Dry Bulk Supply Review - the Seeds of Recovery

Dry Bulk Supply Review - The Seeds of Recovery

2016.09

Commodity & Freight Market Strategy

[Compliance Notice] This report has been produced for general information. Whilst care has been taken in the production of this report, no liability or responsibility can be accepted for any loss incurred in any way whatsoever by any person who may seek to rely on the information contained herein. Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Summary

Seaborne dry bulk trade declined 0.1% in 2015 largely due to a 6% drop in coal trade and is unlikely to show any significant recovery in the medium term. However, record levels of demolition and minimal new orders have given some hope for fundamental recovery, even though fleet supply is expected to increase in the near term because of the existing orderbook. Support for recovery . High slippage and cancellation of contracts . Absence of new orders / Shipyard defaulting . Tonnage adjustment through slow-steaming

Difficulties . Highly fragmented ownership across many geographical regions . Massive remaining orderbook / Government backed Shipyards . Low fuel oil cost 2 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Dry Bulk Fleet Size Distribution as of 1st June 2016

. According to Clarksons, the current trading fleet of bulkers over 10,000 dwt consists of 10.728 units equivalent to about 781 million dwt, as of 1st June 2016. This includes 1625 Capesize(100k+) vessels, 2453 Panamax(65-100k) vessels, 3360 Supramax(40-65k) vessels, and 3290 Handysize(10-40k) vessels.

3 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Baltic Dry Index - at bottom ?

. BDI at historical lows with lots of Orderbook & Shipyard capacity, over-supply continues . The general consensus is that market is at or near the floor and now focus on the shape of the downturn – namely how long will the downturn last? Is there hope this year?

14,000 Super Cycle 2003-2008 China Demand Boom with Lack of Ship & Shipyards capacity 12,000 Baltic Dry Index

10,000

8,000

6,000

4,000 Over-supply In line with Shipping Cycle continues

2,000

4 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 World Seaborne Dry Bulk Trade Demand

. After strong demand growth averaged around 5 percent y-o-y over the last decade, seaborne dry trades declined by nearly 0.1 percent last year and is forecast to remain largely flat this year.

14% Dry Trade Growth Seaborne Dry Trade Volume 6,000 12%

5,000 10% 8% Cargo 4,000 6% 4% 3,000 2%

2,000 tonnes Million

0% Dry Trade Growth (Yr/Yr) Growth Trade Dry -2% 1,000 -4% -6% ※ Source : Clarkson 0 5 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Capesize development & Earning

. The stagnant dry trade growth led Capesize earnings even more correlated to fleet development (r=-0.80) . Supply-side adjustment helps to support rates at the moment, and supply development will be critical for the fundamental recovery of the dry bulk freight market. 3 16,000 14,000

12,000 Fleet

1 10,000 0 8,000

Million Dwt Million 6,000 (1)

C5TC 4,000 /day $ Capesize, (2) 2,000 (3) 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 2015 2016 Fleet Change Cumulative C5TC 2M+ 6 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Fleet by Size

. There was a notable shift away from some of traditional sectors in recent years, with relatively fewer Panamax(65-80k) and Handymax(40-50k) sectors being delivered, in favor of a larger portion of Kamsarmax and Ultramax delivery.

(Million Dwt) 200

Handysize Supramax Panamax Capesize 150

100

7 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Fleet by Age

. With earnings currently at OPEX or below, even 15 YR Old vessels are near at scrap value . Tonnage volume of age beyond 15 years which has become pure candidate for demolition is coincidently matching the size of Orderbook(15% of total fleet).

(Million Dwt) 300 Capesize Panamax 250 Supramax Handysize

200

150

100

0 On Order 0-4 years 5-9 years 10-14 years 15-19 years 20+ years

8 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Old Fleet in No.

. Around 130 Mdwt were identified that could be removed from the market in the medium term based on elderly vessels(15.8% of total fleet) approaching their five year special surveys and/or interim surveys over the next two or three years.

