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Dry bulk shipping: are we at the end of the tunnel? Mare Forum, Istanbul Lisarain Yu Jiang Senior Consultant Drewry Maritime Advisors 21 March 213, Istanbul
Barometer of dry bulk shipping market All segments of dry bulk shipping market has been bumping along the bottom since Lehman crisis in 28. 3 Baltic Dry Index 14, 12, 1, 8, 6, 4, 2, Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Source : Baltic Exchange Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Baltic Dry Index Market corrected sharply after Lehman crisis and has since been low but volatile. BDI dropped to a 25 year low (647) on 3/2/212; BDI threatened to go below historical level again in 213. The influx of new building vessels ordered during the boom times has destabilised the market.
Destabiliser 1: Seaborne trade and economic growth Trade driven by economic growth; gradual upturn in 213 and further strengthening in 214-217 - zone recovery is key. 4 2 Correlation:.8 Annual Growth (%) 15 1 5-5 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 215 217-1 Merchandise trade growth rate Growth rate of GDP, constant prices Source: WEO, Oct212, IMF, Drewry Maritime Research, UNCTAD Close link between GDP and world trade IMF GDP outlook downward adjustment for 213 Gradual upturn in global growth during 213, further strengthening in 214-217 Eurozone recovery is key
5 Destabiliser 2: Excess shipbuilding capacity Excess shipbuilding capacity, more so in dry bulk. Shipyards are reducing prices to get new orders. Shipyard output and orderbook 6 Million cgt 5 4 3 2 1 Shipyards have plenty of capacity 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215+ Dry Bulk Total Source: Clarkson, Drewry Maritime Research Shipbuilding capacity expanded by 8.4% CAGR during 2-212 Excessive shipbuilding capacity: dry bulk historically accounted for 2% of total shipbuilding capacity, but its share increased rapidly: 39% (21), 48% (211), 74% (212) Yards are reducing prices to get new orders. This is likely to aggravate the problem of oversupply and delay freight market recovery.
Destabiliser 3: Newbuilding orders 6 Newbuilding order surge in 26-8 has led to record deliveries and a younger fleet, putting further pressure on the market. ' dwt 1,6, Dry bulk newbuilding orders 134.6 Mdwt 1,6 1,4, 1,4 1,2, 1,2 1,, 1, 8, 8 6, 6 4, 4 2, 2 - - 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 ' dwt Number - right axis Dry bulk fleet delivery and age profile numbers million dwt 12 1 8 6 4 2 Dry bulk VLOC Capesize Post-Pana Panamax Handymax Handysize 3.5 Average age (years) <=8 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 16+ Fleet: m dwt (left axis) Current Fleet - year delivered: number of vessels (right axis) 7. 1.1 8.7 1. 11.5 13.4 Orderbook: m dwt (left axis) Orderbook - scheduled delivery: number of vessels (right axis) 1,4 1,2 1, 8 6 4 2 numbers
Destabiliser 4: Eco design vessels Introduction of new eco vessels with better voyage economics poses threat to freight market recovery. 7 Introduction of new eco design vessels Bunker consumption saving NPV of fuel savings of a new eco type vessel vs the existing 5 years olds Handysize: USD2-3 million Supramax: USD4-7 million Panamax: USD6-8 Million Capesize: USD8-13 million Attractive proposition for cash rich shipowners Imminent threat to market recovery
Stabiliser 1: New environmental regulations Introduction of new regulations will make old vessels costly to operate. 8 Regulatory Changes to increase vessel costs 3.5% limit of Sulphur in Fuel Oil from 1/1/212. New ships, contract for which was signed after 212, must have an approved Ballast Water Treatment plant onboard. Ships contracted before 212 must install an approved system by 216 or at next docking. SEEMP: The Ship Energy Efficiency Management Plan (SEEMP) incorporates practices for the fuel efficient operation of ships. Part of SEEMP is Energy Efficiency Design Index (EEDI), which was made mandatory for new ships from 213, will help to ensure that new ships are built as energy efficient as possible to reduce CO2 emissions.
