Bulk carrier supply and demand outlook Dry Cargo International Bulk Ports, Terminals & Logistics Conference 2012 Amsterdam 21-22nd May 2012 Presented by James Leake CKO – Global Head of Research, Consultancy and Information Strategy Rates near historic lows… but bunkers between $20-60,000/day! 250000 $/day Cape Panamax 200000 Supramax 150000 Handysize 100000 50000 May 12 Jan 12 Sep 11 May 11 Jan 11 Sep 10 May 10 Jan 10 Sep 09 May 09 Jan 09 Sep 08 May 08 Jan 08 Sep 07 May 07 Jan 07 0 © ICAP Shipping International Limited 2012. All rights reserved. Recipe for a freight market recovery… Sustained industrial raw material demand growth (in China) Relative competitiveness and availability of imported commodities Expansion of longer-haul trades Slowing of fleet growth rates Recipe for a freight market recovery… Sustained industrial raw material demand growth (in China) Relative competitiveness and availability of imported commodities Expansion of longer-haul trades Slowing of fleet growth rates Emerging economies driving demand growth for industrial raw materials Steel Electricity 1200 Crude oil 10000 Kg/ capita 1000 2500 KWh/ capita China 1000 Natural gas Kg oil equiv/capita Kg/ capita China 8000 South Korea India South Korea 2000 800 1500 600 India 800 6000 China 600 South Korea India 1000 4000 400 400 China India 2000 200 200 500 South Korea Germany 2010 2000 1990 1980 1970 2010 2000 1990 2010 2000 1990 1980 2010 2000 1990 1980 0 0 0 1980 0 Danger of linear Assumptions…Indian take-off Source: BP, IISI, India CEA, ADB, UN, ICAP Shipping © ICAP Shipping International Limited 2012. All rights reserved. A few provinces a country does not make… China 3t steel per head – USA 20t/head Chinese car ownership 2010 32 per 1000 © ICAP Shipping International Limited 2012. All rights reserved. Investment surge in coal-power stations Additional coal-fired power plants planned and under construction 120 GW 100 80 60 40 20 0 2010 2011 China 2012 India Europe 2013 2014 other Pac/Ind 2015 Americas Source: ICAP Shipping, IEA, newswires © ICAP Shipping International Limited 2012. All rights reserved. But steel consumption growth is not necessarily required for stronger markets Chinese daily steel production Mt 2.2 2.0 1.8 1.6 1.4 1.2 Construction steel demand collapse hits output in Q4 1.0 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 But Cape rates surged back towards $30,000/day in Q4 © ICAP Shipping International Limited 2012 Larger steelmakers respond to lower ore prices with aggressive inventory building Chinese iron ore prices and inventory changes 25 $/tonne Mt 200 180 20 160 15 140 10 120 5 100 0 80 -5 60 -10 40 change in steelmaker stock position (estimate) change in port stocks Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 Sep-10 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 Jan-09 Nov-08 Sep-08 Jul-08 0 May-08 -20 Mar-08 20 Jan-08 -15 TSI (rhs) © ICAP Shipping International Limited 2012 Recipe for a freight market recovery… Sustained industrial raw material demand growth (in China) Relative competitiveness and availability of imported commodities Expansion of longer-haul trades Slowing of fleet growth rates 1,200 600 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 1,400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Major bulk trade volatile but limited by scarce commodity Imports of coal and metal ores – annually and monthly (shown as an annualised figure) Source: GTIS Mtpa OECD selected Flat BUT significant volatility China China rebound 1,000 800 OECD rebound 400 200 0 © ICAP Shipping International Limited 2012. All rights reserved. Examples of short-term volatility drivers in dry sector Monthly fundamental changes - drivers of volatility Combined cargo reduction of 28Mt (≈10% global trade) in Jan 2012 driven by steelmaker margins / commodity prices Trend changes - exceptional by historical comparison but negligible impact compared to ‘typical’ shocks † impact on global trade of max monthly change in Chinese coal and iron ore imports (+19Mt / -11Mt) * major bulks into major economies from September to November 2008 ‡ monthly growth rate over 3 months © ICAP Shipping International Limited 2011. All rights reserved. Price sensitivity of Chinese imports Coal prices – periodically opening arb Iron ore trade price sensitive 240 US$/tonne $/day increasing prices hit steelmaker profitability + ore purchasing 90,000 250 25 Mt/month US$/tonne 220 80,000 200 70,000 180 60,000 200 20 150 160 15 50,000 Capes squeezed on arb 140 40,000 100 120 10 30,000 100 20,000 BCI TCA (rhs) 50 5 India CIF (63.5%) Brazil Spot CIF (65%) 80 10,000 Australia Spot CIF (63%) China Domestic (Hebei) (66%) Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 Sep-09 Jun-09 0 Mar-09 60 0 Jan-07 0 Jan-08 China imports Jan-09 Jan-10 CIF Aus 6000kcal/t Jan-11 Jan-12 FOB China 6000kcal/t Source: CNBS, GTIS, Bloomberg, ICAP Shipping © ICAP Shipping International Limited 2012. All rights reserved. Chinese import volatility the major driver Iron ore Coal Monthly change Mt 20 15 10 5 0 -5 -10 biggest rise -15 biggest fall average rise -20 average fall -25 China EU27 Japan Korea China EU27 Japan Korea Potential for massive volatility – already maximum monthly Chinese coal import volatility approaching import levels of each of the major importers! 14 © ICAP Shipping International Limited 2011. All rights reserved. The cheapest delivered cost will prevail Iron ore cost curve (basis delivered cost China) Recent low 2009 price range Source: Macquarie © ICAP Shipping International Limited 2012. All rights reserved. China – massive internal investment with mixed returns China – crude oil output 450 China – coal output Mtpa 400 $225bn 400 300 300 250 250 200 200 150 China – iron ore output imported ore Chinese ore rebased to 63.5% Fe Chinese ore mined Mt/month $240bn 350 350 140 $63bn 120 100 80 60 100 150 imports production - consumed production - exported 50 100 production 50 40 20 0 consumption Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 0 Jan-01 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 Jan-03 -50 0 Source: ICAP, BP, CNBS, Bloomberg, GTIS © ICAP Shipping International Limited 2012. All rights reserved. Linfen – surrounded by hundreds of illegal mines… Pollution and environmental damage destroy growth and human potential… 2-3% GDP growth each year Production at all costs Xiangjiang River, Changsha, Henan 8 Feb 2011 – effects of recent drought Water wasted in coal washing and ore beneficiation doesn’t help India – democracy prevents aggressive internal production expansion… greater potential for imports India – crude oil output 180 India – iron ore output India – coal output Mtpa 70 12% 30 Mt/month 160 15% Mt/month 10% 60 8% 25 140 5% 50 4% 20 120 40 100 0% 0% -5% 15 80 30 -4% 60 20 -8% -10% 10 -15% -20% 40 5 Mar-12 Nov-11 Jul-11 Mar-11 Nov-10 Jul-10 Mar-10 Nov-09 Jul-09 -30% Mar-09 0 Jul-08 Mar-12 Nov-11 Jul-11 Mar-11 Jul-10 Nov-10 Mar-10 Nov-09 Jul-09 Mar-09 -16% Jul-08 0 Mar-08 2010 2005 2000 1990 1985 1980 1975 1970 1965 0 1995 consumption yoy growth (3mma) rhs Mar-08 production -25% production yoy growth (3mma) rhs Nov-08 20 -12% production Nov-08 10 Source: ICAP, BP, Indian Ministry of Mines © ICAP Shipping International Limited 2012. All rights reserved. Indian mining India investing in the anticipation of becoming a major coal and iron ore importer GUJARAT port capacity Capesize Post-Panamax Other Major coal reserve 270Mtpa > 500Mtpa by 2015 Tuna 12mtpa Mundra (Adani+Tata) 35>60Mtpa by ‘12 Okha (GVK) 4GW coal Salaya (Essar) 20mtpa Jamnagar (Essar) Simar 2GW coal Pipavav (little growth) Dahej (Adani+Sterling) 20mtpa Hazira (Essar) 30mtpa Hazira (Adani) 25-30 by ’13 Orissa Dhamra Apr’11 cape 25mtpa Kalinga (Adani) 100mtpa intra-trade Gopalpur 12mtpa ppmax mar’13 Andhra Pradesh Visakhapatnam (East Quay-1) 6.5mtpa 2013 Jaigarh (JSW) 20mtpa Dighi 30mtpa end’11 Mormugao 7mtpa new coal berth Gangavaram rising to 35Mtpa Krishnapatnam (Capes by end’11) 25mtpa > 65mtpa Tamil Nadu Ennore 16mtpa IO export, coal import Indian Government plans to raise total cargo handling capacity of Indian ports from around 1 billion tonnes today to 3.2 billion tonnes by 2020 (an increase in total global trade of at least 25%, and a volume equivalent to today’s dry bulk