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Global shippinganalyticsmonthly


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Global shippinganalyticsmonthly

  1. 1. Macroeconomic Dry Tankers Shipping Assets Contents Report Navigation... ICAP Shipping Monthly Report Global Shipping Analytics It’s the economy, stupid Sharp declines in consumer spending in the industrial economies have slashed steel and oil products demand. A combination of the knock-on effect of this slowdown and an overheating property market in China has also slashed steelmaking raw material demand. Globally, US$1.8trn in agreed stimulus plans is expected to rebuild confidence. Imported commodities in many cases continue to offer the most competitive input, but trade finance issues continue to frustrate trade volumes. There is some hope that the proposed G20 Summit US$250bn trade finance package may at last oil the wheels of global trade. Boom and bust exacerbated by pricing distortions Iron ore price negotiations are purely academic with miners and steelmakers essentially selling at discounts since the beginning of the year. Regardless of the rhetoric associated with this annual ritual, it is clear that China is increasingly reliant on imported ore as evidenced by the growing equitable interests taken in overseas mines by Chinese interests. Chinese steelmakers are poised to benefit in the long run as a number of EU and US steelmakers become casualties. Lower commodity prices in general are poised to stimulate seaborne trade as an alternative to higher priced domestic alternatives in coal and iron ore. VLCC Market Outlook VLCC market earnings fell further in the 1st quarter of the year but remained at relatively firm levels on average in comparison to those seen in other shipping markets, aided by strong demand for vessels to store cargoes. However, oil market balances point to a much weaker market during the summer. In this report we analyse quarterly VLCC supply/ demand balances for the next 7 quarters using our proprietary VLCC supply/demand Ready Reckoner which charts market developments from Q1 2000 to Q4 2010. Payment guarantees limit manoeuvre This year represents the start of the major newbuilding influx in the dry cargo and tanker sectors. At present, supply expansion is the least of the immediate concerns in a market clouded by problematic trade finance and weak macro economic prospects. The rush of cancellations at the end of last year and beginning of this appears to be abating, with governments offering indirect support to yards via investors. Demolition activity has increased sharply since the end of last year. In this month’s report... April 2009 • Trade Finance • Global Stimulus Packages • Foreign Direct Investment • Fixed Asset Investment • Chinese Steel Market • Commodity Price Differentials • Major Bulk Trade Volumes • Key Dry Market Indicators • Forward Oil Supply/ Demand • Refinery Runs & Utilisation • Crude Oil Trade • Oil Products Trade • Cancellation Issues • Greenfield Yards • Investment Activity • Return On Investment
  2. 2. ICAP Shipping Monthly Report Macroeconomic Shipping markets across all sectors have been hit by the double whammy of tightening availability of trade finance since the Lehman collapse last September and by weaker underlying economic growth in general. Central governments have acted independently in the form of stimulus packages and there is growing international resolve towards unified action as manifested last week at the G20 Summit in London. Trade finance Trade finance has been more of an issue in the bulk carrier and container markets where most of the players lack the clout of multinational oil companies in securing short-term lending. It is estimated for example that the collapse in trade finance wiped out perhaps 15-20% of dry bulk trade volume during Q4 2008. Pending support from national governments of the proposed measure, the recent G20 summit in London has proposed an US$250bn package with which the International Finance Corporation – part of the World Bank - would underwrite US$10trn of the estimated US$15trn of annual global trade to stave off growing fears of protectionism. An example of the problem faced was the collapse in appetite for commercial paper (essentially an IOU), issued by banks and major corporations with excellent credit ratings, from hedge funds and other financial institutions concerned about their creditworthiness following the Lehman collapse, prompting issuers to have to offer drastically increased interest rates to compensate for risk. To get an idea of this risk premium that buyers of commercial paper were demanding, the difference in the cost of lending between 30 day commercial paper and overnight interbank lending (regarded as ‘risk free’) widened from around 100 basis points (1%) to at one point over 600. Whilst short-term interest rates on commercial paper have now fallen back to around 100 basis points, largely following progressive cuts in US interest rates, a brief rebound in appetite for commercial paper issued by banks at the start of 2009 has now been reversed with levels reverting to the post-Lehman US$600bn compared to around US$800bn prior. Ratification of the G20 proposal at national level will be needed to inject this much-needed liquidity into the wheels of trade finance. Stimulus packages The other concern is the collapse of consumer spending and the impact that this is having on corporate profits and jobs across the global economy – a combination of weaker sentiment on the part of consumers but also the increased reluctance of banks to pass on slashed interest rates their clients. Hence the return of big government and their stimulus packages, either stepping in to control these failing businesses or priming the pumps of the economy through measures such as Keynesian spending plans or tax cuts. The recent G20 Summit included high-minded pledges of US$1.1trn, though this figure still requires ratification by national governments and may only materialise in part. Prior to the recent G20 summit, commitments have been made amounting to US$1.8trn, but are dominated by the US and Chinese offerings which are very different in their scope and potential effect on shipping market cashflow and asset values. To what extent will these packages stimulate the demand for crude oil and products, dry bulk commodities and consumer goods for box shipment? China The World Bank has highlighted the Chinese stimulus package as the most integral of the world’s sovereign government policies to the world economy and, with US$477bn out of the US$585bn pledged to be spent over 2009/10 earmarked for investment involving steel consumption, this is of critical importance to the dry bulk sector. It became apparent back in October 2008 that two important external money flows were to be lost: foreign direct investment and exports. Whilst FDI represents only a small proportion of investment in the Chinese economy, less than 5% of the domestic fixed asset investment total, the loss of exports particularly of consumer goods for the container market and steel products as a driver for steelmaking raw material demand was critical. Half of the steel produced in China is used in the construction industry, so with the real estate market on the slide following a growing backlog of unsold units the consumption of construction steel slumped. In addition, just over 20% of all steel produced in China ends up in export channels, with the collapse in steel demand in the industrialised economies, Chinese steel exports fell sharply. Unlike Europe and the US, China has the reserves to support such ambitious policies. It’s the economy, stupidFig. 