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THE PLATOU REPORT2015

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THE PLATOU REPORT 2015

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TABLE OF CONTENTS

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INTRODUCTION

THE SHIPPING MARKET ENVIRONMENT

TONNAGE SURPLUS:A COMPLICATED EXERCISE

THE TANKER MARKET

THE DRY BULK MARKET

THE CONTAINER SHIP MARKET

THE CAR CARRIER MARKET

THE LNG SHIPPING MARKET

SMALL SCALE LNG MARKET

THE LPG SHIPPING MARKET

THE SHIPBUILDING MARKET

MOBILE OFFSHORE DRILLING UNITS

THE OFFSHORE SUPPORT VESSEL (OSV) MARKET

RS PLATOU MARKETS

RS PLATOU PROJECT FINANCE

RS PLATOU REAL ESTATE

STATISTICS

CONTACTS

THE WORLD ACCORDING TO RS PLATOU


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THE PLATOU REPORT 2015 INTRODUCTION

A NEW BEGINNING: PLATOU JOINS FORCES WITH CLARKSONSRagnar Stoud Platou was born in Hamar, next to Norways largest freshwater lake, in 1897.

In 1915 he started as a shipbroker apprentice and in 1936 he founded RS Platou. Over the next decades, RS Platou continued to grow in global reach, number of employees and revenues.

RS Platou first engaged in a couple of joint ventures with H. Clarksons in Canada and Australia, going on to work closely together through the 60s and 70s.

Clarksons weathered the shipping crisis in the 70s and 80s better than Platou, which saw its position in the world of shipping significantly reduced by the mid 80s. However, the firms activity in Offshore continued to thrive.

In 1987 the families that owned Platou encouraged a manage-ment buyout, whereby they transferred 75 percent of the company to existing employees and guaranteed the operating cost for two years. The timing for this new group of shareholders turned out to be very good, as shipping had reached a fundamental turning point in 1987, after 13 years of structurally weak shipping markets.

During the next 27 years, Platous revenue grew from about 6 mill USD to approximately 200 mill USD as our Shipbroking acti vity recovered, Offshore continued to thrive, and the company made a profitable expansion into Project Finance & Investment Banking.

However, we in Platou realized we would not be able to grow our Shipbroking activity to become a truly global player organically. As such we are now very pleased to join forces with Clarksons, the strongest player in the world of Shipbroking.

Clarksons and Platou will continue to work hard to develop our services, and look forward to your continued support in the years to come.

Yours Faithfully,PETER M. ANKER

Managing Partner & CEO (19872015)RS Platou ASA


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T H E S H I P P I N G M A R K E T E N V I R O N M E N T

WORLD SHIPPING 2014: DEEPENING DIVERGENCESA year ago we envisioned a scenario where 2014 would be The Recovery Year for global shipping markets, as an improving world economy boosted tonnage demand, while fleet growth continued to slow to more sustainable levels. We were only partially right, as once again the world economy failed to live up to its recovery billing. World fleet capacity utilization was unchanged for the year, but in the absence of a strong world economy there were bigger divergences between segments than in the recent past. The LPG and tanker markets were the years clear winners, while the dry bulk market emerged as the clear loser.

A YEAR OF CRISES, BUT NO CRISISAs in recent years, geopolitical crises again made the headlines. However, this years crises had little direct impact on shipping. Russias annexation of Crimea and hostilities towards Ukraine did not interfere with any trade flows, and the Wests retaliation measures, while broadly based, meticulously avoided Russias on-going energy production and trade. The emergence of the ISIL terror force was shocking in its suddenness and brutality, but it made no impact on oil production and trade.

LEAVING THE WARS TO THE MARKETInstead, it was a year in which market volatility was driven more by endogenous, industry-specific factors. In the oil market, the war that did break out was the one between Saudi Arabia and US shale oil producers, which caused the oil price to end the year in a vir-tual free fall. The upshot for shipping was a surge in long-haul LPG shipments, as soaring US energy production continues to look for new markets. The global oil trade had a very strong finish to the year as crude oil producers kept pumping and refiners pounced on the sharp drop in input costs to step up production. Both events resulted in more cargo volume looking for tonnage to move it. On the dry bulk side, Chinese authorities accelerated their shifts in energy policy away from coal, and, helped by stronger perfor-

mances from other energy sources, caused the first decline in the countrys coal use on record. Indonesian politicians, meanwhile, decided that it was not in the countrys best interests to continue exporting bauxite and nickel ore. In combination, these initiatives caused trade growth in dry bulk to record its slowest growth since the Financial Crisis.

MARKET VOLATILITY CONFIRMS TALES OF STRUCTURAL OVERCAPACITY WERE EXAGGERATEDIt was a year in which all segments experienced considerable intra-year volatility in freight rates, irrespective of the outcome for the annual averages. As commented on last year, this very volatility argues against the notion that freight markets have become struc-turally over-tonnaged. Nevertheless, there is little doubt that the combination of the Financial Crisis and the largest orderbook in thirty years did create a surplus of tonnage. However, the mecha-nisms of absorbing this surplus slow steaming and waiting days, as opposed to lay-up have been different than in the past. With bunker prices crashing down and freight rates for many, but not all, segments going up, the industry is about to find out just how much (over-) capacity there is. For a detailed discussion of this issue and its complex dynamics, please see page 12.


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TANKERS IN 2014: STRONG START, STRONGER FINISHThe tanker market very closely mirrored 2013s performance, with sinking trade volumes pressuring freight rates for much of the year before a spectacular year-end turnaround. The difference this time was that the upswing was much broader as it also included the clean market. All of these factors reflect stronger underlying fundamen-tals. While trade trends showed similar declines in the first half of the year, 2014s turnaround was more pronounced, spurred by the sharp drop in oil prices. We estimate that trade volume declined by less than 1 percent for the year, again recovering strongly late in the year. A marked lengthening of trading distances caused ton-miles to increase by more than 2 percent, compared to zero growth for this metric in 2013. Total tonnage demand, including estimated changes in productivity, rose by more than 4 percent.

With fleet growth slowing sharply to 2 percent, the slowest rate in more than a decade, capacity utilization increased by nearly two percentage points to 85 percent, the highest level since 2010.

DRY BULK: BELOW EXPECTATIONS DUE TO WEAKER TONNAGE DEMAND GROWTHEarnings for dry bulk ships were on average lower in 2014 than the year before. Preliminary assessments suggest tonnage demand increased slightly above 4 percent. This was lower than anticipated and largely caused by a strong drop in Chinese coal, bauxite and nickel ore imports. The size of the fleet increased 5 percent. The fleet utilization rate thereby decreased by around 1 percentage point.

For the full year, our weighted dry bulk index fell from $12,800 per day in 2013, to $11,500 per day, a drop of 10 percent. The largest decrease came in the Panamax sector, where average earnings decreased from $9,500 per day in 2013 to $7,700 in 2014, a slide of 19 percent. Capesizes obtained $14,800 per day against $16,600 the year before. For Supramax tonnage, freight rates decreased from $10,300 per day to $9,800, while the Handy sector daily earnings eroded from $8,700 to $7,700.

LNG MARKET The LNG shipping market finally witnessed growth in seaborne trade, following two years of decline. However, due to a continued fall in transport distance and improved productivity in the fleet,

total shipping demand remained unchanged. The LNG carrier fleet grew by 5 percent, resulting in a weakening in the fleets utilization rate of equal magnitude and a lowering of the short-term charter rates by 4045 percent. On average, a modern steam turbine ship earned $54,500 per day, while a ship equipped with dual-fuelled propulsion received $10,000 more per day.

LPG: BEATING HIGH EXPECTATIONSRecord high rates for the larger LPG carriers were seen during 2014. Driven by a massive expansion of exports from the USA and healthy Middle East exports and despite a contraction in the ammonia seaborne trade we have estimated that total shipping demand for LPG and ammonia climbed by 16 percent during 2014. Combined with 6 percent fleet growth, the utilization rate ascended by 10 per-centage points and reached an all-time-high of 99 percent. This resulted in a two-fold increase in average spot earnings for VLGCs, at $68,000 per day. The hike in spot rates were less pronounced for the smaller ships; a Midsize LPG carrier earned on average 17 per-cent more in 2014, at $32,000 per day.

