Dry bulk shipping market outlook

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1 Dry bulk shipping market outlook Tina Qianwen Liu Country Manager, China Marine Money Shanghai 20 November 2014, Shanghai

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4 Low commodity prices & lower cost of seaborne logistics 4 Excessive investment pre 2008 boom into mining, excessive mineral supply today (like shipping). Shale Oil/Gas in the US has brought the hydrocarbon energy market into over supply. Low iron ore and coal prices result in substitution effect. Lower bunker prices (despite 2015 ECA regulations). Low steel prices (may result in lower new building prices). For the commodity hungry countries, low commodity prices has a significant positive impact to their growth. Low commodity prices is a great boost for dry bulk tonner mile demand. Eco-ships have lower fuel consumptions. Trade specific designs (larger) ships give better per tonne cargo economics. Valemax / VLOC- much more economical than Capes. Newcastlemax has better economics then the traditional 180,000 dwt Capes where they can be used. Kamsamax, Ultramax, Handies etc all have better $/mt on certain routes Lower new building costs Low interest rate Low bunker prices Low freight markets

5 Iron ore price and sources of supply 5 CFR Tianjin iron ore price ($/tonne) Global Iron ore Cost Curve (62% Fe CFR China) (Highest point $187, Expected sources of global iron ore Source: Bloomberg, Drewry Maritime Research

6 6 Iron ore trade outlook Growth in key drivers World iron ore imports China: CAGR ( ): 7.0% CAGR ( ): 7.3% Total: CAGR ( ): 7.3% CAGR ( ): 5.9% China Iron ore demand to remain robust in medium term. It grew by 16.4% in 2014 (Jan-Oct) to million tonnes compared to 2013 (Jan-Oct). In low price environment, domestic iron ore production will be substituted but decline will be moderate due to local governments support by cutting taxes. There will be increased reliance on imported iron ore from Brazil and Australia. India Permit delays, pending renewal of leases, persistent corruption has led to constrained production of iron ore. India imported about 2.4 million tonnes since early 2013 to Aug This is expected to increase in short term. Iron ore export from India fell to about 16 million tonnes in from the highs of over 100 million tonnes few years ago.

7 Thermal coal price and sources of supply 7 FOB Newcastle thermal coal price ($/Tonne) Global thermal coal cost curve (exporters) (Market high point $192, July 2008) Expected sources of thermal coal at different prices Source: Bloomberg, Bofa Merrill Lynch, Drewry Maritime Research

8 Thermal coal: India will be the key driver 8 Percentage of coal based power generation in India: 2007 vs Indian coal: demand and supply gap Coking coal and steam coal import: India Steam coal imports outlook: power plants The import of steam coal in India took off from year and since then has exceeded the import of coking coal and grew much faster than coking coal import. Note: RES (MNRE): Renewable Energy Sources Source: Ministry of Coal, CEA

9 9 Coal trade outlook World Thermal Coal Import Total CAGR: : 6.2% : 1.2% World Coking Coal Import Total CAGR: : 10.7% : 4.9% China 14-19: 9.4% India 14-19: 6.8% China Increased environmental concerns and reliability on renewable sources of energy. 6% import tax on bituminous coal. Indonesia is exempted. Australia just got exempted. The cost of production of 70% of coal industry in China is below current coal prices. High cost small mines will gradually shut down. Some of the capacity shutdowns are temporary and may resume production if coal prices increase substantially. Overall total coal import fell by 7.6% in 2014 (Jan-Oct) to million tonnes compared to 2013 (Jan-Oct). India India imported about 153 million tonnes in 2014 (Jan-Oct) as against million tonnes in Total coal import could cross 180 million tonnes in 2014 soon surpassing Japan as the second biggest coal importer in the world. All coal blocks allotted since 1993 declared illegal. It would stimulate coal demand further in short to medium term. Coal-fired power plant by independent power producers to go up by a CAGR of 19% between 2014 and Therefore, imported coal demand likely to be surpassing 250 million tonnes.

10 Minor bulk trade outlook 10 Minor bulk trade outlook Minor Bulk Trade Growth rate CAGR 08-13: 5.4% CAGR 14-19: 3.6% Overall there are over 40 minor bulk commodities. Key minor bulk commodities: Iron and steel products, Grain, Fertilisers, Forest Products, Bauxite, Nickel ore etc. Minor bulk is driven by multiple industries which are further governed by GDP whereas major bulk is primarily driven by steel and power industries of key consuming economies. Minor bulk commodities trade is expected to go up from 1.5 billion tonnes in 2014 to 1.8 billion tonnes in 2019, representing moderate growth of 3.6%.

