Marine Money Week

1Dibner Maritime Associates LLC © 2012

Brent DibnerPresident

Dibner Maritime Associates LLCwww.dibmar.com

Strategy in Shipping – Why, What, For Whom?

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OUR AGENDA

CHALLENGES TO MARITIME STRATEGIES WE ARE “WHEELBARROW PEOPLE”

MARITIME STRATEGIES FOR A CHANGING WORLD WHEELBARROW LEVERAGE FLOATING TOOL KITS FLYWHEELS TO STABILIZE CASH FLOW CAPITAL PARTNERSHIP

PRINCIPLES OF MARITIME STRATEGY 7-MINUTE MARITIME STRATEGY INDOCTRINATION

TANGIBLE EXAMPLES PICTURES WORTH A THOUSAND WORDS

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Is Strategy Relevant to the Maritime World?

Yes Strategic principles and techniques apply Implemented in all sectors Crucial to financial – survival or existence not a

legitimate objective for public companies Implicitly expected by investors and creditors

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FAMILIAR Commoditized characteristics Highly cyclical consequences – supply-led with demand shocks Conflicting pressure for specialization and/or flexibility Public and private participants

– etc., etc. etc………….

UNFAMILIAR Changing technologies and regulation – Not just fuel and fuel Global shift in demand and economic resources Approaching peaks in coal and oil Pressures and regulations on banks and sources of low cost capital

CHALLENGES

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WE ARE WHEEL BARROW PEOPLE

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THE WHEELBARROW PEOPLE’S CHOICE:

ROLLER COASTER?

ROMANTIC UTILITY?

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A universal business populated by hard-working, intelligent and committed individuals…..

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….a community excited by their profession....

…… but periodically…….

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………..are prone towards excessive behavior …….

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……..creating financial mayhem for investors and customers…………

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…………discouraging “long term” institutional investment…………until lessons forgotten!

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Unlikely to conform to behaviors collectively, cooperatively, or even rationally - capital access must become more rational and linked to real risk

BANKERS•Basel III•Assess Risk Premiums•Risk-Sharing•ANticipate Loss of Asset Value•Risk/Return•Don’t Harm Clients•Perform Own Diligence

SHIPOWNERS•Diligent Market View & Forecast – Share with Bankers•Plan for Cyclical Cash Flow•Don’t Follow the Pack•Educate Board•Implement REAL •Strategy

&^*%$#!SO THAT’S WHAT WE’RE SUPPOSED TO DO!!

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An industry with a high propensity for self-inflicted wounds…

Drybulk - Capacity and Demand

0

1,000

2,000

3,000

4,000

5,000

6,000

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

mm

car

go to

ns

0

100

200

300

400

500

600

700

mm

dw

t

Total Dry Tons

Total Cap DWT

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….with a propensity to shift blame to the demand side………..

Drybulk - Capacity and Demand

0

1,000

2,000

3,000

4,000

5,000

6,000

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

mm

car

go to

ns

0

100

200

300

400

500

600

700

mm

dw

t

Total Dry Tons

Total Cap DWT

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Knowledge as the powerful precursor to strategic planning

Dry Bulk Tons Per DWT By Major Size Group

-

2

4

6

8

10

12

14

16

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

HANDYHMAX & PANMAXMINI CAPE AND CAPSIZEVLOCSub Cape <80k H HMX & PMX Tons Per DWT

PORT DELAYS

SLOW STEAMING?

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Fiercely competitive and highly sensitive - one load per year (15% utilization) is worth more than $ 10,000 per day

Sub-80k dwt Correlation: Tons/DWT/Yr and One Year TC

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

SUB CAPE1YRTC AVERAGE

Sub Cape <80k HHMX & PMX TonsPer DWT

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As VLOC supply grew to meet Brazil-China growth, Cape rates collapsed as loads per year decreased, partially offset by port delays

Cape Size - Tons Per DWT-Year vs. Cape and VLOC 1YRTC

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,00019

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1996

1998

2000

2002

2004

2006

2008

2010

2012

45566778899 CAPE 1YR TC

RATE

80-200k BC &Cape Tons PerDWT

200k+ VLBC TonsPer DWT

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What is given to “products tankers”………can be taken away……palm oil and benzene….by 5,000 to 310,000 dwt tankers….(and vice versa)

Both Customers of IMO III and II Tankers…

Both Rivals of IMO II and III Tankers…

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…….but creating opportunity for disciplined investors and the creation of legendary opportunistic asset plays…..

