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7/31/2019 IMP Market Outlook SRO

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SECTION 1

SHIPPING MARKET OUTLOOK

CONTENTS

EXECUTIVE SUMMARY 7

1.1 FREIGHT MARKET OVERVIEW 8

1.2 WORLD ECONOMY & SEA TRADE 10

1.3 THE SHIPBUILDING MARKET 12

1.4 THE DEMOLITION MARKET 14

1.5 DRY BULK MARKET OUTLOOK 16

1.6 TANKER MARKET OUTLOOK 20

1.7 CONTAINERSHIP MARKET OUTLOOK 24


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Clarkson Research Services

8 Autumn 2009


The six month period since we wrote our lastreport has had a slightly unreal feeling about it.The Clarksea Index, which reports the averageearnings of tankers, bulk carriers,containerships and gas carriers, is at $10,000/day but at one stage in September was as low as$8,000/day. Such low earnings take us back tothe recessions of the 1990s, although earningsremain above operating expenses for someships and there is still cash in the bank. Overthe summer the markets were generally makingthe best of the gloomy outlook and there werefew signs of real hardship, except maybe in thecontainership business.

Tankers defied gravity and had an exceptionallygood first quarter, with VLCCs earning around$50,000/day and products tankers earning $10-15,000/day. But by April the cracks werebeginning to show and rates came tumblingdown. At one stage in August VLCCs werereporting negative rates and products tankerswere earning less than $5,000/day. Even theAframaxes, which have led a charmed life formost of the last decade, saw their earningsslump well below $10,000/day. All these rateswould have seemed inconceivable a year ago.

In contrast, the bulk carrier market, whichstarted the quarter on its knees and with noexpectations whatsoever, saw rates pick upgradually in spring and surge to a peak in June,when Capesize bulk carriers were once againearning $80,000/day. Analysts savoured theparadox of world steel production being 30%down and Capesizes earnings up 70%, but theexplanation was China (see section 1.5).However, by the end of the summer

fundamentals had reasserted themselves and themarket was back to more realistic levels, withCapesizes earning around $20,000/day andPanamaxes and Handymaxes both earningaround $13,000/day. Low by recent standards,but once upon a time these were boom rates.

Once again, however, the real pain was felt bythe containership market, which had entered therecession earlier than bulk shipping. In this casethere was no miraculous recovery in rates andChinas exports continued to slide, as did thevolumes of cargo on the major containerisedroutes. With deliveries pushing up the fleet ataround 8% a year, and demand declining,charter rates slumped to operating costs in thespring and stayed there. Reportedly about 15%of the fleet was laid up.

In conclusion, the last six months have seentanker earnings down by 67%, bulk carrierearnings up by 79% and containership earningsdown by 52%. With the world economy stillstruggling, despite a few signs that some crucialsectors have bottomed out, and an order bookwhich now looks stunningly inappropriate andmassively overpriced, most market watchersagree that the outlook is grim.

1.1 Freight Market Overview

Avg. $/day Oct '08- Apr '09- %

Mar '09 Sep '09 Change

VLCC (Modern) 62,473 26,494 -57.6%

VLCC (Early '90s) 58,287 24,059 -58.7%

Suezmax (Modern) 51,347 19,312 -62.4%

Aframax (Modern) 37,125 11,147 -70.0%

Products (Dirty) 29,877 10,183 -65.9%

Products (Clean) 22,339 6,483 -71.0%

Weighted Avg. 32,803 10,793 -67.1%

Tanker Earnings



Capesize 15,779 43,751 177.3%

Panamax (Spot) 7,772 15,502 99.5%

Panamax (trip) 8,546 20,082 135.0%

Handymax 9,488 17,145 80.7%

Handysize (t/c) 7,175 11,614 61.9%

Weighted Avg. 8,911 15,993 79.5%

Bulkcarrier Earnings



3,500 teu gls 14,833 6,167 -58.4%

2,500 teu gls 11,167 5,475 -51.0%

2,000 teu gls 8,742 5,058 -42.1%

1,700 teu grd 7,450 4,792 -35.7%

1,000 teu grd 6,200 4,033 -35.0%

725 teu grd 5,317 3,533 -33.6%

350 teu grd 4,425 3,342 -24.5%

Weighted Avg. 7,395 3,486 -52.9%

Containership Earnings


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10 Autumn 2009


The last six months started with the worldeconomy heading into new and largelyunknown territory. Industrial production had

just recorded its biggest fall in 50 years,slumping to minus 18% in the Atlantic andminus 23% in the Pacific.

