Trends affecting the Australian maritime industry

Ports Australia Centennial Conference 18 - 21 October 2016 Melbourne

David Bayne Port Economist [email protected] Fit for function vs Capacity

4 million teus p.a. were barged in Hong Kong prior to the new container terminals. The right question is the port fit for function?

It is not how much but how well you get cargo through a port that matters. The important questions

• Is the port fit for function? • Can our exporters compete? – size and port costs

Have we really matched our ports to the markets? Matching markets to ports

• Focus on 3 shipping markets 1. Dry bulk (iron ore and coal); 2. LNG; and 3. Containers. – Dry bulk because Australia has 5 ports amongst the largest dry bulk ports in the world. – LNG because of our rapid growth and strong prospects. – Containers because the ship upscaling since the GFC in 2008 has changed the market needs. Traditional dry bulk vessel classificationsDrewry

300m , 185 DWT Capesize (280 m)

Panamax (225 m)

Handymax (190 m)

Handysize (185 m) Ship traces combined

Heavily weighted by iron ore Dry bulk –iron ore exports (Drewry Dry Bulk Forecaster Q2 2016)

53% 25% The – 403,000 DWT

• Chinese have now ordered 30 ‘Valemax’ ‐ to be delivered in 2018 and 2019 The Wozmax Capesize subset Our Champion Evolution of ‘standard’ Capesize

Year of build Dwt (‘000) (m) Loa (m) (m)

1981 138 43 270 16.8

1990 149 43 270 17.3

2000 171 45 288 17.7

2010 180 45 292 18.2

Wozmax 300 57 330 18.2

Source: Braemar Seascope Outlook for iron ore Chinese iron ore imports up 9% in Q1 & Q2 2016

Drivers Dampeners (steel production) • Chinese government • Rising anti‐globalisation stimulation of the building sentiment. industry. • US duties on Chinese cold • Chinese steel mills are rolled steel. (As high as 256%). replacing low quality • domestic ore with imports Both India and the EU foreshadowing anti‐steel from both Brazil and dumping measures. Australia. • Increasing competition from • Rising labour costs in China. Brazil with the Valemax. Dry bulk –iron ore imports (Drewry Dry Bulk Forecaster Q2 2016) Japanese coal revival

• Because 36 Japanese solar power stations have gone bankrupt in 2015, the Government commissioned 45 new coal‐fired power plants with better quality coal mostly from Australia.

Source: Drewry Dry Bulk Forecaster Q2 2016 and Bloomberg Dry bulk total order book (‘000 DWT) (Drewry Dry Bulk Forecaster Q2 2016)

Ships on order have dropped from 23.8% of the fleet’s capacity in 2012 to 15.3% in 2016. The VLOC is the exception.

This means the outlook is for increased Brazilian competition in iron ore Dry bulk outlook ship size

Year Average size DWT Largest vessel (DWT) CAGR (2006‐16) 2006 56,067 364,768 2016 72,879 403,919 2.7% 2017 74,815 403,919 2018 76,803 403,919 2019 78,844 403,919 2020 80,939 403,919 2021 83,090 403,919 2022 85,298 403,919 2023 87,564 403,919 2024 89,891 403,919 2025 92,279 403,919 2026 94,731 403,919 LNG shipping

Stay with conventional shipping for this presentation

“Prelude” FLNG 200 km from the WA coast LNG – capacity in m 3

128,000 m 3 Conventional (1976)

145,000 m 3 Conventional (1995)

210,000 m 3 Q‐Flex (2007)

260,000 m 3 Q‐Max (2008)

Source: Moorways Pty Ltd LNG carriers Q‐Max ‐ trading between Qatar and Europe / US Australia and Indonesia best placed for the market.

If it were not for the lower shipping costs, Canada and East Africa would have a competitive advantage. LNG and the widened to increase competition • The widened Panama Canal will now handle all of the current LNG fleet except the Q‐Flex and Q‐Max. • AtripfromUStoFarEastwhichusedtotake 35 days will now take 24 days. • This means a cost saving of between USD 0.50 and USD 0.70 per MMBTu (Q2 USD 4.90 per MMBTu). LNG imports forecast (mill. tonnes)

Japan is still dominant and China is committed to increased Australian LNG LNG fleet development (Drewry Forecaster Q2 2016) Small numbers and no growth Table 3.1 LNG FLEET DEVELOPMENT 18-50 50-75 cbm 75-125 cbm 125-150 cbm 150-200 cbm 200-220 cbm 220+ cbm Total No. 000 cbm No. 000 cbm No. 000 cbm No. 000 cbm No. 000 cbm No. 000 cbm No. 000 cbm No. 000 cbm 2012 8 189 5 348 11 968 225 31,100 65 10,278 31 6,601 14 3,715 359 53,199 2013 7 154 5 348 10 881 222 30,718 82 13,016 30 6,391 14 3,715 370 55,222 2014 5 88 3 205 10 881 219 30,351 114 18,041Stable 30 fleet6,391 structure14 3,715 because:395 59,671 2015 6 118 3 205 8 725 218 30,226 141 22,448Qatar 30 has6,391 put 14 on hold3,715 all420 new63,828 2016 6 118 3 205 8 725 212 29,443 153 24,482development. 30 6,391 14 3,715 426 65,079 2016 8 176 3 205 7 603 210 29,187 182 29,413The 30 widened 6,391 15 Panama 3,978 Canal455 69,954 2017 9 221 3 205 6 481 203 28,296 221 36,000 30 6,391 15 3,978 487 75,572 2018 9 221 3 205 6 481 201 28,036 264 43,425has 30 released 6,391 15shipping 3,978 .528 82,737 2019 9 221 3 205 6 481 201 28,036 281 46,376 30 6,391 15 3,978 545 85,689 2020 9 221 3 205 6 481 201 28,036 284 46,898 30 6,391 15 3,978 548 86,211 1Q15 5 88 3 205 8 725 219 30,351 122 19,345 30Design 6,391 vessel14 3,715 for your401 60,820 2Q15 6 118 3 205 8 725 219 30,351 128 20,322 30 LNG6,391 port14 planning3,715 408 61,827 3Q15 6 118 3 205 8 725 218 30,226 136 21,611 30 6,391 14 3,715 415 62,990 4Q15 6 118 3 205 8 725 218 30,226 141 22,448 30 6,391 14 3,715 420 63,828 1Q16 6 118 3 205 8 725 214 29,700 148 23,627 30 6,391 14 3,715 423 64,481 2Q16 6 118 3 205 8 725 212 29,443 153 24,482 30 6,391 14 3,715 426 65,079