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………….from those who provided credit – with the best of intentions

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An industry with a strategic dependence upon and vulnerability from and diffidence towards its capital providers

Different revenue structure and profit model

Changing exposure to risk

Different and sometimes “softer knowledge”

Different downside risks and options

Changing regulations, metrics, and corporate objectives

2012 Connecticut Maritime “Commodores Panel” comments on capital provision

“Open wallets

Overwhelmed, with insufficient capacity, experience and expertise”

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STRATEGIC IMPERATIVES FOR A CHANGING WORLD

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FOR COMMODITIZED SHIPPING (Wheelbarrow) Long/short charter-in, charter-out, patterns and period

SPECIALIZED SHIPPING (Tool Kit Shipping)Specialized ships and specialized knowledge to

meet customer needs to achieve enduring stability CREATING FLYWHEELS

Move towards defensible segments and relationships with fewer, more rational direct rivals

INFLUENCING CAPITAL PROVISIONInfluence lender activity, focus and costs of

capital

STRATEGIC IMPERATIVES FOR A CHANGING WORLD

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COMMODITIZED SHIPPING – MANAGING PRESSURE FOR CUSTOMIZATION AND FLEXIBILITY

Greater Customization and Specialization To Meet Customer’s Needs- VLOC not VLBC’s – Yet- Juice, Cement, Acid, Chip, Lightering, Shuttle, Belt Ships,- Pipe carrying PSV’s, Multi-Purpose Support Vessels, Inspection Maintenance

Repair– Acronym Shipping: PSV, AHTS, HLCSV, FSV, MPSV, IMR, ERV

AND: Greater General Flexibility and Efficiency Through Technology and Service Design

– IMO II/III Tankers – Products and 95% of Chemical Cargo Requirements– Fuel Oil Trading In Crude Tankers– Petroleum Products Exchanges and Swaps– Box Hold Stowage of Bulk and Neo Bulk Cargos– Lighter, Larger Ship Designs – More Cargo Per Foot – Superior Coatings for Cargo and Life Cycle Cost– Articulated Tug-Barge Units – Fuel and Ballast and Simplicity– Pattern Building to Counter Scale Economies

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Scale and flexibility view for low cost and utilization

COAL IN - IRON ORE OUTLOWEST COST TO <10 PORTS

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THE EMERGING WORLD OF TOOL BELT SHIPPING

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The relatively higher and differentiated solutions for offfshore services

WHAT Offshore Extractive Energy Processes

Wind and Tidal Power

Sub-sea Extraction/Mining

WHERE Inshore

Deepwater

Arctic

WHY Elements of very large projects with emphasis on schedule, reliability, productivity

Purpose-built or – modified tends to support longer term charters

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Solving marine systems requires REAL DIFFERENTIATED KNOWLEDGE– until and unless this know-how is proliferated and commoditized

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A Stolt-Nielsen maxim “If you can specify it – it’s a commodity” Great – if you’re buying

– Increased sources of supply– Reduced prices to buy– Turn an OEM spare part into a multi-sourced item

“Not so much” – if you’re selling– Contestable rivalry– Lower prices to win– Vetting had an “exclusive” period

Countering commoditization– Leading solutions and results– Implicit needs not specified - intimacy– Adding services beyond specifications

- Focus on customer, and- The customer’s customer

- EXAMPLE: The person being moved on a crewboat – what do they need or prefer (sat phone service and in-seat movies)

- EXAMPLE: The chemical parcel’s receiver – what makes them happier (advance notice of cubic meters and prior test specifications)?

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CREATING FLYWHEELS OF VALUE, CASH FLOW AND MOMENTUM

“…………….objects in motion tend to stay in motion. Flywheels help an engine to run smoother, last longer and accelerate more easily from a stop…..”

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FLYWHEELS ENHANCE STABILITY, CASH FLOW, STRATEGIC CONTROL, PRESERVATION OF LEARNING, AND CREATE AN INVENTORY OF CAPABILITIES AND OPTIONS

Step downs to raise create purer plays and raise cash Relatively longer-term customer relationships to reduce cyclical exposure Opportunities to develop and motivate managers Better create shareholder focus and understanding Focus knowledge Maintain stronger positions in smaller, local, or defensible market segments Match lower risks with lower returns and costs of capital

INDUSTRIAL SHIPPING HAS LOWER COSTS OF CAPITAL UNLESS THE PROVIDER CAN COMMAND A PREMIUM FOR SOLVING THE PROBLEM OR CREATING HIGHER VALUE FOR THE CUSTOMER

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BRIEF OVERVIEW OF MARITIME STRATEGY IN SEVEN MINUTES

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Strategy Creates Sustainable Advantages in Two Ways:

