Angela Chao summarizes shipping trends from an Asia-Pacific perspective. She notes that the incredible shipping boom has been driven by Asian demand, notably from China, for commodities like iron ore and coal. While demand growth continues, the rate of growth is slowing. On the supply side, shipbuilding and new orders have skyrocketed in Asia due to high freight rates. However, a large influx of new shipyard capacity in China threatens to cause overcapacity as deliveries increase sharply from 2009 to 2012. With demand growth slowing and supply set to rise significantly, the market is poised to return to balance, which could negatively impact current high freight rates.

1. Remarks by Angela A. Chao
Senior Vice President of Foremost Group
To BIMCO 39
Copenhagen, Denmark - Tuesday, May 29, 2008
Thank you, Yudhi, for that very kind introduction. Thank you to BIMCO and BIMCO39 for having me today. It is my great pleasure to be here, and to stay involved with BIMCO39, because as many of you know, I have a long history and a close tie to BIMCO39!
I have been asked to speak today about “Shipping Trends from Asia-Pacific’s Angle”. My first reaction was – and I am admittedly biased - is there really any other angle besides that of the Asia-Pacific angle? Any angle that is more important anyway? And let me speak from the dry bulk perspective, since while I admittedly don’t know much – dry bulk is really all I know.
After all, the incredible shipping boom of recent history has been completely instigated, propelled and perpetuated by Asian demand, and most notably that of China. We all know the staggering growth in iron ore and coal demand, the large majority of the marginal demand of which comes from China, the incredible growth of steel production, the sky high rise in commodity prices, etc. These are extraordinary times. And for the first time, shipping is receiving international attention and hitting the radar screens of Wall Street and the average joe, now hitting even the front pages of the New York times and Wall Street Journal.
Just take a look at China monthly steel production – that graph is awe-inspiring. This shows China’s steel production from the beginning of 2003 until call it March 2008. The rise is exponential! At a rough glance, it seems as though the sky is the limit! After all, China still has massive amounts of urbanization and infrastructure to put into place. People often quote how China builds a city the

2. size of Houston every month – perhaps not so helpful a benchmark for you Europeans, but that’s huge! Houston is on of the US’s 10 largest cities. But let’s take a closer look. You’ll notice that this graph plots China’s annualized steel production on a monthly basis against the 12 month rolling average. You will see that for the first time in January 2008, the annualized rate of Chinese monthly steel production fell below the 12 month rolling average. This is exactly the type of technicality that economists and graph plotters love, and import all sorts of meaning to. And to be fair, it often does signal a turning point. In this case, it would herald a market peak. Furthermore, China’s first quarter 2008 annualised rate of steel production, 498mt, was actually below the level recorded in Q3 2007 of 503mt. Is this a turning point for steel demand?
When we look at dry bulk demand in general, you will see that while demand continues to grow, the percentage growth in demand is slowing, and has been since 2004. The graph in the upper left graphically represents dry bulk demand growth since 199, and forecasts demand growth for 2008. Please note that this is growth, not absolute demand. You will see from the table below, absolute demand growth continues to rise, but thte pace is on a downward trend. The graph on the upper right breaks out demand growth on an absolute basis for major bulks (like iron ore, coal, wheat, soya beans) versus minor bulks (such as sugar, agribulks, cement, fertilizer, scrap, etc.). This next table shows the same trend for minor bulks as for major bulks – that is, absolute demand rising, but demand growth slowing.
The demand growth has caused dry bulk freight rates to skyrocket as well. Attached is a graph of one-year time charter earnings for standard bulk carriers. As everything else, the trend is up, up, up. There was a slight dip in 4th quarter 2007, but even so, we remained at historically unprecedented levels.

