Global Logistics - Shipping

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ContentsIndustry Definition.................................................................................................................................................3

ACTIVITIES (PRODUCTS AND SERVICES) ......................................................................................................................................3SIMILAR INDUSTRIES........................................................................................................................................................................3DEMAND & SUPPLY INDUSTRIES....................................................................................................................................................3

Key Statistics........................................................................................................................................................5CONSTANT PRICES...........................................................................................................................................................................5CURRENT PRICES.............................................................................................................................................................................5REAL GROWTH...................................................................................................................................................................................6RATIO TABLE......................................................................................................................................................................................6GRAPHS..............................................................................................................................................................................................6

Segmentation.......................................................................................................................................................8PRODUCTS AND SERVICE SEGMENTATION..................................................................................................................................8MAJOR MARKET SEGMENTS............................................................................................................................................................9INDUSTRY CONCENTRATION.........................................................................................................................................................10GEOGRAPHIC SPREAD...................................................................................................................................................................12

Market Characteristics........................................................................................................................................15MARKET SIZE...................................................................................................................................................................................15

LINKAGES.........................................................................................................................................................................................16DEMAND DETERMINANTS..............................................................................................................................................................16DOMESTIC AND INTERNATIONAL MARKETS................................................................................................................................17BASIS OF COMPETITION.................................................................................................................................................................18LIFE CYCLE.......................................................................................................................................................................................20

Industry Conditions.............................................................................................................................................22BARRIERS TO ENTRY......................................................................................................................................................................22TAXATION.........................................................................................................................................................................................23INDUSTRY ASSISTANCE.................................................................................................................................................................23REGULATION AND DEREGULATION..............................................................................................................................................23COST STRUCTURE..........................................................................................................................................................................25CAPITAL AND LABOR INTENSITY...................................................................................................................................................27TECHNOLOGY AND SYSTEMS.......................................................................................................................................................28

INDUSTRY VOLATILITY....................................................................................................................................................................28GLOBALIZATION...............................................................................................................................................................................29 Key Factors........................................................................................................................................................31

KEY SENSITIVITIES..........................................................................................................................................................................31KEY SUCCESS FACTORS................................................................................................................................................................31

Key Competitors.................................................................................................................................................33MAJOR PLAYERS.............................................................................................................................................................................33PLAYER PERFORMANCE................................................................................................................................................................33OTHER PLAYERS.............................................................................................................................................................................45

Industry Performance.........................................................................................................................................49CURRENT PERFORMANCE.............................................................................................................................................................49HISTORICAL PERFORMANCE.........................................................................................................................................................53

Outlook...............................................................................................................................................................57


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INDUSTRY DEFINITIONGlobalLogistics - Shipping

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Copyright 2010, IBISWorld Inc. 3

Industry Definition

This industry comprises establishments primarily engaged in providing deep sea, coastal and inland water transport. Deepsea and coastal water transport includes the transport of passengers and freight over water, both scheduled andunscheduled. The inland water transport segment includes the movement of passenger or freight via rivers, canals, lakes

and waterways, including inside harbors and docks. The industry excludes marine operations such as port operations andstevedoring.

ACTIVITIES (PRODUCTS AND SERVICES)The primary activities of this industry are: Barge Shipping Bulk Shipping Commercial charter services for freight transport Containerized Shipping Deep Sea, Coastal and Inland Freight Transport

Deep Sea, Coastal and Inland Passenger Transport Tanker Shipping (including liquefied natural gas)

The major products and services in this industry are: International Freight Transport International Passenger Transport Coastal Freight and Passenger Transport Inland Water Transport Other

SIMILAR INDUSTRIES

Industry: A-GL - Global Agriculture, Hunting, Forestry and FishingDescription: Establishments engaged in the transportation of goods via rail.

Industry: C2541-GL - Global Civil Ship and Boat BuildingDescription: These establishments manufacture barges, cargo ships, container ships, ferryboats, fireboats, fishing boats,passenger ships, patrol boats and sailing ships for the Shipping industry.

Industry: H4832-GL - Global Logistics - Air FreightDescription: This industry comprises establishments primarily engaged in the air transportation of commercial cargo viaair.

Industry: H4911-GL - Global Travel Arrangement and Reservation ServicesDescription: Companies who dispatch shipments and arrange space for cargo movement to an international destination. Itincludes reviewing invoices and documents required to export or import goods.

DEMAND & SUPPLY INDUSTRIESB-GL - Global MiningC-GL - Global ManufacturingC2541-GL - Global Civil Ship and Boat Building


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INDUSTRY DEFINITIONGlobalLogistics - Shipping

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F4311-GL - Global Wholesale TradeH4913-GL - Global Marine Port OperationI5121-GL - Global Internet Service Providers


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KEY STATISTICSGlobalLogistics - Shipping

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Key Statistics

CONSTANT PRICES2005 2006 2007 2008 2009

Industry Revenue *120,528.1 *133,027.0 *145,289.5 *161,081.7 *138,475.1 $MillIndustry Gross Product *59,541.0 *65,449.3 *71,191.8 *75,386.3 *60,513.6 $Mill

Number of Establishments *28,626 *29,121 *29,328 *29,484 *28,815 Units

Number of Enterprises *10,592 *10,775 *10,881 *10,939 *10,690 Units

Employment *1,550,148 *1,578,233 *1,602,192 *1,619,816 *1,555,024 Units

Exports N/A N/A N/A N/A N/A

Imports N/A N/A N/A N/A N/A

Total Wages *52,296.4 *53,334.8 *53,499.5 *53,574.9 *50,604.0 $Mill

Domestic Demand NC NC NC NC NC $Mill

World Merchant Fleet 959,964.0 1,042,328.0 1,117,779.0 *1,240,000.0 *1,290,000.0 Thousand metric tons

CURRENT PRICES2005 2006 2007 2008 2009

Industry Revenue *109,293.6 *124,514.1 *139,651.7 *158,324.1 *138,475.1 $Mill

Industry Gross Product *53,991.1 *61,261.0 *68,429.3 *74,095.7 *60,513.6 $Mill

Number of Establishments *28,626 *29,121 *29,328 *29,484 *28,815 Units

Number of Enterprises *10,592 *10,775 *10,881 *10,939 *10,690 Units

Employment *1,550,148 *1,578,233 *1,602,192 *1,619,816 *1,555,024 Units

Exports N/A N/A N/A N/A N/A

Imports N/A N/A N/A N/A N/A

Total Wages *47,421.8 *49,921.7 *51,423.5 *52,657.7 *50,604.0 $Mill

Domestic Demand NC NC NC NC NC $MillWorld Merchant Fleet 959,964.0 1,042,328.0 1,117,779.0 *1,240,000.0 *1,290,000.0 Thousand metric tons


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REAL GROWTH2005 2006 2007 2008 2009

Industry Revenue *11.3 *10.4 *9.2 *10.9 *-14.0 %

Industry Gross Product *10.9 *9.9 *8.8 *5.9 *-19.7 %

Number of Establishments *1.2 *1.7 *0.7 *0.5 *-2.3 %Number of Enterprises *1.8 *1.7 *1.0 *0.5 *-2.3 %

Employment *2.3 *1.8 *1.5 *1.1 *-4.0 %

Exports N/A N/A N/A N/A N/A %

Imports N/A N/A N/A N/A N/A %

Total Wages *3.2 *2.0 *0.3 *0.1 *-5.5 %

Domestic Demand NC NC NC NC NC %

RATIO TABLE2005 2006 2007 2008 2009

Imports share of domestic demand N/A N/A N/A N/A N/A %

Exports Share of Revenue N/A N/A N/A N/A N/A %

Average Revenue per Employee *0.08 *0.08 *0.09 *0.10 *0.09 $Mill

Wages and Salaries Share of Revenue *43.39 *40.09 *36.82 *33.26 *36.54 %

GRAPHS

Revenue Revenue Growth Rate


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Employment

Note: Unless specified, an asterisk (*) associated with a number in a table indicates an IBISWorld estimate and references to dollars are to US dollars.


