freight market

© Drewry 2012

1Drewry | Coal Market in India 20133rd Annual Conference

1

Freight market

3rd Annual ConferenceCoal market in India 2013

Rahul | Lead research analystDrewry Maritime Services 27-28 August 2013, New Delhi

© Drewry 2012


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We achieve this through: Our consultancy team - people with senior management

experience in strategic, financial and operational aspects of shipping related activities. Who can apply a multidisciplinary and tailored approach to solutions provision.

Our range of publications – covering all key maritime sectors, keeping business leaders up to date with trends, projections and opinions.

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From our bases in London, Singapore, India and China, supported by associates across the world, Drewry can deliver world class advice anywhere and anytime. That is why the leading shipping companies, port authorities, government departments and financial institutions choose Drewry.

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© Drewry 2012


Dry Bulk Shipping Market

Source : Baltic Exchange, Bloomberg

Baltic Dry IndexEquity prices of dry bulk vessel

operators

22-M

ay-0

022

-Dec

-00

22-J

ul-0

122

-Feb

-02

22-S

ep-0

222

-Apr

-03

22-N

ov-0

322

-Jun

-04

22-J

an-0

522

-Aug

-05

22-M

ar-0

622

-Oct

-06

22-M

ay-0

722

-Dec

-07

22-J

ul-0

822

-Feb

-09

22-S

ep-0

922

-Apr

-10

22-N

ov-1

022

-Jun

-11

22-J

an-1

2

02,0004,0006,0008,000

10,00012,00014,000

Baltic Dry Index

22-J

un-0

5

22-D

ec-0

5

22-J

un-0

6

22-D

ec-0

6

22-J

un-0

7

22-D

ec-0

7

22-J

un-0

8

22-D

ec-0

8

22-J

un-0

9

22-D

ec-0

9

22-J

un-1

0

22-D

ec-1

0

22-J

un-1

1

22-D

ec-1

1

020406080

100120140160

Excel Maritime Eagle bulk Diana Shipping

o Baltic Dry Index on Feb 3, 2012 at a 25 year low.

o Market corrected sharply after Lehman crisis and have since been low but volatile, mainly due to influx of new building vessels ordered during the boom times.

o Equity prices of listed dry bulk companies have followed generally the same pattern.

© Drewry 2012


DEMAND SIDE DYNAMICS

© Drewry 2012


Demand Outlook: Iron Ore will continue to drive the dry bulk market

World steel outlook World iron ore importsChina import: CAGR (2006-12): 14.7% CAGR (2012-18): 8.2%

Steel consumption: CAGR (2006-2012): 3.6% CAGR (2012-2018): 6.0%

Trade 2005:717 mtTrade 2012:1,180 mtTrade 2018: 1,749 mt

On demand side – China is expected to continue to dominate. Iron ore imports are expected to grow at a CAGR of 8.2% during 2012-18.

On supply side, Australia and Brazil would continue to dominate. Whilst some Iron ore expansion plans are being reviewed in the current demand downturn, many of the major miners continue with their expansion plans.

India, a major iron ore exporter, is expected to decrease its exports and increase steel production.

South Africa is likely to become the third largest exporter, replacing India. Longer distances will increase the tonne-miles.

2010 2011 2012 2013 2014 2015 2016 2017 20180

500

1,000

1,500

2,000

2,500

Global steel consumption

Mill

ion

tonn

es

2010 2011 2012 2013 2014 2015 2016 2017 20180

400

800

1200

1600

2000

Iron ore imports

Mill

ion

tonn

es

2010 2011 2012 2013 2014 2015 2016 2017 20180.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

Iron ore - major importers

EU-15 Japan South KoreaChina Taiwan

Mill

ion

tonn

es

Source: Drewry Maritime Research



© Drewry 2012


Demand Outlook: Thermal Coal driven by electricity demand

Rising electricity demand in developing Asia is expected to be the main driver of growth in thermal coal imports. Import demand is projected to be relatively weak in developed economies, as a result of comparatively weaker

economic growth and greater access to natural gas. Thermal coal exports : Indonesia and Australia continue to dominate.

• Colombian exports are expected to increase, which reflects the relatively low cost of production, high energy and low sulphur content of Colombian coal.

• South African exports are forecast to increase as the expansion of rail infrastructure supports increased capacity at the Richards Bay Coal Terminal.

• Mozambique has slowly started exporting coal and will become a significant coal exporter in the long term.. Botswana a long way to go before becomes a significant coal exporter but very likely to become one.