1. Global Stimulus Packages -$bn Source Data: various Fig. 2. USA Stimulus Plan Breakdown -$bn Source Data: US Gov. Statistics Fig. 3. Chinese Stimulus Plan Breakdown -$bn Source Data: Chinese Gov. Statistics 825 53 50 585 48 200 261538.8 China USA IMF EU Japan Germany France India UK 275 79 41 15 87 2416 138 6 90 54 tax relief school districts education pell grant medicare health info tech science & tech infrastructure renewable energy higher education others Total: US$825 bn Steel-intensive: US$144 Bn 58 31 54 22 219 508 54 146 high-tech programs Improving education etc low-rent house constructions suburban construction Infrastructure post-earthquake rebuild renewable energy, pollution control Total: US$585 bn Steel-intensive: US$508 Bn Total: US$1.8 tr 2
  3. 3. ICAP Shipping Monthly Report Macroeconomic Since removal of the dollar currency peg, the Chinese currency had strengthened against the dollar. Changes in monetary policy involving increasing the supply of Yuan may weaken the currency and make Chinese exports more attractive. In addition, the a reversal of the lending restrictions that had been put in place to prevent the Chinese economy from overheating have also brought tangible improvements to consumer spending and trade volumes, helped by falling inflation since midway through last year. The key question mark is to what extent the stimulus package introduces ‘new’ money. 25% of this investment is attributed to the re-construction of the worst affected cities of the Sichuan region after the earthquake of May last year. If this is factored into the projected steel demand increase, an expectation of a renewed surge in 2009 becomes less likely. Whilst not such a significant boost to energy demand, the stimulus package looks likely to result in 2009 crude oil imports being far less down on 2008 than they would have otherwise been. USA The US stimulus package is designed to support financial institutions and stimulate microeconomic growth and is quite the opposite of the Chinese package. With only US$90bn out of US$825bn designated for infrastructure projects – what the somewhat partisan American Society of Civil Engineers regards as only 4% of the investment required - the main focus appears to be on stimulating consumer spending. The steel industry would nonetheless be stimulated; with Deutsche Bank estimating that 15Mt of extra steel demand would be generated reversing only some of the recent collapse in US steel production. Where the US plan could be felt positively is in the tanker and container sector. In November last year, the European Commission announced a €200bn measure to boost purchasing power and generate growth and jobs. Though this objective approach is typical of the EC, it also illustrates the majority of the European states unilateral approaches to revitalising their waning economies. Only a small proportion of this package is expected for infrastructure (€6.3bn), of which, the emphasis will be on improving energy efficiency rather than large new construction intensive projects. The focus of the Western economies is improving credit and entrepreneurial endeavour. This is a relevant approach given the financial services economy that exists in Europe. Having said this, there are examples where investment may have a positive repercussions for shipping. In Germany, a €50bn package was unveiled at the end of January, almost twice that of a similar package in November. Of this, €17.3bn will be allocated for infrastructure while tax cuts will be made for the automobile industry. In France, €4bn of a €26bn investment is proposed for infrastructure, though again, the funding for the automobile industry has brought accusations of protectionism. Such approaches to stimulus packages must be treated as the exception rather than the rule in Europe, as most countries have attempted to improve the balance sheets by encouraging liquidity via fiscal devices only. While these can have an effect on shipping, the derived demand is a protracted one and there will be no immediate improvement based on any significant raw material usage. The Japanese Prime Minister made waves at Davos in February, as he outlined an Asian infrastructure package funded by his country worth US$17bn. The package, which was Japan’s attempt to promote the continued cross-border liquidity in Asia through infrastructure, immediately has one problem: it’s relatively small. If one considers that the Chinese infrastructure package could generate somewhere between 40 and 160Mt of steel demand, the US$17bn invested will create a mere 1-4Mt; not exactly volumes that can invigorate dry bulk freight rates. The Japanese economy itself continues to struggle and the Government are contemplating a second stimulus package as it recognises the first of US$57bn has failed to reverse the trend. India has, so far, proved resilient to the down turn, posting an 8% growth in 2008, a fall of only 1% y-o-y. However, on recognising that growth is expected to slip another 1% in 2009, the government of the largest democracy in the world cut VAT by 4% in December in an attempt to encourage spending while R20, 000crore (US$4.1bn) has been proposed to increase liquidity. This approach has been criticised as too limited in its scope and would expect an amendment in the near future. The dry sector has most to gain from resolution to the trade finance issue. With lower commodity prices, in many cases now imported commodities represent the cheapest option for industrial players and trade finance is one of the major impediments to reducing input costs and boosting profitability. A rebound in trade volumes could occur quite rapidly if the proposed G20 package is ratified at national level. Even with the stimulus to the consumer economy, however, demand for crude oil could be slower to accelerate as it will take some time for sentiment and purchasing activity to change and in many cases people have found alternatives modes of consumption that reduce resource consumption. Fig. 4. BCI vs TED Spread Source Data: Baltic Exchange, Bloomberg Source Data: Baltic Exchange, Bloomberg Fig. 5. Chinese Money Supply vs Export Fig. 6. Foreign Direct Investment Source Data: various 0 5,000 10,000 15,000 20,000 25,000 Jul 06 Apr 07 Jan 08 Oct 08 Index 0 1 2 3 4 5 bpBCI TED Spread 0 5 10 15 20 25 Jun 98 Oct 01 Feb 05 Jun 08 % -40 -20 0 20 40 60 %M2 growth Export growth 0 2 4 6 8 10 12 Jan 06 Nov 06 Sep 07 Jul 08 $bn India Brazil China 3