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SEGMENTATIONGlobalLogistics - Shipping

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Segmentation

PRODUCTS AND SERVICE SEGMENTATION

Product/Services Share

Coastal Freight and Passenger Transport 9.6%

Inland Water Transport 6.6%

International Freight Transport 69.1%

International Passenger Transport 11.3%

Other 3.4%

The Shipping industry transports both goods and passengers, generally referred to as cargo. The world seaborne tradewas around 7.55 billion tons in 2006, rising to 7.7 billion tons in 2007. This growth ensures that it remains, by anoverwhelming margin, the largest carrier of freight in the world. The largest product segment within the industry isinternational freight transport, occupying 69.8% of industry revenue. This segment refers to the transportation of goods bysea between domestic and foreign ports. More than 90% of goods traded between countries are transported by sea. Theshipment of goods via the ocean is the cheapest mode of transport for cross border transportation and can accommodatebulky commodities that are not supported by air transport. Over 70% of the world's merchant fleet (in terms of dead-weight tons) are tankers and bulk carriers. Furthermore, the ability of shippers to adapt to demand changes throughvarious shipment offerings such as round-the-world tri-continental services and traditional end-to-end services providegreater flexibility to customers. The competitors in this product segment are from the Air Freight and Couriers industry thatcharge a premium for their services.

International Passenger transport accounts for 11.3% of industry revenue and are usually provided for by cruise ships.Cruise ships are floating resorts that tend to offer round trips of three days or more. In contrast passenger/ferry vesselstend to convey passengers on daily one-way trips between two or more points (refer to "other" segment). The cruisesegment has grown significantly over the current performance period supported by the increase in disposable incomefrom Asia Pacific and Middle Eastern countries. While the volume transported by this product segment is small comparedto freight, passengers are charged more due to the amenities and service offerings provided by cruise liners. This productsegment is expected to increase over the outlook period, particularly as disposable income increases following theresolution of the global economic crisis.

The cruise market has contributed solidly to industry revenue despite geo-political concerns and high oil prices over thecurrent performance period. Industry body Cruise Lines International Association (CLIA) predicted that 13.5 million peoplewould take a cruise worldwide in 2009, an increase of 2.3% over 2008. This increase is lower than in previous years, butthe significance of any sort of increase in the 2009 climate must be noted. An estimated 13.2 million travelers cruised in2008, up from 12.6 million in 2007. Around 12% of passengers originate from the UK, and around 80% from North

America. The strong interest in cruising was mainly attributed to higher disposable income globally and innovative facilitiesand amenities, upgraded cuisine, increased value-for-money and the rise in the number of home ports for liners. Greater


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interest from developing countries such as China to experience ocean based rather than land based vacation also fueledrevenue growth in this market. The 130,000 square meter Shanghai Port International Cruise Terminal, completed in2008, provides a further boost to the cruise market in China over the medium term.

Coastal Freight and Passenger Transport refers to the operation of vessels for the transportation of passengers or freight

by sea between domestic ports, usually within 32 kilometers of shoreline. It also includes units mainly engaged inchartering or leasing ships with crew, for any period, for use in coastal sea transport. Inland Water Transport on the otherhand, refers to the operation of vessels for the transportation of freight or passengers in harbors or inland waters.IBISWorld believes that both these segments represent 16.2% of industry revenue. The demand for "short-sea shipping"that is the movement of cargo and passengers by water between point situated within close proximity to one another isslowly increasing. It is used to reduce the reliance on congested road transport and bottlenecks, improve utilization ofwaterway capacity, promotion of sustainability in transport and the reduction of greenhouse gases. For instance, bargeshipping is prominent in US waterways to ease traffic congestions in highways.

The Other product segment refers to activities not specifically covered by the above, such as ferry, scenic and "other"associated services (e.g. tugboat and piloting services). Revenue from this segment depends on Government's initiativeto promote environmentally friendly water transport (and ease road congestion) in the passenger market and the level of

shipping activity. Increased shipping activities will lead to greater support services.

Ships in world fleet, 2008

Ship TypeUnits

NumberUnits

% of world fleet

General Cargo ships 18982 37.6%

Bulk Carriers 6890 13.6%

Container ships 4170 8.3%

Tankers 12583 24.9%

Passenger ships 5957 11.8%

Other 1943 3.8%Source: Clarksons Research

MAJOR MARKET SEGMENTS

Market Segment Share

Liquid Bulk 36.9%

Dry Bulk 36.0%

Containers 21.6%

Others including Passenger 5.5%


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The major market segments for this industry are based on the types of ships used to transport cargo. A ship is defined asa large watercraft capable of offshore navigation. Ships come in many sizes and can be measured in terms of overalllength, length of the waterline, beam (breadth), depth (distance between the crown of the weather deck and the top of thekeelson), draft (distance between the highest waterline and the bottom of the ship) and tonnage. In the Shipping industry,the composition of vessels is based on tonnage.

IBISWorld believes that both dry and liquid bulk vessels represent 72.9% of total revenue. In both these markets, vesselsare identified based on their carrying capacity. Bulk carriers come in a variety of sizes from small (less than 10,000 DWT),Handysize (10,000-35,000 DWT), Handymax (35,000-65000 DWT), Panamax (65,000-80,000 DWT), Capesize (80,000-200,000 DWT) and very large bulk carriers of over 200,000 DWT. Dry bulk vessels transport non-containerized cargosuch as coal and coke, grains, limestone and cement, and ores and scrap. These trades are affected by generaleconomic conditions. Liquid bulk cargo consists mainly of crude oil, petroleum products, liquid chemicals, liquefied gases,vegetable oils, water and wine. There are also certain ships manufactured for both dry and liquid bulk known as combinedcarriers. Greece, Japan, and China are the top three owners of bulk carriers with around half of the world's fleet. The crewof a typical bulk carrier may consist of about 20 to 30 seafarers, however smaller ships can be serviced by around 8personnel. Both the dry and liquid bulk markets are expected to encounter challenging times during the outlook period.

The containers market is estimated to account for 21.6% of total revenue. The majority of containerized cargo consists ofmanufactured and semi-manufactured products. The capacity of container ships are measured in twenty-foot equivalentunits (TEUs), however the majority of containers currently in use are 40 feet. Ship sizes of container vessels havecontinued to increase with the average capacity of ship growing from 2,235 TEUs in 2005 to 2,324 TEUs in 2006,reflecting the need to commission larger ships to achieve economies of scale. Deep sea container ships of 3,000 TEUsand above are generally responsible for serving East-West trade routes. These vessels are designated as Panamax orPost-Panamax according to their ability to transit the Panama Canal. The biggest container ship is the Emma Maersk, aDenmark flagged ship with a maximum TEU of 14,500. It is capable of carrying a cargo value of around $300 million.Ships below 1,000 TEU in capacity are the "Feeder" container ships generally operated on an intra-regional basis, often"feeding" cargo within a region from or to main port hubs served by main-lane trade routes. The largest share of thecharter owner container ship fleet is owned by German ship owners. In 2006, the world container fleet was 98% largerthan in 2000 and new ships are still being built at a fast rate. The size of the order book has been rising from 25% in mid-2003 to 57% of the existing fleet in June 2007. It is estimated that global shipping capacity expanded by 13% in 2008alone, amidst a climate of increasing financial strife.

The "Others" segment represent 5.5% of total revenue and includes passenger ships and barges. Passenger shipsinclude many classes of vessels designed to transport substantial numbers of passengers as well as freight. Passengerships include: (1) ferries, which are vessels for day or overnight short-sea trips moving passengers and in some cases,vehicles; (2) ocean liners, which typically are passenger or passenger-cargo vessels transporting passengers and oftencargo on longer line voyages; and (3) cruise ships, which typically transport passengers on round-trips, in which the tripitself and the attractions of the ship and ports visited are the principal draw. Civilian ships by convention are measured bygross tonnage.

INDUSTRY CONCENTRATIONIndustry concentration is medium

Industry concentration indicates the extent to which major players dominate the industry. IBISWorld determines industryconcentration by such measures as the proportion of industry revenue earned by the four largest industry players.IBISWorld believes that the level of industry concentration in the Shipping industry is medium.


