Trade Concentration and Large Vessels in the Container Trades Andrew Penfold Director, Ocean Shipping Consultants Ltd. Barcelona, June 2008 SIL 2008 Barcelona

Presentation Overview - trade expansion, concentration and larger vessels What is actually happening to trade volumes? How are these likely to develop - are these trends sustainable? How have shipping lines reacted to these developments? Optimum future vessel sizes The true position for container terminals Supply/demand balance for larger vessels Issues arising from the size revolution Scale economies are driving the business, ship size revolution will have major effects for all trade sectors - not just arterial SIL 2008 Barcelona

What is Happening to Trade Volumes? Volumes have increased dramatically, with port demand reaching around 470m TEU in 2007 Demand has actually accelerated with total volume’s CAGR increasing from 10.5% pa in the 1990s to 12.8% pa since 2000 This growth - although focused on Asian trades - has been broadly-based and all regions have benefited This is the true manifestation of globalisation - made possible by containerisation Transshipment has been a major demand sector and reached nearly 112m TEU last year Large vessels + feeders is the dominant mode Ports are under pressure to handle larger vessels, shipping lines position under pressure from overtonnaging and fuel prices SIL 2008 Barcelona

World Container Port Demand by Region Since 1990 - million TEUs 2001 - some slowdown in demand growth SIL 2008 Barcelona

What is Happening to the Container Fleet? The role of 10,000TEU+ vessels has increased dramatically - driven by scale economies and competitive pressures Sheer level of ordering for ULCS and New Panamax vessels is difficult to justify - overtonnaging (again) will be the outcome Transpacific and Asia-Europe trades will absorb most of this tonnage - but the ‘cascade’ effect will see redeployment of 6000TEU+ vessels into the Atlantic and some N-S trades At the same time fuel is much more expensive - there are pressures to slower steaming and dropping port calls The overall effect will be further concentration and transshipment activity SIL 2008 Barcelona

Design Development of Deepsea Containerships SIL 2008 Barcelona

A Ship Size Revolution is Underway - I SIL 2008 Barcelona

Asia-Europe Vessel Costs Per TEU Slot by Speed and Bunker Price - $/TEU Slot SIL 2008 Barcelona

A Ship Size Revolution is Underway - II Orderbook for very large vessels at unprecedented levels SIL 2008 Barcelona

A Ship Size Revolution is Underway - IV SIL 2008 Barcelona

A Ship Size Revolution is Underway - III SIL 2008 Barcelona

Much Larger Vessel Sizes - a continuing process We are in the middle of a size-based revolution for container ships This is not just in the arterial trades - much larger vessel sizes are expected in north-south trades and for feeders The economic drivers are clear - lines that don’t move up will see their competitive position undermined Already 13,500TEU+ vessels are a reality and the orderbook confirms this will accelerate The decision to proceed with Panama Canal expansion was a key factor. This will accelerate penetration of larger vessels into the Atlantic Shipping lines will introduce much larger vessels. Ports will have to respond. SIL 2008 Barcelona

The True Position for Vessel Sizes Clearly, the pressure is on to berth larger vessels but, as trades are severely imbalanced, actual draught is much less than design draught. E.g. Asia to Europe vessels are full of light cargoes, Europe to Asia has many heavy containers and many empties Draught has received much attention but only limited further increases are anticipated The major pressure for ports will be handling huge consignments and allowing access for long and wide vessels Investment attention is now focused on handling capacity and providing effective links: For high volume for feeders For the hinterland (especially intermodal) SIL 2008 Barcelona

Design Draught v. Actual Draught at N Design Draught v. Actual Draught at N.Continent Container Terminals 2005-2006 SIL 2008 Barcelona

Forecast Summary - what is the outlook? Strong demand growth will continue, but there will be increased risks These risks are macro-economic How will the Chinese bubble be sustained and what are the implications for container trade and ports? Will the transpacific slowdown be mirrored in the Asia-Europe trades? There are also significant technical changes that will revise the shipping market - specifically the Ultra Large Container Ship and the Panama Canal programme There will be increased reliance on feedering - this sector will see ship size increase and demands for much better service A subsidiary concern - will there be enough feeder ships? SIL 2008 Barcelona

Latest Demand Projections Forecast container port demand will reach between 778-870m TEU by 2015 and could exceed 1bn TEU by 2020 The main danger - the ‘increased risk case’ is that there is dislocation and lower average growth in the medium term. The Chinese bubble, ‘sub-prime’ and ‘credit crunch’ mean risks are much higher now Even here, demand will remain very strong but year-on-year growth rates will vary widely This makes demand projection (and vessel/project financing) much more difficult A period of massive demand expansion is forecast, but volatility will be much greater. SIL 2008 Barcelona

Forecast World Container Trade to 2026 - million TEUs SIL 2008 Barcelona

Implications for Container Terminals In order to handle much larger vessels and consignment sizes terminals must both expand and make better use of existing facilities In North Europe, consignment sizes are averaging nearly 2700TEU for 6000TEU+ sizes. For very large vessels, up to 5000TEUs have been handled at single port calls These increases will be noted in all major front rank ports Terminal productivity has increased - especially volume per berth metre - but there remain wide differences Terminals which do not lift productivity will see market share decline There is scope for considerable further improvement SIL 2008 Barcelona

Major Container Terminals: Berth Productivity 2000-2006 - TEUs/m/a SIL 2008 Barcelona

Implications for Container Shipping In the short term - downward pressure on freight rates as a result of demand uncertainty and over supply Much higher fuel prices will slow trading speeds - absorbing some excess capacity Cascade effect will accelerate ship size pressures in secondary trades - larger vessels much sooner than anticipated As market returns to equilibrium the emphasis on larger vessels will be confirmed Investment required in feeder vessels to meet demand Mid-size vessels under pressure SIL 2008 Barcelona

Daily Charter Rates for Representative Vessels since 1998 - $/day Supply side issues have been the generator of the cyclical pattern in container markets SIL 2008 Barcelona

Estimated ‘Cascade’ Effect for Large Containerships to 2010 Even delayed delivery will see cascade of vessels to smaller volume trades SIL 2008 Barcelona

Container Fleet Productivity 1990-2007 - TEUs per fleet TEU Productivity is key driver of freight and charter markets SIL 2008 Barcelona

Productivity and Freight Rates 1994-2007 SIL 2008 Barcelona

3500TEU Productivity and Charter Rates 1998-2007 SIL 2008 Barcelona

5000TEU+ Containership Demand to 2026 - million TEUs Demand focuses on 5000TEU+ fleet sector - ULCS/NPX dominant on these trades SIL 2008 Barcelona

Large Containership Fleet Development to 2012 - ‘000TEUs SIL 2008 Barcelona

Forecast 8000TEU+ Productivity to 2026 - TEUs per fleet TEU SIL 2008 Barcelona

What does all this mean? Massive container demand growth - even under ‘high risk’ scenario Concentration of demand in largest fleet sectors Increased transshipment: Hub and spoke, and Interline (relay) Bigger ships and much bigger consignments concentrated on hub port calls Short/medium term pressure on shipping profitability Concentration of demand in much larger hub terminals with supporting feeder and regional ports SIL 2008 Barcelona

Trade Concentration and Large Vessels in the Container Trades Andrew Penfold Director, Ocean Shipping Consultants Ltd. Barcelona, June 2008 www.osclimited.com SIL 2008 Barcelona