Developments in the Shipping Cycle & the Impact on Revenues & Asset Values

Developments in the Shipping Cycle & the Impact on Revenues & Asset Values Dr Martin Stopford, Managing Director, Clarkson Research Services Ltd IUMI Hull Underwriting Committee Workshop Mastering Rough Seas-The Hull Underwriting Puzzle 15 th September 2009

This is..not the beginning of the end, but it might be the end of the beginning Three decades, three markets The shipping market today The economy bottoming out Supply Armageddon at hand? The next stage

Bankrupte d by my bankers Can t afford a decent lunch I LOVE SHIPPIN G

Deep Slump in 1980s 50 45 40 (Clarksea Index is a weighted average of earnings by tankers, bulkers, containerships & gas.) Clarksea Index $000/day 35 30 25 20 15 10 SUPER-SLUMP 1979-81 "Rates boomed" 1982-6 "Worst ever" $8,500/day 5 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1989 Far Better! Source: Clarkson Research Services Ltd

Weak Market in 1990s 50 45 (Clarksea Index is a weighted average of earnings by tankers, bulkers, containerships & gas.) 40 Clarksea Index $000/day 35 30 25 20 15 1991 $16,000/day CONVALESCE 1993 A year owners would rather forget 1995 A significant upturn in the dry bulk market $12,000/day 1999 What a miserable six months 10 5 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 $8,500/day Source: Clarkson Research Services Ltd

Super-boom 1: 2000 50 45 (Clarksea Index is a weighted average of earnings by tankers, bulkers, containerships & gas.) 40 Clarksea Index $000/day 35 30 25 20 15 10 5 1980s Recession 2000 $24,000/day Wow 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Dress rehearsal Source: Clarkson Research Services Ltd

Super-Boom from 2003 to 2008 Clarksea Index $000/day 50 45 40 35 30 25 20 15 10 5 0 (Clarksea Index is a weighted average of earnings by tankers, bulkers, containerships & gas.) 1979-81 "Rates boomed" 1982-6 "Worst ever" 1989 Far Better! 1991 $16,000/ day 1993 A year owners would rather forget 1995 A significant upturn in the dry bulk market 2000 $24,000/day Wow 1999 What a miserable six months 2008 $50,000/day 2004 "China's present to $39,000/day bulk shipping". evidence of a super cycle with rather high blood pressure 2001 Back to normal 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Updated 22 Mar 09 $8,500/day Super-Slump $12,000/day Dress rehearsal Source: Clarkson Research Services Ltd $22,800/day Here Super-Boom

Market price of VLCC & Panamax Bulker VLCC price $ million 200 180 160 140 120 100 80 60 40 20 0 VLCC price bottom $4 mill June 1983 & Panamax March 1986 Distressed prices VLCC Price 5 year old Panamax bulk carrier 5 year old Normal prices Premium prices Updated 22 Mar 09 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan '96 Jan-98 Jan-00 Jan-02 Jan-04 Jan '06 Jan '08 Source CRSL & Baltic Exchange

Laid Up Tonnage % fleet laid up 16% 14% 12% 10% 8% 6% 4% 2% 0% 1956 Dry Cargo 1960 1964 1968 The 50 year shipping cycle 1964-2004 1972 1976 1980 Trough Tankers 1984 Figure 2: This shows the surplus tankers and dry cargo laid up 1956-2009 1988 1992 1996 2000 2004 2008 2012

Business cycle is slumping Credit crisis s slowing growth It s all getting nasty Down and out?