CAR CARRIERS: LOCAL PRODUCTION CUTS INTO SEABORNE TRADE2014 was a disappointing year for the car carrier industry. Despite growing auto sales in the major markets, demand for tonnage has been at a standstill, with most of the increased demand for cars covered by local production instead of imports. Sales in emerging markets are in decline and this impacts negatively on seaborne volumes, as local vehicle production is scarce. As the fleet is constantly growing, it means that oversupply of tonnage increased to 67 percent during the year. Consequently, rate levels also declined from the year before. Expectations for 2015 are that demand will return to growth, but only to a level on par with fore-casted fleet growth, meaning that rate levels will remain well below breakeven for most vessels.

WORLD ECONOMY AND WORLD SHIPPINGTo the surprise of many analysts, including ourselves, the world economy in 2014 stuck to its established disappointing pattern. 2013 had ended on a strong note, with US growth accelerating and

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TONNAGE DEMAND GROWTH VS WORLD ECONOMIC GROWTH 20022014

WORLD MERCHANT FLEET 20052014ANNUAL CHANGES

signs of encouragement in China, as well as Europe. Neverthe-less, renewed headwinds emerged quickly in the New Year from familiar as well as new fronts and an all-too familiar pattern of growth markdowns began. An equally familiar development, how-ever, was the continued supportive policies of central banks, with both Chinese and European authorities moving to ease policy. The price of oil also was in focus, as usual. Contrary to previous years, in which spiking prices have been a threat to growth, plunging prices were seen as a tax cut to consuming countries. Consequently, there were once again some signs of encouragement as the year ended, led by surging growth in the US.

GROWTH MOMENTUM BROKEN, AGAIN, DURING THE FIRST HALF The first half slowdown was most acute in the US, where growth went from being seemingly robust in the second half of 2013 and straight into contraction during the first quarter. However, it soon became apparent that the slowdown was weather related. Ameri-cans endured one of their harshest winters in years, causing severe disruptions in economic activity throughout the country. Chinese growth remained uneven, with ongoing weakness in domestic investment and infrastructure, a mixed performance on trade, but still relatively strong private consumption, continuing the pattern since 2013. Europes economies, while technically not in recession, still failed to maintain what little momentum they had due to ongoing tight public sector budgets and fragmented balance sheets. The region was also the hardest hit by the rise in geopolitical tensions resulting from the RussiaUkraine conflict. In Japan,

Abenomics stumbled in the wake of the increase in the consump-tion tax in the spring. With growth weakening in the big economies it was no surprise that many emerging markets suffered; as their exports took a hit, while financing remained tighter than earlier following the reversal of capital flows that had begun in 2013.

These developments resulted in the IMF marking down its 2014 world GDP growth projection by a hefty 0.4 percentage points to 3.3 percent, in line with the weak pace of 2013.

BUT U.S. UPSWING SHEDS SOME LIGHT ON THE SECOND HALFAs soon as the weather related headwinds receded, the US economys stronger underlying momentum resurfaced. The Amer-ican economy is reaping the tailwinds of having tackled the Finan-cial Crisis more aggressively, which has improved balance sheets all around. In addition, the fiscal drag that held the economy back in 2012 and 2013 is now fading. As a result, the economy rebounded forcefully with growth averaging 4.5 percent during the second and third quarters.

A hard landing in China was the big fear for markets going into 2014. However, authorities continued the investment-led downturn in the property sector by pro-actively deploying growth support measures such as fiscal stimulus, although at a much smaller scale than in the past, alongside tax breaks and interest rate cuts. As a result, the growth remained near the governments 7.5 percent target through the year, with an improvement in exports lending support during the second half of 2014. However, growth remained lackluster in the rest of the world. Emerging markets have been suffering from weaker external demand conditions for some time. The downturn in commodity prices, which began during the summer, further added to these problems, particularly for countries in Latin America and for Russia. The latter was obviously at the epicenter of rising geo-political tensions resulting from its aggression against Ukraine, and economic sanctions began to bite during the second half of the year. For Europe and Japan, the second half was as weak as the first even weaker in Japans case,as private consumption failed to recover from the spring tax hike. The slowdown in China, combined with a down-turn and financial instability in Russia, hit the European manufactur-ing sector and once again cast doubts on its banking system.

2015: FROM DIVERGENCE TO CONVERGENCE?The outlook for 2015 is eerily familiar to that of 2014, 2013 etc., with the opinion being that growth has been held back by legacies of the Financial Crisis but should pick up next year. Indeed, no sooner had the year started before there was another markdown of growth


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Seaborne oil trade Seaborne dry trade World output


expectations by the IMF, this time by 0.3 percentage points. The difference from recent years is the emergence of the US as a clear growth leader. The American economy has gained momentum as growth has begun to impact upon the labor market, with consist-ent job gains and a decline in the unemployment rate during the year. 2015 will also reap the full benefits of the plunge in oil prices, although the substantial increase in energy investment and produc-tion seen in recent years is expected to take a significant hit in the wake of the oil price plunge and will offset some of the income gains from lower oil prices.

The strength of the US economy means improved external conditions for its main trading partners, including China, which will also benefit from sharply lower energy prices. We expect the government to continue to provide growth supportive measures, while the long-term trend toward urbanization and the transition away from agriculture and towards manufacturing and services will continue. The Chinese labor market appears to be on solid footing, with wage gains supporting strong growth in consumer spending. As a result we expect growth in China to remain above 7 percent.

With the worlds two biggest economies seeing a stronger advance in 2015, the external environment for other econo-mies should improve. Emerging economies, which are the main drivers of tonnage demand, should benefit from these trends. Growth support is needed as the sharp downturn in commodity prices is hurting energy producers in the Middle East, Latin America and Russia, although the strength of the US dollar is offsetting some of that headwind.

Europe and Japan may still be the biggest downside risks. The former continues to struggle with its banking system and shrink-ing credit growth, while the troubles of Russia have added another layer of complexity. A more competitive Euro and a likely more radical stance on monetary policy should be positive contributors to growth. The situation remains fragile, however, as evidenced by the market reactions to changes in Greek politics.

Overall, we still remain cautiously optimistic that global growth will emerge from the sluggish levels of recent years, aided by the sharp drop in commodity prices, in addition to continued stimulative eco-nomic policies. Propelled by these forces, the world economy should

start moving towards its 4 percent trend rate for the first time since 2010 a development that would be good news for tonnage demand in all segments.

SHIPPING MARKET PROSPECTS: A NEW WAVE, BUT UNLIKELY TO LIFT ALL VESSELS Commodity shipping markets have been affected to roughly the same extent by two macro trends since the Financial Crisis; a weak world economy and above-trend fleet growth. The effects of the late 2000s newbuilding spike are now fading, while some of the seeds sown by the commodity price bubble in the same period are blossoming and transforming production and trade patterns. These changes are likely to mean that we are entering a period of less syn-chronized shipping market cycles than in the recent past.

The tanker market is a case in point. The freight market collapse in recent years was almost exclusively attributed to the US shale oil revolution and the subsequent decline in oil imports. Sharply lower rates, combined with a pervasively negative market sentiment, hit ordering of new vessels. The result is that the market is now facing a new upswing in the oil trades on the back of the lowest orderbook in more than a decade. A further improvement in fleet utilization thus looks highly likely. Unfortunately the dry bulk market is at the other end of the spectrum. Ordering of new vessels rebounded quickly after the Financial Crisis, driven by market optimism on China, and fleet growth has thus remained stubbornly high. Mean-while, the forces shaping the commodity appetite of the markets biggest customer, China, are changing. The countrys growth rate has slowed and composition shifted, while the pressure for more environmentally friendly energy use has intensified. The result is a downshift in the growth rate of dry bulk trade amid persistently high fleet growth.

The outlook for 2015 thus remains one of cautious optimism for shipping overall, but with a much broader range of expected out-comes than usual for the individual segments. We expect tankers and LPG to continue to outperform. Both market segments are beneficiaries of strong growth in world oil production which in turn is supporting strong trade growth. The challenge now is for growth to pick up in order to absorb surging production.

WORLD SEABORNE TRADE AND ECONOMIC GROWTH19702014

ANNUAL GROWTH IN REAL GDPPERCENTAGE CHANGE FROM PREVIOUS YEAR

Source: IMF

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Russia 2.0 0.6 -3.0

China 7.5 7.4 6.8

India 5.4 5.8 6.3

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M. East and N. Africa 3.3 2.8 3.3

Sub-Saharan Africa 6.1 4.8 4.9

L. America 3.0 1.2 1.3

World 3.7 3.3 3.5

Dry bulk will likely remain a laggard. Fleet growth will remain high for the foreseeable future, while lower Chinese coal consump-tion and ongoing support for its domestic coal and iron ore mining industries means lower-than-normal trade growth.

