DRY BULK MARKET OUTLOOK MARCH 217
Dry Bulk Market Outlook March 217 MARKET DEVELOPMENTS - SUMMARY a rather healthy start to the year, with capes leading the charge Iron ore imports to China increased by 13.4 % to 83.5 Mn T in February, mainly due to restocking efforts. Stockpiles grew by a 8.2 % in February, the largest month-on-month increase in 3 years. TC rates increased from an average of USD 11.4 k per day in February to a current USD 14 k per day. Restocking is a clear short term development, but other medium to long term developments could contribute to the bull market. New iron ore from Vale s recently opened S11D mine should contribute to softening iron ore prices, thus increasing the appeal of imports for Chinese buyers. In March 216, the Capesize orderbook totalled 7 % of the fleet, while the ratio currently stands at 2 %. Last year, the capesize fleet shrunk by.1 per cent to 193.4 Mn Dwt. But VLOC orderbook at 23.1 Mn Dwt in total The Panamax and Kamsarmax segments also trending positive, driven largely by an increase in cargoes out of South America carrying grain, and price differences in coal between the Chinese domestic market and the import market, with imports trading at up to a 1 per cent discount. The recent ban on coal imports from North Korea is expected to contribute to a firming in demand for the majority of 217. The country supplies 22.8 Mn tonnes of anthracite to China, about 85 % of Chinese anthracite imports. We expect the ban to create 1.6 % extra demand growth for the segment in 217. Handysizes and smaller segments also benefitting from the current improvements in the market. 1 year TC rates have increased 19.2 % to USD 7,75 and 26.6 % to USD 9,5 for Handysizes and Supramaxes respectively since the start of the year. For Supra s this is the highest rate since end August 215. The short term nature of many of the above factors may well lead to an overinflated sentiment that runs ahead of fundamentals. Supply side discipline essential for market recovery. Renewed newbuilding activity could compromise and prolong any sustainable improvement in the market. Uncertainty on upcoming enforcement of the IMO s Ballast Water Management convention, set to happen on September 8 217. 659 vessels will enter the demolition candidate pool (ships 2 years and older). Low sulphur regulations that are set to enter into force in 22 will add to the cost of operations. 2
ASSUMPTIONS FOR AFFINITY S FORECASTS SUPPLY Dry cargo contracting to stay slow Dry cargo demolitions to continue Removals from Orderbook (approx. 11. Mn Dwt in 216) to continue as yards fail and orders are renegotiated or cancelled Ballast Water Treatment System to reduce effective lifespan of bulk carriers to around 22 years compared to a long-run average of 25 - Estimated deliveries by size band Size / Mn Dwt 217 218 219 22 221 Handy / Supra / Ultramax 13.5 4.2 5.3 5.9 5.7 Panamax / Kamsarmax 1.8 1.5 2. 3.1 4.1 Capesize 15.2 14.9 11.2 5.8 7.7 DEMAND Base case: only marginal changes in demand growth going forward to 221. Owners should consider this before investing 3
Mn Dwt SUPPLY MUST REACT TO FLAT DEMAND GROWTH FOR DRY CARGO OWNERS TO SURVIVE Combined bulk carrier fleet supply and demand scenarios to 221 9 8 7 6 5 Fleet, 3% slippage, overdue ships cancelled, 25 yr life Fleet, 3% slippage, overdue ships cancelled, 22 yr life, Fleet, 3% slippage, overdue ships cancelled, 22 yr life, 1% slow steaming 211 on Demand at % growth 4 Demand growth at historic average levels 3 26 28 21 212 214 216 218 22 Demand at -2% growth Our base case is that the dry cargo markets will see an aggregate of zero demand growth out to 221. Even if demand growth returns to its historic average of 4.4% per annum, owners must continue to manage supply. Thus our base case supply scenario envisages 3% slippage in the orderbook, the cancellation of overdue orders, slow steaming being a permanent fixture and the average life of a bulker being reduced to 22 years by the Ballast Water Management Convention (comes into force 8 September 217). In this case, supply growth levels off to zero with the fleet at around 7 Mn Dwt, giving steady utilisation of around 8%, slightly above the long term average of 78%. 4