Chinese exports CAGR (2006-12) :-33.6%US exports CAGR (2006-12) :41.6%

2005 trade 468 mt 2012 trade 784 mt 2018 trade 1204 mt

2010 2011 2012 2013 2014 2015 2016 2017 20180

50

100

150

200

250

Thermal coal - major importers

EU-15 Japan S.KoreaTaiwan China India

Mill

ion

tonn

es

2006 2007 2008 2009 2010 2011 20120

20406080

100120140160180200

Thermal coal – major exporters

Australia China Indonesia S. AfricaColombia Venezuela USA

Mill

ion

tonn

es



© Drewry 2012


Demand Outlook: Coking Coal driven by steel production

Global coking coal trade expected to grow at a CAGR of 3% The primary driver will be an increase in steel production in China, Coking coal import of China is expected to

witness a CAGR of 16.1% between 2012-2018. EU-27 and Japan to grow at a moderate rate of 3.3% and 1.8% in the next five years. With the investment of Vale, Rio Tinto and many other producers, Mozambique is anticipated to play an

important role in Coking coal export. As Shale gas becomes an influential factor in the US energy mix, the US will become an important coal exporter.

2010 2011 2012 2013 2014 2015 2016 2017 20180

20

40

60

80

100

120

140

Coking coal -mjor importers

China EU-15 Japan S.Korea India

Mill

ion

tonn

es


© Drewry 2012


SUPPLY SIDE DYNAMICS

© Drewry 2012


Supply Outlook: Dry bulk fleet age profile

At the bginning of this year the average age of overall dry bulk fleet is 11.1 years The Post-Panamax vessel segment is the youngest with just 3.8 years of average age Handysize is the oldest in dry bulk fleet with 15.1 years of average age, which is expected to decline with

increased numbers of demolitions in 2012 Despite lower average age, demolitions in Capesize and VLOC segment is expected to be high in the coming

couple of years in view of low freight market


<=80

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15+

020406080

100120140160

02004006008001,0001,2001,4001,600

Fleet: m dwt (left) Orderbook: m dwt (left) Current Fleet - year delivered: number of vessels (right) Orderbook - scheduled delivery: number of vessels (right)

HandysizeHandymax

PanamaxPost-PanaCapesize

VLOCDry bulk

15.19.2

12.43.8

7.610.1

11.1Average age (years)

Mill

ion

dwt N

o. of vessels

© Drewry 2012


Supply Outlook: Fleet growth continues unabated


VLOC Capesize

Post Panamax Panamax

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

(f)

2014

(f)

2015

(f)

2016

(f)

2017

(f)

2018

(f)

(10.0)

(5.0)

-

5.0

10.0

15.0

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Demolitions Deliveries Fleet

mill

ion

dwt

mill

ion

dwt

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

(f)

2014

(f)

2015

(f)

2016

(f)

2017

(f)

2018

(f)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

-

50.0

100.0

150.0

200.0

250.0

300.0


mill

ion

dwt

mill

ion

dwt

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

(f)

2014

(f)

2015

(f)

2016

(f)

2017

(f)

2018

(f)

(2.0)

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

- 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0


mill

ion

dwt

mill

ion

dwt

2003

2005

2007

2009

2011

2013

(f)

2015

(f)

2017

(f)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

- 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0

Demolitions Deliveries Fleetm

illio

n dw

t

mill

ion

dwt

© Drewry 2012


Supply Outlook: Fleet growth continues unabated …


Handymax Handysize

Total Fleet

2003

2005

2007

2009

2011

2013

(f)

2015

(f)

2017

(f)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

- 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0


mill

ion

dwt

mill

ion

dwt

2003

2005

2007

2009

2011

2013

(f)

2015

(f)

2017

(f)

(10.0)

(5.0)

-

5.0

10.0

15.0

- 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0


mill

ion

dwt

mill

ion

dwt

2003

2005

2007

2009

2011

2013

(f)

2015

(f)

2017

(f)

(60.0) (40.0) (20.0)

- 20.0 40.0 60.0 80.0

100.0 120.0

- 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0 900.0


mill

ion

dwt

mill

ion

dwt

© Drewry 2012


Overview of Indian coal sector

© Drewry 2012

15Drewry | Coal Market in India 20133rd Annual ConferenceLocation of some of the upcoming power projects

Most of the imported coal based power projects are located in coastal states.