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IBISWorld estimates that the top four industry players will account for an estimated 48.3% of global industry revenue in2009, a rise of around 2.0% on the 2006 figure. The global economic troubles that commenced in 2007 have not had amajor impact on industry concentration as of early 2010. IBISWorld believes that the medium level of concentration isattributed to: (1) the number of players in this industry; and (2) the vast number of markets covered by the industry. It isestimated that there are more than 10,000 shipping companies in the world, though most are small local operations. Therise in shipping activities is the result of the interplay of macroeconomic, microeconomic and policy-oriented factors. Worldtrade is facilitated through the elimination of trade barriers and the liberalization and deregulation of markets. Forexample, China's entry into the World Trade Organization saw transport and logistic requirements blossomed in thecountry. However, beyond the top 10 companies in this industry that holds more than 60% of industry revenue, the marketis highly fragmented with a large number of small regional players or family owned operations, especially in the coastaland inland water transport segments. The increase in mergers and acquisitions (M&A) has also pushed concentrationhigher over the current performance period. Maersk acquisition of P&O Nedlloyd saw their market share in the containermarket increase from 12% in 2000 to over 18% in 2006.

The Shipping industry covers a vast number of markets (refer to market segmentation) and therefore, makes it difficult fora company to be a prominent player in all markets. Again, using Maersk as an example, the company was the largestcontainer ship operator at the beginning of 2007 but does not feature anywhere else within the top 10 players in the othermarket segments. Another major player in the Shipping industry, Nippon Yusen Kabushiki Kaisha (NYK) was ranked thirdin bulk transport and tenth in container transport.

A cargo operator's decision to sail to a destination is determined by the level of fixed costs to operate a particular route.Fixed costs are expenses that need to be incurred prior to the delivery of a service and are independent of output. Firmswill only provide a service if there is a sufficient market. It can also act as a barrier to entry as incumbent firms that havealready incurred fixed costs and have large levels of output will be able to produce at a lower per unit cost. Other costssuch as port, stevedoring, warehouse leasing, and various ancillary services are also taken into consideration before anetwork route is determined, in addition to the availability of port capacity. Partnerships and alliances such as the NewWorld Alliance are helping shipping companies share their costs and better utilize their assets.

IBISWorld believes that concentration will increase during the outlook period. Numerous companies will be driven to the

wall during lean times for the industry, leaving them ripe for acquisition. Higher levels of competition and bunker oil priceswill push margins lower in the industry, increasing the possibility of further M&A activities as companies seek to expandtheir geographical reach and distribution networks by acquiring struggling firms.

Top 5 Operators by company, 2007

ContainershipsUnits

Vessels Bulk TransportUnits

Vessels

Maersk 505 COSCO 324

MSC 282 Mitsui O.S.K. Lines 145

CMA CGM 234 NYK Line 119

Evergreen 160 "K" Line 92

Hapag Lloyd 128 Zodiac Maritime Agency 62Source: Various industry sources


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GEOGRAPHIC SPREADYear: 2009Geographical Spread by Revenue

Region Percentage

Europe 43.2

North Asia 26.5

South East Asia 9.2

North America 8.4

Africa & Middle East 6.8

India & Central Asia 2.7

South America 1.9

Oceania 1.3

By definition, the global shipping network covers the entire globe, but the highest volume and value routes are primarily inEurope, North Asia and North America. The performance of this industry depends on the same broad factors thatdetermine economic performance such as GDP, and the level of trade and growth within industries that use ships as amode to transport cargo.

Some of the major waterways in the world are: the North Atlantic, between Europe and eastern North America; theMediterranean-Asian route via the Suez Canal; the Panama Canal route connecting Europe and the eastern Americancoasts with the western American coasts and Asia; the South African route linking Europe and America with Africa; theSouth American route from Europe and North America to South America; the North Pacific route linking western America

with Japan and China; and the South Pacific route from western America to Australia, New Zealand, Indonesia, andsouthern Asia.

Europe

The Shipping industry in Europe represents an estimated 43.2% of total revenue. Based on data from the EuropeanCommission, around 90% of European Union (EU) external trade and more than 40% of its internal trade is transported bysea. It corresponds to over 3.5 billion tons of goods and 350 million passengers per year. It has a merchant fleet of morethan 900 ships with a capacity of around 7.5 million deadweight tons. Europe also roughly has 270 international sea portsand 210 inland ports. Greece has the largest number of vessels and represents slightly more than 16% of the total shipsin terms of deadweight tonnage, while the fleets of countries of Central and Eastern Europe dropped marginally. In 2008,European shipping controlled 40% of the global merchant fleet. The average age of EU ships was 9.7 years.

Short sea (coastal) shipping (SSS) is also prominent in Europe. The EU defines short sea shipping as the movement ofcargo and passengers by sea between ports situated in geographical Europe or between those ports and ports situated innon European countries having a coastline on the enclosed seas bordering Europe. SSS represents around two thirds ofthe entire EU-25 maritime transport of goods, and the EU has set up a program to support SSS in Europe. The MarcoPolo Programme is an EU run initiative to provide funding to projects that will result in an important transfer of freight off


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heavily congested roads to more environmentally-friendly modes of transport. In 2006, 16 projects were selectedamounting to $27.6 billion.

The EU also has a strong cruise market as they are the leaders in cruise ship construction and refurbishment, with ordersworth more than $22.3 billion up to 2010. It is also a major source of inbound tourism as over 2.8 million cruise

passengers embarked on their cruises from European ports in 2005.

In Russia (for reporting purposes, Europe includes Western and Eastern Europe and Russia), shipping companies in thatregion are global players such as Sovkomflot, Novorossiisk Sea Shipping (Novoship) and Far East Shipping (FESCO).The majority of players in Russia are involved in the tanker and general cargo market. This is partly attributed to their richenergy and commodity resources. Its percentage share of world trade generated in terms of volume was 1.8% as of thebeginning of 2006.

Asia

The Asian region (for the purpose of this report includes North Asia, South East Asia and India & Central Asia) represents38.4% of estimated industry revenue in 2009. Asia features strongly in the shipping industry due to its strong economic

growth, enormous consumer market and relatively cost competitive labor resources. Centres such as Hong Kong,Singapore, Taiwan and Korea started this cycle with its strong manufacturing base (with the exception of Singapore),followed by China and India. China alone imported over 1.3 billion barrels of oil in 2008, a figure which continues to rise.By 2007, 11 of the world's 12 highest tonnage ports were located in Asia. It is worthwhile to note that the proportion ofcommodity trade is a lot higher than service trade and the former accounts for the largest share of total trade volume. Inparticular, the processing and manufacturing of goods have taken a high proportion and brought significant demands ofshipping in both import and export. It is also arguable that countries and/or regions with a strong shipbuilding base havecontributed significantly to the Shipping industry in those nations. As of the end of 2006, close to 80% of ships were builtin South Korea, Japan and China. Prior to the 1970s, Europe was the largest shipbuilding region in the world, and theirhuge fleet of ships still makes them a prominent player in the industry.

One of the major factors for the high proportion of revenue in this region may be attributed to China. China is the world's

top consumer of iron and steel, copper products, tin material, platinum and iron ore. They are also the second largestconsumer of oil, aluminum and lead due to their strong manufacturing base. In Central Asia, the dominant countries in thatregion are India and Turkey. Based on industry sources, India had a shipping fleet of over 600 vessels in 2006 with acapacity of around 6.62 million tons Gross Registered Tonnage (GRT). About one third of the vessels are used forinternational freight transport, with the remainder plying coastal and inland routes. The high proportion of vessels used forshort sea transport is mainly attributed to the smaller sized shipping companies in India and the vast coastline of 6,000 kmof navigable inland waterways of nearly 14,500 km. Unlike China, India focuses on the energy trade with tankers as wellas wet and dry bulk such as iron ore, coal, fertilizers and grain as their main market segment (as compared tomanufacturing that utilizes containers). India is also one of the few countries that promote fair and free competition fromobtaining cargo.

Turkey plays a small but important role in this industry as they are an up-and-coming nation in the Shipbuilding industry.

Turkey is in the top 10 shipbuilding nations worldwide and holds a strong position in small vessels. IBISWorld believesthat they will play an even bigger role in the Shipping industry, should they become part of the EU in the future.

