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The Export Task Shipping Considerations for Global Markets

Braemar ACM

James a’Beckett 28 July 2014

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Disclaimer The information contained within this report is given in good faith based on the current market situation at the time of preparing this report and as such is specific to that point only. While all reasonable care has been taken in the preparation and collation of information in this report Braemar Shipping Services Plc (and all associated and affiliated companies) does not accept any liability whatsoever for any errors of fact or opinion based on such facts. Some industry information relating to the shipping industry can be difficult to find or establish. Some data may not be available and may need to be estimated or assessed and where such data may be limited or unavailable subjective assessment may have to be used. No market analysis can guarantee accuracy. The usual fundamentals may not always govern the markets, for example psychology, market cycles and external events (such as acts of god or developments in future technologies) could cause markets to depart from their natural/usual course. Such external events have not been considered as part of this analysis. Historical market behaviour does not predict future market behaviour and shipping is an inherently high risk business. You should therefore consider a variety of information and potential outcomes when making decisions based on the information contained in this report. All information provided by Braemar Shipping Services Plc is without any guarantee whatsoever. Braemar Shipping Services Plc or any of its subsidiaries or affiliates will not be liable for any consequences thereof. This report is intended solely for the information of the email recipient account and must not be passed or divulged to any third parties whatsoever without the written permission of Braemar Shipping Services Plc. Braemar Shipping Services Plc accepts no liability to any third parties whatsoever. If permission is granted, you must disclose the full report including all disclaimers, and not selected excerpts which may be taken out of context.

For more information, please contact Research at research@braemar.com

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Braemar Seascope Introduction

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London Listed Parent Company Braemar Shipping Services Plc

Shipbroking Dry Cargo Tankers / LNG / FSPO Sale and Purchase New Building Demolition Offshore

Technical Port construction Naval Architecture Vessel & condition surveys Ship construction supervision

Environmental Pollution control Incident response

Logistics Port Agency Customs clearance Containers

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What a Broker Does...

•Finding ships for cargoes and cargo for ships

•Source of information of market trends and an adviser to owners and charterers

•A dispute resolver

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Finding Ships for Cargoes and Cargo for Ships

•The primary function of a shipbroker is to find cargo for a shipowner and to find ships for a charterer

•This function requires an in depth knowledge of vessels and cargoes, information about ports, methods of loading and discharging of various cargoes, weather patterns, demand and supply of ships and so forth.

&

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Types of Charter

Time Charter

“Hire car”

Voyage Charter

“Courier”

Charters

Spot T/C Period T/C

Bareboat T/C

Spot V/C COA

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CFR & FOB

FOB (Free on Board) Sale

Free on Board means the Seller delivers when the goods pass the ship’s rail at the named port of shipment. This means the Buyer has to bear all costs and risks of loss of or damage to the goods from that point.

CFR (Cost and Freight) Sale

All as per the FOB definition above EXCEPT that the Seller arranges the freight necessary to bring the goods to the named port of destination.

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Why do customers want to buy FOB?

• Exercise control

• Keep their commercial options open

• Take advantage of freight variations

• Maintain flexibility

• Access freight opportunities

• Historical Reasons (Japan, Korea)

Which is exactly why sellers choose CFR!

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"When all of the sales to China were FOB, one day there would be nothing to load, the next day a veritable armada," he said.

"If we're waiting for customers to send ships, we're not in control.“

Rio Tinto Marine COO, Michael Harvey (AFR 9 June, 2011)

But don’t just believe us……………….

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Freight is a manageable risk

• Freight is a hedging tool akin to currency and commodity pricing

• Freight forms a significant portion of the delivered price for many of Australia’s exports

• A lack of control and influence in freight management leaves sellers at the mercy of the buyer

• It leaves the Buyers controlling our ports • FOB sales add no value to our export earning capacity • Freight can maximise profitability for any business with a

defined freight strategy

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The Baltic Exchange

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The History of the Baltic Exchange •1744 – Founded in the Virginia and Baltick Coffee House, Threadneedle Street, London

•1903 – Moved to purpose built exchange at 30 St. Mary Axe, London

•1992 – Terrorist bomb destroys the Baltic Exchange. The IRA mistook the Baltic Exchange for the Stock Exchange by accident…

•1995 – Re-established at 38 St. Mary’s Axe, where they are today

•Original site is now occupied by the London landmark known as the “Gherkin”

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Freight Rate Review

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Factors Determining Freight Rates

The freight market is subject to a wide range of external variables, but it is fundamentally driven by the following factors:

•Fleet supply

•Commodity demand

•Seasonal pressures

•Bunker prices

•Choke points including the straits of Hormuz and Malacca, the Suez and Panama canals etc.