Source: Power Producer’s website, Drewry Maritime Advisors

OPG Power P lant (300 MW )

PipavavDahej

New Mangalore Udupi Power Plant II (600 MW )

ThaneReliance Power Plant (1,200 MW )Tata Power Plant (1,600 MW )

Adani Power P lant (640 M W )Visa Power P lant (1,320 MW )

Adani Power Plant (4,620 MW )Tata Power Plant (4,000 MW )

RatnagiriJSW Energy TPP (3,200 MW )Raigarh

Pipavav Energy Power Plant (1,200 MW )Essar Power Plant (2,520 MW )

AmreliJam nagarMundra

Tam ilnadu UM PP (4,000 MW )

Tuticorin TPP (800 M W )

Sim hapuri Energy Private Ltd. (540 MW )

Therm al Powertech TPP (2,640 MW )Krishnapatnam TPP (1,600 M W )Reliance Power UMPP (4,000 MW )

Madhucon and M alaxm i (540 MW )

Krishnapatnam

SRM Energy TPP (1,980 M W )Cuddalore

TuticorinNagapattinam Gemac Energy TPP (1,320 MW )

Visakhapatnam

NTPC Pow er P lant (4,000 M W )Hinduja National TPP (1,200 MW )

Nayachara IslandUniversal Success TPP (1,980 M W )

© Drewry 2012

16Drewry | Coal Market in India 20133rd Annual ConferenceLocation of cement plants of India

Source: Cement Manufacturer Association of India

Most of the cement plants located in Gujarat, Gulbarga, Nalgonda, Chandrapur and Yeraguntla cluster rely on imported coal due to receding coal linkage. As the coal requirement is relatively small they tend to rely on coal traders.

© Drewry 2012

17Drewry | Coal Market in India 20133rd Annual ConferenceSectoral coal demand

Source: Ministry of Coal, Annual Report

Sector-wise coal demand: India (in million tonnes)

Non-coking coal demand grew at a CAGR of 9% in the past six years compared to coking coal demand CAGR of 6.7%.

S. No. Sector 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Estimated2012-13

( I ) Coking Coal

1 Steel/Coke oven & Cokeris 17.3 17.0 16.6 15.9 16.8 17.2 22

2 Steel (Import) 17.9 22.0 21.1 23.5 23.2 29.4 30

Sub-total Coking 35.17 39.02 37.7 39.4 40 46.6 52( II ) Non-Coking Coal

1 Power (Utilities) 307.9 332.4 362.1 380.1 405 460 512

2 Captive Power 28.1 29.3 32.9 38.5 40 40 43

3 Cement 19.7 21.3 20.1 20.8 26 28.9 30.2

4 Steel 17.5 21.0 19.8 22.9 28.8 30.5 35.3

5 Others 54.5 60.4 75.6 79.8 85 90 100

6 Consumption 0.9 0.9 0.9 0.8

Sub-total Non-Coking 428.7 465.3 511.4 542.9 584.8 649.4 720.5Grand total 463.9 504.3 549.0 582.3 624.8 696.0 772.8

India’s power sector drives the coal demand in India. In 2011-12, Indian power utilities generated non-coking coal demand of 460 million tonnes, 14% more than that in 2010-11. In the year 2011-12, demand for total raw coal in India was close to 696.0 million tonnes. On the contrary, total coal production reported 532.8 million tonnes with a gap of about 163.2 million tonnes.

Overall, non-coking coal demand has been growing at a CAGR of 9% since 2006-07 compared to 6.7% CAGR of coking coal. It is reflective of the fact that thermal power generation has grown at a much faster rate compared to steel production capacity growth in India.

© Drewry 2012

18Drewry | Coal Market in India 20133rd Annual ConferenceCoal Production in India

Note: Others include other PSU, TISCO, and Captive Mining & MeghalayaSource: Ministry of Coal, Annual Report 2012-13

Production of coal: India (in million tonnes)

Coal production has not grown since 2009-2010. Production is targeted to increase by 8% in 2012-13.

Company Target 2012-13

Actual Productionupto Dec 12

2011-12Actual upto Dec 11

CIL 464 308.89 291.24

SCCL 54 37.18 35.26

Others 57.2 38.12 37.62

Total 575.3 384.19 364.12

The Coal production all over India during the period 2011-12 was 532.8 million tonnes as compared to the production of 532.7 million tonnes the year before. In 2012-13, however, production of 574.4 million tonnes of coal is targeted. Since 2005-06, production has grown at a CAGR of 4.6% compared to 7.6% growth in demand. Consequently, the demand and supply gap in India has been continuously widening. In 2012-13, as per Government of India estimates, the demand and supply gap is estimated to be very close to 200 million tonnes.

With marginal growth in 2012-13, coal import is expected to increase in coming years.