CAPACITY UTILISATION BDI WHEN EXPRESSED AS CAPACITY UTILISATION, THERE ARE CLEAR IMPLICATIONS FOR FREIGHT RATES Combined all dry bulk capacity utilisation scenarios to 221 1% Base Case Capacity Utllisation historic average utilisation rate BDI 8, 95% 9% 85% 8% 75% 7% 65% 6% 55% 7, 6, 5, 4, 3, 2, 1, 5% 26 28 21 212 214 216 218 22 - The BDI averaged 673 points in 216, and while the market has improved since then (average BDI for 217 YTD is 87) market movements remain positional rather than fundamental. Prospects for the BDI remain underwhelming even with strict supply-side discipline. 5
CAPESIZE: Capesize utilisation scenarios 95% 9% 85% 8% 75% 7% Best Case Capacity Utllisation Base Case Capacity Utilisation Worst Case Capacity utilisation 65% 6% 26 28 21 212 214 216 218 22 Our base case includes cancellation of all overdue orders, accounts for 3% slippage in delivery schedules, assumes all ships sail at 12.5 knots on average, and that average economic life is 22 years. The base case also assumes 2% annual demand growth for iron ore, however this will mostly be taken up by the VLOC segment. The step down in utilisation is a consequence of VLOC deliveries in 217. VLOC orders dominated contracting Dwt in 216. 6
PANAMAX / KAMSARMAX: Panamax / Kamsarmax utilisation base case 1% 95% 9% 85% 8% 75% 7% 65% Best case Capacity Utilisation Base Case Capacity Utllisation Worst Case Capacity utilisation 6% 26 28 21 212 214 216 218 22 Panamax utilisation in our model is a function of zero demand growth and the same supply side constraints as per Capesizes. While the prospect for grain and coal remain positive in the near term, the orderbook remains onerous and real improvement will only happen when demolitions happen to ships in their mid-teens on average. 7
HANDY / SUPRA / ULTRAMAX: Utilisation base case 15% 1% 95% 9% 85% 8% 75% 7% 65% Best case Capacity Utilisation Base Case Capacity Utllisation Worst Case Capacity utilisation 6% 55% 26 28 21 212 214 216 218 22 Prospects for the geared bulk carrier fleet are less depressing on the basis that demand continues to be seen to grow especially in the minor bulks, grain and coal (for now; long term prospects for coal remain weak), supporting these ship types, which also steal cargo from the larger and older Panamax bulkers. Forecasting freight markets remains a difficult exercise however as the geared bulker markets continue to evolve with ship sizes. Our best guess for 217: watch copper, grains and coke, beware steel products tariffs, look for positional opportunities. It is an operators market. 8
DEMAND TO ONLY INCREASE MARGINALLY BY THE END OF DECADE March 217
Mar 26 Jul 26 Nov 26 Mar 27 Jul 27 Nov 27 Mar 28 Jul 28 Nov 28 Mar 29 Jul 29 Nov 29 Mar 21 Jul 21 Nov 21 Mar 211 Jul 211 Nov 211 Mar 212 Jul 212 Nov 212 Mar 213 Jul 213 Nov 213 Mar 214 Jul 214 Nov 214 Mar 215 Jul 215 Nov 215 Mar 216 Jul 216 Nov 216 Mar 217 Mn Tonnes Dry Bulk Market Outlook March 217 WEEKLY CHINESE IRON ORE INVENTORIES 14 12 1 8 6 4 2 1
1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 YTD 217 Mn T Dry Bulk Market Outlook March 217 CHINESE IRON ORE IMPORTS 1,2 1, Chinese Iron Ore Imports Iron ore imports to China have been steadily increasing due to high availability of cheap ore from Australia and Brazil. This despite a reduction in steel making capacity, supported by capacity cuts in China s domestic iron ore production. 8 6 Chinese iron ore is of low quality relative to imports, and often vastly more expensive to extract and transport to its end user. 4 2 11
Coal Consumption (Mn T) Dry Bulk Market Outlook March 217 INDIAN COAL CONSUMPTION 4 35 3 25 2 15 1 5 Percentage of Indian Urbanised Population / Coal Consumption R² =.9899 Indian energy consumption is on the rise and is closely correlated to its urbanised population. should India s urbanisation rate continue at the current pace, which for the past decade has been 1.14 per cent per year, we can expect India s coal consumption to increase to between 45 and 5 Mn tonnes by 22 and approximately 38 Mn tonnes by 217. That s up 5.5 per cent from 214 which saw 36 Mn tonnes consumed. However, a mounting problem with pollution spurring policy changes and the increasing availability of renewable energy sources may see this relationship weaken. 15 17 19 21 23 25 27 29 31 33 35 % Urbanised Population 12