11 Demand outlook: 6.0% growth p.a. expected 11 Billion Tonne Mile Demand Billion Tonne Mile Demand Growth and relevant vessel category CAGR 08-13: 5.4% CAGR 14-19: 6.0% Dry bulk shipping demand growth to grow around CAGR 6% over the next five years. The growth will driven by iron ore (7.4% CAGR) and coal ( 6.7% CAGR). Iron ore demand mainly coming from China and incremental coal demand mainly coming from India. Minor bulk will continue to closely follow growth of global economy. Therefore, the largest beneficiary is expected to be Capesize vessels for coal transportation and VLOC for iron ore transportation. It is expected that VLOC s will progressively push the Capes out of the Brazil/China trade for Iron Ore.

12 Supply outlook: fleet growth back to normal 12 Total Fleet Overall Fleet Growth After massive fleet growth in 2010 to 2014 the fleet growth will moderate/normalise. The supply growth is expected to be 4.7% over the next five years. The supply growth is expected to come mainly from expansion in Capesize and VLOCs. Smaller vessels to witness a more modest growth. There is a danger of a number of new building orders going into default or being cancelled if the dry bulk market fails to respond with better returns.

13 Freight outlook % 3,000 Utilisation 95% 90% 85% 80% 75% 70% 65% 84.7% 85.1% 85.2% 85.8% 86.6% 87.4% 2,500 2,000 1,500 1, BDI 60% Utilisation-10 knots Utilisation-12 knots Utilisation-11 knots Historical Uitlisation BDI (right axis) Note: 2014 BDI is year to date average. Source: Drewry Maritime Research We estimate that the average speed of the dry bulk fleet is currently just under 11 knots and utilisation levels at this speed to be below 90%. As the demand going forward increases around 6% pa vs a fleet growth of about 4.7%, we expect the utilisation levels to improve and also the fleet speed to increase marginally. We see earnings gradually improving and increased volatility and seasonality in rates. Given the large reserve supply in the fleet in the form of slow speed, we do not see any possibility of another sustained boom in earnings. External factors like congestion and seasonality etc will have an impact but there is sufficient reserve to accommodate most events in the medium term.

14 Dry bulk values 14 Handysize (28,000 dwt) Handymax (55,000 dwt) Panamax (75,000 dwt) Capesize (170,000dwt)

15 Impact of private equity 15 Private Equity investment in shipping Total Private Equity investment in shipping sector between has been estimated at about USD25-30 billion. In dry bulk sector it has been about USD7-9 billion between An expectation that the worst was past us and the earning would rapidly rise 2014 onwards. This can be seen in the surge of new orders in 2013 with the rise in both new building and second hand values. What will private equity do now? If they exit who will fund the outflow of equity or will this result in a sharp decline in asset values and cancellations of many un funded new building orders. Source: Media Reports, Drewry Maritime Research

16 16 Conclusions Demand Highly correlated to Global GDP and very Asia dependent. Iron ore and coal are the main drivers to shipping demand for dry bulk. Iron ore prices: Lower prices will lead to reduction in Chinese domestic iron ore production resulting in higher seaborne imports of Iron Ore. Growth in demand expected to average about 6% in the period, (Iron ore 7.6%; coal 6.6%; minor bulk 4.1%). Larger vessels ie VLOC, Capesize to be the main beneficiary of the increased demand Supply Existing excess supply being absorbed by slow steaming, however this latent capacity remains available. Scrapping has passed it s peak due to younger age profile and expectation of freight market recovery. We expect that supply will grow at an average of 5% 2014 and Asset value Even though asset values are at or below historic averages, values are in a bubble territories in economic terms, if one looks at the returns they are able to generate. Increased values have been supported by near zero interest rates, external money and irrational expectations i.e. irrational exuberance. If earnings are expected to remain low or increase modestly at best, current new building prices are not justified. This is particularly so as : We still have excessive ship building capacity Steel prices are expected to remain low In order for dry markets to economically normalise, either earnings have to rise significantly to justify values or values have to fall to match expected future earning.

17 Bonus Page: Tanker shipping demand and supply outlook 17 Crude and product trade outlook Crude tanker fleet growth 08/13 vs. 14/19 Crude and product tanker shipping demand tonnemile outlook Product tanker fleet growth 08/13 vs. 14/19

18 18 Thank you. Tina Liu, Country Manager, China market reports and forecasts consultancy services on the shipping and ports industries We have offices in London, Delhi, Singapore and Shanghai freight procurement benchmarking and advice to importers and exporters specialist research service and forecast for maritime investors

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