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8th Mare Forum Italy 2012, Sorrento A Presenta*on by Braemar Seascope Research – 14 May 2012
The Outlook for the Dry Bulk Market… …Italian style.
Braemar Seascope
Disclaimer The informa*on contained within this report is given in good faith based on the current market situa*on at the *me of preparing this report and as such is specific to that point only. While all reasonable care has been taken in the prepara*on and colla*on of informa*on in this report Braemar Shipping Services Plc (and all associated and affiliated companies) does not accept any liability whatsoever for any errors of fact or opinion based on such facts. Some industry informa*on rela*ng to the shipping industry can be difficult to find or establish. Some data may not be available and may need to be es*mated or assessed and where such data may be limited or unavailable subjec*ve assessment may have to be used. No market analysis can guarantee accuracy. The usual fundamentals may not always govern the markets, for example psychology, market cycles and external events (such as acts of god or developments in future technologies) could cause markets to depart from their natural/usual course. Such external events have not been considered as part of this analysis. Historical market behaviour does not predict future market behaviour and shipping is an inherently high risk business. You should therefore consider a variety of informa*on and poten*al outcomes when making decisions based on the informa*on contained in this report. All informa*on provided by Braemar Shipping Services Plc is without any guarantee whatsoever. Braemar Shipping Services Plc or any of its subsidiaries or affiliates will not be liable for any consequences thereof. This report is intended solely for the informa*on of the email recipient account and must not be passed or divulged to any third par*es whatsoever without the wriSen permission of Braemar Shipping Services Plc. Braemar Shipping Services Plc accepts no liability to any third par*es whatsoever. If permission is granted, you must disclose the full report including all disclaimers, and not selected excerpts which may be taken out of context. For more informa;on, please contact Research on +44 20 7535 2699 or email us at [email protected]
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A personal Disclaimer…
I hereby promise that I will do my utmost to ensure that during my
presenta*on ‘None shall sleep’.
… or as the Italians say:
“Nessun Dorma”
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1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930
Giacomo Puccini (1858-‐1924) Operas 1884-‐1926
Le Villi 1884, Edgar 1889
Manon Lescaut (1993) La Boheme (1896)
Tosca (1900) Madama BuSerfly (1904) La Fanciulla del West (1910)
La Rondine (1917) Il Tribco (1918)
Puccini dies (1924)
Turandot (1926)
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0
300
600
900
1,200
1,500
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Mill
ion
tonn
es
Puccini’s Operas vs Industrial Expansion World Steel Produc;on 1990 – 2010
5
Source: WSA
Europe
USA, Japan, Europe China
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Seeking the ‘Verismo’ in earnings Assessing normality in the Dry Bulk Market
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1985 1990 1995 2000 2005 2010
Index Va
lue BalFc Dry Index
2012 YTD = 924
2011 historically high
“Verismo” -‐ Normal
(i.e. producing reasonable IRR for owners)
“Roman;c” -‐ Abnormal (i.e. private Jet, castle)
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“Vi disfido!” (Cavaradossi -‐ Tosca) Resilience in the face of massive oversupply TC Earnings 2011 vs OPEX costs
0
2,500
5,000
7,500
10,000
12,500
15,000
17,500
Average TC
E $ pe
r day
TC Earnings 2011 OPEX
• Dry Bulk Market had the largest fleet growth in 2011 amongst other shipping sectors (c.+14%)
• …yet managed sRll to average further above OPEX costs than other markets…
• …thanks to a greater exposure to emerging naRon demand rather than weaker OECD
Dry Bulk
Source: Baltic Exchange, Moore Stephens
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The Story of 2011 in a nutshell Not just about tonnage oversupply
Supply
Demand
Markets suffered NOT ONLY from
tonnage oversupply…
…but also from a significant loss of
cargoes
2011
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Cargo-supply Problems in 2011
Supply Problems…
• Iron Ore – W.Australia Cyclones, Rains Brazil
– Indian Iron Ore Ban from Karnataka
• Coal – Rains/Floods EC.Australia, S.Africa, Indonesia, Colombia etc
• Grain – ECSA delayed by rains. – Russia/B.Sea drought – Weaker US Grain
…weaken Seaborne Trade
• Iron Ore/Coal/Grain Prices surged in FH2011, ‘choking off’ demand & fuel inflaRon fears
• Importers expand domesRc/Non-‐seaborne supplies, or de-‐stock to compensate
Supply
Demand
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Soaring Commodity prices fuel inflaFon risks…
0
50
100
150
200
250
300
1990 1995 2000 2005 2010
Index Va
lue
Industrial Materials index Metal index
Energy index Food index
10
Commodity prices in general soar back up to pre-‐SH2008 Crash levels…
…however the world was in far beSer
economic health pre 2008 than it is now.
