CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 1

Trends & Outlook in the Dry Bulk Shipping Industry

Dr 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

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CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 2

Dry Bulk Freight Market Daily Since 1985

05-Dec-08, 66305-Aug-86, 554

01-May-95, 2,352

06-Dec-04, 6,208

20-May-08, 11,793

2,123

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,0001

98

5

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

4th

Ja

n 1

98

5 =

1,0

00

BFI/BDI Average

Where is the freight market now?

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 3

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

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 4

So, the market collapsed, no surprise, but what were

the real causes?

Perhaps not what we first think….

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 5

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

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 6

Owners responded to increase in the freight market

BDI & Orderbook

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

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

BD

I

0

50

100

150

200

250

300

350

MD

wt.

On Order BDI

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

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 7

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 in

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 8

“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

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 9

Production pre-Olympics continued relentlesslyChina Iron Ore Production and Iron Ore Imports

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Jan-08 Apr-08 Jul-08 Oct-08

1,0

00

to

nn

es

Ore Imports

Chinese Domestic Iron Ore Production

Production increases as

demand slows – result:

price collapse

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 10

Fall in demand triggered slide in Chinese domestic prices

0

25

50

75

100

125

150

175

200

225

Sep

05

Dec

05

Mar

06

Jun

06

Sep

06

Dec

06

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

$/tonne

C3 - Brazil-China freight

Brazil FOB

Chinese domestic

Indian CFR

Brz FOB

Brz-PRC freight

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

freight

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 11

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

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 12

Impact on Freight Market

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 13

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 reachedAverage Basket TC Rates

$0

$50,000

$100,000

$150,000

$200,000

$250,000

Jan-07 Jan-08 Jan-09 Jan-10

$/day Capesize (172k)

Panamax (74k)

Supramax (52k)

Handymax (45k)

Handysize (28k)

Source: Baltic Exchange

6th June

2008

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 14

98% fall in earnings in just six monthsCapesize Continent/Far East spot TC Rates

01-Dec-08

5,096

05-Jun-08

283,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

260,000

280,000

300,000

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

$/d

ay

The fall in the freight market

was greater than for any other

commodity market

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 15

Were the shipowners wrong to invest….?

Spot TC Rate Daily Averages

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

$/d

ay

Capesize (172k)

Panamax (74k)

Handymax (45k)

Capesize (172k) 20,904 12,950 11,918 40,329 69,002 50,344 45,139 116,031 106,025 42,657 34,653

Panamax (74k) 11,102 8,767 7,725 20,063 35,725 24,802 23,778 56,814 49,014 19,295 29,420

Handymax (45k) 9,053 8,344 7,978 14,810 28,191 21,420 20,940 42,168 36,241 15,513 22,609

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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 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…

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 16

Demand Changes

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 17

Trade growth to continue after current disruption

World Seaborne Dry Bulk Trade

Iron Ore

Bx/AlGrain

Coal

PhosRock

Other Bulk

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Million Tonnes

1st oil crisis

2nd oil

crisis

Growth 1960-2000: 4.3% pa

Growth 2000-10: 4.9% pa

Impact of secondary banking

crisis and "credit crunch"

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 18

China Steel Production & Iron Ore Imports

36,80838,201

35,682

42,846

38,90937,788

39,630

37,40339,203

30,61732,520

34,527

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

1,0

00

t...

Ore Imports Steel Production

Chinese iron ore imports collapsed by 9 Mt in October 2008

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

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 19

Demand downturn led by steel

Selected Major Bulk Trades

0

100

200

300

400

500

600

700

800

1q07 2q07 3q07 4q07 1q08 2q08 3q08 4q08 1q09 2q09 3q09 4q09

Millio

n T

on

ne

s..

Other

Bulk

Steel

Exp

Grain

Ore

Coal

Steel

Producti

on

Source: ICAP Shipping

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 20

Seaborne Bulk Market highly dependent on Steel

Seaborne Dry Bulk Trade ~ 2009

Petcoke

Forest Products

6%

Other

20%

Phosphates+Urea

Salt

OthersRice

Tapioca

Sugar

Oilseed/Meal

Soyameal

Gypsum

Bauxite

Steam Coal

20%

Grain (inc Soya)

11%

Scrap

Alumina

Steel Products

6%

Metal Concentrates

Manganese Ore

Coke

Nickel Ore

Potash

Sulphur

Phosrock

Chrome Ore

Iron Ore

29%

Coking Coal

7%

Cement

Just under half of all Dry Bulk Trade is

related - either directly or indirectly -

to the steel industry

Seaborne trade 2009

estimated at 3,180

Mt ±30Mt

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 21

Five Major Groupings

Seaborne Trade 2009 Million tonnes (Mt)