North America

The North America region is represented by the US, Canada and Mexico. A study by the United Nations showed that theTrans-Pacific trade between Asia and North America represented 20.3 million TEU in 2007. It was expected that this trade


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route would exhibit the strongest growth of 6.5% per annum among the three major East-West trades (namely, Asia-NorthAmerica, Asia-Europe, and North America-Europe) between 2002 and 2015. The reason for the expected robust growth inshipping activity in this region is similar to Europe. Many companies in the manufacturing sector in the US and Canadaare outsourcing their production process to developing Asia such as China and Vietnam. It is also worthwhile to note thatthere is an imbalance of trade on this route. For example, in 2007, container flows from Asia to North America totaled 15.4million TEU as compared to 4.9 million TEU in the opposite westbound direction. This is likely to continue in the outlookperiod especially when China has a strong trade surplus with the US, and North American economic problems areongoing.

Growth in North American cruise passengers is expected to grow at a rate of 4.25% per year between 2005 and 2020. Anindustry source revealed that up to 30 brand new vessels will enter service between 2007 and the end of 2010. TheCruise Lines International Association reported that their member lines carried 10.18 million North Americans in 2006, upfrom 9.67 million in 2005. Passenger numbers increased to approximately 10.6 million by the end of 2007.

Africa and Middle East

The Middle East, and to a lesser extent Africa, has grown in importance as an east-west hub in the Shipping industry. The

Middle East's position as an important trading region has been boosted by the region's continuing infrastructuraldevelopment and diversification into non-oil products and services, such as technology. While expanding, many industryexperts believe that it will face challenges in overcoming bureaucratic and regulatory obstacles and in the provision ofexpertise in supply chain management and cargo security. One of the world's largest port operators (DP World) is basedin the United Arab Emirates, and the company's home port has recorded a sharp rise in shipping traffic over the pastdecade.


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Market Characteristics

MARKET SIZE

The global shipping industry is now at a major crossroads, where years of rapid growth appear to be at an end, and thefuture is uncertain. The global economic crisis has made credit hard to obtain, damaged business and consumerconfidence, and reduced freight volumes on key routes. The charter price of ships worldwide fell by astonishing amountsbetween May and December 2008.

Total real revenue in the Shipping Logistics industry is estimated to increase from $108.26 billion in 2004 to $138.48billion by end 2009. This represents a 5.0% increase on an annualized basis, indicating that it has been a good period forthe industry overall, despite the alarming change of fortunes between 2008 and 2009. During this period, majorcompanies placed ambitious orders for new ships as they struggled to build their capacity to meet demand. Now that thedemand has fallen away, shipping lines are cutting routes, cutting staff, and contemplating pulling some of their fleet outof the water in order to remain viable businesses during the downturn.

Strong global demand for commodities, particularly between 2006 and early 2008, has been a key driver of shippingactivities worldwide. Commodity prices endured significant price falls in 2008, but the ongoing medium term demand forresources in developing countries looks to be a ray of hope for the shipping industry. The fall in commodity prices has alsomeant a fall in fuel costs for ships, which has been a welcome occurrence due to the profit squeeze that had been causedby fuel costs in recent years. IBISWorld estimates that industry revenue will decline by 14% in 2009, bitten both by fallingvolumes and weak charter rates.

IBISWorld estimates that there will be 28,815 establishments and 10,690 enterprises in the industry by the end of 2009.Establishments are anticipated to increase by 0.4% over the current performance period. The average revenue perestablishment is estimated at $4.8 million. Establishment numbers in the past five years have been fueled by newparticipants especially in developing regions such as Asia and the Middle East, partially offset by a slowdown inestablishment growth in North America and Western Europe. IBISWorld estimates that establishment numbers will fall by2.3% in 2009, as an industry shakeout gains pace.

Total employment is estimated to reach 1.6 million people at a cost of $50.6 billion by the end of 2009. The industryportrays moderate labor expenses with wages accounting for 36.5% of revenue. The average industry wage is about$32,540, reflecting the moderate level of skills required by this industry. Wages are higher in developed and unionizedcountries as compared to emerging countries. The majority of seafarers are from China, followed by the Philippines.IBISWorld projects that employment and wages will decrease by 4.0% and 5.5% respectively in 2009.

As at January 2008, the world trading fleet was made up of 50,525 ships, with a combined tonnage of 728,225,000 grosstones. These figures have been increasing over the current performance period. The merchant fleet experienced furtherincreases in 2008 and 2009 due to orders previously under construction by Shipbuilders around the world (refer to reportC2541 - Global Civil Ship and Boat Building for further details), and is set to rise again in 2010.


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LINKAGESDemand Linkages

B-GL - Global MiningThe mining sector is a major user of water transportation services to transport cargo around the world.

C-GL - Global ManufacturingShipping providers transport a variety of manufactured goods such as clothing, apparels and accessories, computers andin-process goods around the world.

F4311-GL - Global Wholesale TradeWholesalers use sea freight logistics (especially bulky products) to transport goods into the country.

I5121-GL - Global Internet Service ProvidersVarious online softwares are available to assist importers/exporters to schedule, book and track shipments.

Supply LinkagesC2541-GL - Global Civil Ship and Boat Building

The Shipbuilding industry manufactures barges, cargo ships, container ships, ferryboats, fireboats, fishing boats,passenger ships, patrol boats and tankers for the logistics Shipping industry.

H4913-GL - Global Marine Port OperationThe industry provides wharves and docking facilities for ships to interface with land based transport.

DEMAND DETERMINANTS

The demand for shipping activities is determined by several economic and political factors; economic growth is a majorinfluencer but movement of cargo is also facilitated by trade treaties, economic environment, fiscal policies, tariffregulations and political understanding. It is a cyclical industry and to a certain extent depends on trade cycles. Heavy andlow value commodities are exported and imported in bulk vessels, whereas lighter and high value commodities areexported and imported on container ships. Generally, the factors influencing demand for the Shipping industry include:

Real GDP growth and Disposable income: An increase in economic activity and disposable income will lead to greaterdemand for goods and logistic services. Strong real GDP growth has led to an increase in merchandise trade whereasgrowth in disposable income has increased leisure activities such as cruising. Passenger shipping is represented bycruise operations and its demand is determined by demographic and income factors.

Demand for bulk shipping fluctuates according to demand for commodities (i.e., shipping is a derived demand). Forinstance, improved US-China trade relations brought about the export of wheat which in turn led to increased demand forbulk shipping services between these two countries. In addition, the production of steel in China has generated coal andiron ore movements into China, partly due to their entry into the World Trade Organization (WTO).

Movements in freight rates can influence shipping line choice and national flagged shipping face strong competition in thisregard from flag of convenience (e.g. Bahamas and Bermuda) ships.

Exogenous Shocks - fuel: The increase in fuel prices will have a positive effect on demand as water transport is thecheapest form of cross border transportation against other modes. In addition, the level of crude oil production determinesdomestic deep-sea crude oil movements.


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Price of commodities: Demand for commodities is linked to price. For example, the price of coal had been increasingsince 2001 which also saw the Baltic Dry Index, an overall measure of commodity shipping costs on different routes andship sizes, advancing. The increase in price also saw world seaborne trade in coal rise from around 2,500 billion ton-milesin 2001 to 3,140 ton-miles in 2005. By late 2008, this had all changed, with the Baltic Dry index plunging 79% in the spaceof one month, and global commodities prices trending downwards.

Routes and destinations offered by operators: The higher number of routes and destinations offered by shipping providerswill likely increase demand. Around 90% of international trade is transported by sea and is largely due to a shipper'sability to cover more than one geographical area at any given time.

Seasonal Factors: Depending on the region, seasonal and weather conditions can affect the demand for shipping. Forexample, in Asia, the monsoon season, which occurs from October to March can slow down the voyage of vessels andimpedes chartering operations.

DOMESTIC AND INTERNATIONAL MARKETSDomestic and International Markets Trade

Trade in this industry is highThe trade trend is steady

Domestic and International Markets Analysis

IBISWorld measures the level of international trade in this industry based on the international routes and the level of traffic(in terms of tonnage) operated by shipping transport operators. With billions of tons of cargo being transported acrossborders each year by companies with global reach, there is no doubt that shipping is a highly internationalized industry.That said, calculating an exact figure for trade is difficult due to a number of reasons. Many ships on international routescarry cargo intended for domestic destinations along the way, and a similar thing can be said for international multi-legpassenger cruises that offer packages for transit between two points within the same country.