2011 price rises ‘choked off’ demand…
Source: IMF
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Why will 2012 be any different?
Cheaper Prices & more cargo supply =
Bigger increases in ‘Seaborne’ trade
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InflaFon ‘squeeze’ in the past… but what of the future?
0
50
100
150
200
250
300
350
400
450
500
0
50
100
150
200
250
Grain $ per ton
ne
Iron Ore/Coa
l $ per to
nne
Selected Bulk Commodity Spot Prices The Past • Early 2011: China could not
increase lending for fear of surging infla*on. Economy slows
• End 2011: Infla*on fears in China have been contained; Chinese Government signal ability to increase lending
NOW • 2012: Increased lending
advised to help kickstart economy and con*nue inland development in China.
Low prices will s*mulate growth
Iron Ore
Coal
Wheat
Source: Bloomberg, McCloskeys, CBOT
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What to look out for in the short term…
• Stronger cargo volumes in SH2012 – Iron Ore (Brazil & Australia) & Coal (Australia, Indonesia, S Africa) aher
seasonal Q1 rains/cyclones and Q4 stockpiling • Watch for Brazil strategy – Volume or value?
– Longer haul coal movements to Asia (US, Colombia) – ConRnued support for Non-‐Cape Iron Ore (eg. MEG, WC Americas)
• Wild card: Indian Iron Ore ‘spurt’ afer WC monsoon – if government allows – China Coal imports vs coastal trade. – Grain – Stronger ECSA grains/Soybeans Apr-‐Aug than last year
• Watch for current Soybean drought concerns from Brazil: might s;mulate stronger US Soybeans in Sep-‐Jan
– Stonger US Grain season in Sep/Oct than 2011 – Minor bulk support as emerging economies pick up growth levels
• AtlanRc/Pacific imbalance? More Longer haul ballasRng • If cargo increases are significant, watch out for some discharge port
congesRon
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Will this cargo increase make any difference in rates….especially if fleet growth remains huge?
2011
Massive Fleet growth +
Lack of Cargo Supply =
Weaker Rates, but averaging above OPEX
2012
Massive Fleet growth +
Increased Cargo Supply =
S;ll weaker rates but should average above OPEX once
more
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Bulker fleet & orderbook
889
1932
822
1608 1664
312
80
1361
55
451
22
484 584
87 50
296
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
Small Handy Large Handy Handymax Supramax Panamax Post-‐Panamax
Mini Capesize
Capesize
No. of vessels
Fleet Orderbook
Total % of fleet on order = 23%
OB/F 6% 23% 3% 30% 35% 28% 63% 22%
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Bulker fleet growth to date in 2012
Vessel Size Fleet at 1st Jan 2012 Delivered -‐2012 YTD Scrapped/Lost -‐ 2012 YTD Fleet at 1st May 2012Vessels M Dwt Vessels M Dwt Vessels M Dwt Vessels M Dwt
Cape 1,303 242.5 82 16.7 24 4.3 1,361 254.8Mini Cape 67 7.6 13 1.5 0 0.0 80 9.0Post-‐Panamax 289 26.5 27 2.5 4 0.4 312 28.6Panamax 1,611 119.9 95 7.6 42 2.8 1,664 124.6Supra/50-‐65k Dwt 1,487 82.2 126 7.3 5 0.3 1,608 89.2Handymax 852 38.4 0 0.0 30 1.3 822 37.1Large Handy 1,902 60.7 104 3.6 74 2.4 1,932 61.8Small Handy 898 16.5 9 0.2 18 0.3 889 16.3Total 8,409 594.1 456 39.3 197 11.9 8,668 621.5Panamax sector includes old, geared panamaxes and excludes post-‐1998 (geared) supramaxesSupra/50-‐65k Dwt sector includes old vessels of 50-‐58k Dwt, and all post-‐1998 geared supramaxes
