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

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Summary An independent view on world shipbuilding to 2015 o Macroeconomics o Development of global shipbuilding capacity An internal view on……. o China & Korea shipbuilding o Overcapacity Developments impacting the orderbook o Expansion of the Panama Canal – opportunity for dry bulk?

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Macro Economics GDP growth rate for major economies Source: Maritime Strategies International Ltd.

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER 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% %)! 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?

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER The Outlook Orderbook 214 mGT High ship prices o $130m – 300k Dwt VLCC o $75m – 170k Dwt Cape Strong economic outlook – hence demand for shipping to remain high o Demand for bulk (commodities/raw materials) and container shipping o 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 BuildmGTMarket Share (%) South Korea % Japan % China % Rest of World %

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Shipbuilding – Risks Overcapacity o Capacity creep o New yards Global growth o US, Japan, EU, China slowdown o High commodity prices / high oil price o Weakening demand commodities & finished products o Fall in demand for shipping => fall in demand for new vessels Diversification of commodity sourcing / Infrastructural changes o E.g. EPSO pipeline o Chinese sourcing oil from Latin America o China net importer of coal……Japan / Korea sourcing Australian coal

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER EPSO Pipeline Proximity to Asia

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Outlook – Global Seaborne Trade (MnT) WET CARGO CAGR = 3.8% (2007 – 2015) DRY CARGO CAGR = 4.8% (2007 – 2015)

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER World shipbuilding capacity to 2015 Data Source: Maritime Strategies International Ltd.

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER China Vs Korea – Overview ChinaKorea Shipyards Est. 30+ Mn Dwt 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 MARKET UPDATE LLOYDS REGISTER Shipbuilding - China All state owned 55 years ago o 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……but o For 1 GT in Japan – 10 times the man hours required in China o For 1 GT in Korea – 7 times the man hours required in China o Korea = VLCC 9 months, ULCS 11 months

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Shipbuilding – China…. Heavy investment in shipbuilding (natural stimulus to economic growth) o Relocation of shipyards o Redesign o Control location – proximity of resources Also……..Korean and Japanese involved in China o COSCO and Kawasaki o 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 2015 o New shipyards (10 new vlcc docks) o Chang Xin (Long Xue) – 4 vlcc dry docks o Haixiwan – 300k Dwt & 500k Dwt dry docks!! Since 2/3 yards are state owned a shipbuilding trough is not of paramount concern

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Shipbuilding – Over Capacity Chinese government genuinely interested in control and avoiding overheating o Regulations do exist but are bypassed locally o 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 2010 o Not China….not very market sensitive….will grow relatively independently of price and demand trends o New Chinese yards not yet complete seek orders o Aggressive on price (ave price of k Dwt BC in China was $68Mn vs. $82Mn in Korea)….i.e. 10 – 15% discount

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Global Orderbook & Forward Yard Cover

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Shipbuilding Prices Price is determined by o Shipyard costs – steel, equip, labour (prevailing prices….big yards still making losses) o Market factors o supply and demand (forward cover)…e.g. BC in Korea o 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 capacity o 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 growth o As dwt employment rate declines freight earnings fall o Early phase out would help…if rates are depressed So….overcapacity may be compounded by fleet development

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Expansion of the Panama Canal

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Bulk Carrier Fleet Development

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Bulk Carrier Existing Fleet v Orderbook

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER 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 PacificFY 2006 Commodity Pacific to Atlantic Millions of Long Tons 34.4Grains Coal & Coke Iron Ore Forest Products4.3 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.

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER 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 Japan o 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 small o 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 Expansion of Panama Canal

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Expansion of Panama Canal 9 vessels of 100k to 120k Dwt on order for completion prior to 2010 Interest surrounding subsequent impact (of expansion) on trade o Mitsui OSK Lines – mini-capes (116k Dwt) on order at Sanoyas o Next generation general – purpose bulker o 245m LOA, 43m B, 15.3 D o 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?

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Panama Canal Expansion…possible trades Canada West Coast (Coal) – Europe Venezuelan (Ore) – Far East Possibly US Gulf (Grain) – Far East

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER 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 mind o 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 shiptypes o Globalising business through advancement into growth markets o Shiptype speculation

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Single Hull Phase Out

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER Tanker fleet development

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER 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 VLCCs 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

SHIPBUILDING MARKET UPDATE LLOYDS REGISTER World Fleet Development – by shiptype