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The Independent Maritime Advisor

Drewry 2012

Drewry | The Independent Maritime Advisor

Drewry was founded in 1970 as a provider of independent information and advice to the global maritime industry. We are privately owned with research and advisory teams in London, Delhi, Singapore and Shanghai.
London Drewry 15-17 Christopher Street London EC2A 2BS,United Kingdom T: +44 (0)20 7538 0191 E: info@drewry.co.uk Delhi Drewry 209 Vipul Square, Sushant Lok-1 Gurgaon 122002, India Telephone: +91 124 40476 31/32 E: india@drewry.co.uk Singapore Drewry 15 Hoe Chiang Road, #13-02 Tower Fifteen Singapore 089316 T: +65 6220 9890 E: singapore@drewry.co.uk Shanghai Drewry 555, 5th floor Standard Chartered Tower, 201 Shi Ji Avenue, Pudong District, Shanghai, China 200120
Drewry 2012

Drewry | The Independent Maritime Advisor

Drewry 2012

Drewry | The Independent Maritime Advisor

Main consultancy services offered by Drewry Supply Chain Advisors

Freight Rates & Freight Procurement Support Container freight rates Maritime industry benchmarks International Supply Chain Network Optimisation Shipping corridors Routing & ports DC Location Port of entry strategy Inland and intermodal links Operation & Process Mapping Supply Chain Performance Evaluation / Benchmarking Landed Cost Calculation Air/Sea Mode Selection Inventory positioning International Supply Chain Strategy Support Feasibility Studies Due Diligence Supply Chain Framework & Design DC Location Routing & Ports Inland Corridors

International logistics research

Published reports and databases Quarterly advisory service Future transport capacity Freight Trends Carrier Performance Assessments Contract Tender / Bid Support Negotiation Process Support

Strategic Sourcing
Supply/Demand Trends Equipment Supply Constraints Congestion Impact Risk Analysis

Value Adding Locations

Drewry 2012

Drewry | The Independent Maritime Advisor

Focus: International end to end supply chains (not just transport)

Processes, Documents, Finance and Physical flows

Factorys door at origin

Origin DC

Value added activities International transport

Customer Destination DC

Ports/airports

Drewry 2012

Drewry | The Independent Maritime Advisor

What is it like working for Drewry

Drewry 2012

Challenging World for the Container Liner Operators

09 March 2012

Drewry | The Independent Maritime Advisor

Carrier Profitability Annual boom and bust cycle

10 8 6 10% 4 2 20% 15%

5% 0% -5% -10%

US$ billion

0
-2 -4 -6 -8 -10 EBIT Profit/Loss (Left axis) EBIT margin (right axis)

-15% -20%

Drewry 2012

Drewry | The Independent Maritime Advisor

Carrier Profitability Is anyone making money?

30%

EBIT Margin (%) 2002 - 2010

20%

10%

0% 2002 -10% 2003 2004 2005 2006 2007 2008 2009 2010

-20%

-30%

Cumulative Profits (loss) in US$ billion 2006-2010

-40%

Maersk 2.9 CMA 3.4 APL 0.6 CSAV (0.9) ZIM (0.5)
Drewry 2012

Drewry | The Independent Maritime Advisor

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Industry overview

161 million TEU of full containers moved in 2011 Annual growth in container trade of 10% to 2008 Slowing growth since Steady containerisation of general cargo trades and commodities

More than 400 container shipping lines worldwide. Over 4,000 container ships worldwide Growth of global liner networks This is not the first time the industry has had to face challenging times
Mid 90s to early 2000 slowdown in demand growth resulting in huge oversupply situation

Now is different from before - In 2011 global demand increased by over 7% but the top 20 carriers lost a minimum of $5-6 billion
Drewry 2012

Drewry | The Independent Maritime Advisor

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Historical volume development

700,000 600,000 500,000 400,000 300,000 20% 15% 10% 5% 0%

200,000
100,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 N AMERICA MID EAST % change in world traffic EUROPE LAT AMERICA FAR EAST/SE ASIA OTHER REGIONS

-5%
-10% -15%

Drewry 2012

Drewry | The Independent Maritime Advisor

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Global containership size development

Total order book by teu size range (% of teu capacity)
4% < 1,999 6% teu 2,000 3,999 teu

13% 4,000 5,999 teu

50% 10,000 teu +

7% 6,000 7,999 teu

21% 8,000 9,999 teu

Drewry 2012

Drewry | The Independent Maritime Advisor

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Economies of scale

Drewry 2012

Drewry | The Independent Maritime Advisor

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Liner economics
Factor Economies of scale Perishability High operational gearing Effect Structural overcapacity Push for short run contribution rate erosion Push for short run contribution rate erosion

