Ship Earnings Super-Cycle 60 Bulk Shipping Fundamentals balance - - PDF document

SMM Press Conference - Shipbuilding Martin Stopford 1

CLARKSON RESEARCH SERVICES LTD

SMM Advance Press

Conference

23th May 2012

World Shipbuilding

Dr Martin Stopford Managing Director, Clarkson Research

CLARKSON RESEARCH SERVICES LTD

• 1. The Shipping Market
• 2. Shipyard Capacity & the Fleet
• 3. Four Future Challenges
• 4. Conclusions

How do you play this hand? Is shipping more than just “the worlds biggest crap game?”

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• 2. Shipping Bankers

Shall we say 30 cents in the $, Sir?

• 1. Ship owners

What shall I buy now?

• 4. Investment Funds

Time to drop your pants, boys

• 3. Shipbuilders

We just build ships.. so ORDER SOME! What about

• ur $1.2

billion loan?

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10 20 30 40 50 60

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Clarksea Index $000/day

(Clarksea Index: av earnings by tankers, bulkers, containerships & gas.)

Source: Clarkson Research Services Ltd The Great Shipping Boom

1980s Recession

$8,500/day $12,000/day $22,800/day

DEPRESSION LOW RETURNS BOOM! Bulk Shipping Fundamentals balance BUST

$13,278/day

Ship Earnings Super-Cycle

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10 20 30 40 50 60

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Clarksea Index $000/day

(Clarksea Index: av earnings by tankers, bulkers, containerships & gas.)

Source: Clarkson Research Services Ltd The Great Shipping Boom

1980s Recession

$8,500/day $12,000/day $22,800/day

DEPRESSION LOW RETURNS BOOM! Bulk Shipping Fundamentals balance BUST

$13,278/day

Ship Earnings Super-Cycle

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VLCC Cost & Revenue 1990-2012

20 40 60 80 100 120 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 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 $000/day Depreciation Interest + spread OPEX VLCC Earnings (12 month average)

Operating cost, plus interest at LIBOR + spread on new cost, plus depreciation

INTEREST on New cost at LIBOR + spread

Depreciation –

• ver 20 yrs

12 month earnings way above cost OPEX IN THE RED

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• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% 14% 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Wold GDP & Sea Trade Growth

World GDP (red line) and sea trade (blue line)

Crisis 1 1973 1st Oil Crisis

2001 Dot.com crisis

Crisis 2 1979 2nd Oil Crisis

1991 Financial Crisis 1997 Asia Crisis

Crisis 6 2007 Credit Crisis

% change Oil Crisis Credit Crisis

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10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Oil price (2009 $) 450 Scenario New Policies Current Policies

!$100+ oil prices change the economic framework for ship design !Today’s fleet is partially obsolete !But responding to this change is tricky

$2009/bbl Figure 2: The IEA Oil price scenarios 2010 450 $92/bl New $118/bl Current $140/bl

Oil Price 1965 to 2035

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100 200 300 400 500 600 700 800 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 $/tonne Rotterdam

RISING FUEL COSTS TURN SHIP ECONOMICS ON ITS HEAD

LIBOR (6 Month) 1980-2012

Bunker Oil Price

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The LIBOR Interest Rate

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 % pa LIBOR (average) 1990-1999 Average 5.5% 2000-2010 Average 3.2% THANKS TO CRISES THE COST OF CAPITAL FELL 40% IN THE 2000S In the 1980s interest rates were the killer Today LIBOR .7%

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Bulk Trade Trends

• 5%

0% 5% 10% 15% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Major Bulks Crude Oil Imports

% growth In the 2000s dry trade grew faster and oil trade slower

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Bulk Trade Trends

• 5%

0% 5% 10% 15% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Major Bulks Crude Oil Imports

% growth In the 2000s dry trade grew faster and oil trade slower

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Future Trade Scenarios

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 seaborne imports billion tonnes China Imports World less China 7% i Figure 3 World & China’s seaborne imports with scenarios for future growth

Low Case 1% scenario Base Case

3-4%

High case

7% 4% pa trend 1991-2001 Globalization has a way to go, which is good, but A) The next phase will be different B) The Credit Crisis is not over yet

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The shipyards are Winding down from the biggest boom ever 8 Wheel Shipyard – armed and dangerous!

