Philip Damas Director, Drewry Supply Chain Advisors Birmingham 02/05/12

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1 Container shipping market outlook, freight rates and index-linked contracts Multimodal 2012, TradeExtensions events Philip Damas Director, Drewry Supply Chain Advisors Birmingham 02/05/12

2 2 Agenda 1. Drewry credentials 2. Supply and demand market outlook for Container freight rate GRIs 4. Container freight rate outlook for Carrier losses and risks 6. Use of index-linked contracts 7. Conclusions

3 1. Drewry credentials 3 Drewry was founded in 1970 as a provider of independent information and advice to the global maritime industry. Since then we have worked with over 4,000 clients in more than 100 countries. We are privately owned with research and advisory teams in London, Delhi, Singapore and Shanghai. London Drewry Christopher Street London EC2A 2BS,United Kingdom T: +44 (0) E: Singapore Drewry 15 Hoe Chiang Road, #13-02 Tower Fifteen Singapore T: E: Delhi Drewry 209 Vipul Square, Sushant Lok-1 Gurgaon , India Telephone: /32 E: Shanghai Drewry 555, 5th floor Standard Chartered Tower, 201 Shi Ji Avenue, Pudong District, Shanghai, China T: +86 (0)

4 4 Agenda 1. Drewry credentials 2. Supply and demand market outlook for Container freight rate GRIs 4. Container freight rate outlook for Carrier losses and risks 6. Use of index-linked contracts 7. Conclusions

5 2. Supply and demand market outlook for 2012 Container traffic growth continues globally, but at a slower pace 5 Source: Drewry s Container Forecaster

6 2. Supply and demand market outlook for 2012 Container traffic growth varies by region, with the West the most sluggish. 6 Source: Drewry s Container Forecaster

7 2. Supply and demand market outlook for 2012 Far East-to-Europe container traffic now static, but growth in box volumes to Asia. 7 Source: Drewry s Container Forecaster

8 2. Supply and demand market outlook for 2012 Purchasing managers expect relative stability in orders not exciting, but more predicable than before! 8 Source: Drewry s Freight Shipper Insight

9 2. Supply and demand market outlook for 2012 Consumer confidence levels in Europe are very low, but recovering a bit. 9 Source: Drewry s Freight Shipper Insight

10 2. Supply and demand market outlook for 2012 Tighter load factors on Asia-Europe route follows loose carrier capacity policy of Source: Drewry s Container Forecaster

11 11 Agenda 1. Drewry credentials 2. Supply and demand market outlook for Container freight rate GRIs 4. Container freight rate outlook for Carrier losses and risks 6. Use of index-linked contracts 7. Conclusions

12 3. Container freight rates Tighter capacity drives rates higher 12 Global freight rates have continued their meteoric resurgence, driven by a racheting up of pricing on the once- beleaguered East-West trades. Source: Drewry s Container Freight Rate Insight Drewry s East-West Freight Rate Index, a weighted average across key Asia-Europe, transpacific and transatlantic trade routes, leapt 20% in March following February s halt. The index ended the month at $2,107 per 40ft container, its highest level since May 2011 but still 33% off July 2010 when East-West freight rates last peaked.

13 3. Container freight rate GRIs Carriers pushed through nearly identical GRIs on the Asia/Europe route in March and in April. route st April - Asia to Europe Maersk +$400/teu 1 st April - Asia to Europe MSC +$400/teu 1 st April - Asia to Europe CMA CGM +$300/teu 1 st April - Asia to Europe Cosco +$700/teu 1 st April - Asia to Europe Hanjin +$400/teu

14 3. Container freight rate GRIs (Asia-to-Europe) After a long decline in 2011, Asia-to-Europe freight tripled from less than US$1,000/40ft in January 2012 to about $3,400/40ft container in April and are now 80% higher than a year ago. 14 Source: World Container Index

15 3. Container freight rate GRIs (Asia-to-US) GRIs are also sticking in the transpacific eastbound trade. Mid-April spot rates are 47% higher than early January 2012 rates. 15 Source: World Container Index

16 3. Container freight rate GRIs (Europe-to-Asia) Europe-to-Asia rates are starting to increase. Some shippers are finding it more difficult to secure eastbound capacity to Asia. 16 Source: World Container Index