  4. 4. ICAP Shipping Monthly Report Dry Steel prices and freight – a simple relationship? The ‘correlation’ of freight and commodities prices has become one of those unquestioned truisms of the market for some years and, given the importance of the demand for steelmaking raw materials to the Capesize market, the relationship with steel prices is reputedly the tightest. Why then, the increasing interest of non-traditional interests in physical freight and freight derivatives if they represent no more than yet another asset class correlated to the underlying macro economic picture? Volatility of course is an attraction, but investment in freight-market-linked assets is seen as a diversificational strategy since ‘correlation’ is perhaps too simplistic an explanation. The freight, commodities and energy price boom was largely a consequence of an underestimation of the impact of an expanding Chinese economy, which manifested itself in underinvestment in new productive capacity and logistical networks to meet that demand. A typical boom-bust cycle ensued with increasingly inflated prices and exceptionally cheap money justifying investment in progressively marginal additional sources of raw material supply, transportation and processing. With commodity prices now having corrected, in the cold light of day a large proportion of more recent investments no longer make economic sense at current cash flows. In a perfect market one would expect that the general trend of steel price would also manifest itself in freight and raw materials prices, articulated through potentially volatile ‘blast margins’ or ‘smelt spreads’ (our terminology, similar to the concept of ‘refinery margins’ in the crude oil market, ‘spark spreads’ in the power markets and ‘crush margins’ in soybean market). The interest in this market, however, stems from the distortions created by the contract pricing mechanism. The reason - distortion Contract price negotiations stem from a combination of the inelasticity of supply growth (at least 2-3 years to build a mine, port, vessel or steel plant), a generally low cost commodity, and a market structure that has been dominated by a small number of players leading to a desire for both parties to seek the certainty of long-term agreements. Long- term agreements in the past 6 months have been placed under exceptional price-pressure and have been demonstrated to be perhaps not so copper-bottomed. One solution beginning to get traction with the major players is that of iron ore derivatives. As a cleared asset class they would enjoy minimal counterparty risk and aid future price discovery, but also cut through the sclerotic annual contract distortions, of which the freight market was one of the major beneficiaries in 2008. Despite Chinese complaints last April, agreed contract iron ore price increases of 65-72% saw Brazilian iron ore sell FOB at just over US$80/t. A few months later, spot prices for Chinese domestic ore and Indian ore on a delivered basis into the Chinese market were at over US$100/t premium to Brazilian contract ores. Fixed contract prices were therefore creating an exceptional structural distortion in the maximum rate an importer would be willing to secure freight capacity. In a market where all ore is sold on a spot basis, Brazilian exporters would have charged progressively more for their iron ore with freight a more modest beneficiary. Somewhat ironic is that the distortion in the steel market is not one of China’s making (unlike in the refinery and power generation sectors, where end user prices of finished products are largely state controlled) though she has tried to rein in the speculative excesses of traders by limiting the number of those licensed to import plus charging tariffs for time spent in inventory. Of course there is some correlation between steel prices and freight, but it is the price differential between the cost of ore in the exporting country and the cost of domestic ore in China where the true relationship lies. Contract prices have become increasingly meaningless as the last financial year progressed. With spot iron ore prices at their height, mining companies with period ships at heavy discount to the spot freight market were able to sell their own cargo on a CIF basis around the domestic Chinese price at spectacular profit. When Chinese iron ore prices collapsed at the end of last year to well below Boom and bust exacerbated by pricing distortions Fig. 1. Steel Prices vs Producing Costs Source Data: Steel Business Briefing, Baltic Exchange Fig. 2. Blast Margins Source Data: Steel Business Briefing, Baltic Exchange Fig. 3. Delivered cost of ore in Chinese market Source Data: Steel Business Briefing, Baltic Exchange 0 200 400 600 800 1000 Jul 07 Jan 08 Jul 08 Jan 09 $/t 1.5t freight C3 1.5t ore Vale contract 0.5t coke (domestic) steelprice basket 0 100 200 300 400 500 Jul 07 Jan 08 Jul 08 Jan 09 $/t 0 40 80 120 160 200 240 Jul 04 Oct 05 Jan 07 Apr 08 $/t C3 - Brazil-China freight Brazil FOB Australian CIF Chinese domestic Indian CFR blast margin 4
  5. 5. ICAP Shipping Monthly Report Dry Australian FOB contract prices, again contracts were circumvented but this time with miners selling an increasing share of output at a discount to contract. With Chinese domestic ore prices a few cents per tonne above Brazilian FOB, Vale reputedly offered cargo on a CIF basis at the contract FOB price – essentially a discount. The crash Steelmakers for the bulk of the last 3-4 years have been the highest bidder for the limited commodity that is freight, but spectacularly exited the position of market-maker as commodity price differentials distorted by contract prices constrained maximum bids to a few dollars per tonne. Combined with the impact of the Lehman Brothers collapse on the availability of trade credit and a destocking cycle, this served as a hammer blow to the ‘spot’ market. It is estimated that global trade in dry bulk commodities shrank by around 15-20% in the space of a few months, sufficient to almost entirely eliminate the demand for the 150-200 Capesize vessels trading in the spot market to leave them mostly at anchor for a few months. It is important to note that it was domestic output of iron ore that was first hit. With shortages of iron ore for the last few years and progressively ramping contract prices, ores of decreasing quality and increasing cost of extraction had been exploited - a reputed one- third of Chinese iron ore mining capacity is uneconomic when prices dip