Prospects for the container shipping industry

Prospects for the container shipping industry IQPC Container Terminal Business 2009 Hamburg, December 8, 2008 Eric Heymann Sector Research Think Tank of Deutsche Bank Group

Agenda 1 Weak economic environment 2 3 Investment in container terminals necessary 4 Conclusion and outlook Eric Heymann December 8, 2008 Page 2

1 Weak economic environment A global slowdown many factors Main reasons for global downturn: 1. US economic slowdown and its effect on the global economy 2. The subprime crisis turning into a full-fledged financial crisis 3. Surging commodity prices, in particular oil 4. The weakness of the USD (with negative effects outside the US) 5. Lasting boom in many countries and sectors has led to excess capacities Of course, all these factors are related, but together they have created stormy weather for the global economy! Eric Heymann December 8, 2008 Page 3

1 Weak economic environment World economy on the decline Global GDP and world trade decline in 2009 % yoy 14 12 10 8 6 4 2 0-2 -4 1990 1993 1996 1999 2002 2005 2008 During global recessions, world trade usually slows more than world GDP World trade is expected to decline in 2009 for the first time since 2001 China s hunger for raw materials and US and European demand for consumer goods from China will be dampened Export volume of goods, world Sources: IMF, DB Research Real GDP, world Eric Heymann December 8, 2008 Page 4

1 Weak economic environment Global forecasts: The world in recession GDP growth % yoy, real 2006 2007 2008 2009 USA 2.8 2.0 1.3-1.7 Japan 2.0 2.4-0.1-1.7 Eurozone 2.7 2.6 0.9-1.4 Germany 3.0 2.5 1.5-1.5 Asia ex Japan 9.0 9.1 7.1 5.1 China 11.6 11.9 9.6 7.5 India 9.6 9.0 6.9 6.3 Eastern Europe 7.0 6.7 5.0 2.0 Russia 7.4 8.1 6.2 2.0 Middle East 5.2 5.2 5.7 5.1 Latin America 5.2 5.4 4.4 2.3 World 3.7 3.5 2.0-0.3 Triad slips into sharp recession Asia (ex Japan) continues to be the most dynamic region However, lower growth rates can not be avoided Eastern Europe, Russia and Latin America show significantly weaker economic growth Source: DB Research Eric Heymann December 8, 2008 Page 5 Global GDP (real) growth profile % yoy

1 Weak economic environment Difficult territory: Forecasts are moving targets In the winter half most industrialised countries will be in recession Despite robust domestic demand in many emerging economies, decoupling is elusive Central banks will continue to cut rates and support financial institutions with generous liquidity; how quickly this will transmit into the real economy crucially depends on how fast banks regain their bearings On top of the already implemented stimulus packages, governments will launch major spending programmes to support the real economy Risks in the short run clearly on the downside Growth of world trade will slow down with negative impacts on shipping Eric Heymann December 8, 2008 Page 6

2 A long-lasting boom comes to a sudden end The end of double-digit growth Total world container handling 600 500 400 300 200 100 0 90 92 94 96 98 00 02 04 06 08 10 Container handling, m TEU (left) Sources: Drewry, DB Research 18 15 12 9 6 3 0 % yoy (right) Globalisation, international division of labour and strong economic growth have boosted container handling Average growth since the early 1990s: +10% p.a. Asia confirms its position as the most important region 5 of the world s 10 biggest container ports are located in China We expect (at best) stagnation of world container handling in 2009; only modest recovery in 2010 Eric Heymann December 8, 2008 Page 8

2 Asia dominates world container traffic Proportion of global container transport by route %, 2007 Others 31.8 Trans- Atlantic 5.2 Intra- Europe 7.8 Quelle: Drewry Europe- Far East 15.2 Intra-Asia 23.1 Trans- Pacific 16.9 Intra-Asian routes, routes between Asia and North America and between the Far East and Europe make up more than 50% of world container traffic China has become the world s workbench for many consumer goods China s entry into WTO in late 2001 was an important milestone India will catch up with increasing industrialisation Eric Heymann December 8, 2008 Page 9

2 Supply will grow faster than demand Container ship fleet is expanding m TEU 2.0 1.6 1.2 0.8 0.4 0.0 03 04 05 06 07 08 09 10 11 12 13 New capacity (left) Ships scrapped (left) Total Fleet (right) Source: Drewry 25 20 15 10 5 0 Available capacity will expand by 10% p.a. till 2013 and thus much faster than demand Only a few ships are scrapped; average age of existing container ship fleet is only 11 years (world merchant fleet: 19 years) Pressure on freight and charter rates will remain high due to excess capacities Forecast for new capacity may be too optimistic and for scrapping too cautious Eric Heymann December 8, 2008 Page 10