17 3. Container freight rate GRIs (Europe-to-US) Transatlantic trade is seeing relatively small GRIs new capacity has been added to the market. 17 Source: World Container Index

18 18 Agenda 1. Drewry credentials 2. Supply and demand market outlook for Container freight rate GRIs 4. Container freight rate outlook for Carrier losses and risks 6. Use of index-linked contracts 7. Conclusions

19 4. Container freight rate outlook for 2012 Carriers have GRIs every week since March. 19 Asia outbound GRIs Europe outbound GRIs To Europe (1 st May) Maersk +$400/teu CMA CGM +$385/teu Cosco +$425/teu To Asia (15 th April/1 st May) Maersk +$300/teu NYK +$150/250 per 20ft/40ft MSC $300/teu no show charge To USWC (15 th April/1 st May) Maersk +$500/40ft MSC +$400/40ft To USWC (15 th April/1 st May) Maersk +$160/200 per 20ft/40ft WTSA +$ per 40ft

20 4. Container freight rate outlook for 2012 Will the GRIs stick? Look at what is happening to capacity and to carrier policies 20 NEW CARRIER POLICY AND PRIORITIES BUT SOME CAPACITY IS COMING BACK Capacity management: keep active capacity tight and park surplus ships. About 5% of global capacity is inactive today, following the suspension of previous container services was a fight for market share among carriers. No more fight for market share in 2012? A delicate truce is in place between shipping lines - how long it stays in place is the key to carrier profits. 2 weekly Asia-Europe services are commencing or re-starting in April +21,000 TEU/week 1 weekly transatlantic service started in February +4,000 TEU/week 5 weekly transpacific services are commencing or re-starting May-June +20,000 TEU/week

21 4. Container freight rate outlook for 2012 Despite over-capacity, Drewry forecasts an increase in average east/west freight rates in Source: Drewry s Container Forecaster

22 4. Container freight rate benchmarks and GRIs 4 years of roller-coaster 22 Huge volatility in rates in 2009 (collapse of volumes and prices) Huge volatility in rates in 2010 (volumes and GRIs are back) Huge volatility in rates in 2011 (price war among shipping lines) Huge volatility in 2012 (return of GRIs despite weak volumes end of price war)

23 4. Container freight rate outlook for 2012? 23 FREIGHT RATE OUTLOOK Many shippers who negotiated 2012 annual contracts in late 2011/early 2012 have obtained very low rates below the carriers cost breakeven. Current spot rates are much higher than annual contract rates and higher than the carriers cost breakeven. Therefore, there are 2 co-existing markets which are pulling in different directions. Freight rate outlook will depend on carriers capacity and market share chasing decisions. QUESTIONS AND RISKS FOR SHIPPERS Capacity is getting tight on some routes. Will carriers honour capacity commitments? RISK Indebted carriers may fail/go bankrupt RISK Will carriers prioritise capacity to annual-contract or to spot shippers? RISK FOR ANNUAL CONTRACT SHIPPERS Will carriers ask a renegotiation of 2012 annual contracts (remember Argos court case)? RISK Overall, spot rate increases in 2012 look fairly certain - RISK Can annual contracts cope with today s huge market volatility? RISK

24 24 Agenda 1. Drewry credentials 2. Market outlook for Container freight rate GRIs 4. Container freight rate outlook for Carrier losses and risks 6. Use of index-linked contracts 7. Conclusions

25 5. Carrier losses and risks Container shipping lines lost over US$6 billion in 2011, including over US$2 billion in 4Q11. 25

26 5. Carrier losses and risks Container shipping lines performed much worse than forwarders in

27 5. Carrier losses and risks Carriers survived in 2009 and again in 2011, but their outlook is still uncertain. 27 Maersk Line lost about US$480 million in 2011 and announced a new focus on profitability. Maersk Line still expects to lose money in NO REPEAT IN 2012 OF THE 2011 PRICE WAR BETWEEN CARRIERS Carriers need to secure new sources of financing. CSAV lost US$1 billion in 2011 but survived. Hapag-Lloyd CEO Michael Behrendt: There was an unnecessary, silly and ruinous level of competition between individual market participants. We resisted it as best we could.