Global demand for shipping has increased over the majority of the last five years. Many operators have catered for thisincrease by adding more vessels into their fleet and forming partnerships (e.g. the Grand Alliance) to ensure highutilization and coverage of vessels. For example, strong global demand for crude oil resulted in ton-miles for thiscommodity rising by 4.2% in 2005. This indicates that crude oil supplies were moving longer distances in larger volumes.Crude oil from the Barents, Baltic and Black Seas are increasingly being sourced from Europe and North America andfrom West Africa to Asia. A similar trend was also seen in the dry cargoes segment where ton-miles rose by 5.7%, whiletonnage transported increased by 3.5%. This may be attributed to many of the manufacturing and production facilitiesrelocated from Western nations to Asia.

The World Trade Organization (WTO) reported that world merchandise trade grew by 6.0% in 2007, down from 8.5% in2006, which was the second highest since 2000 due to strong global real GDP growth. Weakening demand in developedcountries, realignments in exchange rates and fluctuations in the prices for commodities (such as oil and gas) introduced

uncertainties into the global markets in 2007, were cited as factors responsible for the fall. These growth figures can alsobe partly attributed to productivity and prosperity gains made by some of the larger developing countries. Merchandisetrade by dollar value increased 15% to $11.76 trillion in 2006. Commercial services exports were up by an estimated 11%and reached $2.71 trillion in 2006. On the other hand, world seaborne trade amounted to 8.02 billion tons in 2007, up from7.76 billion tons in 2006.


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The share of developed market economy countries in goods loaded and unloaded in 2005 were 33.3% and 53.1% of theworld total respectively. For these countries, crude oil and petroleum products accounted for 5.2% and 21.5% of the totalworld exports, while imports accounted 66.9% for crude oil and 50.5% for petroleum products. Among the marketeconomies, Europe was the most important exporter of crude oil and petroleum products, with a total of 105.3 million tons(4.3% of the world total). The largest importer of crude oil and petroleum products was North America with 681.9 milliontons (28.1%), followed by Europe with 542.9 million tons (22.4%), and Japan with 247.5 million tons (10.2%).

The dry bulk segment has the largest share of industry tonnage in terms of dead-weight tons. The share of globalshipments of developed market economy countries was 54% of exports and 55.6% of imports. Europe was the largest drycargo market for exports and imports with 1.07 billion tons or (22.7% of world exports) and 1.51 billion (32.2% of worldimports) respectively. The US, Canada, Australia and New Zealand were also large exporters of dry shipments. This islargely attributed to the rich resources inherited by these countries: iron ore, coal and grain.

In terms of developing countries, the share of seaborne exports was 49%, while imports were 30.4%. It has beenrelatively stable but the share of products differs markedly. The combined share of petroleum products and crude oilexports by developing countries represented 67.6% and 86.5% respectively. In terms of imports, the shares of crude oiland petroleum products were 26.3% and 42.4% in 2005. The variations between developed and developing countries in

the crude oil and petroleum product segments reflect the Gross Domestic Product of these regions. In the dry bulk sector,developing countries' share of both exports and imports were 32% and 30.5% respectively.

Leading exporters and importers in world merchandise trade, 2007 (Top 5)

ExportersBillion Dollars

ValuePercentage

Share ImportersBillion Dollars

Value

Germany 1326.4 9.5 USA 2020.4

China 1217.8 8.7 Germany 1058.6

USA 1162.5 8.3 China 956

Japan 712.8 5.1 Japan 621.1

France 553.4 4.0 UK 619.6

Total 4972.9 100 Total 5275.7Source: World Trade OrganizationWorld Seaborne Trade 2004-2007

BillionMetric Tons Billion

2004 6.76 N/C

2005 7.11 5.2%

2006 7.65 7.6%

2007 8.02 4.8%Source: United Nations COMTRADE database

BASIS OF COMPETITIONIndustry competition is highIndustry competition is increasing

The global Shipping industry has a high level of competition, with the level on the increase due to over-supply and weakdemand as a result of both a cyclical downturn in the industry, and the global economic crisis. The industry does exhibit


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high initial investment costs, operating and berthing costs that can fluctuate according to both capacity and demand.However, there are no extra costs borne by new entrants that are not borne by incumbents.

Internal Competition

Internal competition in the global Shipping industry stems from both conference and non-conference operators.Internationally, a conference is a particular type of agreement being: a route-specific agreement between carriers tocharge common freight-rates, pool revenue and costs, pool profits, and engage in capacity management. Conferencesalso set out the schedule of sailing, ports of call and other minimum service levels. A conference is conventionally definedas an unincorporated association of two or more ocean carriers carrying on two or more businesses each of whichincludes, or is proposed to include, the provision of liner cargo shipping services. Notwithstanding the obvious competitionbetween the conference and non-conference operators, it is not uncommon for conference members to compete witheach other on providing better service levels in an attempt to introduce product differentiation on a small scale. The EUruling in October 2008 to ban conferences operating out of its ports was designed to increase competition in the future,though it remains legal for conferences to operate in many parts of the world.

Conferences also compete with "Tramp" shipping. Tramp ships are generally not controlled by a specific route with a

single commodity. Large oil tankers that are built for time charters for specific origin-destination markets are the exception.The basic tramp vessel might haul coal, grain, fertilizer, and timber in the same year. Adaptability is necessary to minimizelost revenue possibilities that will arise. These vessels might not always be of low-cost, optimal design for any of themovements, but that is a basic trade-off to being flexible. A major consideration of tramp owners is the nation in which theship is registered. The nation of registry requires the shipowner to comply with specific manning, safety, and taxprovisions. Liberia, Greece, and Panama are nations imposing relatively loose requirements in such areas. For thisreason, many of the world ships are registered in these countries.

Specific factors that influence competition in this industry are:

Price (Freight charges): Shipping companies compete on the freight rates charged. Freight rates are usually negotiatedbetween shippers and shipping operators. Rates are based on the type of cargo transported and the weight/volume of the

cargo. Generally, as volume increases, rates tend to fall. The excess capacity that shipping lines are predicted to havefrom 2009 onwards will also serve to drive prices down and increase competition.

Price of Charter: The majority of operators lease and own their vessels. Operators that can rent vessels at a lower pricewill enable them to be more competitive in the industry.

Geographical Coverage: Larger freight companies that have a bigger fleet and brand recognition will be able to gain ahigher market share as they can offer their services at a lower cost or even charge a premium for services to areas whichare not provided by other carriers. Furthermore, the more routes and destinations offered by shipping companies, themore likely shippers will seek their service as better freight and charter rates can be negotiated.

Quality of Service: Shippers that provide reliable service and good reputation can have a competitive advantage in this

industry. This is especially true when there is excess capacity in the industry and rate cutting is common.

Technology: The use of the Internet to reach the customer has also been a successful competitive strategy deployed bymost operators. The internet is used for bookings and payments as well as cargo tracking services, which reduces costsfor both the supplier and consumer.


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Partnerships and Alliances: International alliances between domestic and foreign shippers, such as marketing andcapacity sharing arrangements, have significantly increased competition in international markets. Through code sharingarrangements, foreign providers can obtain access to destinations in which they would otherwise not be able to access.

Competition is higher in the international shipping segment as compared to coastal and inland water transport. Coastal

and inland water trades in some countries such as the US and Australia is protected. This is to ensure that local playerscan have a 'fair go' in this industry.

External Competition

The industry is also affected by substitutes such as road, rail and air transportation. Domestic water carriers compete fortraffic with other modes and to a limited degree with other water carriers. The major competition is from rail services andpipelines. Rail and road competition is for dry-bulk traffic while pipeline competition is directed at the movement of bulkliquids. Air freight competed on the grounds of having a superior level of service that is often preferred by customers whoare moving small volume, time-sensitive and valuable freight. Just-in-time production and inventory management policieshave added impetus to the demand for air freight, though the sharp rise in oil prices between 2005 and mid 2008 hit thisfuel-intensive mode of transport quite hard.