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Investment falls to $90 billion in 2011

• 1. Investment in new

ships was $90 billion in 2011

8 13 7 5 13 11 10 21 21 23 55 39 35 7 15 6 5 6 3 7 5 3 7 11 13 14 25 105 68 13 34 10 1 2 1 3 4 3 2 12 9 9 5 1 1 10 9 3 5 6 11 7 4 22 21 28 28 47 17 1 8 19 12 14 17 14 16 7 9 13 21 33 40 61 42 7 27 43

20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bill $ Orders

20 25 30 35 40 45 50 55 60 65

3,600 TEU $MM

Others Container LPG LNG Bulk Tankers New 3600 TEU $MM

Investment in new ships & newbuilding prices

Investment In New Ships 1996-2011

Offshore Container Bulker Tanker Cruise Gas

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World Shipbuilding 35 Year Cycle

20 40 60 80 100 1902 1912 1922 1932 1942 1952 1962 1972 1982 1992 2002 2012 Million GT Deliveries

The last shipbuilding peak was in 1975 when output reached 36 million GT

Source Maritime Economics 3rd Ed Martin Stopford (2009)

Period 1 1886-1919 Period 2 1920-1940 Period 3 1945-1973 Period 4 1973-1987 Rapid growth of sea trade driven forward by a series of cycles Over capacity & trade slump triggered by 1930s depression Shortages of yard capacity at start & post war trade boom Yard overcapacity and trade slump Period 5 1988-2010 Trade growth & yard expansion Peak 4 7 m GRT Peak 8 20 m GRT Peak 10 36 m GT

Peak 1 Peak 2 Peak 3 Peak 5 Peak 6 Peak 7 Peak 9 Peak 11

3 Mini- cycles Peak 12

2011 New record 100.9 million GT

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Shipbuilding Deliveries by Country 2011

18.4 15.8 8.9 0.4 0.3 0.6 0.5 0.3 0.2 0.3 0.6 5 10 15 20 25 China

• S. Korea

Japan Germany Italy Philippines Norway Turkey Spain Netherlands Others Million CGT Output 2011 Source: Clarkson Research

212 yards 24 yards 51 yards

What is CGT? CGT is the Gross Tonnage (GT)

• f the ship weighted to reflect its

work content per GT. For example the weight for a containership might be 1.0 and the weight for a big tanker 0.25)

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Orderbook in 2011 - Falling

20% 24% 25% 33% 47% 51% 41% 30% 21%

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

2004 2005 2006 2007 2008 2009 2010 2011 2012

% fleet

Orderbook % Fleet By Ship Type (Dwt)

Orderbook % Fleet

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World Shipbuilding Capacity 2011

Shows the CGT output by ship type World Shipbuilding Production by Country and Ship Type

Grand Total Other Gas Containership Tanker Bulker Country 8.7 1.9 0.0 0.0 0.1 0.0 0.3 0.4 0.0 1.1 1.8 3.0 M CGT 0.3 0.0 0.2 0.0 0.1 Romania 19.2 0.2 0.9 3.1 12.0 China 16.0 1.0 4.8 4.0 4.4 South Korea 9.0 0.3 0.4 2.0 5.2 Japan 0.7 0.0 0.0 0.0 0.7 Philippines 0.4 0.0 0.0 0.0 0.0 Italy M CGT Total Other Turkey Vietnam Taiwan Germany 22.9 0.1 0.0 0.2 0.1 0.0 M CGT 9.6 0.2 0.2 0.0 0.0 0.0 M CGT 6.7 0.1 0.1 0.0 0.2 0.0 M CGT 1.5 0.0 0.0 0.0 0.0 0.0 M CGT 49.5 2.3 0.3 0.4 0.4 0.4 Grand Total Other Gas Containership Tanker Bulker Country 8.7 1.9 0.0 0.0 0.1 0.0 0.3 0.4 0.0 1.1 1.8 3.0 M CGT 0.3 0.0 0.2 0.0 0.1 Romania 19.2 0.2 0.9 3.1 12.0 China 16.0 1.0 4.8 4.0 4.4 South Korea 9.0 0.3 0.4 2.0 5.2 Japan 0.7 0.0 0.0 0.0 0.7 Philippines 0.4 0.0 0.0 0.0 0.0 Italy M CGT Total Other Turkey Vietnam Taiwan Germany 22.9 0.1 0.0 0.2 0.1 0.0 M CGT 9.6 0.2 0.2 0.0 0.0 0.0 M CGT 6.7 0.1 0.1 0.0 0.2 0.0 M CGT 1.5 0.0 0.0 0.0 0.0 0.0 M CGT 49.5 2.3 0.3 0.4 0.4 0.4

Indicates market leader for each ship type

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32% 25% 24% 19% 18% 17% 9% 9% 8% 8% 7% 5% 5% 2% 0% 0%

0% 10% 20% 30% 40% Bulkers Offshore Container LNG Tankers >10K MPP Chemical LPG Ro-Ro PCC Other Tankers Tankers<10K Other cargo Gen cargo Combos Reefers