Key Issues Going Forward 1. Now coming to the end of the transitional phase between boom and bust. Economic indicators improving but still very weak. 2. Orderbook now 44% of the fleet compared with 11% in 2000 (double the normal requirement based on 4% pa trade growth) 3. Newbuilding cashflow becoming very pressing, leading to increasingly complex and unpleasant situation

Market Sector Cycle Position Aug 09 Container Gas Offshore Chemical Tanker Handy Handymax Panamax Capesize Products Aframax Suezmax VLCC 1990s -100% -50% 0% 50% % deviation from 7 year trend This chart shows average earnings today for the ship type, as a % of the average earnings during the last 7 years

$000/day earnings $200 $180 $160 $140 $120 $100 Tanker Earnings Monthly Trend $80 $60 $40 $20 $0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 VLCC Suezmax Aframax Products Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Figure 11 Tanker earnings trends 2004 to 2008 Jan '04 Jan '05 Jan '06 Jan '07 Jan '08 Jan '09

$ 000 Per day 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Dry Bulk Carrier Earnings Trend Cape earnings Panamax Trans Atlantic Trip Panamax Trip Handymax 2 year recession 1 Aug '99 Aug '00 Aug '01 Aug '02 Aug '03 Aug '04 Aug '05 Aug '06 Aug '07 Aug '08 Aug '09 Figure 14: Dry bulk earnings 1999 to 2007 2 3 4

Containership TC Rate 35 30 25 Vessel size (TEU) 725 1000 1700 2000 2750 3500 Line 7 $ 000 Per day 20 15 10 5 0 Jan '93 Jan '94 Jan '95 Jan '96 Jan- 97 Jan- 98 Jan- 99 Jan- 00 Jan- 01 Jan- 02 Jan- 03 Jan- 04 Jan '05 Jan '06 Jan '07 Jan '08 Jan '09

Just like the 1970s we have an economic shock. This time it s a banking crisis as well as high oil prices After the unprecedented fall in economic output in the Atlantic and the Pacific we are now seeing a recovery The recovery could be due to restocking and run out of steam due to lack of consumer confidence. Or will it all be over by Christmas? I warned you about irrational exuberance

8% 6% 4% 2% 0% -2% World GDP: In Shock Figure 7: World GDP showing boom 2003-8 and forecast 2009 % growth 7 year moving average of GDP -4% -6% 1973 1 st Oil Crisis 1979 2 nd Oil Crisis 1991 Financial Crisis 1997 2001 Asia Dot.com Crisis crisis 2008 Credit crisis 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

World Industry: Rebound due Figure 6: World industrial production growth rate since 1953 % growth 12 7 2-3 -8-13 1. 1957 Suez Crisis 2. 1973 1st Oil Crisis 3. 1979 2 nd Oil Crisis 4. US Financial Criisi 5. 2001 Dot.com crisis 6. Credit crisis 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

World Industrial Output Volume Index 1992=100 220 210 200 190 180 170 160 150 140 130 120 Three years of lost growth Jan '99 Jan'00 Jan'01 Jan'02 Jan '03 Jan'04 Jan-05 Jan '06 Jan '07 Jan '08 Jan '09

N. Atlantic & Asia 22 % growth 17 Credit crisis started 12 7 2-3 -8-13 -18 Atlantic Economies Asian Economies Jan '93 Jan '94 Jan '95 Jan '96 Jan '97 Jan '98 Jan '99 Jan'00 Jan'01 Jan'02 Jan '03 Jan'04 Jan-05 Jan '06 Jan '07 Jan '08 Jan '09

E Europe and S America % growth 17% Credit crisis started 12% 7% 2% -3% -8% -13% -18% E Europe S America Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan '99 Jan'00 Jan'01 Jan'02 Jan '03 Jan'04 Jan-05 Jan '06 Jan '07 Jan '08 Jan '09

The US Real Estate: Turning up The US real estate boom started in 1993 and peaked in early 2005. Prices first started to decline in january 2007 This triggered the Sub-Prime crisis 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% S&P Case Schiller House price index US house prices start to decline january 2007 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan '09

China Trade: Wobbly and Bouncy China s imports added 1 billion tonnes in a decade They had their first big wobble late last year But bounced back last 6 months due to iron ore Correction likely Mt 130 120 110 100 90 80 70 60 50 40 30 20 10 0 China's Trade Growth Wobbles Jan-99 Jan-00 Imports Exports 1. Trade takes off in 2000 Jan-01 Jan-02 2. Investment overheats 2005 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Woop s! Jan-08 Jan-09