The LNG market is expected to begin a cyclical upturn in response to increased production capacity, which will generate more trade. The car carrier market is expected to remain static.

Global shipping is entering a new period of fragmentation in which new trends in commodity demand and production are reshaping trade lanes. Orderbook levels have also become much more differentiated, as access to financing has become increasingly

selective. It is thus no longer possible to talk about the outlook. 2015 has all the signs of being a mixed year for the markets overall, but with a much clearer distinction between winners and losers than in the past.

OLE-RIKARD HAMMERHead of Research

RS Platou Economic Research


GLOBAL ECONOMIC GROWTH 20052015FORECASTS AND ACTUAL GROWTH RATES

SUPPLY, DEMAND AND UTILIZATION RATE 19902014WORLD MERCHANT FLEET

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TONNAGE SURPLUS: A COMPLICATED EXERCISEAN ENIGMA: The tanker fleet has increased by 50 percent since 2005 (a year with balanced market conditions); seaborne oil trade has increased by 5 percent. How big is the tonnage surplus?

Our estimate for 2014 is 5 percent. How could that be possible?This simple comparison between the fleet growth and the

growth in trade volumes does not tell the whole story. There are a number of additional factors. Measuring overcapacity in shipping markets is a complicated exercise that could be done in many different ways. In the good old days, with very low bunker prices, estimating overcapacity was simple; just count the number of laid up vessels. Either the vessels were sailing at full speed or they were laid up. Today most of the overcapacity is in the form of slow steaming, definitely a much more complicated element to handle. Let us start by establishing some basic principles.

First of all we must distinguish between technical overcapacity and economical overcapacity. For the sake of simplicity we will con-strain ourselves to VLCCs. An example: Lets say that the current speed is 11 knots and that the technical maximum speed is 15 knots. Based on an AG/Korea trade the annual transport capacity for a VLCC is 1.91 mill tons at 11 knots and 2.54 mill tons at 15 knots, implying a technical overcapacity of 25 percent.

However, we regard economical overcapacity to be a much more relevant concept. RS Platou Economic Research has defined 90 percent (quite arbitrarily) as full capacity utilization, correspond-ing with a freight rate giving 8 percent return on total capital based on reasonable assumptions on the price of the vessel, its economic

life, operating cost etc. At the end of 2014 this leads us to roughly $40,000 per day, with an optimum speed of 13 knots at a bunker price of $400 ton per ton in our VLCC example. This points to an annual transport capacity of 2.23 mill tons or 12 percent less than at maximum speed.

Normal productivity for the fleet can be defined as the number of ton-miles produced per deadweight ton per year at a 90 percent utilization rate. Since our goal is to measure tonnage surplus we have to differentiate between market-dependent changes in produc-tivity and structural changes. To illustrate: In a weakening market operators want to reduce the speed because optimum speed is falling. This results in a market-dependent decline in productivity, which is a part of the overcapacity to be measured. An increase in bunker prices is normally also lead to lower speed, but we regard this as a structural drop in productivity. In other words, an increase in bunker prices at a constant rate level will lead to slower speed and the need for more tankers to carry out the same transportation work.

Let us take a look at the other productivity factors in addition to speed:

Transport distances have played an important role in the years since 2005. According to our estimates average tanker distances have increased by 12 percent, resulting in a rise of 17 percent in ton-mile numbers over the last nine years. We regard this as a structural


trend, not a function of market cycles.Floating storage. Over the period from 2005 to 2014 there were

several years with a significant use of tankers for storage purposes, in addition to their traditional trading employment. A peak was reached in November 2009, when roughly 7 percent of the tanker fleet was utilized for oil storage. The current crude oil oversupply may again lead to a new floating storage surge in 2015.

Another structural element is the load factor, defined as the cargo size divided by the deadweight tonnage of the vessel. There has been a consistent trend over many years towards larger Aframaxes, Suezmaxes and VLCCs, while cargo sizes have remained more or less unchanged. This means that we need more deadweight tons to take the same cargo as before, reducing the productivity by some 56 percent since 2005.

Port days. The number of port days per year could fluctuate significantly over time, partly due to market cycles (market-depend-ent congestion), partly due to structural factors, such as changes in global trading pattern and vessel size distribution.

The ballast factor describes the share of days in ballast compared with the total days at sea. Significant and rapid changes in the world-wide trade pattern normally lead to more repositioning of the fleet, more ballast days and consequently lower structural productivity.

Then back to speed again. The sharp drop in bunker prices after September 2014 should have led to a strong rise in structural speed in addition to higher speed driven by improved market conditions. We have actually observed an increased speed, but considerably lower than the optimum level in mid-January 2015. There are several possible explanations behind this, such as charterers requirements, different speed optimization for oil company tonnage and not least that the net-income curve per day as a function of speed is very flat between 11 and 15 knots at $300 bunker prices. Nothing wrong with this, tonnage surplus calculations have to be theoretical.

To sum up: From 2005 to 2014 the structural productivity of the tanker fleet has fallen by 16 percent, contributing to a 43 per-cent growth in tonnage demand. The consequence has been a fall in the utilization rate from 90 percent in 2005 to 85 percent in 2014, despite the 50 percent fleet growth.

ERIK M. ANDERSENSpecial Adviser


TONNAGE SURPLUS: A COMPLICATED EXERCISE


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T H E TA N K E R M A R K E T

A WELL-OILED RECOVERY2014 turned out to be quite a good year for tanker owners with capacity utilization and freight rates improving, very much in line with our forecast. While this improvement was partly due to a sharp slowdown in fleet growth, this was the easy part of the prognosis given the low orderbook. It was the demand side of the market that again offered surprises, and the combination of drivers was somewhat different than expected.

We had foreseen that this would be the year the world economy and oil demand finally began to recover after several false starts. On the contrary, however, it turned out to be yet another year of sluggishness. While such a development is normally not good news for tanker demand, the big surprise was that OPEC (Saudi Arabia) decided along the way to change its strategy in favor of maintain-ing market share rather than supporting prices by reducing volume. The unrestrained increase in world oil production was very bene-ficial to tanker demand, which improved significantly during the second half of the year, as rapidly rising output of crude oil, as well as refined products, needed more tonnage to move it. Cheaper oil also meant longer trading distances, as the US shale revolution pres-sured more Atlantic basin cargoes towards Asia. With fleet growth virtually stagnant, fleet utilization was boosted above the 85 percent

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MR product 13.0 16.3 11.5

mark, tipping pricing power back to owners and resulting in signif-icant rate gains during the last four months of the year. Importantly, the increases were much more broadly based than in 2013, indicat-ing a stronger base.

THE CLEAN MARKET: LIFE, AT LASTThe clean market took part in that strong finish, unlike last year. This obviously represented a highly welcome trend shift, as this segment had been underperforming the rest of the market, not to mention its own lofty expectations, for the past year. The drivers of the upturn were much the same as for crude. The worlds refin-ing sector is in a period of rapid capacity growth and the plunge in crude prices had an immediate positive effect on refiners margins via lower input costs, encouraging them to increase utilization. All of the worlds refinery export hubs were thus humming in synchro-nized fashion during the second half of the year, driving up tonnage demand. While fleet growth remains significantly higher for clean tankers, so does tonnage demand intensity i.e. how much tonnage is needed when factoring in such productivity factors as longer waiting times in port, and multi-porting.

FREIGHT RATES: ACROSS-THE-BOARD GAINS FOR CRUDE, MIXED FOR CLEANFreight rose across-the-board and despite a steep second quarter slump still improved significantly for all segments for the year. Our tonnage-weighted rate index came in at close to $24,000 per day. This was the highest level in four years and represented a solid 44 percent gain on 2013.

Crude tankers were led by a hefty 84 percent increase for Suez-maxes, averaging $26,000 per day. VLCCs, as usual, saw the highest average, coming close to breaking the $30,000 per day barriers for the first time since 2010, but finished at $29,000 per day. The clean segment was much more mixed. MRs struggled for the first nine months and ended the year 30 percent lower on theoretical voyage returns at $12,000 per day. Actual trading results will vary, however, depending on the number of paid trading days accomplished. LR 1s were little changed at $16,000 per day, while LR 2s had an excellent year with an average increase of more than 30 percent to $19,000 per day.