But sentiment mellowed over the summer andSeptember brought various indications that theworst of the catastrophic slide was over.Industrial production turned up in both theAtlantic and the Pacific (see Figure 1.2.1), andthe forecast from the IMF emerged that the fallin gross domestic product for the year would be1.1%, followed by an increase of 3.1% in 2010.

This improvement is supported by signs thatthe United States housing market, the fall ofwhich had originally triggered all theseproblems, has stopped declining and has nowshown a small increase over the last fourmonths. In addition, the extent of the inventorycut back during the first half of the yearsuggests that some bounce-back is almostinevitable, if only to build stock levels now thatthe initial panic is over. So the shippingindustry returned from its holidays to theprospect that the economic performance in the

second half of 2009 would see someimprovement.

Although this is positive news, the concernshared by many market watchers is that thisrecovery, which most seemed to agree wouldhappen, is the result of temporary factors andthe pace of recovery may not be sustained into2010. At a fundamental level, the degree ofdamage done to consumer confidence,manufacturing budgets and government taxmake it unlikely that consumers will revert to

their Happy Go Lucky spending habits whichcarried the world economy through the amazingyears of 2003 to 2007.

Interestingly, the forecast of minus 1.1%growth of GDP shown in Table 1.1 is wellbelow the forecast in our previous report of afall of 0.5% in 2009. So, despite the renewedoptimism, the outlook remains worse than itwas six months ago. The OECD countries areexperiencing a sharp slide in output, with

USAs GDP down by 2.7% in 2009; theEuropean Union down by 4.2%; and Japandown by 5.4%. Japan in particular has beenhaving a very difficult recession. However, withthe notable exception of China, most othercountries are facing the same sort of problem.Russian GDP is expected to be down 7.5% thisyear, South Korea down 1.0%, Taiwan down4.1% and Malaysia down 3.6%. South andCentral America are somewhat less affected,with a fall of 2.5% in GDP predicted, leavingonly Africa where GDP is expected to increasein 2009.

Turning to seaborne trade, our expectation isthat dry cargo trade, which grew by 5.6% in2007 and 3.4% in 2008, will decline by 2.7% in2009. This reflects a substantial decline incoking coal and many other bulk cargo trades.Iron ore trade, the stellar performer of the lastfive years, is expected to be static this year,reflecting a sizable fall in the imports of Europeand Japan, but an equally sizable increase in theimports of China which seem to have surgedahead, undaunted by the global recession.

Oil trade is expected to follow much the samepattern, with crude oil shipments falling by2.6% in 2009 and products by 3.2%. Thedecline in trade is primarily associated with

declining world oil demand.

Finally, the segment which has been the hardesthit by the recession is the container business.The statistics in Table 1.2 suggest that containertrade will fall by 8.5% in 2009, after growingby 4.7% in 2008 and over 10% in the precedingthree years. This turnaround means thatcontainer lifts will not be much higher in 2009than they were in 2006. But during that timefleet has been growing very rapidly.

In conclusion, things are looking better but it ishard to avoid the conclusion that the market iscurrently in a transitional period and, for theshipping industry at least, the demand prospectsare gloomy enough to offer little protectionagainst the surging growth of supply which isdiscussed in the next section.

1.2 World Economy & Sea Trade


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Autumn 2009 11


Table 1.1 Economic Growth Table 1.2 Seaborne Trade

Figure 1.2.1 Figure 1.2.2

Industrial Production

-24

-20

-16

-12

-8

-4

0

4

8

12

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Source: Clarkson Research Services

% p.a.

Pacific - S/SE Asia & India

Atlantic - US & Europe

Seaborne Trades 1988-2010

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010(f)