below US$100/t. Current talk of price negotiations is to a certain extent irrelevant. With Vale having already unofficially cut prices by 30% since the beginning of the year and with Chinese domestic iron ore prices having witness a modest rebound – differentials between the iron ore prices have again widened... and, no surprise here, freight rates have again escalated within these price constraints. As well as creating the attractive price arbitrage opportunities discussed earlier that appear to have a strong correlation with freight rates on specific routes, lower iron ore prices are also supportive of the freight market by boosting volume as a replacement for a higher proportion of Chinese domestic iron ore production. Chinese steel production rhetoric a red herring Chinese interests have been at pains to state how low steel output is likely to be this year, with an obvious impact on freight market sentiment. Iron ore demand is more a function of the pricing of domestic and imported material than it is absolute levels of steel production. With production costs of imported ore significantly more competitive, it is these price differentials (which may or may not be set by annual contract) between Chinese domestic ore and the various export markets that will determine the volume and to a certain extent the freight rate for iron ore trade. This is borne out by recent events, Chinese interests continuing their march of overseas mining acquisitions – up until they hit the buffers of regulators at least… Internal factors alone will drive Chinese ore demand in the short to medium term. Initially a restocking cycle now most of the high cost inventory has been digested, followed by the stimulus package boosting steel demand in H2 from between 40-160Mt over a 12-18 month period. Export-led growth is unlikely to re-accelerate until industrialised economies begin to recover in 2010. The current difficult trading environment is squeezing less efficient steel producers in China much more effectively than earlier central government attempts to force industry consolidation. The survivors will be predominantly those reliant on imported commodity rather than those in the interior – where many less efficient mining operations will be squeezed out by rising resource utilisation fees. Steel plant closures in EU and US mean that in the medium term, when demand in the industrialised economies recovers, that an increasing share of this requirement will come from China, which may also be servicing an expanded Indian demand for steel unmet by delayed domestic projects. Lower steel production globally has paradoxically offered the market some support in the form of slashed coking coal prices on depressed demand. This has had the impact of making imported coking coal more competitive in China and increasing steelmaker margins as they switch from more expensive domestic supplies. Fig. 4. Chinese Steel Inventories Source Data: Steelhome Source Data: Steelhome Fig. 5. Iron Ore Price Variations - adjusted Fig. 6. Commodity Imports Source Data: GTIS 0 50 100 150 200 May 08 Jul 08 Oct 08 Jan 09 $/tonne C3 (Tubarao-Beilun) Brazilian FOB Chinese Ex works Indian CIF Australian CIF 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Jan 07 Jul 07 Jan 08 Jul 08 Feb 09 Mt Wire Deformed steel bars Total Inventories 0 20 40 60 80 100 120 140 160 Mar 08 Jun 08 Sep 08 Dec 08 Mt/month China metal ores China coal S Korea metal ores S Korea coal EU27 metal ores EU27 coal Japan metal ores Japan coal fleet growth trend 5
  6. 6. ICAP Shipping Monthly Report 3mma 12mma Explanatory note: For the major four shipping routes, differentials between the price of key commodities in major consuming areas and on an FOB basis from major long-haul exporters are tracked to identify emerging incentives or disincentives for importers to take advantage of long-haul commodities. Positive differentials encourage trade, negative supresses it. Arbitrage Incentive Indices have been derived for each of the major routes and for the global market from the basket of relevant commodity prices - index value Jan 2007=1000. Commodities were chosen where there is a tendency for volatility in volume and where spot tonnage is often sought to transport them. index 3mma 12mma index 1538Backhaul Arb Incentive index 3mma 12mma Pacific Raw Material Demand met by… Atlantic raw material supply US China soybeans US Japan corn 9.18 11.46 52.13 10.19 Pacific raw material supply 45% 12mma %yoy 22.82 49% 26.68 21% -3% 5.65 36%5.77 3mma 18.11 28.21 19.66 6.24 24% 21.76 3.57 6.80 4.28 9.569.06 3.09 2.72 Mar-09 21.65 31.47 20.03 Brazil - total grain (Mt) 4.22 Indicative commodity price differentials driving longer haul trade Argentina - total grain (Mt) 3.25 3.81 4.564.89 9.60US - total grain (Mt) 10.39 dark spread (dunno) -40% 4.35 5.13 23% 0.00 0.00 0.0% US grain sales (Mt) 20.14 8.67 10.7712.26 3.40 -30.9% 2.2civilian steel ships (m. dwt) 41.0cement equipment ('000t) Chinese output of major industrial products iron ore (Mt) coal (Mt) coke (Mt) 24.2 South Africa - iron ore (Mt) 2.06 2.87 2.292.35 South Africa - coal (Mt) 6.14 6.20 5.10 India - iron ore (Mt) 7.68 9.90 10.90 26.62 9.351.66 7.16 26.53 18.96 10.30 5.33 6.51 15.1726.74 26.41 Brazil - iron ore (Mt) 17.91 13.75 17.51 Australia - iron ore (Mt) 19.36 23.43 Export volumes - major exporters Nov-08 Dec-08 Jan-09 Australia - coal (Mt) 21.88 21.55 19.9823.75 Feb-09Oct-08 China FAI steel use ($bn) 29.08 31.62 soy crush margins (dunno) bloomberg? 0.00 0.0% China FAI construction ($bn 0.00 32.09 -100.0% 21.00 -41.4%China - coastal coal (Mt) 29.08 31.62 -30.9% India coal avail. (no. critical) 29 35 26.1%steel prod - USA (Mt) 3.76 3.92 -54.2% Japan nuclear outage (%) 33.17 34.80 -29.4%steel prod - S.Korea (Mt) 3.15 3.45 -24.5% China coke inventory (Mt) 2.62 2.56 -4.7%steel prod - Japan (Mt) 5.48 6.45 -44.2% 13.4% steel prod - EU27 (Mt) 10.06 9.65 -41.0% China coal inventory (Mt) 15.53 16.92 -0.2% Latest 3mma %yoy steel prod - China (Mt) 40.42 40.22 4.0% China ore inventory (Mt) 65.55 60.50 Key dry bulk market indicators Feb-09 3mma %yoy white goods (million units) 7.7 7.8 24.2% 2.8 44.5% power equipment (GW) 16.2 14.2 105.1% 44.8 18.8% automobiles ('000 units) 852.8 737.4 26.9% 37.6 -13.0% metal smelting eqt. ('000t) 52.6 43.8 43.9% 40.8machine tools ('000 sets) 3mma %yoy engines (GW) 36.6 29.6 -25.0% Feb-09 212.6 0.3% 46.1 46.4 7.0% 1.7 1.7 4.7% 82.9 94.7 39.1% 23.3 -5.7% steel products (Mt) alumina (Mt) thermal power output (TWh) Feb-09 196.6 43.9 203.7 cement (Mt) plate glass (million weight box) 58.2 Australia China coal Australia Japan coal India China iron ore Fronthaul Arb Incentive 1326 index 3mma 12mma 191.47 175.64 41.4 4.1% Brazil China iron ore Brazil China soybeans 3mma %yoy 55.5 9.3% 196.3 15.6% 250.99 152.46 131.57 182.57 Transpacific Arb Incentive $/t 3mma 12mma Australia China iron ore 80.12 67.05 46.77 $/t 3mma 