Source: Drewry Maritime Research Containers

• Containers show a very different story to LNG Slowing global volume growth

Global container volume 1990‐2015 200.0 20.0%

150.0 15.0%

100.0 10.0%

50.0 5.0%

0.0 0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

‐50.0 ‐5.0%

Millions teu port World Container Traffic Millions teu port World % change yoy ‐100.0 ‐10.0% What does slower cargo growth mean for ship upscaling? Container vessel sizes

So it’s not so much cargo growth driving the upscaling Consolidation by acquisition ‐ transactions Consolidation by carrier alliances More changes to come Shipping line Alliance Maersk 2M MSC CMA CGM

China Shipping Ocean Three

UASC NYK 16 companies OOCL Hapag-Lloyd make up almost G6 Alliance 80% of the APL market and work MOL Hyundai in 4 alliances. Cosco K Line Yang Ming CKYHE Alliance Hanjin Evergreen 16 4 This means when an alliance changes to a new port, it comes in blocks Brisbane moved container ships from Hamilton to Fisherman Islands Sydney moved container ships from Port Jackson to Port Botany Port of Melbourne website (2015)

The words show the quantity of capacity, the picture the quality of that capacity. Melbourne’s critical constraints

Constraints: • The Harbour Master’s instructions limit vessels to 300 m LOA on most occasions; • Approach channels are limited to 14 m and 0.6 m tidal assistance (DUKC); • Beam restrictions within Swanson Dock depending on conditions; • Westgate Bridge 50 m plus 2 m exclusion zone; • Webb Dock could possibly handle larger vessels but the design vessel for the capacity upgrade has been limited to ships of 300 m LOA (some 5,500 to 6,500 TEU); • Port Phillip Heads while having 17 m draft, is difficult due to currents and likely to restrict the times of departure. • There is a danger that the new port owner may attempt to restrict competition at Webb Dock to avoid pressure from the Swanson Dock owners. • But there is hope ‐ the Bosphorus‐max. Australian container service vessel list ‐ Q1 2016 (Drewry) All of Australia's Eastern container ports are constrained by Melbourne’s LOA

2016

Source: Drewry Maritime Research Ports smaller than Melbourne servicing 8,000 to 10,000 teu vessels

But there is hope for the Australian trade Two of the most common ship sizes on order

64 in the fleet 73 on order Typically 9,500 TEU capacity

ULCC 18 Class

Compact Neo AKA Bosphorus‐max

Source: Moorways Pty Ltd Neo‐Panamax containerships matrix of Bay x Row (fleet 2015) The design vessel LOA (m) 299‐300 m 301‐320 m 321‐340 m 341‐360 m 361for‐ a366 modern m 367‐370 m Australian port Container rows across Beam (m) 17 rows across 43 22 165 40 12 0 42‐43 m beam 2 0 2 0 0 0 6,300‐7,800 TEU 6,700‐7,900 TEU 8,000‐9,600 TEU 8,600‐9,600 TEU 9,500‐9,700 TEU 18 rows across 23 15 98 34 16 0 45‐46 m beam 0 0 1 0 0 0 7,500‐8,700 TEU 8,100‐8,600 TEU 8,400‐9,600 TEU 9,900‐11,000 11,300‐11,600 TEU TEU 19 rows across 64 0 31 0 95 0 48‐49 m beam 73 0 46 0 6 0 8,600‐10,600 10,000‐11,000 12,500‐14,000 TEU TEU TEU 20 rows across 0 0 0 0 41 38 51‐52 m beam 0 0 0 0 33 16 13,300‐14,500 13,800‐15,000 TEU TEU

Source: Alphaliner The Bosphorus‐max looks possible but not without risk

• The constraints are less critical at Webb Dock. • Therefore Webb Dock may gain a competitive advantage that could affect other terminal operations along the East Coast. A competitive advantage of this size will see some losers and this may make the politics difficult. Containers conclusion • The pace of ship upsizing has accelerated rapidly since the global financial crisis; • Australian ports have not kept pace with global ship size growth, other locations like New Zealand; • Ship upsizing affects Australia nationally –not just one State; and • Australia’s largest container port, Melbourne constrains the other ports as well, It is really a National productivity issue. • Note: this deficiency also affects New Zealand crossover trade. Next steps Determine the National cost of size constraints. Have we matched markets to ports?

• LNG ‐ yes • Dry bulk‐ probably for the mid term • Containers –we are falling behind and offer a less than good match. Trends affecting the Australian maritime industry

Ports Australia Centennial Conference 18 - 21 October 2016 Melbourne

David Bayne Port Economist [email protected]