bn tonnes

Iron Ore Coal

Grain M inor Bulks

Crude Oil Oil Products

GDP (% yoy) 2006 2007 2008 2009 2010

OECD 3.0 2.7 0.6 -3.4 1.3

USA 2.8 2.1 0.4 -2.7 1.5

Japan 2.4 2.3 -0.7 -5.4 1.7

European Union 2.8 2.7 0.7 -4.2 0.3

Germany 2.9 2.5 1.2 -5.3 0.3

France 2.2 2.3 0.3 -2.4 0.9

UK 2.8 2.6 0.7 -4.4 0.9

Italy 1.8 1.6 -1.0 -5.1 0.2

Russia 7.4 8.1 5.6 -7.5 1.5

China 11.6 1 3.0 9.0 8.5 9.0

Asian NIEs 5.6 5.7 1.5 -2.4 3.6

South Korea 5.1 5.1 2.2 -1.0 3.6

Taiwan 4.9 5 .7 0 .1 -4.1 3 .7Hong Kong SAR 7.0 6.4 2.4 -3.6 3.5

Singapore 8.2 7.8 1.1 -3.3 4.1

Thailand 5.1 4.9 2.6 -3.5 3.7

Malaysia 5.8 6.2 4.6 -3.6 2.5

India 9.8 9.4 7.3 5.4 6.4

Africa 6.1 6.3 5.2 1.7 4.0

S & C America 5.5 5.7 4.2 -2.5 2.9WORLD 5.1 5.2 3.0 -1.1 3.1

* Forecast, Source: IMF

Forecast

2006 2007 2008 2009 2010Iron Ore 723 783 843 849 981

9.9% 8.3% 7.7% 0.7% 16%Coking Coal 190 207 219 205 214

3% 8.9% 6.0% - 6.7% 4.4%Steam Coal 539 565 576 572 588

7% 4.9% 2% -0.6% 2.7%G rains inc. s'beans 292 305 322 320 303

7.2% 4.4% 5.5% -0.5% -5.4%O ther Bulks 1,062 1 ,104 1 ,105 1 ,043 1,081

5.3% 4.0% 0.1% -5.6% 3.6%2,805 2,963 3,064 2,989 3,1666.8% 5.6% 3.4% -2.4% 5.9%

Crude 1,933 1,984 1,964 1,920 1,9232.5% 2.6% -1.0% -2.3% 0.1%

Products 736 763 771 746 761

6.5% 3.6% 1.1% -3% 2.0%2,668 2,746 2,735 2,666 2,6843.6% 2.9% -0.4% -2.5% 0.7%

Container TradeEurope 82 92 92 78 78Asia 222 252 270 243 257N.America 45 46 45 38 40Others 76 83 91 88 92Total (mTEU lifts) 426 473 498 447 466

118 130 136 123 12811.2% 10.9% 4.3% -9.3% 3.5%

Seaborne Trades

(mt / mTEU)

Total Dry Bulk

Trades mt

Total Oil Trades

(mt)

Total Container

Trade (mTEU)


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12 Autumn 2009


Over the last six months the shipbuilding orderbook has been an outstanding conversationpiece. In commercial terms the orderbook hascontracted since February to stand at 8,948ships of 529m dwt in August. During that timeabout 58m dwt of ships were delivered but lessthan 10m dwt were ordered. But, as the halfyear progressed, anecdotal evidence of difficultconversations taking place increased.

Shipbuilding Deliveries and Capacity

The upward trend in deliveries saw 73.7m dwtdelivered in the eight months to August. On anannualised basis that works out at 110m dwt,20% up on 2008. However, the distribution ofthe order book suggests that deliveries in H2will be higher than in H1, and we are currentlypredicting deliveries for the full year will reachover 140m dwt. It is worth noting that this isconsiderably lower than our full-year estimatein the spring of 154m dwt. The downwardadjustment was greatest for the dry bulk sector.

We are currently projecting total deliveries of164m dwt in 2010. However developments inthe shipbuilding market suggest that suchpredictions are even more precarious than

usual. Our current projection is that tankerdeliveries will reach 57m dwt in 2009, 59% upon 2008 and that bulk carrier deliveries willmore than double in 2009.

Shipyard Contract Issues

One striking feature of the shipbuilding marketin 2009 is the massively lower level of neworders placed. In H1 orders reached 10m dwt,74% of which were for bulkers and most of thebalance for tankers. Although most shipyards

have far too much work in hand for the lowlevel of ordering to be an immediate issue, onedirect consequence is that the steady cashflowfrom down payments has, for the time being,dried up. To put this in context, $145bn worthof new ships were ordered in 2008. If theaverage down-payment was 20%, that meansthe shipyards received $29bn just for signingthe contract. In contrast, during H1 09 theywould have received only $2bn, a massiveswing in cash flow.

Against this background the basic problem isthat the enormous order book of 525m dwt wascontracted at very high prices. According tofigures in the World Shipyard Monitor (page16) the order book currently has a contractvalue of $477bn. However, since the vesselswere ordered, newbuilding prices have fallen byaround 30% and second-hand prices of someship types are now half what they were at theirpeak. On these figures the market value of thevessels on the order book is today probablycloser to $300 billion than the original $477bn.