LIFE CYCLELife Cycle StageThis industry is in the decline stage of its life cycle

Life Cycle Reasons Industry revenue and value added has been growing at or above real GDP growth during the current performance

period, though this is set to cease from 2009 Mergers and acquisitions feature prominently in this industry as firms compete for market share The number of establishments in the industry has only increased marginally over the past five years, and expected to

undergo a shakeout from 2009

Technology improvements on ships have been moderate and the classification of ships has not changed materially.Product offerings are clearly segmented in this industry

Life Cycle Analysis

IBISWorld believes that the global Shipping industry is in the decline phase of its economic life cycle. Over the past fiveyears, value added growth has been above real US GDP growth on an annualized basis. The industry is determined bythe demand for water transport which picked up since the economic downturn in 2002, remaining robust for a number ofyears following. The bubble finally burst in mid 2008, with shipping prices plunging at alarming rates, profits beingsqueezed, and a number of operators being forces from the industry due to dwindling revenue and fierce competition. Atthis point, the industry switched into a decline that may well take a number of years to play itself out.

Mergers and acquisitions are prominent in this industry. Major players have further expanded their market share in thisindustry, an example being Maersk with the acquisition of P&O Nedlloyd in 2005. Joint ventures in this industry are alsoprominent for companies to expand their geographical reach and share the costs associated with shipping. Many of thealliances were only formed recently (in the last decade) as companies look at ways to improve operations in a relativelycompetitive environment.


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Many governments support their local shipbuilding industries, especially in developing countries (as witnessed by Korea inthe 1960s and China in the 1990s) as it promotes employment. When demand for maritime transport increases, nationswill favor their own flagged vessels rather than a foreign flagged vessel to transport goods. Europe and Asia have beenthe largest shipbuilding nations over the past fifty years and feature prominently in the list of the top 10 shipping lines inthe world.

Establishment numbers are expected to grow by a mere 0.4% over the current performance period. While demand forshipping services increased during most of the current performance period, the level of globalization in this industry wasmoderate, with many domestic operators competing with foreign firms. There has been a slowdown in new technologyand systems in this industry. While ships are more sophisticated, ship operations remain relatively unchanged. Over thelast five years there have been new trade routes opened and capacity and service quality has changed according toderived demand. For example, increase trade with China has led to greater investments into US ports in the Far West toease congestion.


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INDUSTRY CONDITIONSGlobalLogistics - Shipping

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Industry Conditions

BARRIERS TO ENTRYBarriers to entry in this industry are mediumThese barriers are increasing

The high start-up costs of equipment (vessels) are a formidable barrier to entry for the global shipping industry, althoughdepending on the trade or market that the new entrant wishes to enter, second-hand equipment may be adequate. Theprice of a new oceangoing vessel costs anywhere between $120 million and $400 million, with fast increases in price over2008-2009. Ships are also becoming bigger and more technologically advanced. In 1990, the largest container ship wasat around 4,500 TEUs; however in 2007 it reached 14,500 TEUs. Significant capital investments are not only required forvessels, but also the technology, equipment and support services that goes with shipping. However, there are no extracosts borne by new entrants that are not borne by incumbents when the company is up and running.

While labor in this industry is moderate compared to many other industries, the number of qualified seafarers and marinepersonnel have been declining especially in developed nations such as Europe. It may be difficult for start-ups to obtain

qualified maritime personnel and may need to invest further by providing additional training to new recruits. Increasingregulations pertaining to environment protection may also constitute a barrier to entry.

Many major cargo carriers are relying on long term contracts to increase revenue and market share in this industry. Themajority of routes are determined by demand and supply factors which is usually volatile. Many network routes areestablished or suspended because of demand, therefore having a strong reputation with freight forwarders, groundlogistics companies and custom service is essential for participants in this industry. The increasing demand for expressdoor-to-door integrated service (Couriers) is also slowly gaining market share from this industry further increasing thelevel of competition and hence barriers to this industry.

The opportunity for a new entrant to join a Conference would be based on the service levels that the operator wishes tooffer, and whether they are comparable to the standards set by other operators in the Conference. Membership of the

Conference system offers considerable advantages in terms of stability of rates. If the entrant wishes to enter the trampmarket, it would need long term contracts if it is to survive. In this market, it will also have to compete with strongcompetition from lines with flags of convenience.

IBISWorld believes that margins in the Shipping industry are declining, with strong price pressure set to occur in comingyears. While revenue had been increasing strongly due to high demand for shipping services until mid 2008, the oversupply of ships and volatile bunker fuel prices have been affecting profits in this industry. While many major and existingplayers should be able to accommodate this working environment, new players may find it difficult to get the returnsnecessary to survive in the current life cycle stage of the industry in 2009 and 2010.


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TAXATION

Being a global industry, the operations of shipping logistics companies are taxed through hundreds of different localtaxation regimes. Generally, industry taxation regimes in each region/country don't differ markedly from those in thebroader economy, though some issues are of greater relevance to this industry, such as fuel and security.

Taxes that typically make up significant proportions of industry operators' tax bills include fuel tax, payroll tax, propertytax, excise tax; and income tax.

INDUSTRY ASSISTANCEThe level of Industry Assistance is lowThe trend of Industry Assistance is steady

There are no specific tariffs for this industry

This industry is not directly affected by tariffs. However, the reduction in general tariffs on goods carried by water willfacilitate international trade and therefore influence demand for international shipping. Industry assistance over the pastfew decades have been provided through the liberalization of the shipping market and international trade.

Cabotage Law

Many countries enforce cabotage laws. The broad purposes cited by all countries for cabotage laws are to assure reliabledomestic shipping services and the existence of maritime capability that is completely subject to national control in timesof war and national emergency. Cabotage laws such as the Jones Act in the US do not provide a direct subsidy todomestic water carriers, but they do provide a monopoly for US coastal and intercoastal carriers. When implemented in

the correct manner, these laws provide safe, reliable and cost effective transportation options to shippers. Critics of suchschemes cite the lack of incentive to operate in an innovative and efficient manner.

REGULATION AND DEREGULATIONThe level of Regulation is mediumThe trend of Regulation is steady

The Shipping Logistic industry is moderately regulated. Standards and regulations are set by both national governmentauthorities and industry associations. The majority of government regulations is enforced by the nation's Department ofTransport and is similar in each country. On a global scale, regulations and benchmarks are set by the International

Maritime Organization (IMO).

International Maritime Organization

Regulation in the Shipping industry is governed by the International Maritime Organization (IMO). Adopted in Geneva in1948, IMO's main task has been to develop and maintain a comprehensive regulatory framework for shipping and itsconcerns today include safety, environmental concerns, legal matters, technical co-operation, maritime security and the


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efficiency of shipping. Some examples of proposals made by the IMO include "Goal-Based Standards (GBS)", whichaimed to strengthen safety management at sea, and protocols to prevent air pollution arising from ships' exhausts.

IMO's specialized committees and sub-committees are the focus for the technical work to update existing legislation ordevelop and adopt new regulations. Some of the measures undertaken by IMO include: (1) prevention of accidents,

including standards for ship design, construction, equipment, operation and manning - key treaties include SOLAS, theMARPOL convention for the prevention of pollution by ships and the STCW convention on standards of training forseafarers; (2) rules concerning distress and safety communications, the International Convention on Search and Rescueand the International Convention on Oil Pollution Preparedness, Response and Co-operation; and (3) conventions whichestablish compensation and liability regimes - including the International Convention on Civil Liability for Oil PollutionDamage, the convention establishing the International Fund for Compensation for Oil Pollution Damage and the AthensConvention covering liability and compensation for passengers at sea. The inspection and monitoring of the aboverequirements are the responsibility of member states but the IMO has an extensive technical co-operation program forundeveloped and developing countries.