ASSET VALUES: HESITANTLY HIGHER FOR SECONDHAND, MOSTLY FLAT FOR NEWBUILDINGSWhile 2013 had been the year of the newbuilding, 2014 was the year of secondhand prices. Secondhand prices for modern crude carriers increased by a respectable 30 percent on average, relative to year end 2013 levels, while gains for older vessels in general were more muted. The majority of the price increases were seen during the first quarter, as asset markets caught up with the unexpected rate spike in 2013. However, for the rest of the year it was mostly an uphill battle. The middle part of the year was uninspiring and some-what disappointing earnings wise, and buyers showed a distinct lack of conviction during the freight market upswing in Q4. MR values retreated as selling pressure built up in response to the disappoint-ing freight market in the first part of the year. Transaction volume doubled from 2013, however, as improved earnings tempted buyers as well as sellers.

Newbuilding prices also increased, but in a much more muted way. The recovery in freight rates shifted buyers attention towards vessels on the water. Slow activity in conventional segments, some LNG cancellations, and the downturn in offshore all made for a weak demand situation overall. Capacity availability, falling com-modity prices and a higher USD all contributed to keeping a lid on price increases during the second half of the year. For the year, newbuilding prices increased by about 5 percent relative to year-end 2013 levels.

THE OIL MARKET: ONE MANS CURSE IS ANOTHER MANS BLESSINGFollowing three years of remarkable stability, the oil market returned to its volatile ways in 2014. Prices remained near their year-long $110 average for the first half of the year, but began sinking from mid-year. At first the gains were linked to disappointing demand figures, which carried greater weight as the aforementioned down-grades to economic growth forecasts began. However, as oil pro-duction figures continued to beat even elevated forecasts, led by

THE TANKER MARKET

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TANKER FLEET 20052014AVERAGE ANNUAL CHANGES

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the US and the return of Libyan output, it became clear that rising supply was a more pressing issue. During the last four months of the year global oil supplies were growing by nearly 3 percent year-on-year, while demand growth was struggling to reach 1 percent. Com-mercial oil inventories rose and exceeded their normal levels for the

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first time in several years, while spot oil prices fell below those of forward contracts; a clear market signal of excess supply. However, price weakness only turned into a rout during the last two months of the year, as it became clear that Saudi Arabia had no intention of relinquishing market share to support prices. Without an anchor, prices immediately plunged, searching for a new floor somewhere below $50 per barrel.

AS THERE WAS PLENTY OF CARGO TO MOVE OVER LONGER DISTANCES, BOOSTING TONNAGE DEMANDFor the tanker market, the turn in the oil market turned out to be excellent news. More cargoes were searching for a home, boosting demand for transportation capacity. This caused market activity to pick up sharply as China moved to increase strategic storage and Middle East exports rose in response. Trade volume, which had been declining during the first half of the year, began recovering during the third quarter and accelerated during the fourth, as lower oil prices encouraged refiners to raise runs and build inventories. With the strong fourth quarter trade upswing, we estimate that the crude trade declined by 1 percent for the year, having been down by more than 3 percent at mid-year.

Product trades also grew strongly during the second half of the year, with all key export hubs in the US, Russia, Middle East and India humming. Trade volume expanded by nearly 2 percent, mod-erating the downturn in the total oil trade to less than 1 percent.

While it was a disappointing year volume wise, this was more than compensated for via longer distances. On the crude side, the first half of the year was dominated by continued high Middle East volume to the US and increasing long-haul imports to China and India from West Africa and Latin America. The oversupply of oil caused the premium of forward prices relative to spot to increase, thus facilitating more long-haul trade and causing tonnage demand to increase.

Clean trading distances also grew. The reasons for this include the increase of long-haul US exports to Asia, while European gaso-line exports took market share from Latin America in the North American market.

For the year, we estimate that average trading distances for the

entire seaborne oil trade increased by 3 percent, handily offsetting the decrease in volume and leading to an increase in ton-miles of more than 2 percent. This represented a significant improvement from 2013, when ton-mile demand was flat.

MORE TON-MILES AND LOWER PRODUCTIVITY DROVE A SOLID INCREASE IN TONNAGE DEMANDThe final component of our tonnage demand equation, fleet pro-ductivity, played a smaller, but still important, role. We estimate productivity decreased by 12 percent, about half of the typical rate of decrease in recent years, as sharply lower bunker prices during the second half of the year increased optimum speed. Rates were comparatively low and bunker prices comparatively high for most of the year however, which meant that changes were gradual.

Overall, we estimate that tonnage demand increased by more than 4 percent, about half a percentage point higher than 2013. This is a level that should be considered quite strong, given the fairly soft macro-climate, and gives reason to be optimistic as one looks into the near future, and, hopefully, better prospects for the world economy.

FLEET TRENDS: GROWTH SLOWS SHARPLY AS DELIVERIES ARE EVEN LOWER THAN EXPECTEDVery high fleet growth has been the tanker markets nemesis for many years. Since 2009, net fleet growth has averaged more than 5 percent per year, reflecting the spike in new orders that brought the orderbook to nearly 50 percent of the sailing fleet by 2008. The tide began to turn in the second half of 2013, however, as the rate of new-building deliveries slowed. The trend continued in 2014. Deliveries were supposed to be in line with the previous year, but instead fell a further 25 percent to 16 mill dwt, the lowest level in more than a decade. The decline encompassed all segments, but was particularly sharp for Suezmaxes, which delivered only one-third of the sched-ule, mainly due to well-known problems at some Chinese shipyards.

It was an unexciting year for demolition, which remained in line with previous years at around 9 mill dwt, or 2 percent of the total fleet. The number of third and fourth special survey candidates is on the rise, but that has had little impact on demolition figures, so far.

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DELIVERIES AND REMOVALS OF TANKERS 20052014EXCLUDING CHEMICAL CARRIERS

WORLD OIL PRODUCTION AND TRADE 20052014

THE TANKER MARKET

Total fleet growth was thus a meager 2 percent, a sharp slow-down from nearly 5 percent the year before. The decline was most pronounced for the crude fleet, which barely registered any growth at all, with the Aframax fleet actually decreasing. Product tankers, on the other hand, continued their steady expansion, increasing by 4 percent. Slow growth in the LR fleet moderated an 8 percent expansion of MRs.

New orders declined by one third from the previous year to 24 mill dwt, a relatively depressed level. Surprisingly, the pace of ordering slowed sharply during the year, as private equity capital got more interested in vessels on the water. The sharp freight market upswing in the second half of the year had very little effect on order-ing activity, as investors and owners remained cautious regarding the sustainability of the upswing.

MARKET OUTLOOK: GATHERING MOMENTUM, BUT BEWARE OF OIL SLICKS2015 came off to a very strong start, as the demand and supply trends that shaped the second half of 2014 continued. In addition to con-ventional inventory building boosting imports, the use of floating storage became a factor, adding to demand for tonnage. Fleet growth, meanwhile, looks unlikely to top 2 percent, which is very low. These trends all point to further increases in fleet utilization and freight rates. However, the plunge in oil prices has created another layer of uncertainty: Unless oil demand picks up sufficiently, oil supply will have to adjust down, eventually.

A STRONG YEAR FOR TONNAGE DEMAND AS VOLUME AND DISTANCES INCREASE...The world oil trade looks set for a year of robust expansion, hav-ing turned the corner in the second half of last year. World oil pro-duction is growing briskly which creates a positive backdrop for tonnage demand, while the rising USD is encouraging exporters to maximize volume. Importantly, we expect world oil demand to respond meaningfully to the price drop and snap out of its four-year long growth slump. While currency swings and changes in energy taxes cloud the picture, we believe these factors are unlikely to have much impact on the worlds two biggest oil consuming countries,

the US and China. In addition to growing oil consumption in Asia, the region is expected to continue building inventories for long-term strategic reasons as well as for shorter-term commercial ones.

WHILE OIL SUPPLY ADJUSTMENTS ARE MORE LIKELY OUTSIDE THE MIDDLE EASTWith OPEC expected to continue to follow its new policy of letting

the market decide oil prices adjustments to world oil production volume should be less painful for the tanker market than in recent years. We see likely production growth rates slow from very high levels in North America, while high cost countries which for various reasons are deprived of investment, such as Russia, Venezuela, Nigeria and Libya, may see an outright drop in output. On the clean side, refineries in the mature markets in Europe and Asia are thought to be most vulnerable. They are net importers in the first place, however, which should moderate the impact on trade.