Evolution of the Shipyard Order Book

The general feeling in the market at present isthat the shipyards, already feeling financialpressure, need desperately to keep productionschedules going in order to receive stagepayments. In some cases their owners arestruggling to meet the payments. If the yardstook guarantees from banks or other first classentities, then this is not be a problem. But inmany cases the large deposits received and highcontract prices made additional guarantees onstage payments seem unnecessary, and itappears that many yards did not in fact insist onsuch guarantees being given. In these cases thecash flow depends entirely on the ability of itscustomers to meet their obligations. We are still

at an early stage in the recession and financialresources are unevenly distributed betweenshipping companies, but we expect thenegotiations surrounding the payment for shipsunder construction to intensify, and becomeextremely difficult in some cases, over the nextsix months.

Looking Ahead

The outlook for the shipbuilding segments canbest be described as very difficult. The

shipyards have a record order-book and, intheory, should be enjoying the opportunity tobuild on this solid foundation. In practice, thecommercial foundation of the order book islooking much less substantial than it did somemonths ago, leaving the shipyards with theunenviable task of having to navigate a waybetween owners, banks and the usualdemanding problems of building merchantships.

1.3 The Shipbuilding Market


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Autumn 2009 13




Bulk Contracting & Orderbook

0

40

80

120

160

200

240

280

320

360

400440

480

520

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009


m dwt

Bulkers Tankers

Combos Orderbook

year to date

Shipbuilding Deliveries

0

25

50

75

100

125

150

175

200

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010(f)


m dwt

Bulkers Tankers

Combos Others

Orderbook as % of Fleet

0%

10%

20%

30%

40%

50%

60%

70%

80%

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09


% of fleet

Containers

Bulkers

Tankers

Newbuilding Price Index

60

90

120

150

180

210

240

Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09


Index

Bulkers

Tankers


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14 Autumn 2009


For the last five years the demolition market hasbeen quiet, and ships have been trading to theirmaximum life. For example in 2008 the averagemerchant ship demolished was 30.5 years old;for tankers it was 27.6 years and for bulkcarriers 29.8 years. The four LNG carriersscrapped had an average age of 37.9 years andthe two cruise ships scrapped an impressive50.3 years. So, everybody was enjoying theboom and squeezing as much life as possibleout of their floating gold mines. Since merchantships last on average about 25 years, over timedemolition should average out at 4% of thefleet. The market was clearly well below trend(but note from the graph below that the ageprofile for the major vessel types is skewed).

Demolition Trends in 2009

The demolition market picked up significantlyduring 2009. In the year-to-August, 20.3m dwtof ships were scrapped, equivalent to 30m dwt ayear. The dry bulk market led the way, with7.1m dwt. More than half of this - 143 vesselsof 4.3m dwt - was in the Handy segments, butthere were also seven Capesize bulk carriersand 24 Panamaxes sold for scrap.

Although this represents a significant increase,the number of ships scrapped is still relativelylow. The market is still weighing up what islikely to come next, and is generally reluctant totake the terminal step of sending ships fordemolition. The good sense of this strategy ismore than justified by the wild swings whichthe market has experienced over last ninemonths. For example, the dry bulk marketappeared to be dead before Christmas. But ratescame back and any owner who had sold his shipfor demolition missed out on a pretty good

summer for the market. The bottom line is thatit is still early days as far as the demolitionmarket goes.

Demolition Prices

The price of scrap remains low, though therewas a moderate increase during the half-year. Inthe spring, tankers were selling for low $200s/ldt, but this edged up slightly, reaching $350/ldtin September. This probably reflects the

strength of the Chinese steel market and theshort term phenomenon of some VLCCs beingmarketed for demolition. It is certainly not asign of any shortage of vessels for scrap.

Bangladesh continued as the biggest purchaserof vessels for demolition, taking 7.2m dwt inthe first three quarters. India was not far behindwith 6.9m dwt, followed by Pakistan (2.4mdwt) and China (2.1m dwt). This represents amuch more diverse pattern of buyer activitythan in the preceding three years whenBangladesh was the dominant player, followedby India, in a thin market.

Single Hull Phase-Out

We reported in the spring that the tanker fleet isnow on the last lap of its phase-out marathon. Itmay well be the last lap, but not much ishappening. The single hull tanker fleet hasdeclined during the year by around 9%, and iscurrently 61.3m dwt. Some vessels have beensold for conversion, but only around 4.8m dwtfor demolition. To some extent this reflects thefact that spot earnings have been aboveoperating expenses and owners have preferredto wait in the hope that there might be one lastspike left in market.

1.4 The Demolition Market

World Fleet Age Profile

0

10

20

30

40

50

60

70

80

90

100

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