300

250 ~2001 Mdwt No. 노후선비중

Cape 38.8 194 12.5% 200 PMX 36.2 490 18.5% SMX 27.8 593 15.2% 150 Handy 20.4 838 21.9% Total 123.2 2115 15.8% 100

Number of vessels of Number 50

0 Pre 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00' 01' 85 Handysize 185 35 18 9 17 22 16 23 18 25 67 78 96 59 63 45 62 Supramax 35 17 6 3 13 17 17 8 1 45 64 61 67 60 40 41 98 Panamax 18 2 1 1 9 12 5 5 16 33 36 25 55 46 60 55 111 Capesize 0 2 1 4 2 4 14 26 22 18 9 17 6 18 25 26

※ Source : Clarkson, HJS 9 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Scrap Volume in No.

. The demolitions have been very high this year, and as of 1st Jun, the volume reached 21Mdwt which was 10% higher than year-ago level . Low earning and poor outlook for the dry bulk sector provide no incentives for ship owners to retain their vessels.

70 Capesize Panamax 60 Handymax Handysize 50

30 Number of Vessels of Number 20

0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 2015 2016

10 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Recycled Fleet Size & Age Distribution since 2012

. The trend of reduction in the scrapping age has continued, with total 10.8 Mdwt(53%) of the tonnage leaving the fleet aged less than 20 years. . The average demolition age usually follows the state of market, and unsurprisingly it dropped to 23.5 years in 2016, almost two years younger than last year.

(Dwt)

Av. Age 2014 2015 2016

Cape 23.6 20.8 20.6

PMX 25.0 23.0 21.0

SMX 26.7 26.0 22.8

Handy 29.1 28.5 29.0

Total 27.3 25.2 23.5

※ Source : Clarkson, HJS 11 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Scrap & Earning

. Even though, demolition is the only possible solution for ship owners to survive, the slower pace of scrapping vessels is expected in the short-term with onset of the monsoon, the fall in scrap prices, and the hope of seasonal rise in freight rate for the final quarter of the year.

(Number of vessels, ($/day) Million $) 25 60,000 Cape Scrap (Number, 3MA)

Scrap Forecast 50,000 20 Scrap and old ship value spread $Million Capesize 4TC average (RHS) 40,000 15 30,000 10 20,000

5 10,000

0 0

Jan-11

Jan-13

Jan-15

Jan-12

Sep-11

Jan-14

Jan-10

Jan-16

Sep-13

Sep-15

Sep-12

Sep-14

Sep-10

Sep-16

May-11

May-13

May-15

May-12

May-14

May-10 May-16 12 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Dry Bulk New Building Contracting & BDI

. BDI and Dry Bulk NB contracting activities are highly correlated with each other (r=0.7) . Contracting of bulkers is unlikely to significantly increase in the near term, due to the current weak prospects in the freight market.

(Pts, $Million) 12,000 1000 Contracting Value ($Million) 900 10,000 Contracting Number(RHS) 800 8,000 Baltic Dry Index 700 6,000 600

4,000 500

400 2,000 300 0 (No.) 200 (2,000) 100

(4,000) 0

Jul-04 Jul-13 Jul-00 Jul-01 Jul-02 Jul-03 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-14 Jul-15

Jan-00 Jan-09 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 13 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 New Building Contracts by Ship type

. In 2014 Jan-May, there were 712 new vessels ordered. In 2015 Jan-May, there were 503, this year has been 120 orders placed so far in world shipyards. . For Dry bulk carriers, in 2015 Jan-May, there were 135 new Vessels ordered. This year has been only 4 ships if excluding 30 Valemax orders in Chinese shipyards.