In sum, we see a much better balanced oil market during the second half of the year and do not foresee a sharp slump in tonnage demand. Improving oil demand is expected to smooth the inevitable end of oil inventory building.

REVIVAL OF FLOATING STORAGE WILL HELP, BUT IS NOT EXPECTED TO LAST FOR LONGThe present supply imbalance in the oil market also stands to benefit tanker demand, however, as forward oil price spreads have increased to levels making it profitable to hire vessels to store crude for the first time since 2010. Several VLCCs were picked up early in the year, but we do not foresee a repeat of the 200910 boom in which more than 50 VLCCs were taken out of active trading. This is because we believe oil market imbalances are significantly smaller this time.

FLEET GROWTH WILL REMAIN LIMITED, AS NEWBUILDING DELIVERIES STAY LOW

Tanker fleet growth is set to remain very slow, although the difference between the crude and clean segments will be wider than in 2013. Crude tanker deliveries are scheduled at 13 mill dwt, the lowest level since the late 1990s. While last years actual figure


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came in at just 11 mill dwt, we anticipate that this years schedule is unlikely to be on target, as has been the case in recent years.

The situation is different in the clean market, which should see deliveries accelerate from 8 to 12 mill dwt. Demolition is expected to remain moderate. Higher freight rates will discourage owners from scrapping, but there will be an increase in the number of can-didates facing expensive third or fourth special surveys, and not every vessel will pass that survey.

In total, tanker fleet growth is set for another year of very mode-rate fleet expansion of less than 2 percent. That would mean that tonnage demand growth will have an unusually low threshold to cross before there is upward pressure on fleet capacity utilization and rates.

TIGHTER MARKET WILL BRING MORE VOLATILITY BUT THE REAL RISK IS ANOTHER OPEC U-TURNIt follows that the expected increase in fleet capacity utilization will lead to increased volatility in freight rates. The extraordinary situ-ation in which oil imports rise faster than consumption because of stockbuilding, while floating storage further restrains even low fleet growth, will not last forever. At some point the tanker market may find itself in the paradoxical situation of weakening as the world economy begins to improve, because these two factors will begin to reverse. Likewise, the combination of higher gross freight rates in USD/ton and falling bunker prices is very likely to tempt owners into raising speed in order to capture super-profits. This increase in

hidden capacity will contribute to bringing freight rates down from peak levels. For more on this important dynamic, see page 12.

Still, that is not the situation we fear most, as this would merely be a normal correction in an overheated market. The real problems for the tanker market, both crude and clean, will be if the world economy remains mired in sub-par growth, despite lower energy costs. Inventory building has its limits and eventually there will have to be supply adjustment in the market. Although Saudi Arabia has remained adamant that only the most efficient producers shall sur-vive one cannot rule out the possibility that acute financial pressure on some of OPECs members (Venezuela, Nigeria, Iran) will result

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in this decision being reconsidered, possibly in cooperation with large non-OPEC producers, as has happened in the past.

That would be a direct blow to tonnage demand, as cargo volume would decrease. The loss of volume would impact both the crude and the clean segment, but we believe crude would be more exposed, as the least cost-efficient refineries are situated in net importing regions.

In summary, we believe 2015 is shaping up as something of a perfect storm for the tanker market. The oil trade is expected to grow at its fastest rate in several years, while fleet capacity growth will be near its lowest. Against that backdrop, we look forward to another exciting cyclical chapter in the history of the tanker market.

OLE-RIKARD HAMMERHead of Research


Copyright: Aleksey Stemmer

AVERAGE FREIGHT RATES, TRIP CHARTER$1,000 PER DAY

THE DRY BULK MARKET

T H E D RY B U L K M A R K E T

WEAK TONNAGE DEMAND DEFINES DISAPPOINTING YEARAverage earnings for dry bulk ships were lower in 2014 than 2013. Preliminary assessments suggest tonnage demand increased by slightly more than 4 percent, which was lower than anticipated. The shortfall was largely caused by a strong drop in Chinese coal, bauxite and nickel ore imports. Meanwhile, the size of the fleet increased by 5 percent, giving a fleet utilization rate decrease of around 1 percent.

For the full year of 2014, our weighted dry bulk index fell from $12,800 per day in 2013 to $11,500 per day, a drop of 10 percent. The largest decrease came in the Panamax sector, where average earn-ings decreased from $9,500 per day in 2013 to $7,700 in 2014, a slide of 19 percent. Capesizes obtained $14,800 per day against $16,600 the year before. For Supramax tonnage, freight rates decreased from $10,300 per day to $9,800, while the Handy sector daily earnings eroded from $8,200 to $7,700 per day.

SIGNIFICANT DECREASE IN ASSET VALUESShip values generally followed earnings trends, with the number of transactions dropping by around 20 percent compared to 2013. While newbuilding prices fell only marginally, secondhand values decreased between 15 and 25 percent for the Handy, Supramax and Panamax categories, depending on age. For Capesize tonnage, values dropped somewhat less, especially for modern tonnage.

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SEABORNE TRADESeaborne transportation of dry bulk commodities measured in ton-miles increased by around 4 percent from 2013 to 2014. Iron ore transportation climbed by 11 percent and grain/soybean transportation combined grew 9 percent. On the contrary, shipsments of coal fell by 1 percent and other commodities dropped by 1.5 percent.

In China, total dry bulk imports grew by a meagre 2 percent. By commodity, iron ore imports escalated by 13 percent, grain by 52 percent and soybean by 13 percent. On the minus side, coal

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imports fell 11 percent, bauxite 49 percent and nickel ore 33 percent. The dramatic decline in bauxite and nickel ore was caused by the Indonesian export ban introduced in January. Market participants had expected the ban to be repealed during the year, but instead it became law. The drop in coal imports was caused by a substan-tial increase in hydro power generation in the electricity sector, low growth in coal demand from steel and other industrial sectors, high coal inventories at the start of the year, and stable domestic coal pro-duction.

In the rest of the world, dry bulk imports climbed in total 4 per-cent from the year before. India increased imports by 16 percent, mainly driven by coal. Japan and other Asian countries elevated their imports by 5 percent and the Middle East by 3 percent. Africa and the US also imported higher volumes than last year. The US imported more steel products and fertilizer, while African imports were driven by a wider specter of industrial commodities. European countries reduced dry bulk imports by around 1 percent.

Among major exporting countries, Australia continued its rapid expansion of iron ore exports with a 24 percent hike from the year before. Coal exports climbed 9 percent, other minerals 10 percent, and grain exports by 5 percent. Brazil lifted its iron ore export 4 per-cent and other minerals by 3 percent. Grain and soybean shipments fell 3 percent. Argentina experienced a 12 percent drop in grain exports, while US and Canadian grain exports jumped 40 and 20 percent, respectively. Indonesia exported about 10 percent less coal and only minor volumes of bauxite and nickel ore.

SAILING DISTANCESThe average sailing distance in iron ore was 3 percent lower than the year before, caused by a relatively strong increase in Australian exports compared to longer-haul trades. In coal, the average sailing distance was longer, mainly due to higher Australian volumes rela-tive to Indonesian transports to Asian countries. In other commod-ities, sailing distances lengthened in steel products, alumina and wood pulp, with only small changes otherwise.

FLEET PRODUCTIVITY The worsening imbalance in cross trade between the Atlantic and the Pacific Basins resulted in higher ballasting. Average speed fell

only marginally compared with the year before. Port congestion decreased on a global average basis, but with some divergence on a regional basis. Australia and China faced higher congestion, while South American and Indonesian ports were less congested due to improved logistics and slow export growth.

FLEET GROWTHDeliveries of new ships reached 47 mill dwt. This was 13 mill dwt less than the program at the start of the year. Removals amounted to 15 mill dwt. Calculated as an average for the year, the dry bulk fleet increased in size by slightly above 5 percent.

By segment, the Panamax/post Panamax fleet was enlarged by 8 percent, while the Supramax and Capesize fleet expanded by 5 per-cent. The Handysize fleet increased by 1 percent.

