HANDYSIZE & HANDYMAX MARKETS 2008 CONFERENCE

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1 May 2008 HANDYSIZE & HANDYMAX MARKETS 2008 CONFERENCE Key Strengths and Concerns of the Handyclass

2 Strong freight rates should continue in 2008, but a multi-year downturn is expected to begin in 2009 TC Rate $200,000 $180,000 Average TC Rate Capesize 20 65, , , , ,723 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 Panamax Handymax/Supramax Handysize 32,451 21,744 25,4 55,658 54,448 25,473 18,639 23,834 45,159 43,684 Note: To be updated 19,634 from 30, present 32,814 $0 Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- 08 Mar- 08 May- 08 Handymax - Japan-SK / Nopac rv Panamax - Japan-SK / Nopac rv Capesize - Nopac round v Supramax - Japan-SK / Nopac rv Handysize - SE Asia & S Korea - Japan Source: Baltic Exchange Limited Slide 2

3 Strong freight rates should continue in 2008, but a multi-year downturn is expected to begin in 2009 (cont.) Size (DWT 000 s) Total No. Total Order Book (incl. Delivery in April 2008) 2,844 1,613 1, ,747 DWT (MM) Source : Fearnleys Bulk Fleet Update (Apr ) % of Fleet 19.% 19.55% 27.78% 5.38% 28.23% % 2,584 Freight rates will face pressure from significant supply growth in , with the total order book at 59% of the current fleet The Handymax fleet is estimated to grow 46% from 2008 to 2011, while demand for cargoes is expected to grow only 10% Handymax/Handysize vessels can compete with Panamaxes to transport coal and iron ore Handysize vessels are most attractive in terms of supply growth, because they have the lowest order book No Total Order Book ( ) DWT (MM) % of Current Fleet 24.38% 57.29% 40.70% 43.62% 1.11% 59.17% Slide 3

4 Strong freight rates should continue in 2008, but a multi-year downturn is expected to begin in 2009 (cont.) Dry bulk shipping demand growth is expected to be solid over the next few years Global steel demand is expected to increase 5% - 6% in 2008 China will become more dependent on overseas iron ore imports, as older steel mills are phased out, thereby increasing tonne-miles Coal shipments will increase as China and other Asian countries are expanding their use of imported coal in energy and steel production Forward Freight Agreement Rates (Handysize/Supramax) $65,000 $60,000 $55,000 $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 Q1/08 62,500 60,750 59,500 45,000 Q2/08 41,500 Q3/08 Q4/08 41,000 Q1/09 52,500 46,750 46,750 36,000 33,750 31,250 31,250 Q2/09 22,000 Q3/09 Y2010 Handysize FFA Supramax FFA Source : Clarkson Securities Ltd. dated 15 May 08 Slide 4

5 Handysize vessels have a number of unique strengths Shallow draft, box-hold vessels are perfect for unitized, high value commodities, like copper concentrate and aluminum, which are not typically shipped in large quantities Market downturn should remove a large number of vessels and pave the way for more balanced fleet development and earnings over the next 3-5 years Flexibility in multi-port parcelling operations, as they can carry most commodities and can operate in smaller ports with limited loading/unloading equipment Storage and production infrastructure and value favor smaller vessels for smaller stem sizes Future greenhouses gas emission trading schemes may be positive for modern, economical Handyclass vessels Slide 5

6 Even though freight rates are expected to decrease, vessel prices might not significantly move down $13,000 $11,000 $9,000 $7,000 $5,000 $3,000 BDI Comparision of BDI and 5 Years Old Handymax Prices Baltic Exchange Dry Index Handymax Prices US$ million $79 $69 $59 $49 $39 $29 $19 $1, Feb- 01-Mar- 30-Mar- 26-Apr- 24-May- 20-Jun- 19-Jul- 15-Aug- 12-Sep- 10-Oct- -Nov- -Dec- 09-Jan- -Feb- -Mar- 03-Apr- 02-May- 30-May- 26-Jun- 23-Jul- 21-Aug- 18-Sep- 16-Oct- 13-Nov- 11-Dec- 15-Jan- 12-Feb- 12-Mar- 09-Apr- -May- 01-Jun- 29-Jun- 27-Jul- 24-Aug- 21-Sep- 19-Oct- 16-Nov- 14-Dec- 18-Jan Feb Mar Apr-08 Source: Baltic Exchange Limited Shipyards have experienced a strong increase in their input factors, such as labor, steel (in 20, prices rose almost US$ 200 per ton to US$ 900 per ton), and main equipment (prices rose between 10% - 15% in 20) $9 In 2002, 21 yards in China and 9 yards in Korea could build vessels larger than 30,000 DWT; by 20, the number increased to 82 in China and 22 in Korea Yards in China and Korea took three-quarters of all new orders in 20; on average, 7% of Korea contracts and 30% of China contacts were delayed for more than 1 month between Slide 6