(Dwt) 30 Valemax

14 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Dry Bulk Orderbook by Size

. Order being placed for 2016 and 2017 are fairly spread across the size sectors from Capesize to Handysize . New orders beyond 2018 are mainly focused on Capesize with about 65% and 80% of Capesize orders being placed in 2018 and 2019 respectively

2019

2018

2017

Capesize Panamax Supramax Handysize

2016

0% 20% 40% 60% 80% 100% 15 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Dry Bulk Orderbook as of 1st June 2016

. Despite record levels of demolition and minimal new orders, fleet supply is expected to increase because of the existing orderbook. . The large amount of existing contracts that are to be delivered over the next few years focused on Year 2016 and 2017

350

Capesize (100k+) Panamax (65-100k) 300 289 Supramax (40-65k) Handysize (10-40k)

250

200 175 170 160 150 112 112 99 Number of vessels of Number 100

44 40 39 50 32 28 15 17 3 7 0 2016 2017 2018 2019

On Order 16 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Dry Bulk NB Contracting by Country of Build

. In 2016, all 30 Valemax ships ordered in Chinese Shipyards, which will be scheduled for delivery across 2018/2019 while none of dry bulk vessel ordered in Korean Yard . Japanese yards has become increasingly more competitive due to the depreciation in the Yen versus the US dollar, thereby securing large new building orders for 2017-2018

(Dwt)

30 Valemax

17 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Dry Orderbook by Country of Build

. Dry bulk ships are being ordered primarily in China and to a lesser extent, Japan . It is expected that almost half of the orders placed in China will likely be either cancelled or delayed this year while most of the orders in Japan will be delivered on schedule.

(Mdwt)

백만 Capesize 50 Panamax Supramax 40 Handysize 30

0 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 China Japan Korea 18 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Fleet & Orderbook Change in 2016 so far

. The pace of cancellations and new building contract renegotiations has continued at the strong level, with 90 vessels being adjusted from the orderbook which will be scheduled for delivery this year. (310 delivered / 400 removed from the schedule in 2016)

400 310 300

200 95 52 100 24 6 0 -100 -200

Number of vessels of Number -157 -300 -223 -400 -500 -400 2016 2017 2018 2019 2020

Delivery in On Order On Order Total 2016 Summary

Capesize (100k+) Panamax (65-100k) Supramax (40-65k) Handysize (10-40k) Sum 19 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Fleet & Orderbook Change - Capesize

. New 30 Valemax ships ordered which will be scheduled for delivery across 2018/2019. . 12 Capesize vessels being adjusted from the orderbook which will be scheduled for delivery this year. (61 delivered / 73 removed from the schedule in 2016)

80 61 60 30 Valemax in Chinese Shipyard

40 22 9 13 20 0 0 -20

Number of vessels of Number -40 -29 -35 -60

-80 -73 2016 2017 2018 2019 2020

Delivery in On Order On Order Total 2016 Summary

VLOC(260k+) Large Cape(200-260k) Capesize(160-200k) Small Cape (100-160k) Total (100k+) 20 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Delivery Volume in Number

. In the first five months of 2016, Clarksons reported the delivery of 295 units over 10,000 dwt, for a total of 24.7 million dwt. This included 56 Capesize vessels of 10.4Mdwt, 65 Panamax of 5.3Mdwt, 103 Supramax of 6.3Mdwt, 71 Handysize of 2.6Mdwt.

120

100 Capesize Panamax Handymax Handysize

40 Number of vessels of Number

0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 2015 2016

21 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Delivery rate in 2016

. Compared to the orderbook at the beginning of 2016, which indicated 92.7m dwt to be delivered this year, the number of new deliveries of Chinese yard and Japanese yard so far showed a delivery rate of about 33%(by dwt) and 80% in 2016 respectively.

140% 4.5

Japan Delivery Rate China Delivery Rate 4.0 120% Japan Delivery(RH) China Delivery(RH)

3.5 100% 3.0 80%

80% 2.5 Million Dwt Million 60% 2.0 1.5 40% 33% 1.0 20% 0.5

0% 0.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

22 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Slow steaming, Bunker cost & Earning

. Multiple correlation(R=0.78) among Brent price, Capesize speed, and earning explains that either of higher earning or lower bunker cost could result in speed acceleration which would unlock further capacity onto the market, delaying any longer term sustained freight recovery.