12mma -53.07 -49.44 -6.94 25.79 18.84 5.44 33.41 25.65 18.58 30.34 28.38 35.19 -1695 -1876 1178 12.46 Atlantic Raw Material Demand met by… Atlantic raw material supply Pacific raw material supply $/t 3mma 12mma $/t 3mma 163.01 12mma South Africa EU coal 1.71 2.47 19.41 Australia EU coal -3.71 -2.35 177.47 Colombia EU coal 1.00 3.64 18.89 China US steel 7.05 -18.17 EU US steel 25.37 -7.61 -14.46 China EU steel -18.32 -10.56 -146 -142 Freight Arb Incentive -104 -218 1649 Transatlantic Arb Incentive 135 151 1117 Iron ore exports monthly (Mt) Data Source: GTIS, various Chinese Fixed Asset Investment 1230 2216 Data Source: USDA FAS Data Source: CNBS Indian Power Plant Coal Supply Data Source: various US Outstanding Grain Sales (Mt) 0 5 10 15 20 25 30 35 40 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 Braz Aus Ind 15% 20% 25% 30% 35% Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 yoy% growth 0 10 20 30 40 50 60 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 units with <7 days coal 0 10 20 30 40 50 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 outstanding sales Please note the most recent data is estimated from a number of sources 6
  7. 7. ICAP Shipping Monthly Report Tanker VLCC Earnings Decline as Expected VLCC earnings declined further in Q1 09 to levels ranging from some 20% to 30% below Q4 2008 levels and some 20% to 52% below Q1 2008 levels, depending on the route (see Fig. 1). Nevertheless earnings in Q1 remained at relatively high levels, given the state of the world economy and other shipping markets. Earnings essentially followed the direc- tion that we had expected, although they have found lower levels than we had anticipated six months ago as a result of the rapid slump in economic growth and oil demand. Earnings for TD1 (AG-USG) and TD3 (AG-East) came in almost exactly at the levels of our last forecast update in early February ($33,750 and $45,000 respectively) while TD4 (WAF-USG) exceeded our expectation ($49,500). Our calculated returns in Q1 for the AG-East and WAF-USG round voyage routes and the triangulated AG-USG-WAF-China- AG route were all, on average, above what we would expect to be most owners’ breakeven levels, although these figures do not allow for any waiting time. Storage use has of course played a very large part in supporting rates and at the start of April we can still positively identify 34 VLCCs from the trading fleet that are anchored for crude oil storage in the US Gulf (10), Arabian Gulf (8), Mediterranean (5), UKC (5), West Africa (4) and offshore Singapore (2). There may also be other vessels that we have not yet positively identified that would take the total up to around 40 vessels engaged in stor- age at the time of writing. There are also a handful of other vessels that have either been fixed for voyages with storage options or that are known to have anchored with cargoes on board in northwest Europe in the last couple of weeks. Oil Market Balance Points to Further Weakening In spite of the ongoing storage employment, earnings as we enter Q2 have fallen once again, to levels around $20,000/day for AG-East voyages. As we reported in our August 2008 Tanker Monthly Report we expected the market to weaken into Q2 09, which we thought would see the bottom of the market, due to weaker seasonal demand during the Northern Hemisphere spring time, seasonal refinery maintenance programmes and reduc- tions in OPEC production. All of these assumptions have held true, but we did not expect at the time that oil demand would collapse to the extent that it has—leading refiners to dras- tically cut runs—that OPEC would need to cut production so dramatically and adhere to the cuts to such an extent, or that storage employment would play such a significant role. The quarterly oil market balances shown in Figure 2 clearly illustrate why we expect the market to be weaker in Q2 with a further reduction in demand and another sharp reduction in oil supply. The latest data for January showed that OPEC had not reduced production sufficiently at that time to balance the market—with total global oil supply still exceeding the average level of global demand expected in Q1. However, February data showed that this situation seems to have changed and oil supply finally appeared to fall below demand for the first time since Q4 2007. With even higher levels of compliance with OPEC quotas in Q2 we now expect to see a period in which global crude oil inventories are run down during the summer, helping to tighten the market, and paving the way for higher crude oil prices later in the year unless demand proves to be incredibly weak. This will have two effects on the tanker market. Firstly there will be less demand for VLCCs due to the lower levels of OPEC production and exports. Secondly the tighter oil market balance should gradually lead to the unwinding or narrowing of the contango in crude oil prices, resulting in the re-delivery of tonnage back into the market. Neither of these proc- esses are expected to take place in an even fashion. VLCC demand may increase as refiners seek to buy more cargoes in May/June for refineries returning from maintenance. The con- tango may well narrow and then widen several more times—potentially encouraging more short-term storage plays in the process. At present we expect that oil demand will increase in the third and fourth quarters, on a quarter-on-quarter basis if not year-on-year, and this increase together with higher oil prices will spur higher levels of OPEC production and more demand for VLCCs to export cargoes. Unfortunately, from the VLCC owners’ perspective, there will be two major coun- teracting factors to this predicted increase in demand: 1) The anticipated re-delivery of tonnage from storage employment 2) Further newbuilding deliveries The net effects of these developments are considered in our model on the following page. VLCC Market OutlookFig. 1. Monthly Av. VLCC Sport Market Earnings Source Data: ICAP Shipping Fig. 2. Quarterly Oil Market Balances Source Data: IEA (Historicals/Demand Forecast), ICAP Shipping (OPEC Forecast), IEA (non-OPEC Forecast) adjusted by ICAP Shipping AG - USG RV AG - Far East RV WAF - USG RV AG - USG - WAF - China - AG Q1 07 38,978 47,008 58,337 62,978 Q2 07 35,092 38,116 43,250 54,739 Q3 07 15,487 21,714 22,948 33,289 Q4 07 57,984 80,709 61,563 78,931 Q1 08 69,502 90,578 71,301 95,876 Q2 08 93,756 136,011 124,367 136,812 Q3 08 64,413 98,442 91,151 99,148 Q4 08 47,803 61,543 70,705 73,433 Q1 09 33,440 44,660 56,513 54,056 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 $/day AG - USG RV AG - Far East RV WAF - USG RV AG - USG - WAF - China - AG 82.5 83.0 83.5 84.0 84.5 85.0 85.5 86.0 86.5 87.0 87.5 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 m bpd Global Oil Demand Global Oil Supply Stock build Stock draw Jan. 09 Supply Feb. 09 Supply 7