28 5. Carrier losses and risks Container shipping lines are financially distressed, according to the Altman Z score. 28 Transport companies rated as safe (score>2.99) CH Robinson Expeditors Panalpina K+N (no major container shipping line) Transport companies rated as in grey zone (score of 1.8 to 2.99) OOIL/OOCL Agility AP Moller-Maersk A&B/Matson Deutsche Post DHL Wan Hai Evergreen Marine Cathay Pacific (only 5 major container shipping lines) Transport companies rated as in distress zone (score of <1.8) 14 major container shipping lines 2 major airlines (no major forwarder) Source: Drewry s Carrier Performance Insight

29 29 Agenda 1. Drewry credentials 2. Supply and demand market outlook for Container freight rate GRIs 4. Container freight rate outlook for Carrier losses and risks 6. Use of index-linked contracts 7. Conclusions

30 6. Use of index-linked contracts This is how an annual fixed-rate rate normally works Shipper and carrier agree on contract period, fixed rate and floating bunker clause, if any Comparison of Fixed Rate vs. Spot Rate - Trans-Pac Market Contract period (one year) Fixed rate is higher than spot rate downwards rate pressure from shipper Possible variations: BAF surcharges, review periods Fixed rate is lower than spot rate - upward rate pressure from carrier Spot Market Contract Rate

31 6. Use of index-linked contracts Since 2011, we have seen more interest and adoption of index-linked contracts. This is how a standard index-linked contract works. 31 Shipper and carrier agree on contract period, external index, index price discount/base rate Contract period (one or more years) Index-linked rate goes up if the external spot rate index rises Index-linked rate falls if the external spot rate index falls Possible variations: trigger points (no change), maximum and minimum rates

32 6. Use of index-linked contracts Our survey of shippers and forwarders has shown a strong trend towards adoption of index-linked contracts. 32 Shippers appear to have realised the need to pay compensatory market freight rates to ensure surety of shipping capacity through the cycle. It is no longer about short-term cost gains but about stability of the supply chain. Feature Price is decoupled from the contract The index is only used to provide the tracking mechanism, not the actual rate Freight rates follow the spot market Advantages / disadvantages Provides physical space on ships and agreed service terms The contract price can be negotiated at the beginning and agreed to be for example the index price - $100/teu differential Advantage: Cargo more attractive to the carrier / no need to overbook / no risk of roll-overs / no need to renegotiate if the market changes Disadvantage: price risk, except if also use hedging Source: Drewry Supply Chain Advisors

33 6. Use of index-linked contracts 33 Source: Drewry s Unmasking Freight Rates report

34 6. Use of index-linked contracts Index-linked container contracts are not common and have created some confusion and questions. See if you can answer the following questions. 34 Q: With index-linked contracts, everybody has to have the same freight rate. True or false? A: False. The shipper and carrier also negotiate a discount off the index price before signing the contract. Q: It is possible to fix future freight rates even if you have an index-linked contract based on spot rates. True or false? A: True. Some rate indices can be also be used for hedging on the major routes, thereby providing fixed rates for up to 2 years. Q: Some carriers are supporting index-linked contracts. True or false? A: True for some eg CMA CGM, Maersk, but other carriers are not supportive eg OOCL.

35 35 Agenda 1. Drewry credentials 2. Supply and demand market outlook for Container freight rate GRIs 4. Container freight rate outlook for Carrier losses 6. Use of index-linked contracts 7. Conclusions

36 7. Conclusions 36 Growth in container traffic is slowing down, particularly from Asia, but exports on some routes to Asia are holding up. Carriers have reduced capacity on some routes; this results in tighter capacity availability for shippers. Asia-Europe and Asia-US spot freight rates have sky-rocketed. Further large rises will not see 100% success. Europe-to-Asia rates also increasing. Overall east-west rates will increase by about 14% in No repeat of the carrier price war in Carriers rate war is over, but some capacity is coming back to the market. Carrier bankruptcy risk is still high - beware High rate volatility will continue is there a better system? Index-linked container contracts are on the rise, even for large shippers, with or without hedging. New contract models in development. View is that index-linked contracts provide better security of supply and stability with vendors.

37 37 Thank you. Any questions? I can this presentation to anybody who would like it. Philip Damas Director Drewry Supply Chain Advisors Tel:

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