Orderbook % Fleet

Merchant Fleet Orderbook Ranked by % Fleet

Total orderbook 344 m dwt and average is 23% of fleet

SMM Press Conference - Shipbuilding Martin Stopford 11

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20 40 60 80 100 120 140 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

$ million

VLCC Suezmax Aframax Tanker Products Capesize Panamax Bulk 30,000 dwt bulker 6700 TEU

Source: Compiled from several sources including Fearnleys, CRSL

Shipbuilding Prices Falling

Figure 7: World prices for new ships 1967 to 2011 Under pressure

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World Merchant Fleet Growing at 9% pa

100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

world fleet m dwt

• 4%
• 2%

0% 2% 4% 6% 8% 10% 12%

Other Combos Tankers % pa 1980s recession fleet falls fleet up 8.6% pa in 2011 Fleet growth % pa Figure 9: Merchant fleet (bars) and growth per annum (line)

The zero growth line

SMM Press Conference - Shipbuilding Martin Stopford 12

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• So what about the

future?

• We need to take the

cycle “one step at a time”.

• It’s not just about the

market, there are four CHALLENGES we need to think about!!

I feel very nervous

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Regional imports 1950-2010 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

Billion tons of imports

• Asia started to

grow in about 1975

• Chinese trade

picked up in the 1990s

• Non OECD
• vertook OECD in

2008

• New world order

developing

• 7. Challenge 1: The Future of Globalization

Oecd, 589 Non Oecd, 458

Fleet Ownership Non OECD OECD

SMM Press Conference - Shipbuilding Martin Stopford 13

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Challenge 2: Shipbuilding Capacity

Scenario using 3 year moving average of demand

• 10

10 30 50 70 90 110 130 150 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Million deadweight demand/deliveries

Expansion Demand Replacement Demand Orderbook Deliveries

Deliveries based on Orderbook Possible demand scenario? We have too much shipyard capacity for any reasonable demand scenario, so cutbacks seem inevitable.

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5,000 10,000 15,000 20,000 25,000 30,000 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan '06 Jan '08 Jan '10 Jan '12 $/day cost Bunker Cost/$ per day Ship Cost/$ per day

FALLING CAPITAL & RISING FUEL COSTS TURN SHIP ECONOMICS ON ITS HEAD

LIBOR (6 Month) 1980-2012

Ship costs 3x as much as fuel

Challenge 3: Shipping Cost Model

Ship cost $17,000/day Bunker Cost $25,000/day

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Challenge 4: Environmental Footprint

14.4 21.4 36.2 63.3 76.7 77.4

121.2

139 20 40 60 80 100 120 140 Million Kilowatt capacity German Power Stations Containers fleet Non cargo Bulker fleet Tanker fleet Other dry fleet Other specialized Gas fleet

Container fleet has as much power as Germany’s electricity industry The installed power capacity of the shipping industry. Container fleet similar to W German power stations. + SOX, NOX, ballast etc.

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No Magic Solutions

50 100 150 200 250 300 350 400 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8

F u e l c o s t s a v in g , c h a rte r c o s t in c re a s e $ 0 0 0

Shows the effect on the cost of fuel (green lines) & the cost of shipping capacity (yellow line) of changing ship operating speed in 1 knot increments (based on 5000 mile voyage)

best speed at $1500/tonne bunkers best speed at $200/tonne bunkers Speed of ship (knots) 80% saving

LNG

wind

NUCLEAR

Hull form

Engineering

logistics

Note 1: Just difficult decisions

COATINGS

EEDI

scrubbers No ballast

Fuel Cells Back haul

Shipping lanes

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Energy Efficiency Design Index

margin Sea x speed Reference capacity x Cargo CO ies Effiicienc

• 2

CO motor Shaft 2 CO engine Aux 2 CO engine Main

2

+ +

• Main Engines: grams of carbon after deducting shaft

generator calculated from fuel consumption times a conversion factor (about .85)

• Aux Engines: same as main engine
• Shaft motor: less any waste heat recovery (e.g. exhaust

gas boiler with turbo generator)

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Conclusions

1. Key drivers today are:-

• Globalization: positive as we spread into

Non OECD.. we still need to sort out credit crisis

• Shipbuilding overcapacity: over-production

inevitable!but so are cheaper ships, willingness to do innovative work; & lower earnings will make cost control key.

• New economic model: Fuel replaces capital

as key input. Major challenge to identify the design and equipment package for the new conditions

• Environmental pressure shipping’s
• versized carbon footprint means emission

regulation is here to stay. Again a technical challenge facing the marine equipment industry as EEDI & SEEMP move forward 2. Shipbuilding technology has no magic solutions – “improvement engineering”. 3. It sound tough but the cycle make us deal with these problems, whether we like it or not! Don’t worry, there’s still plenty of cargo to move