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Vessel Size No. of vessels M Dwt Total orderbook Orderbook/Fleet %2012 2013 2014+ 2012 2013 2014+ Vessels M Dwt Dwt
Cape 139 111 46 31.2 23.2 10.0 296 64.4 25%Mini Cape 34 11 5 3.9 1.3 0.5 50 5.7 63%Post-‐Panamax 40 37 10 3.7 3.5 0.9 87 8.1 28%Panamax 293 206 85 23.5 16.3 6.8 584 46.6 37%Supra/50-‐65k Dwt 254 181 49 14.6 10.5 2.8 484 27.9 31%
Handymax 10 9 3 0.5 0.4 0.1 22 1.0 3%Large Handy 221 178 52 7.5 6.2 1.8 451 15.5 25%Small Handy 37 18 0 0.7 0.3 0.0 55 0.9 6%Total 1,028 751 250 85.6 61.5 23.0 2,029 170.1 27%
Current Orderbook @ 1st May 2012
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‘Morire? E chi lo sa qual’è la vita? (Puccini/Adami) Bulker demoli*on to date in 2012
18
74
30
5
42
4
5
24 ships
-‐ 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000
Small Handy
Large Handy
Handymax
Supramax
Panamax
Post-‐Panamax
Mini Capesize
Capesize
‘000 Dwt
Total 2011 DemoliFon: 25m Dwt
2012 YTD = 12m Dwt
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Prospects for Dry Sectors
• Capes: 2012-‐13 Fleet growth 10-‐11% – SRll heavy fleet growth, although falling since last few years. – Delayed ‘impact’ from ULOC tonnage (Brazil/Asia) – Support from significant new Iron Ore/Coal projects, but expect some
delays to start-‐up – Earnings: OPEX levels for weak cargo supply Rmes (i.e. Q1); stronger cargo
supply Q2-‐4 spot target $18k-‐20k per day. Overall 2012 avg weaker than 2011
• Panamaxes/Post: 2012-‐13Fleet growth 11-‐13% – Heavy fleet growth and concerns over flexibility (viz. Supras). – Expect weaker earnings vs Supras, but good cargo support from Minerals/
grain.
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Prospects for Dry Sectors
• Supras/Handymaxes: 2012-‐13 Fleet growth 9-‐10% – Flexible and suited to growth trades (grabs). – Benefit of % orders going to Chinese coastal – Earnings to outperform larger vessels; potenRal to average 2011 levels
• Handys: 2012-‐13 Fleet growth c.4% – The forgoren ‘un-‐sexy’ sector but resilient and suited to growth markets. – Lack of tonnage up to 50kdwt – Earnings should also show resilience (above OPEX)
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China’s Iron Ore demand – simply about price
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800
0
500
1000
1500
2000
2500
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012f
Steel Produ
cFon
-‐ mt
Iron Ore Prod/Im
ports -‐ m
t
China – Steel ProducFon vs Iron Ore Supply
DomesRc ProducRon
Iron Ore Imports
Steel ProducRon
• For there to be increases in seaborne iron ore trade, Chinese steel producRon doesn’t actually need to grow.
• What marers is the ‘Price’ of the raw material: – Low prices favour
imports; high prices favour domesRc producRon
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Major Port expansion plans…but will it all materialise? Iron ore export port capacity by year (million tonnes)
• Huge amount of proposed expansion plans both for Iron Ore and Coal, to help feed the growing emerging naRon demand (India coal, China etc.)
• However much is sRll yet to be approved or confirmed.