trade Marakkanam (NTPC) 4GW Cuddalore, Karaikal 21Mtpa, Nagapattinam Tuticorin (North Cargo Berth-I) 6.3mtpa, NCB-II 7mtpa (Oct’12) +5 more coal berths to 35mtpa (serving power plant cluster) Recipe for a freight market recovery… Sustained industrial raw material demand growth (in China) Relative competitiveness and availability of imported commodities Expansion of longer-haul trades Slowing of fleet growth rates The Big 3 – is it all a fix? Shock therapy… when extreme volatility becomes the rule, not the exception © ICAP Shipping International Limited 2011 Let’s kiss and make up… and trouser billions!!! Power OPEC can only dream of… © ICAP Shipping International Limited 2011 Big 4 plus Africa iron ore mine forward ‘orderbook’ 1800 Mtpa rate Vale Rio BHP FMG Africa 1600 1400 1200 1000 800 600 400 200 2015 2014 2013 2012 4Q 11 3Q 11 2Q 11 1Q 11 4Q 10 3Q 10 2Q 10 1Q 10 4Q 09 3Q 09 2Q 09 1Q 09 0 © ICAP Shipping International Limited 2012. All rights reserved. Can Australia deliver on coal? Australian port throughput compared with growing international requirement 1600 Mtpa Apart from dedicated, vertically integrated Indian projects, Indonesia set to become increasingly hampered by government policy protecting power producers 1400 Abbot Point T3 1200 Newcastle (BHP), Gladstone (Wiggins Is.) 1000 Abbot Point T2 800 Newcastle PWCS, Hay Point HPX3 600 Abbot Point X50 400 200 0 2010 2011 2012 2013 2014 2015 additional thermal coal requirement from new power stations Australian coal port throughput (all coals) © ICAP Shipping International Limited 2011. All rights reserved. USA Growing self-sufficiency Deploying a number of strategies to cut demand and increase supply US Energy Production UP: Shale gas US shale gas output, now 23% of total gas production North America China Iran 1931 Europe 180 1275 1045 India 63 180 Reserves in tcf Suitable for power generation and transport © ICAP Shipping International Limited 2012. All rights reserved. Gas and Renewables squeeze King Coal US Power Generation by source TWh 4,500 TWh 4,000 3,500 3,000 Other Renewables Hydroelectric 2,500 Nuclear 2,000 Natural Gas Petroleum Liquids 1,500 Coal 1,000 500 0 199819992000200120022003200420052006200720082009201020112012 Investment drifting away from coal Source: National Energy Technology Laboratory Cost of emissions compliance too high Between 40-60GW coal-fired power plants to be shutdown over next few years – significant increase in potential coal export availability and downward pressure on global prices 31 Exports could exceed 250Mtpa by 2015 Where is the axe falling? Ashtabula and Lackawanna Transhipped off coast of Nova Scotia Powder River Basin Appalachian coal Fairless Hills Lamberts Point Shipyard River Terminal Ex Mississippi River Source: National Energy Technology Laboratory Source: National Energy Technology Laboratory A widening ‘Oceanic Imbalance’ caused by the shift of economic power to Asia Main long haul trade growth routes Iron ore Coal Grain Weaker USD © ICAP Shipping International Limited 2012 Recipe for a freight market recovery… Sustained industrial raw material demand growth (in China) Relative competitiveness and availability of imported commodities Expansion of longer-haul trades Slowing of fleet growth rates Slippage Tsunami Orderbook at Jan 2008 160 140 120 100 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2010 2015 Slippage Tsunami Orderbook at Jan 2009 160 140 120 100 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2010 2015 Slippage Tsunami Orderbook at Jan 2010 160 140 120 100 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2010 2015 Slippage Tsunami Orderbook at Jan 2011 160 140 120 100 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2010 2015 Slippage Tsunami Orderbook at Jan 2012 160 140 120 100 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2010 2015 Growth only accelerating in Panamax sector Panamax Capesize Scrapped Delivered Scrapped Net growth 35 Net growth 50 31 30 40 27 25 38 34 30 21 20 20 19 18 16 16 17 15 14 16 15 14 12 10 18 17 16 12 11 13 12 9 11 11 11 9 7 5 No of Vessels No of Vessels Delivered 60 40 5 20 27 22 20 10 10 13 18 