•Market sentiment

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Record Spot Rates An historical perspective

0

50,000

100,000

150,000

200,000

250,000

US

$/ D

ay

Capesize Panamax Supramax Handysize Handymax

Commencement of Chinese Rapid Development

Chinese Credit Crunch

Cooling Chinese Steel Demand & Reducing Congestion

Record Chinese Iron Ore imports

Source: The Baltic Exchange

Global Financial Crisis

23/07/2014

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Spot Rates (1 July 2011 – Present)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

US

$/ D

ay

Cape Panamax Supramax Handysize Capesize 2014Source: The Baltic Exchange

23/07/2014

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Demand Outlook

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Dry Bulk Trade Growth

0

1

2

3

4

5

6

7

Billi

on T

onne

s

Iron Ore Coal AgribulkBauxite/ Alumina Minor Ores Steel Industry Minor BulksPhosrock/ Fertilizers Forest Products Other Minor Bulks

17/06/2014

Source: Braemar Seascope Research

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Dry Bulk Trade Growth Excluding Iron Ore or Coal

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Billi

on T

onne

s

Agribulk Bauxite/ Alumina Minor Ores Steel Industry Minor Bulks

Phosrock/ Fertilizers Forest Products Other Minor Bulks

17/06/2014

Source: Braemar Seascope Research

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Agribulks

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Handysize/Supramax Cargo Breakdown

Iron Ore 10%

Coal 17% Grain

18%

Steel 12%

Bauxite /Alum 21%

Phos Rock /Fert 4%

Coke 1%

Scrap 4%

Cement/Clinker 2%

Salt 1%

Forest Products 5%

Other Dry Trades 5%

Source: Braemar Seascope Research

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WCNA – China Vancouver, Prince Rupert

USG – Cont/Med/China New Orleans

ECSA – China Rosario, PdM, River Plate

Australia – China Brisbane, Gladstone

ECSA – Cont/Med Rosario, PdM, River Plate

Cont/BSea – Saudi Yuzhnyy, Novo.

Trade Regions: Grain ( Key Ports)

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Global Grain Exports 18/07/2014

0

5

10

15

20

25

30

35

40

Mill

ion

Tonn

es

Wheat Maize Soyabean Soyameal Barley Sorghum Oats Rye

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Global Grain Exports….Supporting volatility 18/07/2014

0

5

10

15

20

25

30

35

40

Mill

ion

Tonn

es

Argentina Brazil Australia USA Canada EU Russia Ukraine Kazakhstan

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2012/2013 Australian Containerized Grain Exports

Wheat 2,100,000 tonnes

64%

Sorghum 400,000 tonnes

12% Cottonseed 400,000 tonnes

12%

Pulses 250,000 tonnes

8%

Barley 100,000 tonnes

3%

Maize 50,000 tonnes

1%

Source: Braemar Seascope Research

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2012/2013 Australian Containerized Wheat Exports by Destination

Vietnam 391,000 tonnes

21%

Indonesia 308,000 tonnes

16%

Taiwan 220,000 tonnes

12% Myanmar 200,000 tonnes

11%

Malayasia 195,000 tonnes

10%

China 125,000 tonnes

7% Thailand 118,000 tonnes

6% PNG

85,000 tonnes 5%

New Zealand 61,000 tonnes

3%

Fiji 47,000 tonnes

2%

Philippines 47,000 tonnes

2%

Singapore 46,000 tonnes

2%

New Caledonia 33,000 tonnes

2%

Korea 16,000 tonnes

1%

Source: Braemar Seascope Research

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Increasing Containerised Grain Shipments

Source: Braemar Seascope Research

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US Containerized Grain by Destination

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Spot Rates – Supramax vs Handysize (Seasonality evident due to grain trades)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

US

$/ D

ay

Supramax HandysizeSource: The Baltic Exchange

23/07/2014

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Vessel Supply – Grain Trade Emphasis

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2014 Bulk removals vs. last year

32

34

24

2

25

1

16

2

35

76

34

3

40

4

24

3 Vessels

0 0.5 1 1.5 2 2.5 3 3.5 4

SmallHandysize

LargeHandysize

Handymax

Supramax

Ultramax

Panamax

Post-Panamax

MiniCapesize

Capesize

VLOC

2013 vs. 2014 – To Date, DWT Scrapped (m tonnes)