World Oil Demand: Slumping Million barrels per day increase 91 IEA Forecast August 2009 Between 2000 and 2007 world oil demand grew by 9.5 m bpd, creating demand for about 48 million dwt of tankers 86 81 9.5 m bpd growth 2000-2007 Demand fell by.3 m bpd in 2008 IEA predicts 2.5 m bpd fall in 2009 bpd in 2009 The IEA is usually over optimistic 76 71 66 76.3 76.8 77.2 79.0 82.5 83.7 85.1 86.5 86.3 83.9 85.3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Container Trade: biggest slump ever Shows container movements on the two biggest arterial routes % growth 50% 40% 30% 20% 10% 0% -10% -20% -30% Asia-USA Asia -Europe Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

World Steel Production Million tons per month 140 120 100 80 60 40 20 0 World steel production has fallen by 35% since June 2008. It may not reach 120 mt a month again for some time 1991-01 1992-01 1993-01 1994-01 1995-01 1996-01 1997-01 1998-01 1999-01 2000-01 2001-01 2002-01 2003-01 2004-01 2005-01 2006-01 2007-01 2008-01 2009-01 Million tons per month 130 120 110 100 90 80 70 113 108 120 116120 119117 113 108 99 88 82 86 84 92 89 100 96 104 Jan '08 Feb '08 Mar '08 Apr '08 May '08 June July '08 Aug '08 Sept '08 Oct '08 Nov '08 Dec '08 Jan '09 Feb '09 Mar '09 Apr '09 May '09 Jun '09 July '09

Steel Collapse: Recovery In Progress China produced 47 mill tons steel in Mar 2008, falling to 40 Mt in Feb 2009 Production in 2008 was 502 mt The recovery started in March and has been strong in China but muted elsewhere Million tons per month 50 40 30 20 10 Japan S.Korea EC-12 China China s big growth started in March 2001 0 Jan '92 Jan '93 Jan '94 Jan '95 Jan '96 Jan '97 Jan '98 Jan '99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan'05 Jan '06 Jan '07 Jan '08 Jan '09

M tonnes 60 55 50 45 40 35 30 25 China Ore Imports Slow then collapse in September 2008 Imports double between February and June 2009 20 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09

World Shipbuilding Orders & Deliveries Figure 7: Shipyards expand in the 1970s boom & the 2000s Boom Million Dwt 250 200 150 Orders 129.5 m dwt in 1973 Numbers indicate market spikes Orders Placed Deliveries 30 Year Cycle Orders 249 m dwt in 2007 100 50 0 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

Shipyard Orderbook % Fleet Orderbook % fleet M dwt (on 1 st Jan of year) 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% million dwt orders 9% 8% 6% 5% 7% 8% 6% 5% 5% 6% 8% 9% 10% 8% 8% 9% 10% 9% 11%11% 13%13% 11% 650 550 450 350 250 150 50 14% 20% 24%24% 32% 46% 48% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Fig 2: Shipbuilding Orderbook 1st Jan 90 Orderbook 112 111 113 175 218 242 341 524 578 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Shipyard Deliveries Stage 1 Million Deadweight 180 160 140 120 100 80 60 40 20 0 Deliveries Demolition 29 33 38 37 41 46 46 50 55 62 24 70 75 80 89 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Stage 1

Shipyard Deliveries Stages 1&2 Million Deadweight 180 160 140 120 100 80 60 40 20 0 29 33 38 37 24 Deliveries Forecast Deliveries Demolition 41 Stage 1 46 46 50 55 62 The Financial Battlefield 70 75 80 89 154 192 157 59 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Aframax price $ million 80 70 60 50 40 30 20 10 0 Newbuilding Prices Price troughs probably give a rough indication of the underlying level of shipyard costs. Since 2003 shipyard prices have been above trend. Now back on trend. Trend price of Aframax tanker 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

Orders by Country in $ Billion 2008 The chart shows the new orders placed by country in 2008 Europe accounted for 50%, Asia 25% and M. East 8% The big issue is how they will respond to the crisis and the interplay with the shipyards Greece Germany China P.R. Denmark South Korea Norway Italy United States Japan Hong Kong 2300 Singapore $ Billion orders 0 3 6 9 12 15 18 7.5 6.3 5.2 4.6 5.1 6.7 2.5 2.3 11.4 18.3 17.6

