SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Shipbuilding Market Overview IMSF Singapore Gary Morgan Market Analyst Lloyds Register 17 April 2006

SHIPBUILDING MARKET UPDATELLOYD’S REGISTER

Shipbuilding Market Overview

IMSF Singapore

Gary Morgan

Market AnalystLloyd’s Register

17 April 2006


Summary

• An independent view on world shipbuilding to 2015o Macroeconomicso Development of global shipbuilding capacity

• An internal view on…….o China & Korea shipbuildingo Overcapacity

• Developments impacting the orderbooko Expansion of the Panama Canal – opportunity for dry bulk?


Macro EconomicsGDP growth rate for major economies

Source: Maritime Strategies International Ltd.


Risks

• Sharper than expected slowdown in the US, EU, Japan or China (important players in global growth)……e.g. US

o Housing (impacts consumption) – subprime mortgage crisis

o Decline in Dollar (less US imports)

o FED expected to cut rates (2003 1%...2007 5%)!

o Record US C/A Deficit versus Asia Surplus – self sustaining

• Large common shock which impacts behaviour (softening demand)

o Spike in oil prices / high price of commodities

o Geopolitics / War / Terrorist attack (e.g. September 2001)

• Will Renminbi rise enough to slow export growth?


The Outlook

• Orderbook 214 mGT

• High ship priceso $130m – 300k Dwt VLCC o $75m – 170k Dwt Cape

• Strong economic outlook – hence demand for shipping to remain higho Demand for bulk (commodities/raw materials) and container shippingo Demand for tankers (oil and products)

BUT

• 2006 Contracting 90 mGT…forward cover at 3 years….is this sustainable?• As deliveries outstrip new orders the orderbook will contract……….outcome?

o Fleet growth 7% & 8.5% for 05/06……demand growth…...5.6% % 7.1% demand growth

• China driving up its capacity

Country of Build

mGT Market Share (%)

South Korea 79.6 37.3%

Japan 57.9 27.2%

China 45.5 21.3%

Rest of World 30.4 14.2%


Shipbuilding – Risks

• Overcapacityo Capacity creepo New yards

• Global growtho US, Japan, EU, China slowdowno High commodity prices / high oil priceo Weakening demand commodities & finished products

o Fall in demand for shipping => fall in demand for new vessels

• Diversification of commodity sourcing / Infrastructural changeso E.g. EPSO pipelineo Chinese sourcing oil from Latin Americao China net importer of coal……Japan / Korea sourcing Australian coal


EPSO Pipeline Proximity to Asia


Outlook – Global Seaborne Trade (MnT)

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2,000

4,000

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14,0001

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Mn

T

WET CARGO DRY CARGO

WET CARGO CAGR = 3.8% (2007 – 2015)

DRY CARGO CAGR = 4.8% (2007 – 2015)


World shipbuilding capacity to 2015

SHIPBUILDING CAPACITY BY COUNTRY/REGION

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Mn CGTOther Eastern Europe Western Europe China Korea Japan

Forecast

Data Source: Maritime Strategies International Ltd.


China Vs Korea – Overview

China Korea

Shipyards • 5000+• Est. 30+ Mn Dwt 2015

• 70 registered with KSA• 7 out of 10 worlds largest yards!

Labour (costs) • Very low• Rise offset by inc. productivity

• Established• Skilled labour shortage

Productivity • Improving rapidly • Very high• HHI 60 – 70 ships per year

Ex. Rate volatility • Fixed against $US • Problematic

Future plans • Rapid expansion plans• Position as number 1

• High value-added ship design• Overseas yard development


Shipbuilding - China

• All state owned 55 years agoo Not uncommon for 10,000 staff to work on 1 ship – everything in house

• Now it is 2/3 state owned – divided up into North (CSSC) and South (CSIC)

• Machinery / electronics – bottle neck (industrial standards) – hence removal of production from yards…to improve efficiency & quality…equipment built externally.

o Advances made with rapid hull structure development are outpacing the above

o Phenomenal investment required (education, training)

• Productivity improving……buto For 1 GT in Japan – 10 times the man hours required in Chinao For 1 GT in Korea – 7 times the man hours required in China

o Korea = VLCC 9 months, ULCS 11 months


Shipbuilding – China….

• Heavy investment in shipbuilding (natural stimulus to economic growth)o Relocation of shipyards

o Redesigno Control location – proximity of resources

• Also……..Korean and Japanese involved in Chinao COSCO and Kawasakio Technology / Management transfer

• Rumour has it that there are over 5000 shipyards in China.....o CSSC – capacity of 15 Mn Dwt 2006 to 28 Mn Dwt by 2015o New shipyards (10 new vlcc docks)

o Chang Xin (Long Xue) – 4 vlcc dry dockso Haixiwan – 300k Dwt & 500k Dwt dry docks!!