7 Even though freight rates are expected to decrease, vessel prices might not significantly move down (cont.) The Handysize fleet is rapidly ageing, and a newbuild program has been limited, so one can expect a shortage of tonnage World Fleet Distribution - Vessel Owners 15-50,000 DWT 3.3% The Handysize/Handymax fleet has a wide ownership structure, and we believe that there are many capital-constrained players 30.4% 26.8% Only a few established yards are willing to build Handysize vessels, so owners must negotiate with relatively new yards in China, Vietnam, India, etc. 8.3% As ports in Asia are steadily expanded and Handymax vessels are accepted, this could create more difficult environment for Handysize vessels 19.8% 11.4% > 20 Vessels Vessels Vessels 5-9 Vessels 1-4 Vessels Undisclosed Source: Fairplay World Shipping Encyclopedia (April 2008) Slide 7

8 Effective human resources management is becoming even more critical The 20 BIMCO/International Shipping Federation survey estimates worldwide crew of 466,000 officers and 721,000 ratings It is estimated that there will be a shortfall of 27,000 qualified officers by 2015, which equals 3,000 vessels Number of Crews 10,000 5,000 0 Officer Shortages (World Scale) Economies of scale might not favor Handysize vessels; when qualified officers are in high demand and the same crew amount is used for a smaller or larger vessel, it makes more sense to operate the large vessel -5,000-10,000-15,000-20,000-10,000 Smaller vessels with quicker voyages and more complicated cargoes require more shore staff to operate the vessels and control quality -25,000-30,000 Source: BIMCO / ISF -27, Slide 8

9 It is estimated that more than 30% of all newbuild vessels have not secured debt finance The estimated orderbook for bulk carrier, container vessels, tankers, and offshore units is US$ 500 billion through 2012 If we assume 65% debt financing, it means that debt of US$ 325 billion, or US$ 81 billion per year, must be secured High yield bond markets are not readily available to finance construction risk at the moment Credit will not be sufficient from the commercial bank market to support this loan growth Evidence of owners renegotiating or canceling contracts Problems with greenfield yards in China and Korea Slide 9

10 It is estimated that more than 30% of all newbuild vessels have not secured debt finance (cont.) Credit markets deteriorated significantly towards the end of 20 due to the subprime crisis Sub-prime writedowns threaten capital adequacy, cutting lending amounts As loan demand remains strong, amortization has increased with lower advance rate, tighter covenants, and wider credit spreads Credit spreads have increased by 50% - 60% in today s market Large Loan Transactions in 20 Company Seadrill Rig AS Prosafe SE Awilco Offshore ASA General Maritime Corporation Teekay Corp. / Teekay Tankers Ltd. Victoria Marine Inc. Songa Offshore ASA Royal Caribbean Cruises Ltd. Source: Nordea Bank Total Size (Millions) US$ 1,500 US$ 1,300 US$ 1,085 US$ 900 US$ 845 US$ 777 US$ 650 US$ 589 Slide 10

11 Container vessels are competing directly for some dry bulk commodities There appears to be some size adaptation to larger parcels to reduce freight costs per unit Migration of demand from Handysize to Handymax vessels could steal market share away for the smaller vessels Container vessels are competing with dry bulk vessels for a number of reasons: Increasing size and quantity of container vessels Imbalance in container trade, so low rates are able for repositioning voyages More ports of call in the networks of container shipping lines Slide 11