We must start out with the premise that forecasting is not a respectable human activity and not worthwhile beyond the shortest of periods Peter Drucker This is a great opportunit y to buy a few ships cheap Translations only $500 THE ORACLE S FORECAST

Shipping Supply/Demand Imbalances M. Dwt Fleet Bill. Tons Cargo Phase 1: Trade and fleet closely coordinated in the 1960s Phase 2: massive dislocation in the 1970s and early 1980s Phase 3: Tight market from 1997 Phase 4: Growing surplus now likely (but this depends on how demand develops and how capacity is managed over next 3 years) 1400 1200 1000 800 600 400 200 0 Trade scenario Sea Trade World Fleet (Dwt) Assumes deliveries on time & moderate scrapping 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011. 11 10 9 8 7 6 5 4 3 2 1 0

Revealed: The ghost fleet of the recession The 'ghost fleet' near Singapore. The world's ship owners and government economists would prefer you not to see this symbol of the depths of the plague still crippling the world's economies The biggest and most secretive gathering of ships in maritime history lies at anchor east of Singapore. Never before photographed, it is bigger than the U.S. and British navies combined but has no crew, no cargo and no destination - and is why your Christmas stocking may be on the light side this year Source Daily Mail It's OK. The recession is over, the stock market is rocketing upwards, house prices are recovering, bonuses are back, the world has a rosy future. These ships are just resting while their crews are on holiday getting blitzed out of their brains in Ibiza. The world's awash with money. Gordon will confirm what I say. - Source eric campbell, harrogate

High Case Scenario It turns out that the worst is behind us in world economy. Asset prices stop falling; the banks regain confidence and consumers start spending The world economy recovers in 2010 & 2011, China steel remains firm and Asia consumers pick up spending Strict tanker phase out complied with and there is heavy cancellation of shipbuilding orderbook The shipyards have massive problems and many contracts not built. It would all get very unpleasant This scenario would still mean a couple of tough years but the impact of the new ships Tsunami would be moderated

Low Case Scenario World economy very weak as financial crisis deepens with major corporate crises in late 2009 and Sovereign risk becoming problematic Trade growth rate falls in 2009 and 2010 as the recession deepens Some single hull tankers continue to trade Shipyard orderbook slippage but cancellations much less than in Scenario 1 as governments step in to help owners and yards Yards drop prices and more counter cyclical orders placed Result: Market recession drags on for a long time 9/21/2009

Coming to the end of the beginning Very unpleasant economic shock but so far not as bad as 1970s Containers hit first in early 2008, followed by bulkers in September and Tankers in Spring 2009 All markets face declining demand, but smaller orderbook and single hull phase out will help tankers Shipyards moving into 2 nd stage of their development with step up in output but toxic orderbook problems are increasing. Asset and newbuilding prices still high and downward pressure expected Tough times ahead, but remember what a fantastic time we ve had We have a lot of problems. What are you going to do? Buy your ships cheap

BACK TO NORMAL? SHIPBROKER S REPORT 31 ST December 1884 :- In almost every trade the lowest points reached during the year at which steamers have been chartered are lower than have ever before been accepted. This state of things was brought about by the large overproduction of tonnage during the previous three years, fostered by reckless credit given by the banks and builders, and over speculation by irresponsible and inexperienced owners.

Shipping Model 1. World Economy 2. Ship Demand charterer 2nd hand prices 1.Orders 3. Ship Supply owner Balance Sheet 2. Scrapping Freight rates Lots of cash

% growth 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Sea Trade Growth Cycles Sea trade expected to fall 4% this year 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1958 World Recession 1973 1 st Oil Crisis 2008 Credit crisis

Shipyard Cycle Shipyards expand in the 1970s boom & the 2000s Boom 120 100 80 60 40 20 0 Million GT Numbers indicate market spikes Deliveries Column 3 30 Year Cycle 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008