Production and demand of coal: India (in million tonnes)

-

100

200

300

400

500

600

700

800

900

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13Co

al P

rodu

ction

(Mill

ion

Tonn

e)

Total coal production Total coal demand

© Drewry 2012


FREIGHT RATE IMPACTING INDIA’S IMPORT

© Drewry 2012


Coal price and freight rate had a nose dive in 2009


We would argue that the co-relationship that existed between thermal coal price and freight rates and coal impots became more prominent as newly designed Eco- Vessels with fuel efficient engines are introduced , which give significantly better voyage economics.

Next slide shows a sound relationship between price/rates and coal imports to India

2002 2004 2006 2008 2010 20120

20

40

60

80

100

120

140

160

180

200

Price - thermal coal (fob)

Richards Bay Indonesia

$/to

nne

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201210,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

Capesize Vessels – 1-year TC rate

$/da

y


© Drewry 2012


High co-relationship between cost of imports and import volume


In terms of pure distance, when coal is imported at the west coast of India, there is hardly any difference between importing from Indonesia or South Africa

When coal is imported at the East coast of India, there is signifcant difference in distance between South African cargo and Indonesian cargo

RB-Mundra

Samari

nda-Mundra

RB-Gangav

aram

Samari

nda-Gan

gavar

am2,500

3,000

3,500

4,000

4,500

Distance comparison

Nau

tical

mile

s

Imports to West coast Imports to East coast

20002001

20022003

20042005

20062007

20082009

20102011

20120

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

8.1 8.4 8.3 12.6 15.624.4 29.0

35.3 36.2

60.175.7

93.7

123.1

Thermal coal imports - India

Indonesia South Africa Others Total

mill

ion

tonn

es


© Drewry 2012


Bigger vessels have started coming to India recently

2007 2008 2009 2010 2011 20120%

10%

20%

30%

40%

50%

60%

70%

80%

Share of coal in various sizes of vessels

Handysize Handymax Panamax Capesize

Sha

re in

tota

l coa

l tra

de

2009 2010 2011 2012 2013 2014 2015 2016 2017 20185,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1-year time charter rate

Handysize Supramax Panamax Capesize

$/da

y

Freight rates plunged in 2009 giving rise to a sharp decline in cost involved in shipping coal to India

Though rates are expected to improve from next year, they might remain low for next few years making imports a good alternative to domestically sourced coal

Source: Drewry Maritime ResearchSource: Drewry Maritime Research

© Drewry 2012


Assessment of shipping options

Time CharterSingle Trip CharterPeriod Charter

Chartering ships on period time charter basis allows the ship owner to calculate the forward cash flow situation more accurately than with the majority of other chartering options. Variable on port and fuel costs

Bareboat Charter

Bareboat charter is similar to period time charter with the added cost of providing for vessel’s operating expenses.

Vessel OwnershipNewbuildingSecondhand

Vessel ownership would provide a hedge against freight volatility, but it requires a considerable capital outlay as well as ship management capabilities. Vessel ownership for longer-haul voyages would require extensive commercial operations to maximise utilisation of the vessel by securing backhauls and potential triangulation voyages. Vessels can be bought and given to vessel management companies to operate it.

There are a number of shipping options which can be chosen for securing freight. The options can vary from spot charter to time charter or vessel ownership depending on the scope of requirements, financial capacity, market conditions etc.

Essentially, charterers can secure freight services on one of two bases. They can either fix vessels to carry a specified cargo (or cargoes) between one or more loading port and one or more discharge port, or they can hire ships for a specified period of time. This choice of charter type influences the division of legal and operational responsibilities and, consequently, financial liabilities between the owner and the charterer. In this context, the term “owner” also includes a disponent owner (i.e., a person or company which has commercial control over a vessel's operation without owning the ship as in a bareboat charter). There are effectively four shipping options:

Voyage CharterSingle (or Spot) CharterMultiple (or COA) Charter

Both offer good scheduling flexibility to the charterer, but spot charter rates are dependent on spot markets and therefore can be very volatile. COA on the other hand, would ensure stable costs through length of COA, but could be variable over duration of project.

Charterers can secure freight services on two bases – for a specified cargo between ports, or for a specified period

© Drewry 2012


Vessel chartering options

Summary of various charter types

Source: Drewry Maritime Advisors

Fixtures can be primarily be done on two basis: CFR basis (cost and freight) , that is method of selling cargo where seller pays for loading costs and ocean freight. FOB basis (free on board) method of selling cargo excluding ocean freight and insurance, but including loading costs.

