Chinese domestic Indian CFR

Price collapse in turn puts a cap on the imported price of iron ore; the fob price is fixed under contract so the only element that can be squeezed is freightBrz-PRC freight

Brz FOB


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and then in Q308 came the financial crisis. The Lehman Brothers collapse; A virtual end to inter-bank lending International financial crisis High street banks collapsing - note also this included Royal Bank of Scotland a leading shipping bank Governments buying Banks (incl. RBS) to prevent total collapse and lend support Issuance of long-term government bonds Letters of credit much more difficult to obtain Base rates dropping to zero but not the same situation for borrowers with shortage of credit keeping rates high

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Impact on Freight Market

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The whole market had been volatile so a big fall was not that unusual; it was not until later that it was apparent that the turning point had finally been reached Source: Baltic Exchange Average Basket TC Rates$250,000$/day

6th June 2008

$200,000

Capesize (172k) Panamax (74k) Supramax (52k) Handymax (45k) Handysize (28k)

$150,000

$100,000

$50,000

$0Jan-0724/03/2010 11:22

Jan-08


Jan-09

Jan-1013

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98% fall in earnings in just six monthsCapesize Continent/Far East spot TC Rates300,000 280,000 260,000 240,000 220,000 200,000 180,000 05-Jun-08 283,000

The fall in the freight market was greater than for any other commodity market

$/day

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 01-Dec-08 5,096

0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-1024/03/2010 11:22


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Were the shipowners wrong to invest.?Spot TC Rate Daily Averages120,000 110,000 100,000 90,000 80,000 70,000

Source: Baltic Exchange/ICAP Shipping Ltd

For a Cape owner earnings in 2007~08 equated to $79 million per ship - more than enough to pay for the ship in just 2 years

Capesize (172k) Panamax (74k) Handymax (45k)

60,000 50,000 40,000 30,000 20,000 10,000 02000 20,904 11,102 9,053 2001 12,950 8,767 8,344 2002 11,918 7,725 7,978 2003 40,329 20,063 14,810 2004 69,002 35,725 28,191

Those shipowners that took delivery of their new ships in the summer of 2003 whether by luck or good judgement saw earnings over the next five years make super-profits which prompted many to order even more ships

$/day

2005 50,344 24,802 21,420

2006 45,139 23,778 20,940

2007 116,031 56,814 42,168

2008 106,025 49,014 36,241

2009 42,657 19,295 15,513

2010 34,653 29,420 22,60915

Capesize (172k) Panamax (74k) Handymax (45k)

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Demand Changes

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Trade growth to continue after current disruptionMillion Tonnes 4,000

World Seaborne Dry Bulk TradeImpact of secondary banking crisis and "credit crunch"

3,500

3,000Growth 2000-10: 4.9% pa

2,500

2,000

Growth 1960-2000: 4.3% pa

1,500 1st oil crisis 1,000

2nd oil crisis Other Bulk Coal PhosRock

500

Grain Iron Ore

Bx/Al

0 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

201017

2015

24/03/2010 11:22


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Chinese iron ore imports collapsed by 9 Mt in October 2008China Steel Production & Iron Ore ImportsOre Imports Steel Production

50,000 45,000 40,000 35,000 30,000

42,846 38,201 35,682 38,909 39,630 37,788 37,403 34,527 32,520 30,617 39,203

36,808

25,000 20,000 15,000 10,000 5,000 0Jan-0824/03/2010 11:22

Chinese iron ore imports are the largest single dry bulk trade so a 9 Mt fall in one month had an immediate negative impact on demand as well as on sentiment

1,000t...

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-0818


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Demand downturn led by steelSelected Major Bulk Trades800 700 600 500 400 300 200 100 0 1q07 2q07 3q07 4q07 1q08 2q08 3q08 4q08 1q09 2q09 3q09 4q0924/03/2010 11:22

Source: ICAP Shipping

Other Bulk Steel Exp Grain Ore

Million Tonnes..

