Presentation | 27 April 2017

Shipping: “Quo Vadis?”

SINGAPORE MARITIME FORUM

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

2McKinsey & Company

Growth is slowing in most shipping sub-sectors

2016 seaborne tradeMillion tons

Cruise

LPG 91

Chemicals 195

Coking coal 247

LNG

25.3 m pax

1,464

Agribulk

1,091

Container

492

Crude oil 1,954

287

1,795

Iron ore

Thermal coal

Oil products

892

5

5

4

3

5

5

5

3

7

5

0

10 year CAGRPercent

5

8

3

1

3

6

3

3

6

4

0

5 year CAGRPercent

4McKinsey & Company

3McKinsey & Company

Macro-economic drivers of future trade

SOURCE: Source 6McKinsey & Company

Loss of dynamism / new protectionism

Rationalization of global supply chain/ near-shoring

Increase in trade between developing economies (south-to-south

trades)

Services flow increase (faster than physical goods) driven by

technological innovations

4McKinsey & Company

Container growth remains healthy

130 135122

139150 155

162171 175 182 188 193 199 205 211

300

150

250

100

200

50

0

15

+3,9% p.a.

+3,0% p.a.

16 2021

Container trade volumeMillion TEU

2019181709 141208 132007 10 11

5McKinsey & Company

Coal will peak by 2020, oil will slow down and peak around 2050, gas continues to grow

2020

192

152

566

200

614

182

202

157

145

2016

152

210

185

206

2030 2040

172

665

168

704

169

170

133

118

163

120

101

2050

749

Oil

Coal

Gas

Non-fossil

CAGR2014-50

1.9%

-0.2%

0.4%

1.2%

0.8%

Primary energy demandMillion terajoules

6McKinsey & Company

Oil product demand plateaus after 2020, growth mostly in clean products

100

110

60

90

50

10

80

70

40

20

30

0

LPG

Ethane

Other1

Diesel

Fuel Oil

Jet fuel

Gasoline

Naphtha

Gas carrier

Clean products

Dirty products

Liquids demand by product Million barrels/days

Oil product demand

2016 2020 2025 2030 2035 2040 2045 20501 Other products includes lubricants, bitumen, waxes, pet coke, refinery gas, refinery olefins, white spirit

7McKinsey & Company

1,500

1,400

1,200

800

600

500

400

300

100

0

1,000

900

700

200

1,300

1,100

20

MENA

Europe

2005 1510

China

Other Asia1

India

Seaborne iron ore demand has peaked in the medium-term

Seaborne iron ore demand, Million metric wet tons per annum

SOURCE: Global steel and raw materials model_2015Q3; McKinsey iron ore team analysis

1 South East Asia and Developed Asia 2 2015 is estimated and 2016 to 2025 is forecasted

High caseLow case Base case

8McKinsey & Company

Seaborne coking coal is still predicted to grow modestly driven by India

Seaborne coking coal demand

Million metric ton

Europe

2,4% p.a.

1,5% p.a.

Developed

Asia

307

Other Asia

2021E

China

RoW

Latin America

India

2016

265285

2015

281

20102005

220

SOURCE: McKinsey steel raw material demand model

1 Asia share includes China, India, Developed Asia and Other Asia

9McKinsey & Company

Seaborne thermal coal remains flat

100

1 000

900

800

300

600

0

700

500

400

200

1412 1311 152010 1716 18 2120

4.7%

-0.2%

19

Other Asia

Western Europe

MENA

Latin America

North America

China

India

Developed AsiaOther regions

Thermal coal seaborne consumption by region

Million tons

10McKinsey & Company

Given demand outlook and supply overhang we’re cautiously optimistic for certain vessel segments if no extra capacity is ordered

20 40305 25150 3510

Container

Supply overhangOrder book as % of fleet

Medium term demand outlookRelative ranking

LNG

Crude

LPG

Bulk

Chemical

Products

Cruise

‘Good’

(high single

digit growth)

‘Neutral’

(low single digit

growth)

‘Bad’

(no-growth to

decline)

good

bad

11McKinsey & Company

However, shipyards are the white elephant in the room as they aggressively trying to fill their shrinking order books

SOURCE: Clarkson

60240

220

180

160 40

20

140

100

20

55

50

45

0

60

25

200

35

120 30

10

0

40

80

15

5

0907 08 132005 1006

DeliveriesMillion CGT

15

OrderbookMillion CGT

1412

Jan 2017

Shipyard

Capacity

1611

Order bookDeliveries1 Over capacity

1 Quartery deliveries annualized

40%

12McKinsey & Company

Market concentration drives industry profitability

SOURCE: Transport Intelligence, Drewry, Alphaliner, Bloomberg, company reports, team analysis

45 10015 9530 906555 8520 3510 50 75706040250 50

14

12

80

6

10

4

16

2

8

Bulk Shipping

Dom. Express US

Contract

LogisticsContainer Shipping

EU Airlines

Cycle-average profitability of Transportation sectors1

EBIT margin

Market share top 3 players2

Cruises

US Airlines

Int’l Express

Forwarding

1 2011 to 2015 2 market share for 2015 except Int’l express for 2014

ROUGH ESTIMATESOtherShipping

13McKinsey & Company

A spate of recent mergers will not be the last

SOURCE: Alphaliner

1.4

2.6

2.2

0.7

0.5

0.7

0.6

0.6

0.6

0.6

16

14

9

5

5

4

4

4

4

3 0.6

0.6

0.6

0.9

0.6

1.5 2

2.41

1.6

2.7

3.0 16

14

9

5

5

4

4

4

4

3

1 Proposed2 HL merger with CSAV has completed, while UASC deal is still waiting for approval

Total fleet, 2013000 TEU

Market share

Total fleet, 2016Million TEU

Market share

M&A announ-ced year

2015

2015

2014, 2016

2014

Bankrupt

2016

14McKinsey & Company

-81.0 2.20.6 1.4 2.82.40

-6

2.0 3.0

8

10

6

-2

4

0

-4

2

1.6 2.61.20.80.2 3.20.4 1.8

CMA CGM

MOLK Line

OOCL

Hapag-Lloyd

Maersk

COSCO

CSCL

NYK

HMM

Hanjin2

Total capacity, million TEUs, January 2017

Zim

Wan Hai

Average operating profit margin %, 2012–161

The largest container shipping companies enjoy higher operating margins

Source: Alphaliner; annual reports; McKinsey analysis

Niche focus on specific routes

1 Latest 2016 figures where available2 Declared bankrupt in August 2016

Global scale and reach

15McKinsey & CompanySOURCE: Source

Shipping, Quo Vadis?