There are mainly two bases of fixtures – CFR and FOB basis

Charter types Single Voyage Charter COAs Time Charter Vessel Ownership

Scheduling Great Flexibility High Flexibility Low to medium flexibility Low flexibility

Quantity One voyageCan be any quantity, but for risk management, size should be split up

Limited by vessels’ operational constraints

Limited by vessels’ operational constraints

Time One voyage at a time

Any duration (normally 12 months),but for risk management, length should be limited or linked to port/fuel Costs

Can be any duration (from trip time for a round voyage to7 years)

Life of the vessel

Cost Variable and Volatile – dependent on spot rates

Stable over length of COA, but variable over the length of the project. Faces risk of under or over-performing the market

Stable for length of time charter,but variable over length of project. Variable on port and fuel costs. Faces risk of under or over-performing the market

Stable. Dependent upon when purchased, but typically stable cost over the long term. Variable on port and fuel costs.

Management Highly operational intensive Medium operational intensity Medium operational intensityHigh operational intensity, although some functions can be outsourced

© Drewry 2012


Strengths Weakness Opportunity Threat Operational Requirement

Short Term Commitmen

t

Spot (or voyage) Charter

(1) Offers great flexibility while scheduling

(1) Freight Cost is highly variable and volatile, dependant on spot rates.

(1) Freight markets expected to remain low over the next 2-3 years.

(1) Port congestion or natural disaster could affect availability of ships, and/or push up freight rates.

Small Team of 3-5 required to look at ship chartering and handle operations including coordinating with port agents and liaise with port authorities and facilitate the associated paper work

COA (any duration, but usually fixed for 12 months)

(1) Offers great flexibility while scheduling

(1) Is prone to fuel and port costs volatility. The charter party would tend to have a Bunker adjustment clause.

(1) Can fix vessel to transport cargo from designated loading port to various destinations and allow to sell CFR

(1) Port congestion or natural disaster could affect availability of ships, and/or push up freight rates.

Small Team of 3-5 required to look at ship chartering and handle operations including coordinating with port agents and liaise with port authorities and facilitate the associated paper work

Long Term Commitmen

t

Long Term Time Charter

(1) Freight Rates are stable over the length of the charter

(1) Is prone to fuel and port costs volatility

(1) Book vessel at the lower end of the shipping cycle and use to sell CFR cargoes

(1) Current oil prices are very volatile, and could push bunker prices quite high in the next few years.

(1) Requires medium to high operational capabilities.

Consecutive Voyage Charter (CVC)

(1) Freight Rates are stable over the length of the charter, but can vary over the project duration

(1) Is prone to fuel and port costs volatility



(1) Requires medium to high operational capabilities.

Bareboat Charter

(1) Advantages of vessel ownership, but without capital repayment

(1) A bareboat charterer has to meet stringent operational requirements. (2) Is prone to fuel and port costs volatility



(1) Requires high operational capabilities. (2) Depending on number of vessel acquisitions, a big team would be required to fix loading and discharge programs, vessel maintenance etc

Vessel Ownership

(1) Own vessel can give lowest freight economy

Requires huge capital outlay

(1) Current asset markets are near the bottom of the historical cycle, and therefore a good time for cash rich investors to enter the market

(1) Scheduling flexibility is low, i.e., the charterer might only want fob sales

(1) Requires high operational capabilities. (2) Depending on number of vessel acquisitions, a big team would be required to fix loading and discharge programs, vessel maintenance etc

Summary of chartering options, risk management and operational requirements

Following table shows SWOT analysis

© Drewry 2012


Thank you.

We have offices inLondon, Delhi, Singapore and [email protected]

market reports and forecasts consultancy services on the shipping and ports industries

freight procurement benchmarking and advice to importers and exporters

specialist research service and forecast for maritime investors

Rahul – Lead Research [email protected]+91-9868461589

© Drewry 2012


Contact

UK OfficeDrewry Shipping Consultants Ltd15-17 Christopher Street, London EC2A 2BS, United Kingdomt: +44 (0)20 7538 0191e: [email protected]

India OfficeDrewry Maritime Services Private Limited209 Vipul Square, Sushant Lok-1Gurgaon, Haryana-122002, Indiat: +91 124 497 4979e: [email protected]

Singapore OfficeDrewry Maritime Services (Asia) Pte, Ltd.15 Hoe Chiang Road, #13-02 Tower fifteenSingapore 089316t: +65 6220 9890e: [email protected]

China OfficeRep office of Drewry Maritime Services (Asia) Office 555, 5th floor Standard Chartered Tower, No. 201 Shi Ji Avenue, Pudong District: Shanghai, Chinat: +86-2161826759e: [email protected]

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major iron ore exporter