  8. 8. ICAP Shipping Monthly Report Tanker If the strong relationship between VLCC earnings and the supply/demand changes shown in our Ready Reckoner above persist, the direction of the market throughout the summer is clear, based on the assumptions used in our model. Bearing in mind that it seems likely that storage employment for VLCCs will now persist well into the second quarter, our August 2008 prediction that Q2 would see the bottom of the market may not now turn out to be the case. However, our model points to the conclusion that the two factors outlined on the previous page will more than offset the increase in trade demand in Q3 and therefore the markets could soften further. In fact the cumulative changes in supply and demand reflect a net market balance in the 3rd quarter that is similar to the situation that was seen during the weak market of Q2 2002. The situation in Q4 2009 does not improve much if we assume that all storage tonnage returns to the trading market. Furthermore our supply side outlook assumes 10% slippage of deliveries and the removal of 35 VLCCs from the trading fleet by the end of the year—which is a high number bearing in mind the lack of many al- ternative options for vessels other than scrapping and storage. However, it would seem logical that a period of much weaker rates during the summer, and likely lower employ- ment levels, would be enough to encourage more owners to remove single hull vessels from the market—especially if the prospects of a strong re-bound in rates and employ- ment levels for single hulls seems limited. Even in 2010, where we have assumed a 1.0 million bpd re-bound in world oil demand and an increase in OPEC crude oil production of 1.6 million bpd, the recovery of the market would seem to be modest and gradual due to strong fleet growth in 2009 and further fleet growth in 2010, in spite of the fact that we have estimated that a further 45 vessels will be removed from the market in 2010. Of course history teaches us that looking at these supply/demand balances does not nec- essarily produce a conclusive outlook for freight rates (although there has been a 73% correlation this decade) as other factors have a habit of intervening. Apart from the wild cards that often affect the market, we must consider whether there is enough consolida- tion in the market and determination among owners to resist a prolonged downturn in rates for the remainder of the year. In 2007 we saw earnings persistently averaging around $20,000/day from July until mid-November. These weak levels together with ris- ing bunker prices encouraged slow steaming which helped to tighten the market, although rising OPEC output and the “Hebei Spirit” incident were arguably the main drivers of the rise in rates. There are also uncertainties with respect to the unwinding of the contango and storage positions and of course with respect to the timing and delivery of the new- building programme, both of which are crucial to the outlook, although VLCC deliveries appear to be progressing on schedule so far in 2009. There are also downside sensitivities since we cannot be certain at this point that demand will start to recover in the second half of the year. In 2010 there will also be the question of how the increased use of double hulls affects the market. However, our annualised supply/demand balances show that, although it would represent a tight market, there would be enough double hull tonnage to cover all shipments in 2010 if the market were to move in that direction. Analysis of the fundamentals point to several quarters of weakness at the moment, but we may yet see some of the support factors that we outlined in our December Tanker Monthly Report come into play to drive the market back up towards healthier levels. Figure 3 captures supply and demand develop- ments in the VLCC market since the start of this decade, measured on a quarterly basis. While this is not as detailed as our annual supply / demand model that captures all VLCC trading routes this Ready Reckoner model provides what we believe to a good estimate of changes in the market balance from quarter to quarter. The model shows a strong correlation (73%) be- tween the net changes in supply and demand over the course of this decade and the development of VLCC earnings. The model uses the following assumptions: Cumulative Changes in AG & WAF VLCC Demand are calculated by taking the quarter-on-quarter changes in crude oil production in the Arabian Gulf and West Africa since Q1 2000 and applying fixed ratios to the changes in crude oil volumes to ac- count for changing volumes estimated to be ex- ported by VLCCs from each of these sources. In addition we also apply fixed ratios for destinations of these exports e.g. for U.S., European and east- ern discharge. We then calculate the change in the number of vessels that would be required to ser- vice these changes in trade based on appropriate voyage lengths and convert this into dwt tonnes. By adding the changes in all previous quarters back to Q1 2000 we arrive at the cumulative total in each quarter. While we acknowledge that the use of fixed ratios in terms of VLCC liftings and desti- nations means that some changes in demand will not be captured, we feel that overall the most important changes in demand are reflected in the model. Cumulative changes in non-AG & non-WAF VLCC Demand are taken from our annualised model reflecting all of the major changes in VLCC trade and vessel demand, excluding those involving Ara- bian Gulf and West African exports, such as in- creased exports from Venezuela to China, in- creased fuel oil trade from the Atlantic Basin to the Far East and increased long-haul crude oil ex- ports from Ceyhan and North Africa using VLCCs. The annual changes are then converted into quar- terly changes on an even basis. Cumulative Changes in Storage Use are our esti- mates of the amount of dwt tonnage of vessels normally engaged in trading that are being used for storage purposes on an average basis across each quarter. Cumulative Changes in Supply are derived from a quarterly breakdown of the annual changes in VLCC fleet supply (including deliveries, scrapping, conversions and other removals). We have then calculated the cumulative increase since Q1 2000. Changes in Demand minus Changes in Supply (Cumulative) are the result of subtracting the changes in supply since Q1 2000 from the sum of the total changes in demand including Arabian Gulf and West African exports, non-Arabian Gulf and non-West African exports and storage employ- ment. This effectively produces the net change in the market balance since Q1 2000. Fig. 3. Quarterly VLCC Supply/Demand Ready Reckoner Source Data: ICAP Shipping -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0 30.0 32.0 34.0 36.0 38.0 40.0 Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108 Q109 Q110 Mn. Dwt $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 $110,000 $120,000 $130,000 $140,000 $150,000 $160,000 $170,000 $180,000 $190,000 $200,000 $/day Cumulative Changes in Storage Use Cumulative Changes in non-AG& non-WAFVLCC Demand Cumulative Changes in AG& WAFVLCC Demand Cumulative Changes in Fleet Supply Changes in Demand Minus Changes in Fleet Supply (Cumulative) VLCC Earnings AG-East 8