Percentage Dry Bulk Market Outlook March 217 SEABORNE COAL BY VESSEL CATEGORY Graph shows what percentage of coal trade is carried on respective vessel types. 3% 25% 2% 15% 1% 5% % Handysize Supramax Ultramax Panamax Kamsarmax PostPanamax SmallCape ModernCape Newcastlemax VLOC 13
Percentage Dry Bulk Market Outlook March 217 SEABORNE IRON ORE BY VESSEL CATEGORY Graph shows what percentage of iron ore trade is carried on respective vessel types. 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % Handysize Supramax Ultramax Panamax Kamsarmax Post Panamax Small Cape Modern Cape Newcastlemax VLOC 14
Mn T Dry Bulk Market Outlook March 217 SEABORNE TRADE DEVELOPMENT 5, 3,75 Combined % growth for 216 is estimated to have been around 3% and is expected to average about 1% towards the end of the decade. 2,5 1,25 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 Est. 216 Est. 217 Est. 218 Est. 219 Est. 22 Iron Ore Coal Grain Soybean Minor Bulk 15
Tr Tonne Miles Dry Bulk Market Outlook March 217 TONNE MILE GROWTH 2 18 16 14 12 1 8 6 4 2 211 212 213 214 215 216F Iron Ore Coal Grain & Agricultural Products 16
LIMITED CONTRACTING FOR NB DELIVERIES SET TO DECLINE STRONG DEMOLITIONS TO LAST March 217
2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 YTD 217 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 YTD 217 Number of Ships Mn Dwt Number of Ships Mn Dwt CONTRACTING AND DEMOLITION: HOPE FOR THE FUTURE Graphs show vessel contracting and demolitions for vessels ranging from 1, Dwt and upwards. All Bulker Contracting All Dry Demolitions Number of Ships Mn Dwt Number of Ships Mn Dwt 14 14. 6 35 12 12. 5 3 1 1. 4 25 8 8. 2 3 6 6. 15 4 4. 2 1 2 2. 1 5. 18
DRY BULK FLEET AGE GROUPS Table showing all size types by age in number of ships. Orderbook of which ordered before 214 Dry Bulk Fleet By Number of Ships -4 5-9 1-14 15-19 2-24 25+ Total Orderbook years years years years years years Fleet as % of Total Fleet VLOC 69 3 63 93 6 2 4 16 22 31% Newcastlemax 36 5 121 65 43 3 232 16% Capesize 27 8 211 579 18 83 35 6 194 2% Small Capesize 1 1 24 96 3 3 1 127 1% PostPanamax 35 1 124 266 6 28 8 4 49 7% Panamax 23 14 15 297 266 282 134 29 1158 2% Kamsarmax 98 5 44 356 55 815 12% Ultramax 184 38 535 69 64 3% Supramax 26 5 261 1148 363 142 1914 1% Handymax 14 3 112 68 21 131 169 52 553 3% Handysize 162 24 639 1197 278 229 223 194 276 6% Total Fleet 675 17 2644 4234 1275 9 612 32 9967 7% % of Total Fleet 7% 1.1% 27% 42% 13% 9% 6% 3% 19
DRY BULK FLEET AGE GROUPS Table showing all size types by age in Mn Dwt. Orderbook of which ordered before 214 Dry Bulk Fleet By Mn Dwt -4 5-9 1-14 15-19 2-24 25+ years years years years years years Total Fleet Orderbook as % of Total Fleet VLOC 23.13.79 17.95 28.16 1.48.46 11.16 4.38 63.59 36% Newcastlemax 7.49 1.4 25.11 13.44 8.8..62. 47.98 16% Capesize 4.8 1.41 37.86 13.31 31.67 14.17 5.43.91 193.36 2% Small Capesize.11.11 2.69 1.9.31.32..11 14.33 1% PostPanamax 2.92.7 1.72 24.49 5.31 2.33.73.36 43.93 7% Panamax 1.66 1.9 11.34 22.67 2.19 2.92 9.48 1.92 86.53 2% Kamsarmax 8..41 33.3 29.13 4.54... 66.7 12% Ultramax 11.52 2.41 33.38 4.26.... 37.64 31% Supramax 1.46.28 14.79 64.82 19.63 7.33.. 16.57 1% Handymax.61.13 5.15 3.12.99 6.13 7.67 2.26 25.33 2% Handysize 5.89.84 22.47 36.85 8.1 6.29 5.7 4.92 84.24 7% Total Fleet 67.6 8.57 214.49 341.16 1.92 57.96 4.79 14.88 77.2 9% % of Total Fleet 9% 1.1% 28% 44% 13% 8% 5% 2% 2
196 1962 1964 1966 1968 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 Number of Ships 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 218 22 Mn DWT DRY BULK CUMULATIVE FLEET Including dry bulk carriers over 1, Dwt Dry Bulk Fleet Profile 12 1 8 6 4 2 Additions Removals %Change 15 3% 1 2% 5 1% % -5-1% While the orderbook for 217 is very large, high levels of slippage are expected. The low orderbook for 218 is indicative of the diminished appetite for new tonnage, as the market struggles with a slump on the demand side. Considering that around 47 Mn Dwt delivered in 216 vs the more than 6 Mn Dwt originally scheduled to get delivered, it seems unlikely that all the 43 Mn Dwt scheduled to deliver in the balance of the year will in fact arrive on time. If shipyard performance in 216 is consistent, then over one third of this year s scheduled deliveries will be pushed back to later years or dropped altogether. The dry bulk fleet saw a rapid expansion following the large scale ordering at the peak in 28. Fleet growth has slowed down significantly in line with the current condition of the freight market, predominately due to high levels of demolition and minimal contracting activity. -1-2% 21