Firm operations are also subject to and affected by a variety of federal, state, local and foreign environmental laws andregulations relating to the discharge, treatment, storage, disposal, investigation and remediation of certain materials,

substances and wastes. Some of the initiatives and on-going projects by the IMO include: (1) the International Conventionfor the Safety of Life at Sea the International Convention on Standards of Training; (2) Certification and Watchkeeping forSeafarers (STCW) which establishes basic requirements on training, certification and watch-keeping for seafarers; and (3)to the Convention on the Prevention of Maritime Pollution (MARPOL 73/78), which required double hulls on all tankers.These initiatives were prompted by representatives of the US. The following analysis will therefore concentrate onindustrialized nations (US and Europe) that are the heaviest regulated in the world.

United States

The Oil Pollution Act of 1990 (OPA-99) mandates that single-hull tankers serving U.S. ports be phased out in stages,based on age and size, beginning in 1995. IMO regulations for tankers serving foreign ports require that new tankersdelivered after July 6th 1996 have doubled hulls and that 25 year-old single-hull tankers be retro-fitted with double hulls

beginning in 1995. At the end of 1998, Clarkson's Tanker Register (a comprehensive registry of seagoing tankers)reported that only 26% of the world's tankers were equipped with double hulls.

The U.S. Coast Guard's Office of Response is responsible in administering Oil or Hazardous Material Pollution PreventionRegulations for Vessels. Response plans are required by law for each vessel owner or operator of hazardous shipments.

In terms of safety the IMO Safety of Life at Sea (SOLAS) conventions requires that all ships of at least 500 grossregistered tons meet International Safety Management (ISM) mandated safe-management standards. Passenger ships,tankers, bulk carriers, and high speed cargo ships had to be ISM certified by July 1, 1998. Other cargo ships had to beISM certified by July 1, 2002. Vessels that did not have ISM certification were denied access to U.S. ports. So far, ISMcertification has not restricted the shipping capacity available for the deep-sea trade. The Jones Act (Section 27 of theMerchant Marine Act of 1920) precludes foreign owned, foreign built and foreign flagged vessels from participating in the

U.S. domestic trade.

From March 2004, the Bureau of Customs and Border Protection (CBP) has enforced a rule requiring ocean carriers toelectronically submit the names of the "actual shipper" of containerized cargo destined for the United States. As part of itsimplementation of the Trade Act of 2002 and the Maritime Transportation Security Act, CBP issued a rule requiringcarriers to provide the names of all foreign shippers of inbound containerized cargo 24 hours prior to the vessel'sdeparture from the port of loading. Parties affected by this ruling such as the World Shipping Council, the National


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Industrial Transportation League, the National Customs Broker and Forwarders Association of America, and the RetailIndustry Leaders Association asked the government to revise the text of that rule. The groups objected to provisionsrequiring ocean carriers to obtain and provide the names, in some cases, of their "customers' customers", who can beforeign vendors and suppliers that do business with ocean consolidators (known as NVOCCs) and are not directlyinvolved in a commercial relationship with the carrier. Shipowners are also required to keep their ships sea-worthy andcertificates are issued after periodical inspections during ship surveys. As of January 1, 2007, vessels that operate on thenavigable waters of the US must be equipped with and operate electronic charts.

Europe

Regulations relating to shipping or maritime matters in Europe are part of the body of law and treaty developed by theEuropean Community. On December 1986, the Council of Ministers adopted four Regulations which lay the foundationsfor most of EC shipping law such as liner conferences, the environment and pilotage. Since then, the commission has setup a maritime policy function with the task of analyzing maritime affairs and the policies affecting them, coordinatingbetween sectoral policies and piloting the development of cross-cutting policy tools.

In October 2008, the EU ended the anti-trust immunity that allowed shipping lines to organize themselves into

conferences. From that date, the EU stopped allowing the issuance of certificates in respect of the vessel belonging to a"conference line". European shipping conferences involved shipping lines applying joint tariffs for transporting containersto and from the European Union. The conferences tended to make agreements on tariffs, capacity, etc for a certain tradeto reduce volatility and price competition. The carriers must now publish their own freight charges and the varioussurcharges (for terminal costs, fluctuations in fuel and exchange rates, congestion in ports).

Others

The International Labour Organization is a specialized agency of the United Nations that is devoted to advancingopportunities for women and men to obtain decent and productive work in conditions of freedom, equity, security andhuman dignity. Founded in 1919, it seeks to promote employment creation, strengthen fundamental principles and rightsat work. The ILO hosts the International Labour Conference in Geneva every year in June. At the Conference,

Conventions and Recommendations are crafted and adopted by majority decision. The Conference also makes decisionson the ILO's general policy, work program and budget. The organization plays a huge role in the lives of seafarers byensuring their fair treatment and safety.

Environmental concerns are major issues in this industry. The reduction of air emissions from ships has become a majorfocus of regulatory attention in the Shipping industry. In relation to air emissions, the EU was looking to the discussions inIMO on the revision of MARPOL to come forward with measures to reduce air emissions by the end of 2008. The industryis also committed to reducing carbon emissions. The IMO in conjunction with various Federal Governments are takingaction to reduce its CO2 emissions such as CO2 indexing, emission trading and differentiated harbor dues.

COST STRUCTURE

Year: 2009


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Item Cost %

Wages 36.5%*

Purchases 32.2%*

Depreciation 6.5%*

Rent 4.3%*

Utilities 1.5%*

Other 16.8%*

Profit 2.2%*

IBISWorld believes that the cost structure of companies in this industry varies depending on the size of the company; theservices offered by the company, the value of contracts gained, capacity utilization, geographical spread of customers;and the level of prices charged for products.

In general, labor costs makes up the single largest proportion of an entity's expenses at 36.5% of revenue, indicating thatthe industry is labor intensive. Larger firms tend to have higher costs because they have broader service lines, cover awider geographical area and in more industrialized nations, are likely to be unionized. For larger companies, effectiveroute and schedule management and sourcing seafarers from cheaper overseas countries can lead to efficientmanagement of labor expenses. For vessel-owner operators, labor costs are more difficult to control and owners cangenerally only increase revenue (and reduce the proportion of labor expenses to revenue), by working longer hours andoperating services at higher fees. Labor costs as a proportion of revenue have increased from 2008, as revenue hasfallen by a larger percentage than what has been saved through staff cuts.

A major expense in this industry is purchases which include the acquisition of vessels, materials, equipment and bunkerfuel. Because these costs are relatively large, this industry is vulnerable to fluctuations in the prices of materials and

supplies. Purchases account for around 32.2% of industry revenue. Bunker fuel is one of the most significant expenses fora shipping company (within the "purchases" segment), often accounting for around 20% to 30% of all operating expensesfor firms in this industry. The expenditure on fuel that companies were forced to make during 2007 and 2008 fluctuatedwildly, but from late 2008 has settled at a more moderate level. Fuel prices and availability are subject to wide pricefluctuations based on geo-political issues and global supply and demand over which no one company (or country) hascontrol. Between 2005 and 2006 alone, bunker prices rose by an average 26%. Many smaller companies lack thefinancial resources and expertise to buy fuel in bulk, enter into forward purchase contracts for fuel (whereby they agree totake delivery of a set amount of fuel, at a fixed price, on a future specified date) and lack the negotiating power toincorporate fuel cost adjustments or escalation provisions into long-term contracts.

The price of new ships has been another main upward driver of shipping costs in recent times. Shipbuilding costs in 2006were about 25% higher than in 2005, and these prices soared even further until the economic crisis of 2008. While the

price for commissioning a newly built ship is much lower in 2009, many shipping companies are locked into veryexpensive contracts that were signed in 2007 and 2008, and paying in installments into 2009. During the currentperformance period, ships became bigger and more expensive as firms sought to expand their fleet size to exploiteconomies of scale. All tanker vessels are expected to be double-hulled by 2010, and shipping companies have beenputting in strong orders for vessels during most of the current performance period to meet this regulatory requirement.


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Other expenses include insurance, advertising, cleaning costs, repairs and maintenance of vessels, which account foraround 16.8% of industry revenue. Costs for storage during repairs (such as dry dock) can be prohibitive. As firms attemptto gain an advantage in the market, advertising and promotion costs increase; because industry competition is fierce,operators must constantly update their advertisements. Since the terrorist attack of September 11, 2001 on the US andthe subsequent war against terrorism, costs relating to insurance and security of cargo have increased. The major playershave passed this cost increases to their clients in the form of surcharges. Another driver of insurance premiums in 2008and 2009 has been the increased incidence of piracy off the coast of Somalia. Finally, average returns within the industryhave fallen to around 2.2%, with numerous carriers expected to record a substantial loss in 2009.

