May 2008 HANDYSIZE & HANDYMAX MARKETS 2008 CONFERENCE Key Strengths and Concerns of the Handyclass
Strong freight rates should continue in 2008, but a multi-year downturn is expected to begin in 2009 TC Rate $200,000 Average TC Rate 2004 2005 2006 2007 2008 $180,000 Capesize 65,308 46,694 44,314 112,387 126,723 Panamax 32,451 21,744 25,064 55,658 54,448 $160,000 Handymax/Supramax 25,473 18,639 23,834 45,159 43,684 $140,000 Note: To be updated from 2005-present Handysize 19,634 30,424 32,814 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Jan- M ar- M ay- Jul- Sep- Nov- Jan- M ar- M ay- Jul- Sep- Nov- Jan- M ar- M ay- Jul- Sep- Nov- Jan- M ar- M ay- Jul- Sep- Nov- Jan- M ar- M ay- 04 04 04 04 04 04 05 05 05 05 05 05 06 06 06 06 06 06 07 07 07 07 07 07 08 08 08 Handymax - Japan-SK / Nopac rv Panamax - Japan-SK / Nopac rv Capesize - Nopac round v Supramax - Japan-SK / Nopac rv Handysize - SE Asia & S Korea - Japan Source: Baltic Exchange Limited Slide 2
Strong freight rates should continue in 2008, but a multi-year downturn is expected to begin in 2009 (cont.) Total Order Book Total Order Book Size (incl. Delivery in April 2008) (2008-2014) (DWT 000’s) No. DWT (MM) % of Fleet No. DWT (MM) % of Current Fleet 10-40 2,844 75.738 19.06% 576 18.465 24.38% 40-60 1,613 77.696 19.55% 796 44.511 57.29% 60-100 1,511 110.377 27.78% 545 44.928 40.70% 100-150 153 21.362 5.38% 80 9.318 43.62% 150+ 626 112.157 28.23% 587 117.892 105.11% Total 6,747 397.330 100.00% 2,584 235.114 59.17% Source : Fearnleys – Bulk Fleet Update (Apr - 2008) • Freight rates will face pressure from significant supply growth in 2009 - 2012, with the total order book at 59% of the current fleet • The Handymax fleet is estimated to grow 46% from 2008 to 2011, while demand for cargoes is expected to grow only 10% • Handymax/Handysize vessels can compete with Panamaxes to transport coal and iron ore • Handysize vessels are most attractive in terms of supply growth, because they have the lowest order book Slide 3
Strong freight rates should continue in 2008, but a multi-year downturn is expected to begin in 2009 (cont.) Forward Freight Agreement Rates • Dry bulk shipping demand growth is (Handysize/Supramax) expected to be solid over the next few $65,000 years 62,500 60,750 $60,000 59,500 • Global steel demand is expected to $55,000 increase 5% - 6% in 2008 52,500 $50,000 46,750 45,000 46,750 • China will become more dependent on $45,000 41,500 overseas iron ore imports, as older steel 41,000 $40,000 mills are phased out, thereby increasing 36,000 tonne-miles $35,000 33,750 31,250 31,250 $30,000 • Coal shipments will increase as China $25,000 and other Asian countries are expanding 22,000 their use of imported coal in energy and $20,000 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 Y2010 steel production Handysize FFA Supramax FFA Source : Clarkson Securities Ltd. dated 15 May 08 Slide 4
Handysize vessels have a number of unique strengths • Shallow draft, box-hold vessels are perfect for unitized, high value commodities, like copper concentrate and aluminum, which are not typically shipped in large quantities • Market downturn should remove a large number of vessels and pave the way for more balanced fleet development and earnings over the next 3-5 years • Flexibility in multi-port parcelling operations, as they can carry most commodities and can operate in smaller ports with limited loading/unloading equipment • Storage and production infrastructure and value favor smaller vessels for smaller stem sizes • Future greenhouses gas emission trading schemes may be positive for modern, economical Handyclass vessels Slide 5
Even though freight rates are expected to decrease, vessel prices might not significantly move down Comparision of BDI and 5 Years Old Handymax Prices BDI US$ million $13,000 $79 Baltic Exchange Dry Index $69 $11,000 Handymax Prices $59 $9,000 $49 $7,000 $39 $5,000 $29 $3,000 $19 $1,000 $9 20-Jun-05 19-Jul-05 07-Nov-05 09-Jan-06 26-Jun-06 23-Jul-06 13-Nov-06 15-Jan-07 01-Jun-07 29-Jun-07 27-Jul-07 16-Nov-07 18-Jan-08 01-Feb-05 01-Mar-05 30-Mar-05 26-Apr-05 24-May-05 15-Aug-05 12-Sep-05 10-Oct-05 05-Dec-05 06-Feb-06 06-Mar-06 03-Apr-06 02-May-06 30-May-06 21-Aug-06 18-Sep-06 16-Oct-06 11-Dec-06 12-Feb-07 12-Mar-07 09-Apr-07 07-May-07 24-Aug-07 21-Sep-07 19-Oct-07 14-Dec-07 15-Feb-08 14-Mar-08 18-Apr-08 Source: Baltic Exchange Limited • Shipyards have experienced a strong increase in their input factors, such as labor, steel (in 2007, prices rose almost US$ 200 per ton to US$ 900 per ton), and main equipment (prices rose between 10% - 15% in 2007) • In 2002, 21 yards in China and 9 yards in Korea could build vessels larger than 30,000 DWT; by 2007, the number increased to 82 in China and 22 in Korea • Yards in China and Korea took three-quarters of all new orders in 2007; on average, 7% of Korea contracts and 30% of China contacts were delayed for more than 1 month between 2000 – 2007 Slide 6