  9. 9. ICAP Shipping Monthly Report Crude Oil Trade (m bpd) Oil Products Trade (Thousand bpd) Comments Forward Oil Supply/Demand (m bpd) Refinery Runs & Utilisation (m bpd) Data Source: IEA World Refinery Throughput (m bpd) Data Source: IEA (Historicals/Demand Forecast), ICAP Shipping (OPEC Forecast), IEA (non-OPEC Forecast) adjusted by ICAP Shipping Data Source: ICAP Shipping Crude Oil Tonne-Miles (Bn) US Product Trade (m bpd) Data Source: US EIA World Oil Demand & Supply (m bpd) 36.20 Tanker markets are suffering from extremely low refinery throughput at present. That of course means low demand for crude oil and low levels of production of refined products. Refiners have been cutting runs as a result of weak demand for products and poor refining margins. At present the situation is exacerbated by seasonal maintenance programmes, but these should come to an end during the 2nd quarter. Global throughput is expected to increase in Europe and the U.S. initially with Japanese and Korean refineries returning from maintenance schedules at the end of the quarter. This should mean that we see a slight increase in tanker demand and fewer re-lets in the market. 19.5% 70 9.7%133 38.05 38.02 40.15 41.34 2010 2011 2012 38.31 79 88 38 125 105 Year Ago 132 14 2009YTD 131.0% 14 13 58 88 5 1608.9% 108 7347 Year Ago %∆ 2007 133 139 2007 2008 2009YTD Latest 37.4% Fuel Oil Latest 8684 96 114 104 181 2 444 397 441 550 107 85 -62.3%32128 28 397 38.5% -86.8% %∆ %∆ 5 46 2 OECD N/Am. 18.3 17.9 15.6 20082007 1,256 29.1%1,204 1,395 1,537 1,622 177 Year Ago 17.4 17.4 17.3 Latest2007 2008 2009YTD 10270 n/a 33.8% 279 248 12.7% 1,188 Jet Kerosene -42.4% 295 192 280 Jet Kerosene 378 356 6.3%368 -3.0% 2007 2008 2009YTD Latest Year Ago %∆ 4.60 4.48 2009 4.14 5.104.83 4.26 -5.3% 2.82 2.78 n/a 2.81 2.60 7.9% 4.68 4.75 n/a 2.35 2.98 2.98 9.80 9.49 9.06 4.10 12.5% -8.7% -8.9%9.95 2.65 -8.0% Year Ago %∆Latest 3.29 Q2 2006 Q3 2006 Q4 2006 JanNov 85.0 85.4 May Jun 87.0 86.7 86.1 86.0 Q1 2007 Q2 2007 2007 85.5 85.2 83.9 82.8 17.4 17.0 16.9 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Mar 85.0 86.5 83.5 85.1 85.1 85.8 87.2 84.6 84.6 17.1 17.3 Apr May 12.8 12.8 Jul Aug Sep Oct 2008 20092008 2008 2009 1H Jun 2009 2008 13.1 17.2 17.9 17.1 13.4 2008 2008 200920092008 2009 Feb 2009 1H (e) OECD Eur. 13.5 13.4 13.313.6 13.8 13.8 Oct Jan 20.9 21.3 21.4 20.8 10.03 85.8 Supply Demand 84.6 72.8 Feb All Asia 22.4 22.0 2.38 85.3 3.05 3.74 73.2 72.3 Aug Sep 21.5 Q1 2006 2008 21.7 21.3 21.2 13.3 Dec JulMar Apr 71.9 20.8 20.6 World Total 75.4 75.1 71.5 83% 82% 84% 83.9 84.9 85.9 86.2 22.0 71.4 71.7 2008 2008 2008 21.0 72.5 72.8 73.9 2008 2009 2008 86.8 85.7 85.2 84.9 Utilisation 2008 2008 20082008 2008 2008 Supply Demand 71.1 71.6 84.5 84.0 12.4 13.1 13.5 Runs OECD N/Am. 84% 83% 84% 87% OECD Eur. Nov Dec 87% 86% 84% 74% 82% 83% 2008 2009 YTDFY 82% 85% 84% 85% 83% 85% 86% 86% 84% 82% 84% 84% 81% 85% 81% OECD Pac. 87% 88% 84% 81% 77% 83% 85% 84%84% 4.11 85% 79% 2009YTD 85% 85% 3.05 3.31 3.74 85% 84% 84% 84%82% 85% 85% 81% 79% 82% 82% 3.58 4.10 Middle Distillates 84% 82% 84%83%World Total 9,9988,544 8,773 8,167 348 420 9,532 888 113 0.9% 0.7% -5.5% Gasoline 1,121 1,053 1,051 229 2008 33 0.5% 2.7% -6.9% 7.6% Total Imports by Country China Japan Korea Global Seaborne Trade %∆ Y-o-Y Billion Tonne-Miles Sing+Taiwan+Thailand US1 Germany+Netherland+UK France+Italy+Spain China Exports4 Fuel Oil US Exports3 All Products China Imports4 Gasoline Middle Distillates Jet Kerosene Fuel Oil %∆ Y-o-Y US Imports3 Gasoline Middle Distillates Seaborne Crude Trade2 Data Source: IEA Oil Market Report Data Source: IEA Oil Market Report Data Source: 3 US EIA and 4 China Customs Statistics Data Source: GTIS, except 1 which US EIA and 2 which ICAP Shipping 5.0% 5.6% 3.0% 8.5% 4.9% 8,787 82.5 83.0 83.5 84.0 84.5 85.0 85.5 86.0 86.5 87.0 87.5 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Oil Demand Oil Supply 71.0 71.5 72.0 72.5 73.0 73.5 74.0 74.5 75.0 75.5 76.0 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 World Refinery Thoughput 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 2000 2002 2004 2006 2008 2010 2012 -7.00% -5.00% -3.00% -1.00% 1.00% 3.00% 5.00% 7.00% 9.00% Bn Tonne-Miles % Change 2.70 2.90 3.10 3.30 3.50 3.70 3.90 4.10 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 US Products Imports (LHS) US Products Exports (RHS) 9
  10. 10. ICAP Shipping Monthly Report Shipping Assets Strong quarterly supply growth is in prospect for both the dry bulk and tanker sectors for the next 2-3 years, yet for the next 18 months growth rates have opposite trajectories. The bulkcarrier fleet is at the start of a long period of accelerating growth, whilst Q1 2009 represents the high water mark for quarterly tanker deliveries until perhaps 2011 with growth rates slowing in the meantime, further decelerated by removal of single hull tankers and the pushing back by some investors of orders. Where are all the cancellations? From the events of Q4, the idea that the orderbook would be decimated by cancellations was discussed at length with some commentators suggesting that a 50% reduction could emerge in the dry bulk sector alone. Involuntary cancellations could have resulted from the perspective of the investor or the yard, where the tightness of credit frustrated contractual agreement. With it unclear whether values on delivery would be significantly discounted to purchase price, some investors were even tempted to leave deposit monies on the table or at least come to some terms with the yard to cancel some of their orders at a price. There are a number of possible reasons for the slowdown in cancellations. Stronger rates certainly helped, along with a sense that supply growth will to a certain extent be kept in check by demolition and slippage. Demolition has surged with over 5Mdwt being scrapped in Q4 2008 and 3.5Mdwt being scrapped so far in 2009. Vessels demolished so far this year are much younger at 20yo than that for the last decade of nearer 30. There still remain a significant body of vessels that make ideal scrapping candidates, 14% over 25yo and 20% over 20yo, following several years of negligible removals. Slippage is expected to result in a similar deduction in expected deliveries this year. Based on last year’s slippage of dry bulk and looking at the number of greenfield yards which are to deliver this year and their possible performance, 16% of what is scheduled to be delivered in 2009 may not hit the water until 2010. Many of the more recently signed contracts contain ‘payment guarantees’ as well as the usual refund guarantees sought by the buyer. Additionally there is increased support and encouragement from Governments, in particular the Chinese. After the Korean government pledged to support its shipbuilding industry, the Chinese government has gone further with the policy of offering to take on debt unwanted by traditional shipfinance banks or providing finance to support yards in building vessels on their own account. Another option on the table is to set up a system similar to that of the German KG system. Unlike the problems facing the over-leveraged German system, the savings rate in China is one of the highest in the world, money has also exited equity positions and investors are seeking alternative strategies for their portfolios, the current dip in asset values may provide an ideal opportunity. On the tanker side, deliveries of VLCCs in Q1 appear exactly on schedule, with 24.2% of the 66 due this year having been delivered. The Suezmaxes are slightly behind, with just 15.0% delivered, but it is expected further 2009 orders will be moved into 2010. Aframaxes appear ahead of schedule with 28.0% of the 107 delivered, whilst Panamaxes lag with 19.6% of the 51 delivered. The MRs (45-55k dwt) are struggling to deliver the 183 slated for 2009, with just 15.3% delivered, whilst the Handy sector (27-45k dwt) is fairing marginally better with 17.8% delivered. Whilst the mostly on-target deliveries will be a concern for freight rates, the low levels of fleet growth seen in some sectors last year, due to smaller numbers of deliveries and the removal of many vessels for conversion projects in the first part of the year, will be providing some help. Whilst the scope for conversion projects has now been vastly reduced, single-hull vessels still need to be phased out, meaning owners may opt to cash in at the breakers yard before the rush begins, especially if freight rates remain at depressed levels. Overall, it appears that the worst of the negative effect of the oversized orderbook is yet to be felt. Deliveries of tankers are on target, if not a little slow, while bulker deliveries are to be slow until H2 2009, when the majority of cape deliveries are made. With only 77 bulkers (3.22Mdwt) delivered of a total 962 (71.4Mdwt) there is clearly a long way to go and rates could look very different again later in 2009. Distressed sales have also been a feature of the dry market, particularly for those exposed to period or paper positions vastly out of kilter with settlement. With the strengthening of dry rates during first quarter, the removal of casualties and a steady reduction in the number of players exposed the fear of widespread defaulting is now easing. Payment guarantees limit manoeuvreFig. 1. Dry bulkcarrier orderbook Source Data: LR Fairplay Fig. 2. Tanker orderbook m.dwt/qtr Source Data: ICAP Shipping Fig. 3. Chinese ship plate RMB/t 10-20mm Source Data: Steelhome Fig. 4. Contracting activity - March 2009 Source Data: ICAP Shipping 0 1 2 3 4 5 6 dry bulk tanker container other options contracts 0 5 10 15 20 25 30 2006 2007 2008 2009 2011 2012 0 3 6 9 12 15 18 2006 2007 2008 2009 2011 2012 3,500 4,300 5,100 5,900 6,700 7,500 8,300 Jan 07 Sep 07 May 08 Jan 09 10
  11. 11. ICAP Shipping Monthly Report 4.99 7.44 28.50 0.70 0.15 0.46 1.57 4.98 49.09 1.14 4.00 3.03 0.00 0.32 0.30 0.30 0.00 0.00 0.15 0.00 21.51 48.34 2.33 8.30 3.58 9.71 8.09 16.32 7.13 1.82 2014 39% 15% 58% 32% 31% 40% 47% 48.17 1.92 8.79 19.42 15.63 76.31 6.37 13.56 11.04 Size 11.38 33.96 2011 10.33 54.61 20102009 150%31.05 6.3% 9.6% 70% 38% 4.9% 6.2% 6.2% 6.9% 154.83 5.47 0.00 0.85 99% % 11.33 12.51 14.96 11.18 416.03 71.20 1.56 1.42 1.17 0.00 29.83 1.32 0.25 1.21 27.00 25.00 - - 24.50 25.57 0.45 0.53 0.08 0.05 0.00 0.20 0.00 0.26 0.11 0.05 $258.42 14.5% 7.9% - 0.21 0.00 0.06 0.11 0.00 0.00 $0.00 $0.00 $0.00 $0.00 $2.65 $7.70 325.00 - 310.00 - - - $2.37 $6.55 13.1% 7.6% 18.8% 16.2% 8.8% 14.0% 8.5% 18.6% 7.93 0.08 8.3% $0.00 8.2% China NB 13.1% Re-sale 10.3% 5-yr Old P/E 0.95 0.03 0.06 0.21 0.00 0.00 0.21 0.00 1.07 12.2% 14.4% 6.0% 10-yr Old 10.4% 5.4% 10.6% 15.2% 4.1% 15.8% 32.9% 28.6% 74.4% Investment by Shipping Sector ($bn) Investment, Sales and Scrapping Handymax Panamax P-Pmx Capesize $12.25 $4.92 $2.93 $13.55 Handy Handysize VLCC Suezmax Aframax Panamax MR 29.3% 25.1% 55.1% $1.60 8.7% 14.9% 14.5% 9.6%10.2% 8.1% 0.87 3.32 2013 Capesize Panamax 13.41 Internal Rate of Return (IRR) SK NB 69% 39% 293.16 27.31 Aframax Panamax VLCC Handy $0.04 $0.00 $0.04 $0.00 77.84 105.92 20.63 140.43 Fleet and Orderbook 21.03 $0.34 $1.01 10.72 44.38 Over 15 Over 20 $4.70 $6.37 Handysize $9.34 Panamax Handymax Handysize Supramax MR Suezmax $2.33 $5.65 VLCC Suezmax Aframax LR1 153.65 46.33 20.35 31.86 16.05 23.55 19.02 14.20 5.65 3.84 %DH MR Size 392.35 Age 57.89 27.95 6.26 Capesize P-Pmx 2009 0.61 0.44 0.20 0.00 1.08 $9.15 $13.63 $9.91 $5.82 $24.08 2010 $6.67 $10.01 $7.23 $6.29 $14.70 2011 Investment on Deliveries ($bn) 1 $0.24 Average 3m $1.01 Average 12m Monthly Contracting Investment ($bn)1 $0.00 Feb-2009 $0.53 $0.31 $0.47 $0.21 $8.81 $4.10 $2.29 $3.12 $4.93 $12.31 $1.48 $6.14 $3.96 $0.27 $0.00 $0.00 $0.04 $0.09 $0.18 $0.18 $263.00 $264.53 $0.00 $0.00 $0.00 $0.09 $0.00 $0.00 $0.00 $0.00 29.05 Total dwt (Mdwt) $250.00 $255.25 1.84 0.43 31.32 30.33 Scrap (YTD)1 1.89 YTDFeb-2009 Secondhand Sales (Mdwt)2 Average $/ldtAverage Age Over 25 109.20 42.93 Fleet Capesize P-Pmx Panamax Handymax Handysize TOTAL 39.8% 38.9% 87.9% 22.3% TOTAL MR Handy 9.95 2.74 5.48 0.74 Capesize Orderbook VLCC Suezmax Aframax Panamax 4.91 4.87 5.48 5.09 5.19 - 6.41 7.10 7.66 7.12 34.87 27.30 82.44 58.58 37.39 8.68 8.82 9.51 8.82 88.69 14.17 4.04 6.75 17.52 15.09 31.12 9.25 4.42 6.26 4.85 7.07 1.54 0.81 1.62 10.46 85% 73% 94% 85% 90% 90% 81% 13.07 6.58 2012 35.28 P-Pmx Panamax Handymax Handysize TOTAL VLCC Handy TOTAL Suezmax Aframax Panamax MR 69.75 8.94 20.14 8.73 25.30 23.58 71.61 0.00 0.53 9.61 6.18 15.89 0.52 0.45 1.62 0.33 108.78 3.75 53.62 41.55 139.63 30.79 17.13 8.18 4.72 Second Hand Sales (Mdwt) Data Source: ICAP Shipping P/E Ratio (Years) 6.78 151.75 0.26 30.06 2.67 3.00 4.76 Data Source: 1 LR Fairplay and 2 ICAP Shipping Data Source: LR Fairplay and ICAP Shipping Data Source: ICAP Shipping Data Source: LR Fairplay, ICAP Shipping b) Repayments over 18 years for NB and Re-sale, 10 years for Second-Hand d) Other assumptions: scrap price 500/ldt, escalation in operation costs 3% and interest rate 4% IRR Assumptions c) Vessels owned to 20-year anniversary, e.g. 5 year olf vessel owned for 15 years a) Debt/Equity Ratio 60%/40% Data Source: ICAP Shipping 0 2 4 6 8 10 12 14 16 18 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Dry Bulk Tankers 0 1 2 3 4 5 6 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Dry Bulk Tankers 0 1 2 3 4 5 6 7 8 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 P/E Cape P/E VLCC P/E MR 11