Other

82

3%

Agribulks

479

15%

Energy

663

21%

Steel-Related

611

19%

Fertilizers

88

3%

Industrial

333

10%

Iron Ore

924

29%

Seaborne trade

2009

estimated at

3,180 Mt

±30Mt

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 22

Sharp downturn in steel production

China and World Crude Steel Production

Rest of World

China

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,4001

99

0

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Million tonnes

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 23

Fleet Developments

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 24

The legacy of the current orderbook will

be apparent for the next 20+ years

Age Profile Bulk Carrier Fleet @ 18th Feb 2010

0

20

40

60

80

100

120P

re-8

0

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Md

wt

Handysize Hmax/Smax Panamax Cape

The Sanko order in 1984 for

130 Handymax Bulk Carriers

– ships now 26 years old

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 25

Even though many shipowners were aware of the looming

overcapacity risk heavy ordering still continued in 2008Bulk Carrier Contracting

17 18

11

25

1710

21

29 30

17

34

146

82

32

4.30

0

20

40

60

80

100

120

140

160

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

MD

wt.

.

Cape 100+

Pmax 60-100

Handymax 40-60

Handysize 10-40

Bulk Fleet (10,000+ dwt)

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 26

Latest OB shows bulk of deliveries in next 3 years

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

MD

wt.

.

Deliveries Dwt

Delivered Ytd Dwt

Bulk Carrier Orderbook at 1-Mar-10

Total orderbook +

2010ytd deliveries=

262.0 Mdwt

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 27

Impact on Ship Prices and Demolition Rates

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 28

As BDI has now fallen scrapping will increase sharply

Bulk Carrier Removals from the Fleet v. BDI

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

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

MD

wt

0

2,000

4,000

6,000

8,000

10,000

12,000

BD

I

MDwt BDI

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 29

Dramatic fall in second-hand prices…

Secondhand Prices

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

$m

Cape 172k Max 5Yr

Pmx 74k Max 5yr

Super Handy 52k 5Yr

Source: Baltic Exchange

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

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 30

… and in $/ldt rates for demolition

Dry Bulk - Demolition Rates

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

$650

$700

$750

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-10

$/ld

t

Hmax/Pmx Indian subcontinent

Hmax/Pmx CHINA

Source: Baltic Exchange

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 31

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

$61.50

36.50

32.00

26.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Jan-

08

Apr-

08

Jul-

08

Oct-

08

Jan-

09

Apr-

09

Jul-

09

Oct-

09

Jan-

10

Apr-

10

Jul-

10

Oct-

10

$m

Capesize

Panamax

Supramax

Handysize

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 32

Supply/Demand Integration

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 33

Expect increased scrapping and fewer deliveries than scheduled

Bulk Carrier Fleet Changes

+9+12

+9 +8

+19+22

+24 +23+18

+29

+98

+82

+35

-1

-13

-20

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

MD

wt

To be delivered Dwt

Scrapped Ytd Dwt

Delivered Ytd Dwt

Net Change Dwt

Net addition

2009-12:

244.6Mdwt

Spill over

expected from

2010 to 2011

and then to

2012 as well as

further

cancellations

Slippage this year

could exceed 50%

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 34

Throughout all this trade still expanding…

Seaborne Dry Bulk Trade Forecast 2009-12

Iron Ore Iron Ore Iron Ore Iron Ore

Steel-RelatedSteel-Related

Steel-Related Steel-Related

IndustrialIndustrial

IndustrialIndustrial

AgribulksAgribulks

AgribulksAgribulksFertilizers

FertilizersFertilizers

FertilizersEnergy

EnergyEnergy

Energy

OtherOther

OtherOther

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2009 2010 2011 2012

Millio

n T

on

ne

s

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 35

Trade Growth AggregatedGrowth in Seaborne Dry Bulk Trade 2009~2012

3,1803,317

3,468 3,573

393

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2009 2010 2011 2012

Millio

n T

on

ne

s

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 36

Net Fleet Change and Trade Growth

Cargo & Net Fleet Growth 2009-2012

Cargo Growth Mt

393

Net Fleet Growth

245 MDwt x7=

1700

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Cargo Growth Mt Net Fleet Growth 245 MDwt x7=

Mt

Ca

rgo

Eq

uiv

ale

nt

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...

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 37

Assume 50% cut in scheduled deliveries

Cargo & 50% Net Fleet Growth 2009-2012

Cargo Growth

Mt, 393

Net Fleet Growth

122MDwt x7=,

850

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Cargo Growth Mt Net Fleet Growth 122MDwt x7=

Mt

Ca

rgo

Eq

uiv

ale

nt

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

Shipping history is full of such

events

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 38

Forward Markets

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

$ p

er

da

y

Cape 172k 4TC

Panamax 74k 4TC

Supramax 52k 5TC

Handysize 28k 6TC

Source: Baltic Exchange/ICAP ShippingDry FFAs at 23-Mar-10

CEFOR

24/03/2010 11:22 CEFOR 24th March 2010 39

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

© ICAP