2013 (Same period) 2014

2014 YTD = 7.9m DWT

2013 Total = 21.6m DWT 2012 Total = 36.5m DWT

01/07/2014

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Panamax (58-84,999 DWT)

50 22 23 11 5

27 51 54 41

73 57 62 56

112

52 20

73 82 91 63 68 59

99

167

256

200

90

81

144 108

28 0

50

100

150

200

250

300

Num

ber o

f Ves

sels

Fleet Orderbook

01/07/2014

Panamax sector includes old, geared Panamaxes and excludes post-1998 (geared) Supramaxes

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Ultramax (60-69,999 DWT)

4 14 24 44 53 38

89

254

187

41

1 0

50

100

150

200

250

300

Num

ber o

f Ves

sels

Fleet Orderbook

01/07/2014

Ultramax (modern Supramax) sector includes 60-69.99k dwt geared vessels built after 2009

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Supramax (50-59,999 DWT)

2 2 1 2 1 5 3 8 7 6 12

66 67 55 65 97 86 85

111

168

283 323

268

134

38

29

37 22 1 0

50

100

150

200

250

300

350

Num

ber o

f Ves

sels

Fleet Orderbook

01/07/2014

Supramax includes 50-59.99k Dwt sector including old vessels of 50-58k Dwt, and all post-1998 geared Supramaxes

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Handymax (40-49,999 DWT)

110

8 17 22

15 4

45 60

79

60 58

35 30 31 24

9 13 5 7

14 13 4 3 3

13 20

8

28

17 6 3 0

20

40

60

80

100

120

Num

ber o

f Ves

sels

Fleet Orderbook

01/07/2014

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Large Handysize (25-39,999 DWT)

231

14 12 9 15 6 14 34 42 57

32 30 30 39 46 38 55 54

34 47 73

124

227 253 262

163

77

94

208

88

16 0

50

100

150

200

250

300

Num

ber o

f Ves

sels

Fleet Orderbook

01/07/2014

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Small Handysize (10-24,999 DWT)

180

6 8 6 9 11 15 31 37 44

30 30 16 22

11 7 9 9 21

35 31 36 27 23 32 9 6

9 5 3

0

20

40

60

80

100

120

140

160

180

200

Num

ber o

f Ves

sels

Fleet Orderbook

01/07/2014

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Conclusion

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Bulk Freight Rates • In isolation, the handy sector is the most robust of all dry bulk sectors. However

significant over supply in the supramax/handymax sector will inevitably push down handy rates.

• The average size of Handysize and Supramax vessels being ordered has been steadily increasing over the past few years moving away from the smaller size vessels.

• Larger, newer and higher numbers of Handysize and Supramax vessels may require producers to consider the impact of this transition and to review the “standard” stem size shipped, more so to suit the vessels available.

• The large orderbook will ensure a mostly weak freight market out to 2014, even with record scrapping levels in the past. The market is due to begin a recovery, albeit modest, in late 2014/early 2015. A stronger recovery with firming rates in 2015 & 2016 is increasingly uncertain due to recent newbuild ordering.

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Differences Between Shipping in Bulk vs. Containers

On face value you would think bulk is by far the better option but there are many other factors to consider. 1) Financing – In order to sell a bulk cargo of you would usually set up a letter of credit between the sellers bank and the buyers bank. This takes a large amount of funds to arrange from the buyers end. By using containers buyers can buy smaller amounts with cash making it easier to manage cash flow. 2) Storage/Logistics – By using containers buyers can drip feed grain into their sheds/mills as needed saving money on buying in bulk and having higher inventory costs. A big benefit for smaller buyers who can therefore buy direct from the source rather than be forced to buy through local traders or largely buyers who have access to or control of the bulk handling facilities in that area. 3) Sourcing/accumulation – Exporters have many challenges in grain accumulation some of which can lessened by using containers. Many smaller traders in Australia look at the grain export business purely through containers and leave bulk to the bigger players. 4) Grain in container provides volume for the container shipping lines so discounts can be sought on that basis which means exporters can get some benefit on economies of scale whereas on bulk grain exporters are competing with all other bulk commodities for vessels. For these reasons the movement of grain in containers has increased considerably over the last 10-15 years and have become a critical part of the worldwide grain trade.

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