3. Anecdotally, demand growth remains very strong from China. I have just returned from a trip where they continue to express their needs for raw materials and major bulk commodities. China is growing and booming, but there are many causes for pause. Inflationary pressures are mounting, speculative real estate ventures are being cracked down – and rightly so – by the government, credit is tightening, China’s labor costs are rising and China is no longer the go-to- no brainer choice for cheap labor and cheap manufactured goods. The subprime credit crisis that rocked the US financial markets in August of last year is still making its way through the international financial markets in ways that could not have been imagined six months ago, and among US financial leaders, the consensus is that there will be additional fallout. So there are any number of demand shocks that could occur to further slow demand – both in absolute and percentage growth terms. And as we all know, shipping markets are unpredictable – it is always something that no one expects that sets the market afire or ablaze….
Let’s turn our attention to the supply side. Asia is where commercial ships are being built – whether you are speaking of bulk carriers, containers, tankers, etc. Prices have gone through the roof as you can see from this next graph. Again, focusing on the dry bulk side, you can see that newbuilding prices have basically doubled since 2004. That is astonishing. While tanker and container newbuilding prices haven’t quite doubled, their appreciation is impressive nonetheless! VLCC’s started at 77M, and in 2007 they were $146M!
You will also see that despite the historically unmatched newbuilding prices, there has been an ordering frenzy. You’ll see on this next graph bulk carrier ordering at 306 contracts in 2002. They more than doubled by 2006 to 621, and then from 2006 and 2007 – in the space of one year – ordering almost tripled, and the number of contracts placed in 2007 was a record-breaking 1,630. 356 tanker orders were placed I n2002, rising to 1,122 in 2006 alone and while falling off

4. slightly in 2007, still almost triple 2002 levels at 882. Containers and reefers had only 124 contracts in 2002, and have triple or quadruple that number of orders for each consecutive year since then.
The explosion of newbuilding orders has been propelled, naturally, by sky-high freight rates. However, this could not have been possible without the significant expansion of shipyard capacity in the last five years. China has again been the leader in shipyard capacity growth. New shipyard all over China have been popping up, and former repair yards are now transforming into shipyards! It’s really quite remarkable and rather scary. Some of these shipyards are literally greenfields with no experience in building a handysize, much less a capesize.
This next graph shows how much capacity is popping up. While in 2006 and 2007, Owners were scrambling to secure berths for 2010 and 2011, it is not 2 years later, and new Yards are popping up with new berths, it seems, every few weeks. And existing, established Yards are finding it profitable enough to squeeze out earlier berths for a healthy premium at the Owner’s expense. This graph shows how much capacity still exists as of the end of 2007. You will note that there is still 10M deadweight tons forecast available for 2007, 79M deadweight tons for 2011 and 152m deadweight tons for 2012 – all the way up to 161M deadweight tons in 2012. This is AFTER the newbuilding orders have increased so dramatically in all sectors, year on year, since 2002.
When visiting Shanghai alone, you can see any number of shipyards now soliciting business. Outside of Shanghai, there are stories of ships literally being built on beaches. New yards are being forced to poach workers and more importantly, top management from existing and established shipyards. There is a serious deficit of experienced shipyard management, and those who have it have lucrative proposals before them. And in China, even the big, state owned yards

5. have crops of young managers who while bright and hard-working, also do not have years of experience. If you have a senior manager at one of the big state- owned yards even for a year, then you are considered a hot commodity. Skilled labor like welders and technicians are in high demand, not to mention those who have naval architecture backgrounds and/or who can speak English with even a minimal proficiency. These new Yards have an infusion of private capital, but not always very much, and so they desperately compete to secure contracts in order to fund their cash flow. The level of activity is at dizzying levels and causing all sorts of disconnects between available resources and available opportunities.
If we take a look at the current dry bulk orderbook, you will see the enormous spike in deliveries starting in 2009 for the smaller handysize and handymax vessels, and 2010 for the panamax and capesize vessels. The above table shows the current dry bulk orderbook in terms of vessels on order per year, and the below graph shows the same information but in terms of millions of deadweight on order per year.
With demand slowing, and supply increasing, it is just a matter of time for the market to come back into balance and fall from its extraordinary heights. The other dangerous aspect of what has occurred is that shipyard capacity is long- lived. If you build a shipyard, you can’t just shut it down when the market goes south, unless it goes bankrupt. In other words, the incredible market that we have experienced since the fall of 2002 was due to a fundamental lack of supply which is poised to come into balance and then is seriously threatened by a systemic overcapacity of supply.
Another important contribution that Asia makes to shipping is the supply of crew. Crewing is a fundamental part of shipping – without our crews, we couldn’t run ships! With the explosion of shipbuilding and newbuilding deliveries, the

6. different sectors are competing for a limited pool of crew. While traditionally India and more recently the Phillipines became great seafaring nations, China has caught up quickly in the last few years. There is a long maritime tradition in China with important ports like Shanghai, Tianjin, Dalian, Hong Kong.