CAPITAL AND LABOR INTENSITYThe level of Capital Intensity is medium

The cost of buying and/or leasing vessels and other equipment is high. In addition, once purchased, labor input is

required Capital costs are less significant in ship management segment

The handling of cargo requires less labor as compared to passengers due to the technological advancement in thetracking and handling of goods

Technological advancements have reduced labor input

The industry is moderately labor intensive with wages accounting for 36.5% of revenue, with a typical firm in the industryusing approximately 5.6 units of labor for each unit of capital. This means that for every dollar invested into plant andequipment, approximately $5.60 is spent on labor. The average industry wage is moderate at around $32,500 per person,per year, reflecting the skilled nature of maritime work; however, many industry positions are as low skilled deck hands orhospitality workers, and a large proportion of positions are part time in nature. The industry portrays a medium level ofcapital intensity owing to the high costs involved in ship acquisition, offset by the less capital intensive segment of shipmanagement. The cost of new builds, depending on the type and size, can vary between $120 million and $400 million. Itis also worthwhile to note that in most cases, ship management services providers do not actually own the vessel thatthey are operating.

Water carriers are not highly labor intensive in terms of their movement operations but may require more labor in terminalareas for certain types of freight. Labor costs have not moved higher over the last five years as there is a large pool ofseafaring labor readily available from developing countries. In addition, technological advancement in ship operations hasallowed multi-skilling to take place and therefore has reduced labor input but increased the skill level required by laborers.In addition, ships are becoming more sophisticated with high value vessels such as Liquefied Natural Gas (LNG) andLiquefied Petroleum Gas (LPG) vessels having the best safety record with the best crews and officers. However, laborrequirements are much higher in cruise ships as compared to other carriers due to the amenities and service offeringsprovided by cruise liners to their passengers.

It is however important to note that while vessels are becoming more sophisticated and modern seafarers are required todo multiple tasks, wages accorded to seafarers are still considered low. Prior to the beginning of 2007, the minimumsalary for a seafarer was $500 per month. This was increased to $515 per month by the International Labour Organization(ILO) effective January 1, 2007.

Over the longer term, capital investment within the industry is likely to increase as competition becomes more intense andthere is a greater demand for high quality, safe and environmentally sound travel options. Sightseeing firms will be able to


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gain an advantage in the market by increasing investment in technologically advanced vessels with on-boardcommunications and entertainment equipment (cruise liners) and improved route and schedule planning programs.

TECHNOLOGY AND SYSTEMS

The level of Technology Change is medium

Technology is focused on maintaining a competitive cost structure by controlling acquisition and operating expenses, andinvesting in global standardization, information technology infrastructure and product development.

One of the major technological developments associated with liner shipping has been the design of the ships themselves.Ships with more fuel-efficient engines and shallow draughts have helped the industry to be more competitive through costsavings. Vessels today are also becoming much larger. The demand for ultra-sized container ships (vessels over 12,600TEU) surged at the end of 2006. Based on industry sources, as of August 2007, global demand for these vessels totaled80 ships as compared to 0 in the same period in 2006. The demand for such vessels is due to strong growth incontainerized cargo trades and substantial expansion on container fleets due to competition among the global shippinglines. Some of the other on-going technology improvements made on ships are propulsion, transmission and engine room

equipment, noise, shock and vibration controls, security, satellite and navigational equipment and electrical equipmentand power supply.

The use of satellite communications is another major technological advance in the industry facilitating the Global MaritimeDistress and Safety Signals (GMDSS) system. The GMDSS is used for maritime safety information, to communicate withland and to provide search and rescue information. Paper navigation charts have been replaced with electronic chartdisplay systems. These digital charts provide greater accuracy than paper charts, and are very reliable in shallow watersand tight waterways such as paths through coral reefs and other reefs.

Through Information System Agreement (ISA) the world's major ocean carriers are co-operating to promote GlobalElectronic Commerce in the Maritime Industry. ISA has been a leader in developing standards for electronic datainterchange (EDI). With the advent of the internet, the participants are creating web-based applications that can speed the

delivery of important information amongst themselves and their customers. While it does not usually occur very often,container losses at sea does occur. Many ships have lost their cargo due to rough weather. Modern container ships makeuse of rigid, fixed lashing structures as opposed to old-style lash-ups of chain and wire. Efficiencies in ship operations anddesign include the burning of low-sulphur bunker oil which can reduce fuel use by 10%. The design of new cargo shipshas reduced the number of pillars in the structure, which allows another 10% of cargo to be carried.

INDUSTRY VOLATILITYIndustry revenue volatility is medium

In theory, this industry should not display high levels of volatility. Industry output is affected by economic activity, as

measured by world GDP. As world economic growth is more stable than the GDP growth of individual countries, it istherefore less volatile. The level of international trade will influence the demand for shipping logistics. International tradehas been increasing throughout the current performance period. The shipping transport industry caters for a diverse rangeof clientele, which should limit the degree of revenue volatility. In the passenger segment, industry output is driven by thecontraction or expansion of international sea travel, which has been expanding for over 20 years. Trade fluctuations arecaused by a number of factors such as exchange rates, pricing levels of commodities, domestic demand for imports andincome levels. Shipping is the cheapest form of cross-border transport, leading to relatively stable demand over time.


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However despite all of this, the industry does indeed exhibit high revenue volatility. Because of the length of time that ittakes to order and build a ship, the shipping industry tends to either overshoot or undershoot on its demand forecasts forits fleet. This creates regular supply/demand imbalances, which have a big impact on shipping rates and hence revenue.In October 2008 alone, the charter rate for dry bulk ships fell by 79% in the wake of the global economic crisis, yet theworld shipping fleet is set to grow by over 10% in both 2008 and 2009 as pre-existing orders are delivered to their newowners. It is this constant battle to accurately predict economic and demand conditions years in advance that makes itdifficult for shipping lines to match their fleet levels with demand levels that is a key driver of the revenue volatility that iscurrently being witnessed, and will continue to haunt the industry until at least 2011.

IBISWorld measured industry revenue volatility at 6.1 over the current performance period; a score of between three and10 points indicates a medium level of volatility.

GLOBALIZATIONThe level of Globalization is highThe trend of Globalization is steady

Globalization measures the extent to which this division operates on a global scale and is determined by: (1) level offoreign operators; and (2) the level of foreign interaction by local operators in a particular country. IBISWorld rates theindustry as having a high level of globalization, with the majority of the industry's major companies operating in multiplegeographic regions. In 2006, the top 35 maritime countries according to deadweight tonnage registered controlled over95% of the world merchant fleet. Foreign flagged ships carry significant tonnage, particularly in the international shippingsegment, while domestic and coastal shipping are normally restricted to vessels registered and owned by operators fromthe domiciled country and/or region. For example, The Jones Act (Section 27 of the Merchant Marine Act of 1920 - US)precludes foreign owned, foreign built and foreign flagged vessels from participating in the US domestic trade.

The level of foreign interaction by local operators in a particular country is also considered medium and increasing. This islargely attributed to the diversity of operators from various countries. For instance, the leading 10 container serviceoperators as of 2008 were: A.P. Moller Maersk Group (Denmark), Mediterranean Shipping Company S.A. (Switzerland),

CMA-CGM (France), Evergreen Group (Taiwan), Hapag-Lloyd (Germany), COSCO Container Lines (China), APL(Singapore), China Shipping Container Lines (China), NYK Group (Japan), and Hanjin Shipping Group (Republic ofKorea/Germany). The global financial crisis had not caused any major companies to topple by early 2010, with the marketshares of the major global players remaining relatively stable during the worst of the downturn.

Consolidation within this industry is also increasing the level of globalization. In late 2005, A.P. Moller - Maersk A/Sacquired Royal P&O Nedlloyd N.V. To honor P&O Nedlloyd's commitments to various conferences and consortia, P&ONedlloyd and Mae

Global Logistics - Shipping

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