- LOWERS Cost and/or Investment

- RAISES Pricing or Market Share

Credit: Adrian Slywotzky, author Value Migration (1995)

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Sources of Advantage

Strategy Creates Sustainable Advantage in Two Ways:– Lowers Cost and/or Investment– Raises Pricing or Market Share

Strategy Emanates from Three Sources:

– Timing

– Scale

– Linkages


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Timing, Scale, Linkages

TIMING ASSET Purchase

and Sale EARLY ENTRY

for First Mover Advantage and Experience and Expertise

FOLLOW Mover Gaining from Learning and Avoiding Mistakes

PRE-EMPTIVE service, capability or location

LEARNING faster

SCALE Economies of

SCALE PATTERNS of

Service and Density

FLEXIBILITY and DENSITY

Purchasing POWER

Knowledge to RESPOND

Capacity to SERVE Capacity to

LEARN Brand

LEADERSHIP

LINKAGES CONTROL of

value-added chain

Relationships with CUSTOMERS

Relationships with SUPPLIERS

Relationships with COMPETITORS

Relationships with BROKERS

Access to TECHNOLOGY and DESIGNS

Access to KNOW -HOW

Derived by Dibner Maritime from: Adrian Slywotzky, author Value Migration (1995)


These forms and sources are inter-related

Opportunities for Sustainable Advantage

Sources of Advantage

Early-Entry Efficiencies

Scale Efficiencies

Integration Efficiencies

Early-Mover Differentiation

Leadership Differentiation

Synergy DifferentiationFo

rm o

f Adv

anta

ge

Lower Cost or

Investment

Higher Price or

Share

Timing Size Linkage


Patterns of competition reflect the strength and scope of sustainable competitive advantage

Patterns of CompetitionStrength of Sustainable Advantages

Scop

e of

Sus

tain

able

A

dvan

tage

s

Broad

Narrow

Strong Moderate Weak

Industry Domination Broad Rivalry

Contestable Positions

Defensible Niches Local Matches



Patterns of competition reflect the strength and scope of sustainable competitive advantage

Patterns of CompetitionStrength of Sustainable Advantages

Scop

e of

Sus

tain

able

A

dvan

tage

s

Strong Moderate Weak

Industry Domination

Imperatives: Gain and maintain leadership o Risks: Loss of position; costly victory

Broad Rivalryo Imperatives: Match moves or coexist with major competitors o Risks: Ruinous rivalry; entry

Contestable Positions

o Imperatives: Hustle; skim short-run opportunities o Risks: Excess industry capacity; immobility

Defensible Nicheso Imperatives: Find and dominate a nicheo Risks: Loss of position; overcrowding

Local Matcheso Imperatives: Manage segment rivalso Risks: Intense competition; broadening of boundaries

We can relate these forces and factors to the shipping industry in general and can extend the implications of competitive patterns to the characteristics of the transportation business.

Broad

Narrow


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Three Key Maxims for Daily Review

LEARNING - what did we?

VALUE GROWTH - how and why?

LOWER COST - what progress?

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Examples of Strategies

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Maersk a global leader in both container and harbor assist service

BOTH – technical and process competence

BOTH – scale advantages and network

LOCAL MATCHES OR

DEFENSIBLE NICHES

DOMINATION OR

CONTESTIBLE POSITION

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Seacor’s Introduction of High Speed Crewboats/Fast Support Vessels – while also providing helicopter services to offshore and other clients

DOMINATION AND TIMING

(FIRST MOVER

ADVANTAGE)

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Stolt-Nielsen’s Long Commitment to Chemical Logistics ….parcel …terminal ….feeder…..barges….container….logistics ….marine software services ….software spin outs……..bitumen……LPG

INTEGRATION EFFICIENCIES

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As while arch-rival Odfjell focused in a slightly different manner including re-processing bottoms, slops, and interfaces in its own refinery and ordering a super-sized 76,000 dwt chemical tanker

SCALE AND LINKAGES INTEGRATION EFFICIENCIES

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Weyerhauser’s balancing containers east and internal high quality paper west bound - ground weld seams became distinctive

DEFENSIBLE NICHE

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CSL International has extended Great Lakes solutions for short-haul high intensity dry bulk logistics to international customer needs and has sustained advantages through pooling

DEFENSIBLE NICHE

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Coeclerici is one of several operators who have focused on floating transshipment services, with others as rivals or dominators of other niches and needs – such as CLS Oldendorff

DOMINATION AND FIRST MOVER ADVANTAGE

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THANK YOU!

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Marine Money Week