Dry Bulk ShippingShipping- an Opportunity or an IIlusion IIlusion? ?

4th IRON ORE & COAL World World Shipping Summit 2012

Lisarain Yu Jiang Senior Consultant 1 October 2012 Athens t e s

Drewry Will the dry bulk market recover as demand accelerates?

The dry bulk market cycle - where are we today

Baltic Dry Index
14 000 14.000 12.000 10.000 8.000 6 000 6.000 4.000 2.000 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Baltic Dry Index

Bulk Carriers TC Rates (US$pd)

180.000 160.000 140.000 120.000 100.000 80.000 60.000 40.000 20.000 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 160 140 120 100 80 60 40 20 0

B lk C Bulk Carriers i R Resale l P Prices i (US$)

Capesize 1-yr TC Handymax y 1-yr y TC

Panamax 1-yr TC Handysize y 1-yr y TC

1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 Handysize 10-yr Panamax 5-yr Handymax 5-yr Capesize 5-yr
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Drewry Will the dry bulk market recover as demand accelerates?

Iron ore and coal contribute to 60% the total dry bulk trade
Dry bulk

Major bulk

Minor bulk

Iron ore

Coal

Grains

Steel Products

Forest Products

Aggregates

Fertiliser

Others

4.000 3.500 3.000 Million tons 2.500 2.000 1.500 1.000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

70% 60% 50% 40% 30% 20% 10% 0%

Historically, major bulk such as iron ore and coal witnessed higher trade growth than that of the minor bulk cargoes. Iron ore and coal contribute to 60% of the total dry bulk trade volume in 2011. Major bulk trade is mainly driven by the steel and power sectors in China, and to some extent India

Major bulk

Minor bulk

% share of iron ore and coal (right axis)

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Drewry Will the dry bulk market recover as demand accelerates?

Chinese steel and iron ore market

Monthly steel production and iron ore imports 2004 2012 YTD

80 70 60 Million tonnes M 50 40 30 20 10 0

Steel production

Iron ore imports

Source: UNCTAD, ABARE

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Drewry Will the dry bulk market recover as demand accelerates?

China steel production expected to continue to drive the market

2011 ( (mt) )
271.1 180.0 86.2 71 7 71.7 22.4 68.1 EU15 USA 108.2 Japan China S.Korea Taiwan India Others 689.6

2016
469.4

(mt)
189.2 93.5 EU15 119.2 USA Japan

117.7 31.7 88.5

China S.Korea T i Taiwan India Others

Source : Drewry, MEPS

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Drewry Will the dry bulk market recover as demand accelerates?

India coal imports and upcoming coal-fired power plants

Indian coal imports 2004 2011
140 120 Million ton nnes 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 thermal coal

coking coal

OPG Power Plant (300 MW) Adani Power Plant (4,620 MW) Tata Power Plant (4,000 MW)

Mundra Jamnagar Essar Power Plant (2,520 MW)

Universal Success TPP ( (1,980 , MW) )
Nayachara Island

Pipavav Energy Power Plant (1,200 MW) Amreli Visa Power Plant ( (1,320 , MW) ) Dahejj Adani Power Plant (640 MW) Pi Pipavav Reliance Power Plant (1,200 MW) Thane Tata Power Plant (1,600 MW) Raigarh JSW Energy TPP (3,200 MW) Ratnagiri

Visakhapatnam

NTPC Power Plant (4,000 MW) Hinduja National TPP (1,200 MW) Simhapuri Energy Private Ltd. (540 MW) Madhucon and Malaxmi (540 MW) Thermal Powertech TPP (2,640 MW) Krishnapatnam TPP (1,600 MW) Reliance Power UMPP (4,000 MW)

Krishnapatnam

New Mangalore

Udupi Power Plant II (600 MW)

Tamilnadu UMPP (4,000 MW)
Cuddalore

SRM Energy TPP (1,980 MW)

Nagapattinam Gemac Energy TPP (1,320 MW) Tuticorin

Tuticorin TPP (800 MW)

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Drewry Will the dry bulk market recover as demand accelerates?

India crude steel production to drive coking coal import

2011
271.1 180.0 86.2 71.7 22.4 68.1 EU15 USA 108.2 J Japan China S.Korea Taiwan India Others 689.6

2016
189.2 469.4 93.5 EU15 119 2 119.2 USA Japan 117.7 31 7 31.7 88.5 China S.Korea Taiwan India Others

Source : Drewry, MEPS

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Drewry Will the dry bulk market recover as demand accelerates?