160 상관계수 속도 유가 운임

11.9 140 속도 1 -0.49 -0.42 유가 -0.49 1 0.66 11.7 120 11.5 100 11.3 80

60 11.1

40 10.9 Knots speed, Vessel

20 10.7 Brent, &C5TC Index 100=2014.09 Index &C5TC Brent,

0 10.5

Brent C5TC Speed (right) 23 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Dry Fleet Outlook

. The severity of the freight market weakness forced owners to recycle their ships in near record level last year and is forecast to do so this year. However, considering the large amount of existing contracts, dry fleet will continue to expand albeit at a slower pace for next 2-3 years.

120 20% Dry 17% 100 15% Delivery 15% 80

10% 11% 60 10% 7% 7% 7% 7% 7% 6% 40 4% 4% 4% 3% 3% 2% 2% 5%

dwt of Vessel s Vessel of dwt 20 1% 1%

0 0% Million Million (20) -5% (40) Removal (60) -10%

Dry Deliveries Dry Demolition Orderbook Total Growth 24 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Capesize Outlook

. Last year, while the fleet has shrunk by five vessels, the larger size of new builds led 0.3% fleet growth in dwt term and for now is forecast to increase modestly around 0~1% across 2016/2017 before facing 30 Valemaxes in 2018

50 23% 25% Cape 19% 19%

40 Delivery 20%

30 12% 15%

9% 9% 9% 9% 9% 20 10% 5% 5% 5% 5% 5% 10 3% 3% 5% 0% 0% 0%

Million dwt of Vessel s Vessel of dwt Million 0 0%

(10) -5% Removal (20) -10%

Cape Deliveries Cape Demolition Orderbook Growth 25 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Panamax Outlook

. 파나막스 섹터는 연비가 높은 대형 캄사르막스(80-84k)선형의 유행으로 2010-2013년까지 연평균 10%수준의 매우 높은 선복 증가율을 기록했으나 지난해부터 인도량 감소와 해체량 증가로 1%대로 성장율이 하락함. 현재 섹터 중 가장 저조한 수익을 보이고 있어 해체량이 더욱 증가할 것으로 예상 됨에 따라 당분간 증가율은 약 0~1%에 머물 것으로 전망됨

30 30% PMX Delivery

20 20%

12% 12% 12% 9% 9% 8% 8% 8% 10 7% 6% 10% 6% 5% 4% 4% 3% 1% 1% 1% 0% Million dwt of Vessel s Vessel of dwt Million 0 0%

Removal (10) -10%

PMX Deliveries PMX Demolition Orderbook Growth 26 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Supramax Outlook

. 수프라막스 섹터는 지난해 다른 선형들이 모두 약 0~1% 수준의 낮은 선복 증가율을 보였음 에도 홀로 8%의 매우 높은 성장율을 기록함. 여전히 막대한 신조 주문 잔량이 남아 있고 현 존 선대 역시 대부분 2010년 이후 인도된 모던 선박들로 구성되어 해체량 규모 역시 기대하 기 힘들어 2017년까지도 약 4~5% 수준의 높은 선복 증가율이 유지 될 것으로 예상됨.

30 30% SMX

Delivery 20% 18%

20 20%

12% 11% 9% 9% 8% 8% 10 7% 7% 7% 7% 8% 7% 10% 5% 5% 5% 4% 2%

Million dwt of Vessel s Vessel of dwt Million 0 0%

Removal (10) -10%

SMX Deliveries SMX Demolition Orderbook Growth 27 Contact : Daejin Lee / [email protected] / + 82 10 3462 5311 Thank you

Previous Reports : includes freight forecasts

(1) Bulk Supply : The Seeds of Recovery (Korean / English) (2) Tanker Supply : Oil Prices and Oversupply (Korean) (3) Coal Trade Market : The end of the coal era, soon or yet? (Korean / English) (4) Iron Ore Trade Market : Chinese steel market (Korean) (5) Understanding Bulk Shipping Market (Korean)

We invite any comments and/or questions you may have. if you need bespoke reports & analysis, we would love to meet specific client needs. To discuss any individual requirements please contact below

Daejin Lee / Commodity Research / Shipping / FFA

Hanjin Shipping Dir: +82 2 3770 3379 Mob: +82-10-3462-5311 Email: [email protected] / [email protected]

Contact : Daejin Lee / [email protected] / + 82 10 3462 5311