• Since 2/3 yards are state owned a shipbuilding trough is not of paramount concern


Shipbuilding – Over Capacity

• Chinese government genuinely interested in control and avoiding overheatingo Regulations do exist but are bypassed locallyo Capacity exaggeration

• As forward cover for shipyards deteriorates over the next few years (since new orders will be less than deliveries).......marginal shipbuilding capacity will be shed.

o Currently c.3.2 years! 90+ mGT during 2006 (China 26% of 2006 orders)o E.g. forward cover receded last year….over 4 months prices fell 15%

• Squeeze on shipbuilding capacity post 2010o Not China….not very market sensitive….will grow relatively independently

of price and demand trendso New Chinese yards not yet complete seek orders

o Aggressive on price (ave price of 170-180k Dwt BC in China was $68Mn vs. $82Mn in Korea)….i.e. 10 – 15% discount


Global Orderbook & Forward Yard Cover

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Global Orderbook (Mn CGT)

Global Yard Capacity (Mn CGT)

Yard Forward Orderbook Cover (Years)

Forecast


Shipbuilding Prices• Price is determined by

o Shipyard costs – steel, equip, labour (prevailing prices….big yards still making losses)

o Market factorso supply and demand (forward cover)…e.g. BC in Koreao delivery time – pre 2010 difficult

o Exchange rates – volatility problematic….weak Dollar / strong Won (24% since 2002) => Korea Inc. $ price

• Important factor is supply / demand for global shipbuilding capacityo excess capacity will exert downward pressure on global prices for ships

o further expansion in Vietnam / Philippines

Scenario….Tanker market – between 2007 and 2011 c.180 Mn Dwt to hit water...supply growth rates =

8 ~ 9%o Optimistic demand scenarios not close to such growtho As dwt employment rate declines freight earnings fallo Early phase out would help…if rates are depressed

So….overcapacity may be compounded by fleet development


Expansion of the Panama Canal


Bulk Carrier Fleet Development

Fleet Growth (Mn Dwt)

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45

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2014 0

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600Deletions Deliveries Fleet

Source: Maritime Strategies International Ltd


Bulk Carrier Existing Fleet v Orderbook

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6%8%

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Existing Fleet Orderbook


Expansion of Panama Canal

• Lots of interest surrounding Mini Cape aka Handy Cape (c.116k Dwt)

• So………what are the principal dry bulk commodities trading on the Panama Canal?

Atlantic to Pacific FY 2006 Commodity

Pacific to Atlantic

Millions of Long Tons Millions of Long Tons

34.4 Grains 2.3

1.9 Coal & Coke 3.8

0.76 Iron Ore 0.92

1.6 Forest Products 4.3

• Biggest trade is grain from Atlantic to Pacific followed by forest products from Pacific to Atlantic. Interesting to note that iron ore trade is negligible in comparison to grain trade.


• So….....what is known of the existing fleet / trade movements of vessels of size 100k – 120 k Dwt?

• 9 vessels in service (as at end Dec 2006)o Movements analysis – Australian Coal to Japano Japanese ports can which can accommodate draft of the 116k Dwt design

can also accommodate Capesize! o Japanese grain and coal/ore (92k Dwt Panamax) receiving ports too smallo Hence application of Handy Cape to Japanese port infrastructure

questionable

• Grain is principally traded commodity via canal. Could Handy – Cape capitalise on this trade?

o Handy – Cape draft would restrict access to many L.American grain terminals

o Grain F/C difficult: 1) weather 2) LR follow population / income growth




• 9 vessels of 100k to 120k Dwt on order for completion prior to 2010

• Interest surrounding subsequent impact (of expansion) on tradeo Mitsui OSK Lines – mini-capes (116k Dwt) on order at Sanoyaso Next generation general – purpose bulker

o 245m LOA, 43m B, 15.3 Do MOL & Sanoyas “expect trade patterns of the worlds three major

bulk cargoes to change after the expansion of the Panama Canal”o Carry coal to emerging economies with less developed port

infrastructure e.g. India…

• Coal……..Atlantic trade dominated by South African & Columbian exports whilst Pacific trade is dominated by Australia & Indonesia…..role of the canal?


Panama Canal Expansion…possible trades

Canada West Coast (Coal) – Europe

Venezuelan (Ore) – Far East

Possibly US Gulf (Grain) – Far East


In Summary

• Perhaps the Handy Cape Bulkers Carriers will capitalise on trade developments post expansion – however this is very difficult to foresee

o Owners / Operators may have specific trades / routes in mindo Handy Capes likely to serve Japanese / Chinese / Indian ports – the

role of the Panama Canal is uncertain

• Further analysis may reveal possibilities due to canal expansion i.e. ports with suitable drafts and suitable commodities

• Owners and their fleet (since c.2003 earnings have been substantial)o Fleet expansion through newbuidling o Service improvement through offering a diverse fleet of shiptypeso Globalising business through advancement into growth marketso Shiptype speculation


Single Hull Phase Out


Tanker fleet development

Single & Double Hull Tanker Fleet Development

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num

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Double Hull Additions Double Hull Deletions Single Hull Deletions

forecast


• So….there will be a squeeze on SH tonnage due to….

o Regulatory – MARPOL Annex 1 Regulation 13G phase out

o Operational (chartering policies)

o Which charterers and terminal operators will allow SH?

o For instance barely any SH VLCC’s trade to European / U.S ports and terminals

o Surge in DH tonnage – hence more abundant

• What happens to tonnage…………SH Fleet is now below 100Mn Dwt

o Scrap

o Conversion to DH

o Conversion to another shiptype

o Conversion to FPSO

o Conversion for use as floating storage unit (FSU)

Single Hull Phase Out


World Fleet Development – by shiptype

Documents

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Shipbuilding Market Overview IMSF Singapore Gary Morgan Market Analyst Lloyds Register 17 April 2006