Overall demand outlook: 2012-2016

Drewry scenario
on tonne mile Billio

Dry bulk tonne mile demand (btm) Minor Bulk Million tonnes
1,243 1,292 1,340 1,400 1,465 1,534
12.000 10.000 8.000 6.000 4.000 2.000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201 15 2016 201 16

Major Bulk Million tonnes

2011 2012 (f) 2013 (f) 2014 (f) 2015 ( (f) ) 2016 (f) 1,959 2,047 2,164 2,312 2,469 2,638

% Growth
1% 5% 5% 5% 5% 5%

% Growth
4% 4% 4% 4% 5% 5%

Iron Ore 8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0 200 01 200 02 200 03 200 04 200 05 200 06 200 07 200 08 200 09 Billion tonne mile

Coal

Billion tonne miles

2011 2012 (f) 2013 (f) 2014 (f) 2015 (f) 2016 (f) 12,212 12,964 13,932 15,125 16,415 17,826

% Growth
3% 6% 7% 9% 9% 9%

Billion tonne miles

6,589 6,948 7,317 7,760 8,242 8,758

% Growth
5% 5% 5% 6% 6% 6%

201 10

201 11

201 12

201 13

Grain

Other Minor bulk

Overall CAGR of trade between 2012 and 2016: 5.2%. Overall CAGR in tonne mile demand between 2012 and 2016: 7.9% as distances are increasing. Forecasts are subject to current economic uncertainties. A prolonged slowdown in many countries in Europe will lower the growth in dry bulk demand. China and India growth rates are slowing. Chinese government policies to consolidate its steel industry, cool down housing market and curb inflation will have direct impact on iron ore trade. Whilst our outlook is optimistic , there is some downside risk to the growth in demand.
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201 14

Drewry Will the dry bulk market recover as demand accelerates?

Supply outlook: massive fleet growth continues

200 160 million dwt 120 80 40 0 -40 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Deletion Delivery Fleet (right axis) 900 800 700 500 400 300 200 100 0 imillion n dwt 600

High delivery growth Heavy y deliveries as a result of over ordering g during g the 2006-2008 shipping pp g boom. Slippage of new building deliveries Fleet growth based on scheduled deliveries and expected demolitions: 31% in 2011-2013

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Demolition age falling, economics and regulation putting further pressure

Dry bulk demolition
5.000 5 000 4.500 4.000 3.500 3.000 2.500 2.000 1.500 1.000 500 0 2007 2008 2009 Handymax 2010 Panamax 2011 Handysize

Number and dwt of demolition increasing: Total demolition 2009 (9.5 mdwt), 2011 (24.2 mdwt) Demolition age falling: Capes being scrapped around 27 years. Due to very recent energy efficiency designs, new technology ships would be far cheaper to operate, providing 20-25% higher efficiency. This will further push tonnage around 25 years to scrap yards. New environmental regulations on onboard ballast water t t treatment t and d emission i i control t l areas will ill put t further f th pressure on older tonnage.

'000 d dwt

10.000 9.000 8.000 '000 dwt 6.000 5.000 4.000 3.000 2 000 2.000 1.000 0 2007 2008 2009 Capesize 2010 VLOC 2011 Post-Panamax Post Panamax Age (years) 7.000 36 34 32 30 28 26 24 22

Dry bulk average demolition age by segment

2008 10-40,000 110 200 000 110-200,000

2009 40-60,000 220 000 220,000+

2010 80-110,000 60 80 000 60-80,000

2011

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Excess shipbuilding capacity, more so for dry bulk

Shipyard output and orderbook
250 Mill lion dwt 200 150 100 50 0 00
Chemical (f) PCC (f) MPP (f)

Shipyards have plenty of capacity

01
Chemical PCC MPP

02

03

04

05

06
General Cargo Offshore Tanker

07

08
RoRo (f) LPG (f) Dry Bulk (f)

09

10
RoRo LPG Dry Bulk

11

12
Reefer (f) LNG (f) Container (f)

13

14
Reefer LNG Container

15+ 15

General Cargo (f) Offshore (f) Tanker (f)

Shipbuilding capacity (considering all sectors) increased four-fold from 50 mdwt in 2002 to 200 mdwt in 2010. On average nearly 30% of the total shipbuilding capacity is involved in dry bulk. For the past three years it has been over 60% of the total capacity The majority of yards, both new and established, have increased their productivity and their total production dramatically. Consequently, there is excessive shipbuilding capacity and yards are reducing prices to get new orders or resell cancelled orders. A number of new orders were placed in 2010 and 2011 due to falling prices. This will aggravate the problem of oversupply and freight market recovery. recovery This will continue to haunt dry bulk freight market as major chunk of low cost Chinese capacity is dedicated to dry bulk.