• Despite this, significant addiRonal capacity will materialise, however expect some delays/cancellaRons
0
500
1,000
1,500
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2,500
3,000
2010 2011 2012 2013 2014 2015 2016 2017 2018
Australia Brazil Canada South Africa West Africa Others
M tonnes
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Technical Analysis…
…and other forms of Voodoo fortune telling
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Cape earnings – Fibonacci levels
0
10,000
20,000
30,000
40,000
50,000
60,000
Jan-‐10 Jul-‐10 Jan-‐11 Jul-‐11 Jan-‐12 Jul-‐12
US$/da
y
100%
61.8%
0%
100%
61.8% 50% 38.2%
23.6%
0%
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Bulker Freight rates in TC equivalent
Source: Baltic Exchange
Source: BalRc Exchange
0
10,000
20,000
30,000
40,000
50,000
60,000
Jan-‐10 Apr-‐10 Jul-‐10 Oct-‐10 Jan-‐11 Apr-‐11 Jul-‐11 Oct-‐11 Jan-‐12 Apr-‐12
US$/day
Capesize Panamax Supramax Handysize
05/03/2012
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Panamax bulker values
0
10
20
30
40
50
60
70
80
90
100 US$ m
NB
5YR OLD
10YR OLD
• Asset prices at a low historical level.
• OpportuniRes to buy…but ‘what’, ‘when’ and ‘how many’?
• Restraint required at this point in the market cycle
• Focus on fuel efficiency & what the market ‘requires’.
08/03/2012
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Panamax/Post Supply:Demand
0
20
40
60
80
100
120
140
160
180
200
2006 2007 2008 2009 2010 2011 2012 2013
M dwt p
er year
• Supply:Demand Model scenarios suggests fleet uRlisaRon falling to c.81-‐88% over the next 2 years.
• However supply:demand gap could be reduced due to various factors including: – Slow Steaming – Higher scrapping/
slippage scenario – Firmer pick up in
Dry Bulk trades
Demand
Supply
@ 2kn slow steam
@ 1kn slow steam
High case Low case
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Dry Bulk Deliveries, DeleFons & Net Fleet Growth
-‐10%
-‐5%
0%
5%
10%
15%
20%
25%
-‐40
-‐20
0
20
40
60
80
100
120
1970 1975 1980 1985 1990 1995 2000 2005 2010
Net Fleet Growth
Sum of D
wt (million)
Deliveries DeleRons Net Fleet Growth
28
Total Fleet growth in 2010 c. 17%, a level not seen since expansion of Japan
Fleet growth to slow down from 2012-‐13
to c.10-‐12%.
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0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1950 1960 1970 1980 1990 2000 2010
Million To
nnes
Oil Dry Bulk
A new era for Shipping?
Japan Europe
No Major Expansion
(S Korea & Taiwan)
China
India
Others?
Major Industrial Expansions
Avg growth 1950-1980 Oil Trade = c.+8% Dry Bulk = c. +7%
Dry Bulk 2000-2016 = c. +5%
Oil Trade 2000 – 2016 = c. +3%
Avg growth 1980 - 2000 Oil Trade = c.+1% Dry Bulk = c. +2%
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The Southern Silk Route: How China can keep growing without the West
SE Asia Africa
S.America
China India
Massive expansion in South:South Trade, as new economies such as China invest overseas to secure
raw material supply
Movements of Oil, Iron Ore, Coal, Grain etc. from emerging na*ons in return for investment/
infrastructure, Oil/Steel products from China/India
U.S. Europe
Japan
OECD Trade expansion 1950+
Southern Silk Route
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Summary
• Market expectaRons need to get back to ‘reality’.
• Resilience in spot earnings, as underlying demand is good.
• However condiRons will sRll be challenging as cargo supply struggles to keep pace with demand.
• Fleet growth is sRll excessive for today’s market, but is declining.
• CriRcal point in the market cycle: a good Rme to buy, but be careful of ‘what’, ‘when’ & ‘how many’ – Too early to celebrate (Mario Cavaradossi – Tosca); keep persevering through
the tough Rmes like Calaf (Turandot)
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Grazie