Even though freight rates are expected to decrease, vessel prices might not significantly move down (cont.) • The Handysize fleet is rapidly ageing, World Fleet Distribution - Vessel Owners and a newbuild program has been 15 - 50,000 DWT limited, so one can expect a shortage of tonnage 3.3% 26.8% • The Handysize/Handymax fleet has a 30.4% wide ownership structure, and we believe that there are many capital-constrained players • Only a few established yards are willing to build Handysize vessels, so owners must negotiate with relatively new yards 8.3% in China, Vietnam, India, etc. 11.4% 19.8% • As ports in Asia are steadily expanded and Handymax vessels are accepted, this could create more difficult environment > 20 Vessels 15 - 19 Vessels 10-14 Vessels for Handysize vessels 5 - 9 Vessels 1 - 4 Vessels Undisclosed Source: Fairplay World Shipping Encyclopedia (April 2008) Slide 7
Effective human resources management is becoming even more critical • The 2005 BIMCO/International Shipping Officer Shortages (World Scale) Federation survey estimates worldwide crew of 466,000 officers and 721,000 Number of Crews ratings 10,000 • It is estimated that there will be a shortfall 5,000 of 27,000 qualified officers by 2015, which equals 3,000 vessels 0 -5,000 • Economies of scale might not favor Handysize vessels; when qualified -10,000 officers are in high demand and the same -10,000 crew amount is used for a smaller or -15,000 larger vessel, it makes more sense to operate the large vessel -20,000 • -25,000 Smaller vessels with quicker voyages and more complicated cargoes require more -27,000 -30,000 shore staff to operate the vessels and 2005 2015 control quality Source: BIMCO / ISF Slide 8
It is estimated that more than 30% of all newbuild vessels have not secured debt finance • The estimated orderbook for bulk carrier, container vessels, tankers, and offshore units is US$ 500 billion through 2012 • If we assume 65% debt financing, it means that debt of US$ 325 billion, or US$ 81 billion per year, must be secured • High yield bond markets are not readily available to finance construction risk at the moment • Credit will not be sufficient from the commercial bank market to support this loan growth • Evidence of owners renegotiating or canceling contracts • Problems with greenfield yards in China and Korea Slide 9
It is estimated that more than 30% of all newbuild vessels have not secured debt finance (cont.) • Large Loan Transactions in 2007 Credit markets deteriorated significantly towards the end of 2007 due to the sub- Total Size Company prime crisis (Millions) Seadrill Rig AS US$ 1,500 • Sub-prime writedowns threaten capital adequacy, cutting lending amounts Prosafe SE US$ 1,300 • As loan demand remains strong, Awilco Offshore ASA US$ 1,085 amortization has increased with lower advance rate, tighter covenants, and General Maritime Corporation US$ 900 wider credit spreads Teekay Corp. / Teekay Tankers Ltd. US$ 845 • Credit spreads have increased by 50% - Victoria Marine Inc. US$ 777 60% in today’s market Songa Offshore ASA US$ 650 Royal Caribbean Cruises Ltd. US$ 589 Source: Nordea Bank Slide 10
Container vessels are competing directly for some dry bulk commodities • There appears to be some size adaptation to larger parcels to reduce freight costs per unit • Migration of demand from Handysize to Handymax vessels could steal market share away for the smaller vessels • Container vessels are competing with dry bulk vessels for a number of reasons: ⇒ Increasing size and quantity of container vessels ⇒ Imbalance in container trade, so low rates are able for repositioning voyages ⇒ More ports of call in the networks of container shipping lines Slide 11
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