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Shipbuilding consolidation
Dry bulk newbuilding orders
160 000 160.000 140.000 120.000 '000 dwt 100.000 80.000 60.000 40.000 20.000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 New orders ('000 dwt) New orders (Nos) 1 600 1.600 1.400 1.200 Numb ber
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1.000 800 600 400 200 -

Newbuilding activity going down Consolidation in shipbuilding industry: orders drying up beyond 2013. China: impending consolidation of Chinese yards. Dalian D li Oriental O i t l Marine M i & Heavy H I d t Zhejiang Industry, Zh ji Ji Jingang Shi b ildi Shipbuilding, D Dongfang f Shi b ildi filed Shipbuilding fil d for f bankruptcy b k t in i 2012 Government aims to consolidate Chinas shipyards.

Japan: merger between IHI Marine United and Universal Shipbuilding

Drewry Will the dry bulk market recover as demand accelerates?

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Orderbook and expected delivery

200 180 160 140 Million dw wt 120 100 80 60 40 20 0 2011* 2012 2013 Database atabase 2014 2015 Drewry e y adjust adjustment e t 2016

Delivered e e ed t till Aug ug 2012 0

Deliveries assumptions Newbuilding delivery slippage was 33% in 2011. To August 2012 only 41% of the 2012 order book has been delivered, so clearly there will be further slippage/cancelation of deliveries in 2012. Forecast: 116 mil dwt ship deliveries in 2012, 83 mil dwt in 2013. Post-2013, deliveries will comprise of slippages from previous years and new orders.

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% of dry bulk fl leet 0 1 2 3 4 5 6 10 20 25 15 0 5

Averag ge days delay 7

Congestions marginally easing oversupply

Handymax

Atlantic

Port congestion index

Percentage fleet at anchorage

Panamax Capesize Total

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Pacific

w week 02/08 week 08/08 w week 14/08 w week 20/08 w week 26/08 w week 32/08 w week 38/08 w week 44/08 w week 50/08 w week 04/09 w week 10/09 w week 16/09 w week 22/09 w week 28/09 w week 34/09 w week 40/09 w week 46/09 w week 52/09 w week 06/10 w week 12/10 w week 18/10 w week 24/10 w week 30/10 w week 36/10 w week 42/10 w week 48/10 w week 02/11 w week 08/11 w week 14/11 w week 20/11 w week 26/11 w week 32/11 w week 38/11 w week 44/11 w week 50/11 w week 04/12 w week 10/12 w week 16/12 w week 22/12 w week 28/12 w week 34/12 w

24/10/ /07 05/12/ /07 06/02/ /08 17/03/ /08 02/05/ /08 13/06/ /08 25/07/ /08 05/09/ /08 17/10/ /08 28/11/ /08 16/01/ /09 27/02/ /09 10/04/ /09 22/05/ /09 03/07/ /09 14/08/ /09 25/09/ /09 06/11/ /09 18/12/ /09 29/01/ /10 12/03/ /10 23/04/ /10 04/06/ /10 16/07/ /10 27/08/ /10 08/10/ /10 19/11/ /10 31/12/ /10 11/02/ /11 25/03/ /11 06/05/ /11 17/06/ /11 29/07/ /11 09/09/ /11 21/10/ /11 02/12/ /11 13/01/ /12 24/02/ /12 06/04/ /12 18/05/ /12 29/06/ /12 10/08/ /12

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Drewry Will the dry bulk market recover as demand accelerates?

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Demand-supply balance: excess supply continues to grow

Adjusted demand-supply balance: dry bulk
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
June 2012 2014

400 350 300 250 200 150 100 50 0 Million dwt

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Demand (% growth)

Supply (% growth)

Supply Surplus (Right axis)

Supply Surplus (Right axis)-reduced speed

Demand exceeds supply by more than 250 million dwt at present. Reduced Red ced speed can ease supply s ppl by b over o er 80 mdwt md t Demand-supply balance easing very slowly beyond 2014. Demand uncertainties in China, Europe and elsewhere.

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Conclusion - where are we heading to

Demand uncertainties and supply overhang Global economic uncertainties Over-ordering on the back of shipping market boom between 2006 and 2008.

Rays of hope Increasing demolition age due to falling earnings Ne energy New energ efficient designs might make older tonnage unviable. n iable Regulatory changes for ballast water treatment and emission control areas will be added pressure on older tonnage. These factors will ease supply. Slow steaming g can alleviate the oversupply pp y p problem marginally. g y Port congestion easing oversupply Consolidation in shipbuilding might rationalise capacity p on iron ore imports p Chinas continued dependence Rising electricity demand in developing Asia

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