Coal

Steel Producti on


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Seaborne Bulk Market highly dependent on SteelSeaborne trade 2009 estimated at 3,180 Mt 30Mt

Seaborne Dry Bulk Trade ~ 2009Grain (inc Soya) 11% Gypsum Forest Products Sulphur Potash 6% Phosrock Phosphates+Urea Tapioca Sugar Other 20% Oilseed/Meal Soyameal Rice Chrome Ore Nickel Ore Manganese Ore Iron Ore 29% Coke Scrap Bauxite Metal Concentrates Alumina

Steam Coal 20%

Salt

Cement Petcoke

Steel Products 6%

Coking Coal 7%

Others

Just under half of all Dry Bulk Trade is related - either directly or indirectly to the steel industry

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Five Major GroupingsSeaborne Trade 2009 Million tonnes (Mt)Other 82 3% Iron Ore 924 29%

Energy 663 21% Industrial 333 10% Fertilizers 88 3%

Seaborne trade 2009 estimated at 3,180 Mt 30Mt

Agribulks 479 15%

Steel-Related 611 19%

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Sharp downturn in steel productionChina and World Crude Steel Production

Million tonnes

1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400

China

Rest of World300 200 100 0

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200922

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Fleet Developments

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The legacy of the current orderbook will be apparent for the next 20+ yearsAge Profile Bulk Carrier Fleet @ 18th Feb 2010120

Handysize100

Hmax/Smax

Panamax

Cape

80

Mdwt

60

40

The Sanko order in 1984 for 130 Handymax Bulk Carriers ships now 26 years old

20

0Pre-80 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201624

24/03/2010 11:22


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Even though many shipowners were aware of the looming overcapacity risk heavy ordering still continued in 2008Bulk Carrier Contracting160 Cape 100+ Pmax 60-100 Handymax 40-60 Handysize 10-40 Bulk Fleet (10,000+ dwt) 146

140

120

100

MDwt..

82 80

60

40 25 20 17 18 11 17 10 21

29

30 17

34

32

4.30 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201024/03/2010 11:22


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Latest OB shows bulk of deliveries in next 3 yearsBulk Carrier Orderbook at 1-Mar-10120 Deliveries Dwt Delivered Ytd Dwt 100 Total orderbook + 2010ytd deliveries= 262.0 Mdwt

80

MDwt..

60

40

20

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201624/03/2010 11:22


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Impact on Ship Prices and Demolition Rates

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As BDI has now fallen scrapping will increase sharplyBulk Carrier Removals from the Fleet v. BDI12.0 MDwt 11.0 10.0 9.0 8.0 7.0 8,000 10,000 BDI 12,000

MDwt

6.0 5.0 4.0 3.0 2.0 1.0 0.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

6,000

4,000

2,000

0

24/03/2010 11:22


BDI28

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Dramatic fall in second-hand pricesCape 172k Max 5Yr Pmx 74k Max 5yr Super Handy 52k 5Yr

Source: Baltic Exchange

Secondhand Prices

160 150 140 130 120 110 100 90

$m

80 70 60 50 40 30 20 10

This fall has a clear negative impact on both buyer and seller. The next seller fears prices falling further and is tempted to accept first offer while for the next buyer they may now postpone buying in the hope of prices falling further or decide not to buy at all.

Huge fall in confidence and deals dry up as a result

0 Jan-0424/03/2010 11:22

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-1029


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Source: Baltic Exchange

and in $/ldt rates for demolitionDry Bulk - Demolition Rates

$750 $700 $650 $600 $550 $500 Hmax/Pmx Indian subcontinent Hmax/Pmx CHINA

$/ldt

$450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-1024/03/2010 11:22


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NB prices have been slow to react but now fallingDry Bulk NB Prices

100.00 90.00 80.00 70.00 60.00$m$61.50

Capesize Panamax

50.00 40.00 30.00 20.00 10.00 0.00 Jan0824/03/2010 11:22

36.50 32.00 26.00

Supramax Handysize

Apr08

Jul08

Oct08

Jan09

Apr09

Jul09

Oct09

Jan10

Apr10

Jul10

Oct1031


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Supply/Demand Integration

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Expect increased scrapping and fewer deliveries than scheduledBulk Carrier Fleet Changes