25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 Number of Ships 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 Mn DWT KAMSARMAX The Kamsarmax segment is defined as vessels between 8,Dwt and 84,999 Dwt with a beam less than 32.26, a LoA less than 236m and a draft less than 21m. 16 14 12 1 8 6 4 2 Kamsarmax Fleet Profile The average fleet age in the Kamsarmax segment is 4.6 years. A large volume of deliveries in 212 can be attributed to heavy investment in the sector prior to the collapse of the freight markets in the latter part of 28, as well as delays and rescheduled deliveries. 2 15 1 5 Fleet Orderbook 22
196 1962 1964 1966 1968 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 Number of Ships 196 1962 1964 1966 1968 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 Mn DWT PANAMAX The graphs show the development of the Panamax segment with the year on year percentage change in fleet size. 1 8 6 4 2-2 -4-6 -8-1 -12 Panamax Fleet Development 2% 16% 12% 8% 4% % -4% -8% -12% -16% -2% This data shows the development of the Panamax fleet, taking into account all capacity added to the sector and deletions. Recent high demolition activity has led to negative fleet growth in the Panamax sector. January 217 continues that trend, but at a lower intensity, with.5 Mn Dwt scrapped; this is 6 per cent of total Panamax demolitions in 216. This is partially due to the increased popularity of the Kamsarmax segment. Additions Deletions %Change 15 1 5-5 -1-15 -2 4% 3% 2% 1% % -1% -2% -3% -4% 23
21 211 212 213 214 215 216 217 218 219 Number of Ships 21 211 212 213 214 215 216 217 218 219 Mn DWT ULTRAMAX Ultramax is defined as 6, to 69,999 Dwt, built after 29, and are geared, usually 5 hold / 5 hatch arrangement and less than 2m LOA. 14 12 1 8 6 4 2 Ultramax Fleet Profile The Dry Bulk fleet is constantly evolving, thus the Ultramax sector only started being delivered from 21 onwards. The current orderbook accounts for 3per cent of the current fleet. 25 2 15 1 5 Fleet Orderbook 24
1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 NUmber of Ships 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 Mn DWT HANDYMAX The graphs show the development of the Handymax fleet, with year on year additions and deletions as well as the annual percentage change. 6 4 2-2 -4 Handymax Fleet Development 3% 2% 1% % -1% These graphs clearly show how demolition figures in this segment spiked as a result of international financial turmoil; noticeably in 1986 and more recently in the aftermath of the 28 financial crisis, the latter of which has resulted in sustained negative growth since 29. The fleet is also shrinking as bulk carrier designs have evolved into Supramax and Ultramax. -6-2% Additions Removals %Change 1 5-5 -1 3% 24% 18% 12% 6% % -6% -12% -18% -24% -3% 25
DRY BULK SLIPPAGE BY SIZE BAND START OF PERIOD Slippage and Cancellations. 8% 7% 213 214 215 216 6% 5% 4% 3% 2% 1% % 26
EARNINGS IMPROVING BUT STILL RATHER LOW March 217
Jan-4 Jun-4 Nov-4 Apr-5 Sep-5 Feb-6 Jul-6 Dec-6 May-7 Oct-7 Mar-8 Aug-8 Jan-9 Jun-9 Nov-9 Apr-1 Sep-1 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 USD / Day BCI 4/5TC CAPESIZE TC RATES AND BCI 18, 18, 16, 16, 14, 14, 12, 12, 1, 1, 8, 8, 6, 6, 4, 4, 2, 2, - - 1YR TC BCI 28
USD / Day BPI PANAMAX TC RATES AND BPI 9, 12, 8, 7, 1, 6, 8, 5, 4, 6, 3, 4, 2, 1, 2, - - 1YR TC BPI 29
Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 USD / Day BSI SUPRAMAX TC RATES AND BSI 8, 7, 7, 6, 6, 5, 5, 4, 4, 3, 2, 3, 2, 1, 1, - - 1YR TC BSI 3
Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 USD / Day BHSI HANDYSIZE TC RATES AND BHSI 45, 3,5 4, 3, 35, 3, 25, 2,5 2, 2, 1,5 15, 1, 5, 1, 5 - - 1YR TC BHSI 31
RECOVERY IN 5 YO PRICES FOR PANAMAX AND HANDYSIZE March 217
Mn USD PANAMAX ASSET VALUES 12 1 8 6 4 2 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Resale 5 YO 1 YO 15 YO 33
Mn USD HANDYSIZE ASSET VALUES 6 5 4 3 2 1 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 NB Resale 5 YO 1 YO 34
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