Stabiliser 2: Ship finance drying up Ship finance squeeze will keep new orders under control. 9 Top 4 Bank Lending to Shipping 47 46 US$ billion 45 44 43 462.9 436.2 449.8 454.9 42 422.1 41 4 28 29 21 211 212* *Ship finance based on data up to November 212 Source: Petrofin Bank Research November 212
Stabiliser 3: Demolition age falling as earnings plunge New regulations, falling charter rates and high bunker prices are make operating older tonnage less economically viable. Dry bulk demolition smaller ships Dry bulk demolition bigger ships 1 ' dwt 6, 5, 4, 3, 2, 1, ' dwt 1, 8, 6, 4, 2, 26 27 28 29 21 211 212 26 27 28 29 21 211 212 Handysize Handymax Panamax Post-Panamax Capesize VLOC 34 Dry bulk average demolition age by segment 32 Age (years) 3 28 26 24 22 28 29 21 211 212 Handysize Handymax Panamax Capesize VLOC Source: Drewry Maritime Research
Stabiliser 4: Slow steaming and high bunker prices High bunker prices are forcing shipowners to slow steam. This has absorbed more shipping fleet. 11 Bunker Price: Singapore 1,2 USD per tonne 1, 8 6 4 2 21 22 23 24 25 26 27 28 29 21 211 212 IFO MDO Average speed of dry bulk vessels Source: Cockett Marine Oil, Arctic Securities, Drewry Maritime Research
Stabiliser 5: Port congestion Port congestion absorbs significant fleet surplus. Congestion index 12 average days delay 7 6 5 4 3 2 1 Dec-7 Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Atlantic Pacific 25 Vessels on anchorage 2 percetange 15 1 5 2/8 28/8 2/9 28/9 2/1 28/1 2/11 28/11 2/12 28/12 2/13 Source: Global Ports Handymax Panamax Capesize Total
Stabiliser 6: Consolidation in shipbuilding Loss making has led to bankruptcy and consolidation; much needed capacity reductions possible. 13 1,2 Steel price development 1, USD/mt 8 6 4 2 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 Hourly manufacturing costs in China USD per hour 3. 2.5 2. 1.5 1..5.57.62.66.73.81 1.6 1.36 1.58 1.98 2.18 2.61. 22 23 24 25 26 27 28 29 21 211 212
Summary: Destabilisers Dry bulk market is characterised by high demand growth and excess fleet supply. 14 Subdued economic recovery Slow recovery of global economy Gradual upturn in 213 and further strengthening in 214-217 dependent on Eurozone recovery Excessive Shipbuilding capacity Excess shipbuilding capacity, more so in dry bulk Shipyards are reducing prices to get new orders Newbuilding orders Newbuilding order surge in 26-8 has led to record deliveries Fleet becoming younger Eco design vessels Market interest in new, more fuel-efficient designs
Summary: Stabilisers Survival of the fittest is going to be the norm in the industry, with new regulations, lack of credit and high costs 15 Regulatory changes Emission control areas Onboard ballast water treatment EEDI Squeezed ship finance Tighter regulation of Basel III Reduced availability of finance Demolition age falling Decreasing demolition age due to new regulations, falling charter rates and high bunker prices Capes of 15 years have gone to the scrap yard Slow Steaming and high bunker prices High bunker prices are forcing shipowners to slow steam, absorbing some tonnage
16 Summary: Stabilisers Without a healthy reduction in the existing fleet, the road to a freight market recovery will be long and painful. Port congestion Port congestion absorbs fleet surplus Consolidation in shipbuilding Shrinking orders, escalating costs and currency Loss making has led to bankruptcy and consolidation Much needed capacity reductions possible Conclusion Market rebalancing act Market might stabilise in the next 2-3 years Charter market recovery expected in early 215 but difficult to envisage a significant boost
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