Ordering of new ships remained brisk during the first half of the year, but slowed substantially in the second half in response to the weaker freight market. Nevertheless, 67 mill dwt of new orders were placed for the whole year, giving an orderbook increase, from year end 2013 to year end 2014, of 16.5 to 20 percent of the existing fleet.

MARKET PROSPECTSTonnage demandThe prognosis for the world economy is for world steel demand to increase by 23 percent from 2014 to 2015. Chinas steel demand is forecasted to climb by only 1 percent.

One critical factor for tonnage demand, especially for Capesize tonnage, will be Chinas import requirement for iron ore. Last years substantial increase in iron ore imports, combined with increased domestic production, raised Chinese iron ore inventories to an all time high at year end. Based on the prevailing forecasts for steel demand growth, we doubt there is room for another year with a sim-ilar increase in iron ore supply to the Chinese market without prices eroding further. With lower production costs in Australia and Brazil, falling production in China and other high cost producer countries seems likely. However, if Chinese mines receive support from the Government, the closedown of high cost Chinese production could take longer than expected, thereby forcing overseas mines to cut production and exports in order to stabilize prices.

Another vital element will be Chinas coal import requirement.

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MARKET VALUES OF BULK CARRIERS 200520145 YEARS OLD

THE DRY BULK MARKET

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Stronger focus on environmental issues will most likely reduce the growth in coal consumption over the coming years at the expense of other energy sources. Utilization of growing hydro power capacity will greatly depend on rainfall. Other key elements for future coal import to China will be the underlying growth in energy demand, how quickly the energy mix changes, and not least Chinese policy related to support of domestic coal mining.

The strongest upside potential in coal trade is in higher Indian imports. Expanding steel production and coal burning power plant capacities are expected to generate stronger growth in coal demand than domestic production can satisfy in the short- to medium-term. There are also a couple of new coal fired power plants under con-struction in other Asian countries, driving coal imports.

World coal trade is therefore likely to increase going forward, but the underlying growth rate may be lower than in recent years.

The transportation of bulk commodities, especially in the minerals sector, should, in general, expand in tandem with economic growth. The strong growth in Chinese steel products export is likely to moderate this year due to the withdrawal of export rebates on boron steel, making Chinese steel less competi-tive on the export market.

New supplies of bauxite will gradually become available in Australia, Malaysia and West Africa, but a full replacement of the Indonesian shortfall will come in 2016 at the earliest. Nickel ore exports from the Philippines have only partly replaced the Indo- nesian volumes, and any further escalation of production capacity is not in the pipeline in the medium-term.

It is premature to conclude regarding the grain and soybean trade; nevertheless, the bumper crops of 2014 should bode well for continued high trade volumes, at least in the first half of 2015.

A continued expansion of arable land in South America is expected to raise demand for fertilizers at a quicker rate than the expansion of local production can meet. Fertilizer import is there-fore the most likely growth segment in the coming years.

In forest products, wood pellet transportation is anticipated to escalate further, especially from North America to Europe, but also from Vietnam, China and Canada to South Korea. We also foresee a further increase in woodchip and log transportation to China.

In our base scenario, we predict seaborne dry bulk trade to increase in the region of 4 percent from 2014 to 2015. In this scenario, we anticipate Chinese iron ore imports to grow by 50 mill tons and coal imports to remain more or less stagnant. Growth in real ton-nage demand is not expected to deviate significantly from volume growth. Sailing distances in grain, soybeans and forestry products are expected to rise, while we foresee relatively small changes in iron ore and coal. Even though bunker oil prices have dropped dramat-ically of late, we do not expect the sailing speed to increase much unless freight rates rise to unexpectedly high levels.

Fleet trendThe fleet is anticipated to expand by between 4 and 5 percent in 2015. The orderbook program suggests around 73 mill dwt to enter oper-ation this year. We assume actual deliveries to total some 55 mill dwt due to expected slippage. Removals are assumed to land in the region of 2224 mill dwt.

CONCLUSIONOn this basis, supply and demand growth is not expected to devi-ate dramatically, and market fundamentals are therefore likely to remain more or less unchanged, with average earnings remaining at relatively low levels. However, we should expect volatility through 2015 for seasonal and other reasons.

The major downside risks for dry bulk demand in a short- to medium-term perspective are the Chinese import requirements for iron ore and coal. Should demand deviate significantly from assumptions, it will have a major impact on market fundamentals.

The upside potential lies in a more expansive fiscal policy in China, which could result in higher growth in, for example, steel-in-tensive investments, potentially stimulating raw material imports.

BJRN BODDINGRS Platou Economic Research

DELIVERIES AND REMOVALS OF BULK CARRIERS* 20052014 WORLD STEEL OUTPUT 20052014

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THE CONTAINTER SHIP MARKET

STATUS QUOThe Container Ship Market in 2014 was characterized by small changes in freight rates compared with the year before. The decline in box rates in the last two months of the year was driven by slowing volumes on major trade lanes after the peak season in the third quarter. In general, average charter rates showed only moderate changes from the previous year, but with some deviations among individual segments.

FREIGHT RATES AND CHARTER RATESFreight rates per TEU increased about 2 percent from the previous year, calculated on a yearly average basis. However, strong volatility was registered, especially on the Asia to Europe string, with slack freight rates during the first half followed by a stronger third quarter, before faltering again towards the end of the year. In other trades, there was less volatility, probably as a result of the relatively higher coverage of term freight contracts.

Charter rates also showed relatively small changes. The year was as dull as the year before, with low charter rates affecting most vessel sizes, except for larger over Panamax tonnage, particularly ships above 9,000 TEU. Compared to 2013, smaller tonnage of 5,500 TEU did not do as well, whilst Panamax tonnage enjoyed a slight recovery. The small upswing in this segment was fuelled by several service upgrades and extra demand for ships to the US, caused by heavy congestion on the US west coast.

CONTAINER MOVEMENTS AND TONNAGE DEMANDPreliminary data suggests global container ship demand jumped by over 6 percent from 2013 to 2014. Trade statistics suggest global con-tainer movements climbed by between 5 and 6 percent.

Assessing trends by region, in the US containerized imports

were up nearly 5 percent year-on-year. The volume of laden boxes from Asia was up 4 percent, while container traffic from South America rose by only 1 percent. On the EuropeUS route, an increase of nearly 10 percent was recorded.

Container traffic into Europe climbed 6 percent. Activity grew steadily over the first three quarters, but slowed in the last as a result of softer economic activity. Far East Asian volume to Europe was up 8 percent year-on-year, while traffic from the USA and South America increased only marginally. The strongest rise in European imports came from India, with an 11 percent escalation.

Intra Asian container traffic increased by a moderate 4 percent. China registered only a slim increase in containerized imports, while Korea recorded a 5 percent climb. Thailand and Indonesia elevated their container volumes by 4 and 6 percent, respectively. Asian exporters raised containerized exports to the Middle East by 8 percent and to Africa by 13 percent, while box shipments to East Coast South America rose 5 percent.

FLEET GROWTHSome 1.5 mill TEU of new container ship capacity entered opera-tion in 2014. This was about 300,000 TEU less than the order book program. Scrapping totaled 400,000 TEU of capacity, which was

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FLEET TRENDNew ships with a capacity of around 1.9 mill TEU are scheduled for operation in 2015. Continued weak market conditions could cause some slippage. We assume that 1.6 mill TEU will hit the water. A very large proportion of the new ships entering service this year are within the largest size categories. This will continue to generate a cascading effect on other trades. We assume that scrapping will be slightly lower than last year. On this basis, the net fleet expansion will be slightly below 7 percent from 2014 to 2015.

Congestion and bottlenecking have caused concern during 2014. Industry commentators blame these issues on bigger ships and the larger volumes of cargo being passed to docks in one portion. With vessel upsizing set to continue not only on major trades, but also on smaller trades as a result of cascading this issue will not be resolved in the near future.

The recent sharp drop in bunker oil prices raises the question of what will happen with ship speeds. Industry leaders are divided, but if fuel cost savings are less than charter ship costs etc. there might be incentives for operators to increase speed on some services in order to reduce the share of chartered tonnage. Higher fleet efficiency will, on the contrary, affect the fleet utilization rate and contribute to weaker freight rates.