120 To be delivered Dwt Scrapped Ytd Dwt Delivered Ytd Dwt Net Change Dwt

100

80

Spill over expected from 2010 to 2011 and then to 2012 as well as further cancellations

Slippage this year could exceed 50%+98 +82

Net addition 2009-12: 244.6Mdwt

60

MDwt40 +35 +29 20 +9 0 +12 +9 +8 -1 -13 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201433 24/03/2010 11:22

+19

+22

+24

+23 +18


CEFOR

Throughout all this trade still expandingSeaborne Dry Bulk Trade Forecast 2009-12

4,000 Other Energy Fertilizers Agribulks Industrial

3,500 Other Other 3,000 Energy

Other Energy Energy Fertilizers Agribulks Industrial Fertilizers Agribulks Industrial

Million Tonnes

2,500

Fertilizers Agribulks Industrial

2,000

1,500 Steel-Related 1,000 Steel-Related

Steel-Related

Steel-Related

500

Iron Ore

Iron Ore

Iron Ore

Iron Ore

0 200924/03/2010 11:22

2010CEFOR 24th March 2010

2011

201234

CEFOR

Trade Growth AggregatedGrowth in Seaborne Dry Bulk Trade 2009~20124,000

3,500

393

3,000

Million Tonnes

2,500

2,000 3,180 3,317 3,468 3,573

1,500

1,000

500

0 200924/03/2010 11:22

2010CEFOR 24th March 2010

2011

201235

CEFOR

Net Fleet Change and Trade GrowthCargo & Net Fleet Growth 2009-20121,800 1,600 1,400 1,200Mt Cargo Equivalent

1,000 800 600 400 200 0

Currently there is a huge overcapacity for the anticipated fleet growth. This overcapacity will be absorbed over the years through natural scrapping, low levels of deliveries after 2012/13 and through trade recovery but it will take time...

Cargo Growth Mt 393

Net Fleet Growth 245 MDwt x7= 1700

Cargo Growth Mt24/03/2010 11:22

Net Fleet Growth 245 MDwt x7=36


CEFOR

Assume 50% cut in scheduled deliveriesCargo & 50% Net Fleet Growth 2009-20122,000 1,800 1,600 1,400Mt Cargo Equivalent

Halving the current orderbook still leaves a large fleet surplus unless we see: an exceptional increase in scrapping or trade growth, congestion or fleet supply disruption

other events natural disasters, war, canal closures, etc, that could cut fleet supply or increase demand unexpectedly

1,200 1,000 800 600 400 200 0

Shipping history is full of such eventsNet Fleet Growth 122MDwt x7=, 850

Cargo Growth Mt, 393

Cargo Growth Mt24/03/2010 11:22

Net Fleet Growth 122MDwt x7=37


CEFOR

Forward MarketsSource: Baltic Exchange/ICAP Shipping

Dry FFAs at 23-Mar-10Cape 172k 4TC

100,000 90,000Panamax 74k 4TC

80,000 70,000 60,000$ per day

Supramax 52k 5TC Handysize 28k 6TC

50,000 40,000 30,000 20,000 10,000 0Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

24/03/2010 11:22


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Conclusion & Final Reflections The fall in the market had been expected to occur as a result of increasing fleet oversupply; in fact it was triggered by a collapse in seaborne demand which has yet to fully recover to 2008 levels Although signs of economic recovery and demand growth are now emerging this is only part of the picture Fleet expansion is expected to outpace demand growth by a considerable margin and is already acting to subdue earnings Recovery could take a significant time to work through the system as the legacy of the surge in newbuildings (2009-11) will be evident for many years to come The pattern of over ordering leading to market collapse seems to be an inevitable part of the working of the market ICAP24/03/2010 11:22


39

trends & outlook in the dry bulk shipping industry mars 2010

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