17 16 17 16 21 23 20 16 15 12 8 23 17 22 16 14 13 10 7 21 0 0 -10 -5 -20 -10 -30 -15 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Jan-10 Apr-12 Apr-10 Jul-10 Oct-10 Supramax Scrapped Jul-11 Oct-11 Jan-12 Apr-12 Scrapped Net growth Delivered Net growth 50 41 40 40 41 28 22 20 30 29 27 20 30 27 17 17 19 21 18 13 12 12 10 24 20 27 23 22 29 26 14 9 No of Vessels 30 29 33 30 33 32 25 No of Vessels Apr-11 Handysize Delivered 50 30 Jan-11 10 12 11 18 15 20 16 15 10 16 14 7 7 2 0 11 13 10 12 13 7 1 0 4 -3 -7 -10 0 -20 -10 -30 -40 -20 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Q2 delivery spike a statistical aberration, but acceleration in Panamax fleet growth a concern 25 Deliveries by quarter in million dwt 20 15 geared pmax/ppmax cape geared pro rata 10 pmax/ppmax pro rata cape pro rata 5 0 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 2008 2009 2010 2011 2012 2013 2014 © ICAP Shipping International Limited 2012 Positive economic choice to torch: Mid90s-built DH VLCC secure $20m, $10m for a Cape Geared BC 36m dwt 25yo+ 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 5 Pmax/PPmax BC 14m dwt 25yo+ 0 10 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 5 10 0 5 10 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Scrapped pre-crisis Trading fleet Proportion of launched fleet Capesize BC 7m dwt 25yo+ Current fleet m.dwt © ICAP Shipping International Limited 2012 Chinese yard profit margins – bulk carriers % Debt finance availability remains tight – for new debt and funding next stages of existing projects Panamax Capesize Supramax Handysize Source: IHS Fairplay, ICAP Shipping © ICAP Shipping International Limited 2012. All rights reserved. Debt finance availability squeezes NB market m dwt Bulkers Tankers Containers Other LNG Offshore LPG 250 200 150 100 50 Source Data: ICAP Shipping 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0 © ICAP Shipping International Limited 2012. All rights reserved. Chinese and Indian combined crude oil trade reaching levels where iron ore transformed dry market Shares of global trade in key commodities for the tanker and dry cargo sector China – iron ore surge in Chinese share of global iron ore trade coincided with transformation of dry bulk freight market India – crude oil plus China – crude oil almost reaching 2003 trade share of iron ore 46 Concluding thoughts China and India lack resources Indian takeoff imminent OECD still not ‘recovered’ Low yard margins and tight lending limits orders Financial constraints render some orderbook mythical Commercial obsolescence will also constrain supply Iron ore supply and Capesize fleet 1800 Million dwt Mtpa rate Vale Rio BHP FMG Africa 450 Capesize fleet (rhs) 1600 400 1400 350 1200 300 1000 250 800 200 600 150 400 100 200 50 2015 2014 2013 2012 4Q 11 3Q 11 2Q 11 1Q 11 4Q 10 3Q 10 2Q 10 1Q 10 4Q 09 3Q 09 2Q 09 0 1Q 09 0 © ICAP Shipping International Limited 2012. All rights reserved. Can this additional iron ore be consumed? • Extra 600Mtpa between now and 2015 • 200Mtpa to replace ~500Mtpa low grade domestic ore • 300Mtpa growth (6% cagr steel consumption growth) • 100Mtpa ROW - 60Mtpa additional steel consumption • There are additional junior miner projects, success based upon production cost and speed of execution • Capesize ordering will no doubt resume once optimism and debt finance in more plentiful supply Thank you Produced by ICAP Shipping Research CKO, Global Head of Research, Consultancy and Information Strategy – James Leake Head of Oil & Tanker Research – Simon Newman Senior Tanker Analyst – Stavroula Betsakou Tanker Analysts – Oliver Burdick, Lichun Zhang Head of Dry & Basic Materials Research – Georgi Slavov, MD Dry Analysts – Nneka Chike-Obi, Rui Guo, Stefan Ljubisavljevic ICAP Shipping International Limited, 2 Broadgate, London EC2M 7UR United Kingdom +44 20 7459 2000 shippingresearch@icap.com www.icapshipping.com ICAP Shipping Derivatives Limited and ICAP Shipping Tanker Derivatives Limited are authorised and regulated by the Financial Services Authority © ICAP Shipping International Limited 2012. 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