In conclusion, the anticipated tonnage demand growth is more or less in line with the likely growth in fleet capacity. The fleet utilization rate is therefore expected to show small changes from 2014 to 2015. The main downside risk is a weaker than predicted per-formance from the world economy. Container carriers attempts to improve profitability may, in addition to reducing operating costs, also include an adjustment to the size of the operating fleet. This can be done with idling or withdrawals of capacity in low volume seasons. The newly established vessel sharing agreement among the largest liner companies will lead to stronger competition for increased market shares and may therefore affect freight rates negatively. The main upside potential in this sector is a quicker than expected economic recovery, especially in the Euro area, which will boost tonnage demand significantly, especially in the large sizes.

BJRN BODDINGRS Platou Economic Research

60,000 TEU lower than last years record. The average age of ships sold for breaking was 22 years, about the same as in the previous year. Net fleet expansion was 6.2 percent across the year.

The idle fleet decreased to 118 units at the end of 2014, equivalent to 230,000 TEU of capacity. This represents only 1.2 percent of the total fleet. Only three ships above 7500 TEU and two ships between 5000 and 7500 TEU were reported idle.

The total fleet capacity utilization rate was more or less unchanged, while the operating fleet utilization dropped somewhat due to the re-activation of idle tonnage. MARKET PROSPECTSHistorically, container traffic has increased at a rate that is around double the world GDP growth. In 2014, the ratio was 1.7, which is the same as in 2013. Despite stronger growth in European and US container imports compared with the previous year, intra regional trade within Asia and a couple of other emerging market services increased less than the year before.

The prevailing prognosis for world GDP in 2015 suggests an increase in world container traffic of some 67 percent. This is based on the same factor to GDP as last year assuming there is a relatively limited need to replenish global inventories in the short-term.

On a regional basis, the most important trade lane in the con-tainer market, measured in TEU-miles, is Asia to Europe. GDP growth in Europe is forecast to be moderate, which suggests an associated increase in container imports. US container imports seem likely to increase somewhat more than last year, driven by expected higher economic growth.

Trade growth within Asian is likely to accelerate at a faster pace than last year. Chinese import growth is expected to remain sub-dued due to predicted low economic growth. However, within other Asian countries such as Korea, Thailand and Indonesia, there is an assumption that brisker economic activity should support containerized imports. The Indian economy is also anticipated to recover and this should lead to higher imports of consumer goods etc. Latin America and Africa are also likely to contribute more significantly to world container trade growth going forward.

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THE CAR CARRIER MARKET

T H E C A R C A R R I E R M A R K E T

ANOTHER DISAPPOINTING YEAR2014 turned into a disappointing year for the car carrier industry. Despite growing auto sales in the major markets, demand for tonnage has been at a standstill, with most of the increased demand for cars covered by local production. Emerging market sales are in decline, directly impacting on seaborne volumes as local production is scarce. In addition, constant fleet growth means that the oversupply of tonnage has been exacerbated.

Seaborne volumes from all of the largest export markets developed negatively over 2014. Japanese exports came down as expected, but the reduction was larger than we had anticipated, ending down 4 percent. This was mainly due to new assembly capacity commenc-ing operation in overseas markets, covering most of the added demand for Japanese brands. While we had expected Korean exports to rebound from a disappointing 2013, the downward trend continued and volumes were reduced by 1 percent. Exports from the EU were also significantly reduced, mainly into African and Latin American markets.

However, emerging export markets such as China, Thailand and India continued their positive development. Combined, these three countries boosted exports by an estimated 3 percent, despite a troublesome first half of the year in Thailand.

Auto sales, the ultimate driver for seaborne transportation of cars, developed positively in all of the largest markets, namely USA, Western Europe and China. However, as vehicle assembly is being expanded rapidly in these markets, most of the added demand was covered by local production. Emerging market sales, which depend more on imports due to limited local production, are down. Russia, Latin America, Africa and the Middle East have all seen reduced

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demand in 2014, which to a larger extent impacts negatively on sea-borne volumes.

Relocation of production is a trend likely to continue in the short- to medium-term. Japanese and European automakers have already shifted some of their production to North America, China, Thailand and India, and Korean makers are expected to follow suit. This also opens the possibility for new trade lanes at sea, as some models will be produced at new locations for export to global markets. That may, over time, generate added tonnage demand, but we expect that these new volumes will mostly fill available capacity onboard the fleet in the next few years, until they reach such levels that further tonnage is required.

We estimate that tonnage demand in 2014 did not grow, but remained at the same level as the year before. Despite an anticipated reduction in export volumes from Japan and Korea, demand is fore-casted to grow by around 3 percent in 2015, backed by increased volumes from emerging exporters, as well as from the EU and North America.

The car carrier fleet expanded by a modest 2 percent in 2014, as 22 new vessels entered into operation and 13 were removed. The orderbook at year-end comprised 55 vessels due for delivery into 2017, corresponding to 10 percent of the fleet. Fleet growth in 2015 is estimated at 2.8 percent.

As a consequence of fleet growth being higher than demand growth, the fleet capacity utilization was reduced to 83 percent in 2014, down from 85 percent in 2013. The increase in oversupply of tonnage impacted negatively on rates too; the average 12-month T/C rate for a 6,500 cap. car carrier ended at $23,200 per day, down $1,400 per day from a year before. The outlook for 2015 does not bode for much change, as both demand and supply are expected to grow at the same rate. Overcapacity is therefore likely to remain at the same level. The balance is rather fragile though any unex-pected events, and they tend to be negative, would unfortunately only increase the oversupply of tonnage.

OLE GUSTAV ERIKSEN RS Platou Economic Research

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THE LNG SHIPPING MARKET

T H E L N G S H I P P I N G M A R K E T

LNG MARKET APPROACHING THE BOTTOM OF THE CYCLEThe LNG shipping market finally witnessed growth in seaborne trade after a declining pattern over the previous two years. However, due to a continued fall in transport distance and the improved productivity of the fleet, total shipping demand remained unchanged. The LNG carrier fleet grew by 5 percent, resulting in a corresponding 5 percent weakening of the fleets utilization rate, and a fall in short-term charter rates of 4045 percent. On average a modern, steam turbine ship earned $54,500 per day, while a ship equipped with dual-fuelled propulsion commanded $10,000 more per day.

Preliminary figures suggest a LNG seaborne trade of 241 mill mt in 2014, up 2.5 percent from 2013. One facility, the Arun plant in Indo-nesia, finally closed down after 36 years in service. Three facilities were inaugurated: PNG LNG in Papua New Guinea, Arzew GL3A in Algeria and Queensland Curtis Island LNG in Australia. These projects have a nameplate capacity of 20 mill mt per year.

The second part of the ton-miles equation, transport distance, continued to decline during 2014. In spite of a small increase in the inter-basin trade between the Atlantic basin and Asia, the average recorded transport distance was almost 2 percent lower this year than last.

Coupled with a small improvement in the fleets productivity, mainly resulting from lower bunker prices, and thus higher optimal

speeds and a small increase in the capacity used as FSRUs, we have estimated total shipping demand for 2014 to be at the same level as the year before.

The LNG fleet saw an uptick in its growth rate during 2014, as 30 new ships left the shipyards. Four vessels were removed from the market, resulting in a capacity expansion of 5 percent across the year. Order activity in 2014 was high, particularly towards the end of the year, and in total we recorded 70 new contracts. By the end of 2014, an orderbook of 20 mill cbm represented 34 percent of the existing fleet.

Demand was at a standstill and, seen against a 5 percent fleet expansion, this resulted in a drop in the fleets utilization rate of 5 percent, lowering short-term rates by the aforementioned 40 to 45 percent during 2014.

In 2015, we expect seaborne trade to pick up even further. Five new LNG projects are due to come online, four in Australia and a small one in Indonesia, with a combined nameplate capacity of 20 mill mt. Pooled with the additional capacity of last years expansion, we foresee a 16 mill mt growth in trade, equal to 7 percent growth year-on-year. Average transport distance is expected to continue to decline, albeit marginally, as lower oil price and thereby also the LNG price in Asia will negatively affect inter-basin trade. In sum we forecast a 7 percent growth in shipping demand this year.

Deliveries of new tonnage should be at the same level as in 2014, 4.8 mill cbm, which, combined with an anticipated removal of 1.2 mill cbm, should yield a fleet growth of 9 percent in 2015. In total, this should result in a 2 percent drop in the fleets utilization rate to 84 percent.