Fragmented industry
Commoditised Inelastic demand curve

Continuous battle for share

Little scope for differentiation; intense price competition Falling rates have a limited effect on demand

Cumulative effect is continuous rate erosion Lines are profitable only when, by chance, demand exceeds supply This situation will persist until economies of scale run out and an oligopoly is established

Drewry 2012

Drewry | The Independent Maritime Advisor

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Dominance of the big three

1992
Maersk 4% 4% MSC 3% CMA CGM

2006

2011

17% Maersk 17% 10%

16% Maersk 16%

58%

31% Remaining 17 Remaining 17 50%

MSC 6% CMA CGM Remaining 17 47%

13% MSC

8% CMA CGM

Drewry 2012

Drewry | The Independent Maritime Advisor

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The shipping market cycle

Optimism supports orders Demand for new tonnage Supply exceeds demand / trade growth slows

Freight rates recover

Over tonnaging

Demand and Supply realign

Freight rates drop

Fleet growth slows / trade recovers

Demand for vessels drops

Drewry 2012

Drewry | The Independent Maritime Advisor

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Round voyage slot costs (Asia-N. Europe)

1,200

1,000

800 US$/teu)

600

400

200

4,000 9,000 Capacity (teu) Capital costs + operating costs Fuel costs Port + canal costs 11,000 14,000

Drewry 2012

Drewry | The Independent Maritime Advisor

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Freight rate development

All-in rate including BAF (US$ per teu, right axis)
2,000

1,600

1,200

800

400

2004

2005

2006

2007

2008

2009

2010

Drewry 2012

Drewry | The Independent Maritime Advisor

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Operating Margins (US$ per TEU)

200 15%

150 10% 100 5% 50

0 2000 -50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1H2011

0%

-5% -100 -10% -150

-200

-15%

Drewry 2012

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Container shipping - the Great Escape

5,000 4,500 4,000
US$/40ft

110.0
Supply-demand index (1980=100)

105.0 100.0 95.0 90.0 85.0 80.0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

3,500 3,000 2,500 2,000 1,500 1,000

Asia-USWC Freight rates

Asia-N Europe Freight rates

Supply-Demand Index

Layup Slow steaming Unexpected volume bounce Delay in vessel delivery

Drewry 2012

Drewry | The Independent Maritime Advisor

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Freight rate outlook

108
106 104

1,550

1,500

1,450 102 100 98 96 1,300 94 92 90 2010 2011 2012 2013 2014 2015 2016 Drewry East-West Supply-Demand Index All-in rate including BAF (US$ per teu, right axis) 1,250 1,400

1,350

1,200

Drewry 2012

Drewry | The Independent Maritime Advisor

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Volatility and carrier losses (containers) Current financial trends conclusions

Carriers selling vessels to independent shipowners in sale and lease-back charter deals European banks may foreclose loans to independent shipowners who have had a three year holiday from interest payments under Basel II regulations Operators exiting the industry (MISC) or certain trade lanes due to poor profitability (PIL/Wan Hai) Carriers announcing large freight rate increases to reduce losses Newbuild orderbook has substantially slowed down less finance available, LOIs cancelled Planned IPOs have been delayed or halted Some carriers seeking more operational alliances or actual operational partners In trouble: Zim did not achieve waiver of financial covenants by end of 2011; CSAV looking for partner; Horizon Lines experiencing difficulties and exited transpac trade (vessels chartered until 2018) 2011 carrier failures included TCC and Yang Hai Shipping; Trailer Bridge filed for bankruptcy Drewry does not foresee industry M & A activity. Consolidation more likely from exit or disappearance of smaller companies Some new equity being raised CSAV cash injection, Trailer Bridge (Seacor Holdings) Carrier are burning cash this cannot last much longer, Lines are now acting - Maersk

Drewry 2012

Drewry | The Independent Maritime Advisor

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Estimated industry cash reserves and burn rate, US$ billions

Cash Reserves
25

20

Daily Cash Burn Rate = US$48.7m Forecast Date When CCE Runs Out = 03/10/2012 Daily EBIT Loss = US$25.7m Forecast Date When EBIT Losses Exceed CCE = 15/02/2014

15

10

0 1-Jun-11 1-Aug-11 1-Oct-11 1-Dec-11 1-Feb-12 1-Apr-12 1-Jun-12 1-Aug-12 1-Oct-12

Drewry 2012

Drewry | The Independent Maritime Advisor

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Liner operators have previously emerged from difficult times and whilst these are challenging times, no doubt the liner industry will once again emerge from these challenges
Drewry 2012