2 Overcapacities are expected to increase Many new big container ships in the order book Capacity of existing fleet and ships on order m TEU Ships up to 1,999 TEU 2,000-3,999 TEU 4,000-5,999 TEU 6,000-7,999 TEU 8,000-9,999 TEU 10,000 and more TEU Source: ISL Total Existing fleet Order book 0 5 10 15 Boom in container shipping led to an increase in orders for new ships Demand for big container ships (>10,000 TEU) skyrocketed during the last few years Time lag between orders and deliveries results in cyclicality Ships on order account for 55% of existing fleet Significant cancellations of orders or longer production times due to economic downturn and weaker demand likely Eric Heymann December 8, 2008 Page 11

2 Charter and freight rates will remain under pressure Sharp drop in prices Index 1,600 1,400 1,200 1,000 800 600 400 200 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Weaker demand and growing supply lead to a sharp drop in charter and freight rates All relevant market indicators show more or less the same picture Rates will remain under pressure at least until 2010 0 0 06 07 08 HARPEX (left) Baltic Dry Index (right) Bulk carrier market is even more strongly affected Sources: Harper Petersen, Global Insight Eric Heymann December 8, 2008 Page 12

2 Oil price takes a respite Recession brings oil price down Crude oil price per barrel 160 140 120 100 80 60 40 20 0 90 92 94 96 98 00 02 04 06 08 Recent decline in oil price is mainly caused by economic downturn and is a temporary phenomenon In the medium term, demand for oil will increase faster than supply Backlog demand in China, India and other emerging markets Exploration and extraction from new oil and gas fields will become more expensive Energy procurement remains vulnerable to supply shocks EUR USD Sources: HWWI, DB Research Eric Heymann December 8, 2008 Page 13

2 Slow steaming becomes popular Reducing speed saves energy Fuel consumption* (t/day) at different speeds 160 140 120 100 80 60 Significant potential to reduce energy consumption by lowering speed Problem of overcapacities can be reduced However, longer travel times mean higher costs of capital and labour 40 20 0 24.5 22 20 18 Knots *For a 4,250 TEU container ship Source: Seaspan Eric Heymann December 8, 2008 Page 14

3 Investment in container terminals necessary Long-term prospects for container shipping are favourable Despite current economic slowdown, container shipping will continue to be a growth sector (+7 to 8% p.a. till 2015) We don t see the end of globalisation and international division of labour Advantages in terms of efficiency and productivity (e.g. short loading times, good opportunities for onward transport, larger vessels) favour container shipping Degree of containerisation will continue to rise especially in Eastern Europe, Latin America and Asia Short sea shipping in Europe is on the rise Container ports and terminals have been one bottleneck for the expansion of the industry Capacity utilisation will come down to normal levels Current crisis probably affects shipping companies more than harbours Need for expanding harbour capacities and hinterland connections still highly topical Huge amounts are to be invested in new container terminals in the next few years Eric Heymann December 8, 2008 Page 16

3 Investment in container terminals necessary Investment in container terminals three basic options Government or public authorities build and operate the harbour Pros: Government retains total control of the infrastructure; public resistance (e.g. against expansion plans) can be overcome more easily Cons: Public funds as determinant bottleneck; low level of competition Public private partnership: Government defines the framework, private companies operate the facilities after tendering process Pros: Inclusion of private capital and know-how; faster realisation of projects; high degree of competition supports efficiency (subject to tendering process); risk sharing Cons: Transaction costs may be high; installation of a contestable market to avoid monopolistic behaviour Material privatisation: Government sells the facilities to private investor and gives him plenty of latitude Pros: High revenues for public sector; efficient allocation of resources possible; government focuses on core competences Cons: Limited control; public resistance may be high Eric Heymann December 8, 2008 Page 17

4 Conclusion and outlook The crisis is severe, but there is no reason to panic World economy slumps into a recession; risks are on the downside; world trade declines Shipping market is highly affected; boom of the container shipping industry will come to an end; only stagnation in world container handling in 2009 Major problem for shipping companies for now: overcapacities and low or even declining freight and charter rates Medium and long-term prospects for the container shipping market are intact Investment in container terminals and intermodal infrastructure in the seaports hinterland are a must Scarcity of public funds generally benefits private investors Eric Heymann December 8, 2008 Page 19

Thank you for your attention! Questions? More on www.dbresearch.com Copyright 2008. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite Deutsche Bank Research. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Eric Heymann December 8, 2008 Page 20