JRN BAKKELUNDRS Platou Economic Research

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SMALL SCALE LNG MARKET

SM A L L S C A L E L NG M A R K E T

ANOTHER HECTIC YEAROur predictions from the Platou report last year on the LNG marine fuel market came true. As predicted, we have seen several small-scale LNG companies announce new marine LNG bunkering capacity. Notable projects were GDF-Suez and Shells orders for one LNG bunkering vessel each in Asia and, at the beginning of 2015, Skangass order of Europes first custom-built LNG bunkering vessel.

What now remains to be seen is if the North American LNG bunker market will also develop with a similar, or maybe even stronger, pace than the European market. The spread between gas prices and liquid fuel prices here are even more pronounced than in Europe, which should facilitate strong growth.

In parallel with the availability of new marine bunkering capacity, shipowners have followed up by ordering even more vessels capable of running on LNG. At our newbuilding desk in RS Platou, we have seen a steady increase in owners interested in LNG fuel capabilities for their newbuildings. This is also connected with the new rules for the northern European Sulphur Emission Control Area (SECA), which entered into force on 1 January 2015.

2014 will also go down in history as a year of dramatic fluctu-ations in energy costs. Whilst the oil price at the start of the year was around USD 110 per barrel, 2014 ended with a steep decline and prices that fell to below USD 50 per barrel by the beginning of 2015.

The small-scale LNG market is also an energy market. The end users of the product can often choose between several energy sources, including liquid fuels. Although a large part of the volumes

in this trade are normally sold on longer-term contracts, a sustained drop in oil price will surely impact the small-scale LNG sector as well. In 2015 it remains to be seen if pressure on energy prices will influence the ton-mile demand in the small-scale LNG sector. How-ever, despite the fall in oil prices, LNG remains an attractive energy source in the long run.

When looking into 2015, we believe there will be continued healthy growth in the small-scale LNG segment both for vessels transporting LNG, and for vessels using LNG as fuel. Based upon our sensors in the market, we also believe that we may see more mid-sized LNG vessels being built in the years to come. This is due to fur-ther developments in the small-scale LNG infrastructure, with more shore-based receiving terminals under construction. LNG may therefore be transported greater distances to these new locations.

EGIL ROKSTADRS Platou Shipbrokers

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T H E L P G S H I P P I N G M A R K E T

LPG SHIPPING MARKET REACHES NEW HEIGHTSDuring 2014 record high rates for the larger LPG carriers were seen. Driven by a massive expansion of exports from the USA and healthy Middle East exports and in spite of a contraction in the Ammonia seaborne trade we have estimated that total shipping demand for LPG and Ammonia has grown by 16 percent during 2014. Combined with a 6 percent fleet growth, the utilization rate climbed by 10 percent and reached an all-time-high of 99 percent. This resulted in a two-fold increase in average spot earnings for VLGCs at $68,000 per day. The hike in spot rates was less pronounced for smaller ships, with a Midsize LPG carrier earning on average 17 percent more in 2014 at $32,000 per day.

The seaborne trade for the two commodities LPG and Ammonia developed in the opposite direction during 2014. Based on pre-liminary figures we have estimated an upswing in LPG exports by 18 percent. The USA continued to be the main driver, increasing exports by almost 70 percent, while Middle East exporters appear to have increased exports by 10 percent.

The Ammonia trade is estimated to have eroded by 6 percent in 2014. Lower exports from Ukraine and Russia, due to geopolitical tensions, and much lower US imports are the main reasons behind the fall. In total, seaborne trade is estimated to have increased by 15 percent in 2014.

LPG AND AMMONIA TRANSPORT DISTANCEThe average transport distance for LPG is estimated to have increased by 2 percent during 2014. The LPG exported from the USA was, on average, transported 10 percent further compared to the previous year. The portion of the export shipped to the

Americas slipped three percentage points to 60 percent, while the amount of cargoes sold to Europe increased from 15 to 19 percent. The share to Asia also increased, from 13 to 15 percent.

A 13 percent decline in the average transport distance in the Ammonia trade resulted in a 1 percent rise in transport distance for LPG and Ammonia combined. We estimate a 16 percent growth in demand for LPG carriers in 2014.

FLEET DEVELOPMENTDuring 2014 we registered 21 new LPG carriers delivered from the shipyards, with a combined capacity of 1.05 million cbm. Mean-while, six smaller vessels, equal to 0.09 million cbm, were removed. Record high ordering activity resulted in 91 new contracts placed during 2014, as the orderbook ended the year at 9.9 million cbm, representing 52 percent of the existing fleet. The average fleet growth in 2014 for fully- and semi-ref ships larger than 10,000 cbm was 6 percent year-on-year.

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BALANCE IN 2014A 6 percent fleet growth compared to a 16 percent growth in ship-ping demand lifted the utilization rate in 2014 by 10 percent to 99 percent. This impacted upon average spot earnings for VLGCs, which saw a two-fold increase to an average of $68,000 per day.

EXPECTATION FOR 2015For the coming year, we expect seaborne trade to increase by 4 percent. LPG trade is projected to grow by 5 percent, again driven by exports from the USA, while the Ammonia trade is expected to weaken by 3 percent on the back of lower US imports.

We predict that the average transport distance for LPG will increase by 5 percent, as more US exports are shipped to Europe and Asia. We expect a small decline in transport distance for Ammonia.

The total transport distance should increase by 4 to 5 percent and overall shipping demand is forecast to grow by 9 percent in 2015.

Newbuild deliveries will start to pick up this year, with 3.8 mil-lion cbm of shipping capacity set to be delivered. Combined with an anticipated removal of 0.6 million cbm, the fleet should grow by 11 percent.

The utilization rate in 2015 is thereby anticipated to drop by 2 per-cent to 97 percent, which should ease some of the upward pressure seen last year.

JRN BAKKELUNDRS Platou Economic Research

THE LPG SHIPPING MARKET

Copyright: BW LPG

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T H E S H I P B U I L D I N G M A R K E T

WEAK FREIGHT MARKETS RESTRAIN ORDERING ACTIVITYShipyard activity in 2014 was characterized by a high volume of new orders early in the year, decreasing steadily towards the end. While private equity boosted demand for new vessels in 2013, the window of opportunity for this kind of players vanished as orderbooks were filled up and delivery times were prolonged.

New orders amounted to 39 mill compensated gross tons (cgt), which is a reduction of 15 percent from 2013. Orders for tankers, bulk carriers and container ships were markedly reduced, whereas contract volumes for capital intensive vessels like gas carriers, chem-ical tankers and cruise ships increased by almost 50 percent.

Order volumes were on par with our estimated shipyard capacity, which is also reflected in our newbuilding price index which ended 2014 at the same level as it started.

DEMAND FOR NEW TONNAGEWhile demand for newbuildings exceeded expectations in 2013, the level of contracting returned to more normalized levels in 2014, at least compared to prevailing market conditions in the various ship-ping markets. 39 mill cgt of new orders were registered at shipyards during the year, a 15 percent reduction from a year before. This is still somewhat higher than what we had expected a year ago; how-ever, this can be party explained by the continued presence of insti-tutional investors in the first quarter of 2014 when orders came in significantly above the average for the remaining three quarters.

These players dominated the contracting arena in 2013, utilizing the opportunity of ordering ships of new design at low prices with relatively short time until delivery in what appeared, at the time, to become improved markets.

As newbuilding prices increased on the back of increased demand and delivery times were prolonged as orderbooks became thicker, this window of opportunity vanished and the flow of private equity into shipping did too. This tendency was clear already during the first quarter when new orders dropped signifi-cantly from January until March.

Our freight rate index increased by 25 percent from 2013 to 2014 and ended at $17,200 per day for the year. Historically, this index is linked to the volume of new orders placed by conventional ship owners, i.e. those who are in this business with a long-term per-spective. A freight rate index at this level indicates that the annual volume of new orders placed should be in the region of 33 mill cgt. While reported orders came in at 39 mill cgt, or close to 20 per-cent higher, the deviation may be explained partly by the very high activity early in the year. January and February orders combined

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THE PLATOU REPORT 2015 THE SHIPBUILDING MARKET

represented more than 4 mill cgt of additional volumes compared to what the 2014 monthly average indicates.

Newbuilding prices increased as a consequence of the large volumes of orders placed in 2013 and early 2014. However, as order-ing activity started to drop again, prices reached a peak in the second quarter of last year before starting to decrease again. Our newbuilding price index rose by 12 percent during 2013 and added another 2 percent until mid-2014, but has since then retracted and we are now back at the level seen at

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